Discuss about the Status and Opportunities Associated with Product.
Activity based costing has got attention during the last few decades as traditional costing method does not provide efficient cost allocation of overhead costs. Activity based costing allocates overhead costs on the basis of the resource utilization by each activity. On the other hand traditional costing method allocate costs simply taking machine hours as cost base that give rise to certain issues in calculating exact cost consumed by each product.
In this report, activity base costing model and its features are discussed in detail to provide how ABC costing works and helps the cost manager in allocating overhead cost in most appropriate manner. The application of ABC model in Harvey Norman has also been explained in detail and also one other costing model has been provided other than ABC model that can be applied in Harvey Norman.
Activity based costing (ABC) is a costing methodology used by business organizations for identifying the costs incurred in production of their products and services as per the actual resources consumed by them. This is done by identifying the number of activities involved in manufacturing of a product or delivering a service and then allocating the costs of each activity as per the resources consumed. The model assigns the indirect costs incurred in manufacturing of products or services into direct costs and helps in realization of actual accounting data to track the costs of final outputs produced by a firm. Thus, the model of ABC adopts the use of assigning the resources to the activities and activities to the cost objects on the basis of consumption of resources. The cost objects helps in determining the final costs involved in manufacturing process of a firm by adopting the use of cost drivers that are the factors impacting the cost of each activity (Christiansen and Bryan, 2014).
Management accountants are increasingly adopting the use of ABC costing method for gathering real accounting data and thus taking important decisions for maximizing the operational efficiency. Activity base costing (ABC) allocate all the indirect cost to the main product cost in more logical manner as compared to traditional approach. Traditional costing method allocates all the indirect costs simply on the basis of either machine hours or labour hours. It gives rise to most significant issue of not allocating the indirect cost on the basis of resource utilization. In relation to this activity based costing assign all the indirect costs to the activities and through use of cost pool it has been allocated to the product with the help to actual utilization of resources by each product in each activity. So it can be said that through use of activity based costing one can allocate the cost to product on resource utilization basis while traditional costing uses illogical method which is based on assumption that all cost are used in proportion to labor hours or machine hours (Hansen and Guan, 2007).
In the recent decades, the activity based costing has received a great importance as manufacturing overhead costs have increased in great quantity and it has been that there has been no correlation of overhead cost with the productive machine hours or direct labour hours. With the diversity of products and services the demand and supply of each product varies that means some product are manufactured in large quantity while some are manufactured in small quantity. It means there is high requirement of cost model that understand the cost structure and helps to allocate indirect cost as per use of resources by each product.
Activity based costing provides most appropriate and accurate method of costing to calculate the cost of product and services. It helps cost manager in pricing decision making through providing more accurate pricing of products. The use activity based costing helps in better understanding of overheads and cost drivers and also allow to make visible the non value added activities in more precise manner. So through use of ABC costing cost managers work on non value added activities to reduce the overhead costs (Hoque, 2005).
Harvey Norman is recognized as an Australian based company that is involved in retailing of furniture, bedding, computers, communications and consumer electrical products. It provides its products and services both domestically and at an international level. It carries out its operations as a franchise at an international level with the main brand in Australia owing all the stores in foreign locations. The mission of the company is to deliver diverse product range to its customers in the categories of furniture, electrical goods, bedding, home appliances, bathroom items and computerized communications. The company aims to attain its mission by incorporating the use of high technology methods for manufacturing of its key products for gaining market leadership. The strategic mission of the company to attain market leadership is determined to be achieved by it with the use of its franchise model enabling it to expand its business operations. The company at present is known to have about 280 company owned and franchised stores across Australia, New Zealand, Europe, South-east Asia and many other foreign locations (Harvey Norman, 2018).
The company strategy is to develop positive engagement with its local communities through establishing the franchise system. The company grants franchisees to independent proprietors who sell its products under the major retailing categories. The proprietors lives in close association with the franchised unit and tend to develop positive relations with local communities. This helps the company in gaining an insight into the customer needs and expectations adequately and fulfilling them appropriately. The product unit is delivered to the customer from its franchised complex with the help of local transport company. Thus, the franchise model of the company is the main strategic driver responsible for carrying out its business operations at a global level adequately and maintaining positive relations with customers (Harvey Norman, 2018).
Activity based costing method is proving to be largely useful for the retailers to identify their overhead costs and convert them into direct costs. This helps in identification of the actual cost incurred in the manufacturing process of a company and thus assisting the management accountants in taking strategic decisions. The strategic decisions regarding the future growth and development can be taken by the management accountant of the company with the use of quantitative measurement of costs obtained. Harvey Norman is involved in manufacturing of its diverse product categories that involves consumption of varying resources. As such, it is essential for the business manager to identify the actual cost involved in its production process to take essential steps for improving its operational efficiency and thereby driving its profitability position (Varteiu and Bota, 2012). The actual resources consumed in production of a business unit by the company can be assessed accurately with the use of ABC costing method. This is made possible by the use of ABC costing method through identification of activities involved in manufacturing of a product. This is followed by assessing the resources that are consumed by each activity and determining the cost divers for each activity. The unit costs involved for each driver are then calculated that helps in allocation of the financial costs for each cost object, i.e., a product manufactured (Using Activity-Based Costing (ABC) to Increase Profitability, 2018).
The use of ABC costing method can help in resolving significant issues faced by the company during designing of its various product categories. This includes long lead times, quality problems and customer complaints. These problems can be resolved by the management accountant in collection of realistic accounting data for analyzing the resources consumed during its production process and taking strategic decisions for redesigning of its products. The most significant aspect in this context is to identify the raw material consumed by a product or a manufacturing process. The raw materials cost that is difficult to be quantified includes overhead or indirect materials costs such as glue or paint required for the production of a furniture items (Quesada-Pineda, 2018). Therefore, ABC costing method is recommended to be used by the company for gaining a cost estimation of the costs that fluctuates as per the volume of products manufactured. ABC costing method categories the activities involved in the production process as value-added or non-value added and thus assists the managers in eliminating all the activities that can be considered as wasteful. Therefore, it help in gaining information about the variable costs incurred in the overall production process by only determining the cost of the activities that are value-added. Also, the business manager acquires information about the unnecessary activities that should be eliminated and thus improving the operational efficiency (Andersch and Lawser, 2013).
The company is recommended to adopt the use of following steps for the implementation of ABC costing method:
The company is recommended to adopt the use of standard costing method that helps in identifying the variances between the expected and actual costs. The method of standard costing involves the use of determining target costs on the basis of direct material or labor to be utilized in the manufacturing process of a company. The collection of real direct cost incurred helps in identifying the variances by the management accountants and implementing necessary strategies for overcoming them. Thus, the use of standard costing in addition with ABC costing method will help the company to gain an accurate collection of direct and indirect costs involved in its manufacturing process (Berger, 2011).
Conclusion
The report has concluded that ABC costing method is highly efficient to be used by the business companies to success in the present competitive business world. This is because it provides a collection of realistic accounting data hat assists the management accountants to identify the wasteful activities that should be eliminated and thus driving the operational efficiency of the manufacturing process. Harvey Norman, involved in manufacturing of diverse product items should adopt the use of ABC costing model to realize its corporate strategy of business expansion. This is because it will drive the company profitability and thus supporting its corporate strategy of driving business expansion at an international level.
References
Andersch, A and Lawser, S. 2013. Status and Opportunities Associated with Product Costing Strategies in Wood Component Manufacturing. Forest Science 59(6).
Berger, A. 2011. Standard Costing, Variance Analysis and Decision-Making. GRIN Verlag.
Christiansen and Bryan. 2014. Handbook of Research on Global Business Opportunities. IGI Global.
Hansen, D. and Guan, L. 2007. Cost Management: Accounting and Control. Cengage Learning.
Harvey Norman. 2018. Company overview. [Online]. Available at: https://www.harveynormanholdings.com.au/company/ [Accessed on: 28 May 2018].
Hoque, Z. 2005. Handbook of Cost and Management Accounting. Spiramus Press Ltd.
Palmer, J. and Wiedenbeck, J. 2013. Product Costing Program for Wood Component Manufacturers. Forest products journal 63(7/8), pp. 247-256.
Quesada-Pineda, H. 2018. The ABCs of Cost Allocation in the Wood Products Industry: Applications in the Furniture Industry. Publications and Educational Resources.
Using Activity-Based Costing (ABC) to Increase Profitability. 2018. [Online]. Available at: https://onlinemasters.ohio.edu/using-activity-based-costing-abc-to-increase-profitability/ [Accessed on: 28 May 2018].
Varteiu, D and Bota, C. 2012. Application of the Activity Based Costing System to the Wood Industry. [Online]. Available at: https://stec.univ-ovidius.ro/html/anale/RO/2016/2016-I-full/Section-V/34.varteiu_daniel.pdf [Accessed on: 28 May 2018].
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