Activity-based costing (ABC) refers to the managerial accounting method, which helps to trace the overheads costs into activities and after then allocates it to different activities by making use of suitable cost drivers. In the present era, manufacturing entities are engaged in the production of multiple products by implemented several expenses. Therefore the application of traditional costing technique is not a viable approach. By considering this aspect, various authors have provided their viewpoint of application of activity based costing to assist management in the decision-making process by applying accurate cost information (Dale and Plunkett, 2017). Activity based costing mainly concentrates on identifying the activities of production processes, which are utilized to process a job for allocating cost instead of allocating overheads by using single blanket rate. Such individual activities are assembled jointly by way of the considering processes into a cost pool, and it relates to a single activity cost driver (Gupta and Galloway, 2003).
ABC costing is a more appropriate method of allocating indirect costs than the other methods (traditional costing). However, computation of this method is complex and as it requires in-depth information. In order to cope up with the limitations, various researches have been done on the proposed topic. For a better understanding of the application of activity-based costing present study aims to make a comparative evaluation of two existing studies, i.e. application of Time-Driven Activity-Based Costing in a service related company and IT integration and the use of ABC. Both the concerned studies are based on the application of ABC costing in present era by considering commercial context as a research base. The present study will initially cover the purpose of these studies and their set research question on the cited topic. Further, it will evaluate similarities and difference among the outcome of the research conducted by authors and by considering that the lesson learned from these studies will be discussed.
1.For the effective management of a company, the managerial authorities and the board requires reliable information regarding operational cost structure as well as profitability to assist them in making effective decisions. To offer correct information, a cost calculation system is employed to reflect how the corporate has done the allocation of resources in order to do supply its related products and services. The present paper aims to consider the application of Time-Driven Activity-Based Costing in a service related company (Riediansyaf, M.D., 2014). The purpose of the paper is to discuss on the used research methods, the room cost’s initial calculation, and in-depth calculation of the cost of the room by making use of the TDAC, and considering a comparison amid these two approaches Dale and Plunkett, 2017). Along with this, the paper also states the manner by which the Time Driven ABC method at the organization namely; Graha Cakra help in producing effective and valid cost information for making decisions as compared to the conventional approach of costing used by the hotel.
The research cost object is a hotel as well as the Room Division which is the major source of the revenue of the hotel. In doing so, approx 80% of the revenue of the hotel is generated from the room rent activity; direct as well as indirect costs are re-computed by making use of Time Driven ABC method. Further, the outcomes generated from the computation of Time Driven ABC are compared to the outcomes from the first cost calculation method employed by the company (Kaplan and Anderson, 2003).
Time Driven ABC has been developed to eradicate the problems and issues held in the implemented and operations of the ABC system, although the ABC system is costly to establish, sustain, and modify, and this study aims to consider the shortcomings of the ABC and make the Time Driven ABC as their initial strength. It is stated that method of Time Driven ABC is more simple, inexpensive, and solid as compared to the traditional ABC approach, and the same is buttressed by the (Kaplan and Anderson (2007) with the help of two steps in the application of the same system as provided as below
First is that this method does the cost calculation of the supply of the resource capacity and then divides the outcomes by the departmental capacity in order to acquire the department capacity to retain the rate of capacity cost Dale and Plunkett, 2017). Following to this, the second step is that the Time Driven ABC makes the use of rate of the capacity cost to foster the resource costs of the department to the cost objects through the estimation of the resource demand capacity that is required by every cost object.
However, the inaccurate calculations of costs might lead to the emergence of over or underpricing which can later impact the competitiveness and profits of the hotel. At present, the hotels are competent enough to offer accommodation services, as well as a restaurant, laundry, rental services and so on. Moreover, the research focuses on the calculations of the costs solely on the room division of the hotel in the present case study. The main rationale of selecting this aspect is that the room division offered the leading revenue portion in the real-time hotel’s case study that is approx 80% of the total revenue of the hotel made from the room division (Kaplan and Anderson (2007).
2.It has been reviewed and revealed by the former research that the mixed results in regards with the performance of organization gained from the IT integration and the use of ABC, the study also does the extension of the former studies and makes use of structural equation modelling in order to consider if or if not the manufacturing plant information technology affects the extent of the utilization of the ABC and if or if not there is a direct relationship among the integration of IT, and the extent of the activity based costing use affects the performance of plant by the reduced costs and strategic aspects for differentiate products (Maiga, 2015).
It is held that the market performance also considerably impacts the profitability; in this aspect, the information technology can offer better insight into the relevant information for the managerial accounting systems. (Burns and Vaivio, 2001). Hence, it can be broadly recommended that there are significant connects among information technology and managerial accounting systems. (Chapman and Chua, 2000). At the same, it is broadly recognized that the information technology has a great role in terms with accounting and firms are experience with issues of proper integration of IT in the managerial accounting practices. By considering this from a richer point of view, it can be considered that the information technology acts as an enabler of prevailing management approaches specified to the organization. In a more specific way, information technology integrated with the databases allows users to determine, understand and use the data Dale and Plunkett, 2017). The current study has made contribution to the literature in three key ways; first is that the contribution has been made by the paper by taking measure to the gap filing among the mature literature on the strategic decisions of business in context with the lower costs and product differentiation strategy and lately the literature highlighted on the modern developments held in the information technology as well as managerial accounting (Ittner and Larcker, 2001).
The second comes in terms with the evaluation of the link among the IT integration and the of extent of ABC use, plus the potential dominant impacts of the plant strategies over the relation among the IT integration and extent of the use of ABC, and performance of plant with a structure offered to show the relation among the IT integration and extent of ABC use and its effect over the plant performance that is in turn temperate by the plant strategy. Last, the third contribution by the study to the literature is the suggestion that the theoretical insight for examining the IT integration/extent of ABC use and the link of performance is required to integrate the plant strategies as a prime factor when implemented in the concerned sample in the study.
Similarities and Differences in the findings of the two studies
The similarities in both the study lies in that both the studies are focused on activity based costing, and both the study reflects the advantages of the activity based costing to the different organization or industry.
The first study focused on the point that the organization needs accurate information in relation with the operational cost structure and profitability for decision making, in order to get hand on accurate information, an optimum cost calculation method is needed to do cost and resource allocation, and the study suggests that the optimal method is time driven activity based costing which will be more suitable in terms with the requirements of the cited organization, and the same is to be applied to the room division of the organization which is the most revenue producing area, and the applicability of the TDABC will drive profitability and performance (Riediansyaf, 2014).
On the other hand, the second study relates to the aspect that whether the manufacturing plant IT impacts the extent of the use of the ABC and whether there is presence of direct relationship amid the IT integration and extent of ABC use, that impacts the plant performance by low costs as well as differentiated product, which is the main difference among these two studies. The main difference in both the studies is that first is study is based on a time driven and second is based on the integration of information technology and the extent of the ABC use (Maiga, 2015). As the first study is based on the application of time driven ABC and the second one is based on the impacts of integration of IT and extended the use of ABC over organizational profitability.
The findings of both the study emphasize the role of the leading factors of ABC while depicting the relationship among the business performance and profitability and activity based costing. It is also found that more contemporary cost allocation approach which is activity based costing have been considered to be highly effective rather than the conventional methods in service as well as manufacturing firms and industries.
Lessons learned from the two studies’ research findings
3.Thus, the research indicates that the TDABC method is better and can be applied for the Hotel services costing and also that the rate of capacity cost can be optimally and reliably applied in the cost compilation. Hence, it is indicated by the study that hotels are required to assess all of the related costs, direct as well as indirect and then must regain the same by the offered services.
By considering the overall study and result analysis, it can be learned by the management accounting that, the cost calculations with the time driven activity based costing method by making use of unit time and cost rates of capacity which cab determine cost each minute or assigned cost per minute in the attainment of the activity accurately and precisely as compared to the conventional met6hod applied by the case study company (Kaplan and Anderson, 2007).
Also the management accountants should understand that the calculation dependent on the time-driven ABC method also leads to a cost driver rate being correct as a calculation base for each procedure. Management accountants and senior management should evaluate the performance for each activity or any undertaken activity by all departments in a regular manner, so that there are constant improvements’ thereby making the unit time highly effective (Ozyurek, H. and Dinç, Y., 2014). Management should also supervise the activities that make use of resources which are vital to driving the cost-effectiveness and since the initial cost is calculated on the basis of management judgment, so it is essential for the operators to decrease the rates of hotel room particularly for junior suite as well as royal suite type and consider more marketing efforts while covering a larger area to acquire more visitors.
One more strategy and learning to address with low costs of resources needed is that, instead of removing the supplied resources directly, managers might choose to sustain that capacity for the growth in future times in integrating new lines of business. From the provided information by the time driven activity based costing, managers must learn to forecast the amount of the improvised business that can be addressed by the current capacity.
4.The key outcomes of this study have considerable implications for the company practices as the investments in information technology integration and the activity based costing is required to be conducted in aligned with the strategic direction, effective tools, business strategies, requiring an excessive involvement level in the managerial area. The study also shows that the profitability held from ABC as well as IT integration is based on the level how they make improvement in their core strategies and business scope (Ravichandran & Lertwongsatien, 2005). To this note, it needs the better amount of planning while designing and making an investment in the Activity-based costing and information technology for ensuring their reliability and validity to the strategies development (Byrd and et al., 2006).
Managerial authorities can gain better insights and learning from the study that to attain higher return from their made investments within information technology and activity based costing, in doing so the management is required to align all the related resources with the strategies of the business.
Thus, the findings derived from the study make significant contributions and efforts to the prime literature in terms with IT, ABC and the performance linked and to the debate held on the organization, that they must focus on a single thing that is cost strategy or differentiation of product in order to gain success (Porter, 1980, 1985). In this sense, the outcomes of this study must improvise the confidence of practitioners and users in the business strategy, as an enabler of the link amongst IT integration, use of ABC and business performance. Further, the study assists the business management in forming intuitions regarding the means that can drive these established relationships (Moscove et al., 1999). In addition, the model must assist to give information to the development of more comprehensive models while helping the future-oriented future empirical work with various industries, organizations and samples.
Hence, the key empirical and findings derived from the outcomes indicated the support for the theoretical structure (Chenhall, 2003). However, the integration of plant IT considerably create an impact over the extent of its ABC use, and these both aspects can also dramatically impact the lower costs and strategies for product differentiation that ultimately affects performance and profitability in the marketplace.
Therefore, the speculation that the IT and ABC might improvise the performance indirectly through the effect on other factors that overall might add value, which is also buttressed by the research and its implications for the further research, investing more of valuable relationships held in the business firms.
Conclusion
In accordance with the present study conclusion can be drawn that, with the technological development and introduction of advanced accounting process, business entities had modified their cost planning strategies. This is done with the objective to improvise their business decision-making process by considering accurate cost information as the approach of allocation of overhead by using single blanket rate is not viable. Both the studies have similar findings regarding benefits of activity based costing for service as well as manufacturing entities. However, one study is focused on time driver ABC costing method while another study integrates ABC with information technology. Both these factors hold their crucial position in business strategies so that viable analysis of different prospects can be done to make better decisions for the business. By the analysis of both the researches, learning has been obtained that TDABC method is a suitable method for organisations operating in the hotel industry. It is because this method considers factors such rate of capacity cost which can be reliably applied in the cost compilation for deciding to price for various services. Further, second research provides learning that advancement of technology had affected costing procedures of various businesses. Therefore, business entities are required to make investments in information technology for integration of same with the activity-based costing. This approach will align the strategic direction by making use of effective tools and business strategies that require an excessive involvement level in the managerial area.
References
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Moscove, S. A., Simkin, M. G. and Bagranoff, N. A. (1999), Core Concepts of Accounting Information Systems, Sixth Edition, John Wiley and Sons, New York, USA.
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