Discuss about the Costing Model for Evaluating Effectiveness of RFID.
Activity-Based Management (ABM) is defined as a method used in the internal analysis of a business aimed at identifying its activities and evaluating them on the basis of the cost incurred and the value added by the activities (Chung-Kai, & Chun-Yu, 2017). The same study denotes that the main idea of ABM is analyzing the activities in relation to the business operation while identifying the possible opportunities for improving the profitability and efficiency of the business. On the other hand, Activity Based Costing (ABC) is a method of accounting that helps in identifying the activities performed by a business organization while assigning direct indirect costs to the product results of the activities (Ippolito et al., 2016). In other words, ABC as an accounting system helps in recognizing the relationship between products, costs, and activities in a relationship through which it enables the assigning of indirect costs to products that are less arbitrary than the traditional accounting methods. This paper evaluates and presents the importance of Activity Based Management and Activity Based Costing in a contemporary environment of a business.
ABM is often known to be a procedure that begun operation in the 1980s as essential in analyzing a business process with the aim of identifying the weaknesses and strengths of the business. Kim, Han, Yi, and Chang (2016) points out that ABM mainly targets section of the business that are causing financial losses with the aim of eliminating or improving the activities or the areas to increase the business productivity and profitability. The same study denotes that ABM helps a business in analyzing the costs of equipment, facilities, employees, and overhead distribution in the business among other factors. Chung-Kai and Chun-Yu (2017) point out that ABM can be applied in different types of businesses organizations such as non-profit org., government agencies, service providers, manufacturers, and schools among other sectors. It is hence essential in providing the cost information of the business in all facets of its operation.
The analysis of ABM involves the classification of business activities as non-value-added or value-added. In his study, Dimitropoulos (2007) denotes that value added activities has a positive impact on the business as it increases the perception of the customers towards the value they have on the products of the organization. On the other hand, non-value added activities forces the business to incur costs but has no positive influence on the perception of the customers towards the products offered by the organization. Once the evaluation process on the value of the organization is completed, the organization can then focus on the activities that add value to its businesses while eliminating or reducing those that add not value to the business. Forcina (2015) denotes that companies that utilize ABM may often rank the value addition in a chosen scale of either one to five or one to ten so as to demonstrate the various levels and degrees of the customers’ perception towards the value addition of each activity.
From the analysis, it is evident that Activity-Based Management has specific objectives that it aims at achieving within the organization. Trowbridge (2013) points out that ABM often targets at achieving two major objectives. These include identifying and enhancing value-added activities in different facets of the business, identifying and eliminating or reducing non-value added activities, and redesigning the operational procedures of the company. These goals when achieved will help the organization to improve efficiency, maximizing value-added activities, and cutting wasteful spending on the invaluable activities.
According to ElGammal et al. (2016), the use of Activity Based Costing is often adopted in manufacturing organizations as it helps in enhancing the cost of data reliability thus producing a better classification of costs the company has incurred while executing its processes of production. Runliang and Bingning (2015) also point out that this costing accounting system is often adopted in product costing, product line, and target costing analysis, service pricing, as well as the analysis of the customer profitability. The method of accounting is thus hugely popular as it helps businesses to develop a much better and effective corporate strategy and focus when costs are better grasped.
According to cost accountants, using the traditional cost accounting methods can often obscure or hide information on the costs of individual services or products, mainly when the local rules of cost allocation misrepresents the actual usage of resources according to Spiewak (2012). In such a case, the adoption of ABC is driven by the need of understanding the true costs of individual services and products with more accuracy. In support of the concept, Adane, Abiy, and Desta (2015) denote that companies often implement activity based accounting with the aim of identifying unprofitable individual products, finding the true cost of products and services for proper pricing policy, and revealing unnecessary costs that are worth elimination.
Activity Based Costing is thus essential in the enhancement of the costing process in three major ways. Zakka et al. (2016) denote that ABC helps in expanding the number of cost pools hence suitable for assembling the overhead costs. Instead of the accumulation of all costs within one companywide pool, ABC helps the company to pool costs through its activities. The resulting effect is that it creates new bases for the assigning of overhead costs to different items to enable the allocation of costs on the basis of the costs-generating activities instead of focusing on the volume measures such as direct labor costs or machine hours. In support of this idea, Charaf and Rahmouni (2014) denote that ABC accounting system alters the organizational nature of various indirect costs enabling them to be traced to certain activities. The examples of these indirect costs include inspection, power, and depreciation among others.
In a systematic review, Park and Simpson (2008) denote that ABC can be adopted by an organization to identify wasteful products. The study reveals that every ABC method adopted by a company for similar costs to production performance hence allowing the business to have a clear understanding on the progress of the overhead costs. The study hence denotes that the data can be used in identifying unnecessary costs and wasteful products to enable the productive use of resources. Park, J., & Simpson (2008) also denote that the process can as well be used in fixing prices of services and products that are incorrect or excessive. In other words, the overall products and the quality of services can increase as the data details presented from the ABC can help in identifying cost and production issues that need to be resolved. According to Elgammal et al. (2016), adopting ABC in a business helps in improving the process of business for the organization. The ABC system adopted helps in allocating indirect costs on the basis of the product cost driver or on the factors creating costs. In other words, as these costs are allocated per product, a picture begin emerging in evaluating the business process that performs well and which other process calls for improvement.
In their review, Kihuba et al. (2016) point out that management methods and practices have changed over the last decade. The same study denotes that organizations are moving from vertical to horizontal management systems. It is denoted as a move from a functionally oriented to a process system orientation adopting the use of just-in-time, total quality management, and business process reengineering as horizontal management initiatives for improvement. These are initiatives that are designed with the aim of improving the working process of the organization while ensuring its activities efficiently and effectively exceed or meet the ever changing requirements of customers. Park and Simpson (2008) also denote that the management information systems of tracking and providing information concerning the business horizontal aspects have significantly lagged behind the needs of the management.
Activity-Based Management is hence adopted as a trend in many organizations to fill the required information as it provides the cost and operating information that often reflects the horizontal view of the business (Kihuba et al., 2016). The focus of ABM in horizontal business view provides the accurate information on the cost of services, products, distribution channels, activities, projects, contracts, and customer segments. The trend of ABM adopted by many organizations hence makes the costs and operation information useful as it provides cost drivers, value analysis, and measures of performance that can initiate, support, or drive improvement efforts and better decision-making.
Depending on the organization adopting the accounting system, the Activity Based Costing is adopted in different trends (Charaf &Rahmouni, 2014),). For instance, in the manufacturing companies, most manufacturing companies divides the overhead costs within the business into various activity centers mainly the machining, assembly, and quality inspection activity costs. Tsai et al. (2015) point out that each of these three activity centers does possess associated factors or costs drivers that influence the costs. For example, the machining activity costs can take into consideration the processing hours or the machine while the total number of the parts used can be considered in the assembly activity costs.
From the analysis of different literature presented in this manuscript, the adoption of the Activity based Accounting and the Activity-based Management accounting tools are adopted by many organizations as opposed to the traditional accounting methods. ElGammal et al. (2016) point out that they are often viewed as an opportunity for achieving the desire of improving the costing accuracy mainly to get very closer to the true costs as well as the return on investment for programs and projects among other initiatives in the business. Kihuba et al. (2016) also denote that organizations which effectively and consistently use activity-based accounting are viewed as practicing activity-based management. In other words, the management adopts ABC in supporting pricing deleting or adding items from product portfolio, choosing between in-house and outsourcing production, as well as the evaluation of the process improvement initiative. However, Charaf and Rahmouni (2014) assert that implementing Activity Based Accounting requires the very detailed information on the specific company activities such as the services, products, and tasks together with complete and detailed information on the resources consumed by these activities such as labor, time, etc.
In a strategic survey, Chen et al. (2014) denote that any organization or company considering implementing or already implementing ABM needs to identify that certain market factors or products might be beneficial to the organization. However, some factors may not lead to the desired successful implementation goals. As a result, ABM can be adopted by the organization to solve the dilemma of what factors to implement as it gives a better chance to establish a beneficial costing for a valuable business output. However, ElGammal et al. (2016) denote that the process often comes with a challenge as it difficult finding out what costs are relevant for a particular activity. At the same time, the individuals involved in the process may also be suspicious of the other colleagues charged with the responsibility of evaluation. Adane, Abiy, and Desta (2015) also denote that some areas tend to overlap increasing their complexity and difficulty of separating them in addition to ABM being a costly process.
The Activity-based costing or activity-based accounting id often used as a way of allocating costs on the basis of a number of resources that a service or a product can consume. Zakka et al. (2014) denote that its adoption is often essential in business organizations which provide customized services or products. Te same study denotes that a customized environment of production in a business requires allocation of the ABC on actual indirect costs to specific products so as to identify the true cost of the product. In their study, Kujacic (2015) also denotes that the process of implementing ABC can be a very challenging task for every business as the process has got its opportunities and challenges of implementation as well.
The adoption of Activity Based Costing often comes with challenges to the organization as some costs are often difficult to assign through this cost such as office staff salaries and management expenses when focusing on assigning them to a specific product produced as pointed out by Kali?anin and Kneževi? (2013). For this reasons, its use is mostly adopted in the manufacturing industries as denoted by the same study. Additionally, its process of implementation is quite expensive as setting up an effective ABC accounting system requires many procedures and takes a longer time. In the process of analyzing the business activities, they have to be broken down into the individual components of each activity. According to Charaf and Rahmouni (2014), the process will require using up other valuable resources in the process of data collection, measurement, and entry into the new system adopted. The same study denotes that the process may as well require the assistance of a consultant with effective skills in the specialization to ensure a proper setup of the ABC system and provide training to the employees on how it is used. With modern technology, Spiewak (2012) denotes that most companies are currently using software that also adds additional expense to the process of implementation but it can be used in automating most of the manual aspects required while using ABC.
According to Diavastisa et al. (2016), the misinterpretation of data is often a common challenge for many businesses. ABC system produced reports often contain essential information such as the activity product margin that often varies from that reported while using the traditional cost methods. In other cases, the Activity Based Costing may contain some irrelevant information due to the decision-making scenarios adopted. For instance, Ippolito et al. (2016) denote that ABC should not be used for external reporting as it does not confirm to any recommended accounting standard. The same study denotes that since the traditional cost figures are often the norm, the interpretation of ABC data together with the regular information of accounting can be very confusing leading to bad decision-making.
Conclusion
ABM and ABC have caused a radical change in managing cost for the organizational resources and activities. Activity-Based Management is essential in supporting the organizational excellence as it provides information essential in facilitating long-term strategic decisions on issues such as sourcing and product mix. It helps the product designers in understanding the impact their different designs can cause on the flexibility and cost for the possibility modifying the designs accordingly. The ABM adoption in business supports the organizational desire for continually improving the performance of the organizations as it allows the management to evaluate and gain new insights into the productivity and performance. ABM hence focuses on permitting the management with the aim of creating behavioral incentives that can improve the different facet aspects of the business.
On the other hand, Activity Based Costing is not a method of costing but a tool for better management of the organization. The tool is a one-off activity that measures the performance and the cost of resources, activities, as well as the objects that consume them so as to generate accurate and meaningful data or information for effective decision-making within the organization. The use of activity-based costing or costing can hence be adopted as an essential tool in gaining a cost advantage over business competitors while increasing efficiency in operational and strategic decisions that can, in turn, lead to improved financial performance and profitability. The impact of using ABC and ABM in businesses hence helps in boosting their financial performances.
References
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