The management of a business organisation may need to undertake a number of strategic decisions in order to operate, compete and grow in the market which the business may belong to. Such strategic positioning may be in line with the pres-et long-term goals as set by the owner groups or the management for the sustainability of the business in the industry as well as in the society as a whole. In order to accomplish such corporate goals sets, the management may often adopt strategic tools to identify the gaps in the performance, evaluate the impact and possibility of the volatility of such gaps and corresponding results and then apply corrective measures in order to make the business process effective and efficient. While performing such tasks, the managers may often require critical business related data so that the decision so undertaken may be comprehensive, informed and effective for the business. The management accounting helps the management in this regard by providing a system management information system (MIS) within the operational horizon of the business and thereby presenting the refined information to the managers for the purpose of strategic decision making. In other words, the management accounting plays a crucial role as a helping hand to the management as far as support services for the purpose of decision making is concerned (“Strategic management accounting: how far have we come in 25 years?”, 2018).
ABC, on the other hand, is a management accounting tool (rather strategic management accounting tool) that may be immensely helpful for the managers in order to undertake critical strategic decision for the business in terms of pricing, process restructuring, cost-cutting and even value creation. The subsequent parts of the paper discuss in details the concept of ABC along with its critical analysis and also its relationship with strategic management accounting in an organisational context. The analysis has been perfumed by referring selected journal articles from “Accounting, Auditing & Accountability Journal” database and other secondary data sources and based upon the findings; the subsequent evaluation has been made in the report.
Conceptual Framework of ABC
Costing has always been a challenging area of operations for the managers in terms of decision making. An organisation incurs different t types of costs (fixed, variable, semi-variable etc.). Some costs are directly attributable to the products which may be termed as direct costs and variable costs. These costs are comparatively easy to identify as the same may fluctuate in line with the scale of operations. For example, if there is no production, then direct material consumption cost will be nil and accordingly the same will increase in the case of the subsequent production operation. The management may face many difficulties in identifying those costs and assigning to the products for the purpose for costing (“Strategic management accounting: how far have we come in 25 years?”, 2018).
However, these are few overheads cost which is fixed or semi-variable by nature. These costs are, at times, comparatively difficult for the managers to identify product wise. For example, rent of a production shop may not be easily attributable to the product unit wise and hence, may be apportioned based on the absorption rate pre-determined by the management. However, it has been identified that such absorption may lead to the situation of inappropriate costing by way of over or under absorption and thereby over or under-costing of the product. This is the situation where ABC may come into the picture as a big relief to the managers (Hoozze & Hansen, 2014).
The concept of ABS may be said to be primarily related to the accounting subject that focuses on the cost measures of the business organisation. The tool basically identifies the cost drivers and assign costs based on those cost drivers top the overheads for the purpose of product costing. The costs which are not easily identifiable or traceable product unit wise, are appropriately assigned to the product as per the cost activities and cost driver (Fei & Isa, 2010)s.
The concept of ABC is a systematic approach which may be applied by the management through various steps. These steps are to be rigorously followed by the management in order to get the necessary cost data, identify the required cost resources and then apply the same in the situation in order to accurately cost the product. These steps are briefly described below.
Figure 1: Steps in ABC
(Source: Created by author)
The resources are basically the production expenses incurred by the business organisation for manufacturing a product. For example, the production labour cost, indirect material cost, sales and marketing labour cost, occupancy, utilities, set-ups, equipment and supplies etc. In this context, it may be worth to note that none of the cost is directly traceable to the product unit and hence apportioned to the product based on the cost drivers, discussed later on. In other words, the concept of ABC purposefully excludes the direct costs and expenses which may be directly chargeable to the production (Fei & Isa, 2010).
Activities represent the work performed by the business organisation for producing the product. Such work may be performed in direct departments like sales, accounting, customer services etc. The fundamental of the step is to identify the department where the relevant costs are being incurred so that those costs may be accurately assigned to the relevant units of the product or any units thereof manufactured in such departments (Fei & Isa, 2010).
The ABC model is based on the profitability framework which denotes the fact that the most costs incurred in profitable segments or departments or activities of the manufacturing process of the business should be charged to those segments only so that the overall product costing becomes an efficient one. A business may be losing money by losing customers because of ineffective after sales customer services. If the costs may be identified as per the activities, and relevant profitability may be calculated for each cost objects, the costs so incurred in after-sale services segment may be reduced and assigned to other areas where the comparative profitability is higher. Such object identification may help the business to measure the performance even the individual project, jobs or contracts wise (Fei & Isa, 2010).
The identification of resource driver is a critical part of the entire ABC model as the same involves establishing the linkage between the costs incurred for the production and the activities related with the production which has incurred those costs. For example, the salary of supervisors or the customer care executives may not be directly attributable to product unit wise. However, if the total costs in the form of salary to this human resource may be separately identified, then the same may be apportioned as per the time spent by these human resources on the given activity. It is needless to mention that the identification of proper resource driver is of utmost importance for the accurate costing of the product (Fei & Isa, 2010). If the determination of the resource driver may seem to be wrong, the entire purpose of ABC may get vitiated.
The final stage of the ABC model is the determination of cost drivers. Such drivers trace the link between the cost objects and activities. For example, the delivery of the product may involve travelling expenses, depreciation of the vehicle, the salary of the drivers, fuel costs etc. It is quite evident that the costs will proportionally vary with the number of deliveries so made. Therefore, these costs will be apportioned with reference to the number of deliveries so identified. In the given case, the cost driver will be a number of deliveries itself (Fei & Isa, 2010).
The discussion provides a broad overview of the ABC model and how it works; however, it is also to be noted that the modus operandi of the ABC model majorly focuses on the need of the management for getting an accurate or near accurate picture as to the cost structure of the product from production to distribution. Since the cost identification is a complex process because of its inherent characteristics of non-traceability at times, the management has to face difficulty in identifying the costs accurate to the activities, objects and products or even services (Fathi & Mousavi Dozdahiri, 2015). Strategic management accounting (hereinafter may be referred to as SMA) may be construed to be a specific section of management accounting which helps the management to adopt the new-age technologies and methods to identify the gaps, issues; overcome the challenges and apply the information and insight so obtained by utilising such tools in the practical scenario in order to undertake effective strategic decision for the business (“Management accounting change in South Africa: case studies from retail services”, 2018). Therefore, it may be said that the ABC is an integral part of SMAS in terms of its role and functionalities in identifying and determining costs and allocating the same to the units in moist systematic manner. The concept of SMA has been attempted to be defined by various researchers. Some are of the opinion that the process of SMA may be segmented into six stages which are mentioned below:
In nutshell, it may be considered that the SMA is the comprehensive process of strategic orientation that may contribute towards the idea generation, option evaluation, interpretation and analysis of management accounting information for arriving a strategic positioning for the business (“Management accounting change in South Africa: case studies from retail services”, 2018). The essence behind the SMA lies in the fact that the business should always focus on attaining the competitive advantage by re-engineering its operational process in order to create value and thus achieve sustainability.
In this context, it may be wise to note that the two studies as discussed herein focus on the activity based costing as a tool to management accountants. However, the differences lies in the approaches as adopted in both the studies. One study emphasises on the application of management accounting in the South African’s industry based on the case studies from retail services. On the other hand, the other study explains the evolution and development strategic management accounting concept in last 25 years with primary focus on the development in North American context. In nutshell, it may be construed that both the studies attempt to provide a critical analysis of various aspects of management accounting from the perspective of country as well as industry in the backdrop of changing landscape of market preferences.
The ABC model is immensely helpful for the business for the following reasons:
In spite of a number of advantages, the model suffers from certain inherent limitation, which is briefly mentioned below:
Accountants may need to assume a significant amount of roles and responsibilities in implementing the ABC model in a business context as the same involves a sizeable volume of training, understanding and controlling (Askarany, 2011). The accountants may need to understand the management’s vision and act in line with the same so that the application of the model is apt for the business. Since SMA requires a learning orientation, the accountants should play an advisory role for the business in effectively applying the monitoring the progress of the operation as well as the model.
The smaller business may not be able to adopt ABC because of its complexity and expensiveness. However, the management of smaller firms may need to get the essence of cost objects and cost drivers so that the same may be applied in their daily routine operations even in an unstructured manner (RUAN & ZHOU, 2017). That initiative may contribute towards the generation of operational efficiency. For bigger firms, the adoption of ABC is surely the desired approach. However, the application will require a considerable amount of training and cost involvement as well Moreover, the change may be resisted by the existing employees which should be carefully handled by the HR department of the business so that the traditional model of costing may be done away with the ABC in a smooth manner.
Conclusion
Based on the discussion and analysis performed in the preceding sections of the report, it may be identified that the ABC model is immensely effective as modern day tool for managerial decision making. The concept of SMA has been extended from the evaluation and assessment of accounting data to strategy formulation based on the MIS data and hence, it is the need of the hour that the management of the businesses evaluates the ABC in their business context as well. A careful and informed adoption and implementation of ABC and its subsequent control and monitoring will significantly contribute towards the achievement of corporate goals and objectives in most cost efficient and efficient manner.
References
Askarany, D. (2011). The interaction between Target Costing and Activity-Based Costing: Is Target Costing a True Costing Technique?. SSRN Electronic Journal. doi: 10.2139/ssrn.1888824
Fathi, Z., & Mousavi Dozdahiri, E. (2015). A survey of activity-based costing in the hotel industry. Management Science Letters, 855-860. doi: 10.5267/j.msl.2015.6.012
Fei, Z., & Isa, C. (2010). Factors Influencing Activity-Based Costing Success: A Research Framework. International Journal Of Trade, Economics And Finance, 1(2), 144-150. doi: 10.7763/ijtef.2010.v1.26
Hoozze, S., & Hansen, S. (2014). A Comparison of Activity-Based Costing and Time-Driven Activity-Based Costing. SSRN Electronic Journal. doi: 10.2139/ssrn.2489118
Management accounting change in South Africa: case studies from retail services. (2018). Retrieved from https://search.proquest.com/business/docview/211254587/E01A8FDF220F45EDPQ/4?accountid=30552
RUAN, Y., & ZHOU, L. (2017). The Research on Management Accounting Tools—Based on the Comparison Between Activity-based Costing and Traditional Costing. Destech Transactions On Engineering And Technology Research, (amsm). doi: 10.12783/dtetr/amsm2017/14848
Strategic management accounting: how far have we come in 25 years?. (2018). Retrieved from https://search.proquest.com/business/docview/211295731/E01A8FDF220F45EDPQ/1?accountid=30552
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