This paper basically discusses two research-based journal articles namely “The Impact of Activity based Costing on Organizational Performance” and “Implementation of the Activity based Costing Model for a Farm: a case study which is based on ABC model of costing. It describes the Activity Based Costing method, explains the main purpose of these journal articles and also discusses what questions they have set out to explore in these two papers (Mahal, 2015). Moreover, it also discusses about the differences and similarities in the findings of the above two papers. Besides these it also explains about the 4 specific lessons or outcomes learned from the research of the two-journal article that will be advantageous for management accountants in Australian organizations to learn from.
The ABC is an accounting method which is more logical in identifying and assigning manufacturing overhead cost to final products than other older methods of allocating cost . ABC system identifies the relationship between overhead activities, industrial products and costs, and with the help of these relationship, it allocates indirect costs to goods less illogically than the traditional approaches. Some expenses are tough to allocate by this process of cost accounting. ABC is commonly used in the manufacturing companies as it increases the consistency and reliability of expenses or cost data (Byrne & Torry, n.d.). Therefore, making approximately true costs and improved categorizing the costs acquired by the organization during its making process.
The ABC costing method is mainly used in reducing the overhead cost. It’s often useful in more complex situation which includes more machines, product or the complex process which is difficult to sort. The first step of the method is to identify the cost which is to be assigned. It is later followed by several steps like loading secondary, loading primary pool, collecting information on activity drivers to assign cost in secondary pools to primary pools and then finally formulating all the information for making final decision. This method includes several steps. Yet it is more proper and accurate approach of assigning indirect costs to goods or products and department in an appropriate manner (Cardos & Pete, 2011). There are other advantages of the model as it enhances the understanding of cost drivers and overheads and makes non- value and costly adding events more noticeable, permitting managers to eliminate or decease them. ABC model also enables efficient challenge of costs of operation to find improved ways to eliminate and allocate overheads.
ABC method helps managerial accountants in assigning overhead expenses to jobs and goods based on the number of activities required for manufacturing specific goods, rather than making an estimation of the total sum used by each job (Findler, et al., 2017). Assigning indirect costs in an appropriate way is vital for management, specifically in cases where the company is outsourcing various services or is experiencing downsizes. The profitable departments of the company theoretically should appear less or unprofitable by assigning indirect cost. The inappropriate or incorrect allocation of cost can affect these profitable departments on which there is more dependence there by affecting the operation carried out by these departments (Belton, 2017). It may lead to compounding of issues due to closure of profitable branches or departments and left ones are unprofitable departments. Closure of branches or department of company that are profitable causes company incapable to settle or cover its fixed costs. Outsourcing is also affected by inappropriate distribution of indirect costs (Almeidaa & Cunha, 2017).As for example, due the incorrect allocation of cost, the organization may decide to outsource an inexpensive operation instead of outsourcing the more expensive operation. In these cases, outsourcing can actually be expensive.
The ABC improves the process of costing in 3 way: The first step begins by expanding the number of cost pools which can be used while assembling overhead cost. It does not accumulate all cost into one wide pool but rather it pools cost through activities. It assigns the overhead cost to items by creating new bases in such a way that the cost is not allocated on volume measure rather they are based on activities which generate cost. Lastly, ABC model changes the identity of various indirect cost which were firstly considered indirect to certain activities. The examples of these indirect cost are inspection, depreciation, etc.
The two research studies which will briefly discuss the impact of ABC methods are discussed below:
This study is mainly for identifying ways to apply activity-based model of costing for agriculture-based organization or farms. The research is similarly directed at inspecting problems that are linked to application of the Activity Based Costing (ABC) deign in farms. Technical aspects are thought to be crucial in applying the Activity Based Costing (ABC) design in farms. The farming production faces substantial problems concerning on costing of the products due to its exclusive characteristic. This is accepted and taken as a complex problem, mainly for supervisors in farms along with other groups that works for the production of farming products (Kannaiah, 2015). The study is significant in identifying the usage of ABC costing model for organization which is based on agricultural products.
The above study resolves several doubts on ABC method. For instance, it cleared the concept that ABC model is driven by activities not by the volume. Additionally, it determines the price of product or resource in two steps. It helps in assigning the price by analyzing all the problems and difficulties which incurs while pricing the products produced by farms or other bodies associated with farming (Costing., 2017). Moreover, the research moves out in the direction of trying to discover issues and problems that are encountered by such farms and other groups in applying this Activity Based Costing (ABC) design.
The section will analyze the impact of ABC model costing over the performance of the organization. It is detailed by the contingency principle of managerial bookkeeping that there is not just a single governing method of bookkeeping that can be used on all associations in the same manner. Each association experiences an atmosphere of process that differs substantially from other associations, and must assess it cautiously by means of a tactical method of planning (Oseifuah, 2014). Agreeing with the contingency principle, super vision of an association must make sure that the arrangement and tactic fits to the atmosphere that exists, to improve its enactment. Auditors’ methods of price control are applied for integrating and assisting an associations’ complete tactical purposes, that are aimed at improving its performance in reference to the Institute of management. This research, for that reason, was carried out to examine Activity Based Costing (ABC) in defining its effects on the enactment of an association.
This investigative study has a research query, which it arrays out to answer in its conclusions. For example, it is centered on the research query in case of Activity Based Costing (ABC) design increases performance of an association (James, 2018) . Incidentally, the research tries to investigate in what way Activity Based Costing (ABC) design improves performance of associations that frequently function in competitive and difficult environments. Maximum number of associations practice the old procedures of bookkeeping, that have several inadequacies, for instance they do not offer them with tactical and beneficial information to aid in vital decision making in their existing atmospheres (Alexander, 2016). Because of the dire necessity for the supervision of such associations to obtain fast, dependable, exact and appropriate data for making appropriate choices in their dealings, these investigative study strategies creative tools of management bookkeeping that could be used for such resolves by means of tactical methods of management.
The discoveries of the two investigative studies propose that arrangements of management bookkeeping and cist regulator for example Activity Based Costing (ABC) design are very important in any association, as these decide in what manner the association works, as a result improving its monetary performance. The two investigative studies are centered on the detail that associations face several problems in their working atmospheres, that has considerable effect and disturbs them in their everyday actions concerning price regulation.
The discoveries of the two investigative studies are likewise similar in that they very much inspire and recommend associations to apply and use Activity Based Costing (ABC) design as a vital method of price regulation. The above case on, “the application of activity-based costing in agriculture farms”, endorses Activity Based Costing (ABC) design as a methodology that could be incorporated to resolve the pricing problems of farming products. Similarly, the second research study on, “the importance of ABC costing model on company’s performance supports and promotes the application of ABC model over other for improving the performance of an organization.
Moreover, the consequences of the two systematic investigative studies are directed at providing essential instructions to managerial and cost auditors along with administration of a firm concerning the profits of embracing Activity Based Costing (ABC) design, its related application problems and in what way it could improve and make simpler distribution of overhead prices to methods, works and sections within the association (Wiedemann, 2014). This is very significant in visualizing out the necessity for carrying out of this design as the chief price regulation arrangement in associations, for assisting in observing and assessment of overhead prices.
As for instance, the findings of the above case study on the application of activity-based costing on farms or agriculture-based organization were directed to be used by the agriculture-based organization or farms responsible for producing agricultural products. While, the second research study on the importance of ABC costing model on Company’s performance discussed on all the process involve during production which requires costing (Fito & Llobet, 2017).
In addition to these, the case study on the application of ABC costing on farms described the regulation of price and all the issues associated with its application. In this investigative study, technical matters comprising information availability and restricted access to resources or dearth are drawn as the most important aspects impelling application of Activity Based Costing (ABC) design of pricing for farms and farming based associations (Schmidt, 2018). Then again, the conclusions of the systematic investigative study “The Impact of Activity based Costing on Organizational Performance” emphasizes generally in what way Activity Based Costing (ABC) design effects performance of associations in common. In this systematic investigative study, it has been discovered that associations, which use this pricing design, are most probable to experience decreased price that causes enhanced performance of the association.
The lesson learned from the above research are:
I) The research study can assist the cost accountant in understanding all the aspects of activity-based costing method with an exception that direct materials cover all operating cost (Dichev, 2017). For developing an understanding, the management accountants need to understand skills required to identify all the activities which are significant for model of costing (Lu & Sridharan, 2016). Planting, pruning, applying chemical or natural fertilizer, watering, weeding, etc. are the activities which comes under any agriculture farm.
II) In addition, the above study findings help managerial accountants to gain a considerate understanding of the several challenges and problems that could be confronted during the execution of the ABC model of costing (Zaman, 2009). For instance, there were several issues such as limited resources, lack of data while developing this model but the in order to overcome the same the cost accountant need to come up with several ideas or heuristics required for its implementation. As for example, assigning cost of activities can be done by using the volume of sales where the volume can’t be measured even through different ways.
As per the results obtained from the above article which clearly showed the effect of activity based on costing on company’s performance. The article itself provides a lesson to the cost accountants on how to manage the cost effectively.
The results of the journal article showed how the cost accountant can analyze the financials of the company from its income statement by the application of ABC model. Hence, it is evident that the performance of an organization or firm can be analyzed by studying different ratios like liquidity ratios, profitability ratios, efficiency ratios and leverage ratios (Kumar & Mahto, 2013). The results also show that these measures are meaningfully applied by the managerial accountants to determine hoe third parties like lenders, investors and creditors are interested and evaluate complete financial performance of a company.
The study of the above journal article is significant for all cost accountant as it assisted them in finding out which decision can be in the favour of the company and which can be harmful to its performance. It also helped in finding out, the significance of the ABC model over the other traditional methods of cost accounting. The study also demonstrated the short comings of old and outdated traditional costing methods which do not provide enough information required for making key decisions. The study promotes the use of activity cost method of costing over the other traditional methods as it is more informative and reliable in decision making than other costing methods (Cardos & Pete, 2014).
Conclusion
Hence from the above discussion, it is evident that Activity Based Costing (ABC) model is a method that assigns and identifies costs to overhead actions and then allots those expenses or costs to goods. It is an approach used in managerial accounting. It is a method of assigning or allocating indirect costs of overheads to the several products or departments within a company, that assist it in developing the costs through the process of production. The results or findings from the above two research articles “The Impact of Activity based Costing on Organizational Performance” and “Implementation of the Activity based Costing Model for a Farm: An Australian Case” are very important and commonly useful to managerial accountants of many Australian Organization to understand the importance of applying Activity Based Costing (ABC) model and leaving old traditional methods that are improper and outdated for crucial decision making. For example, the findings of these studies assist managerial accountants to find factors that might influence decision making of any organization whether or not to apply Activity Based Costing (ABC) model. In addition to these studies are also beneficial to accountants in evaluating how the financial information from financial statements reported publicly can be used in examination of fluctuations in the organizational performance, that has resulted from the application of Activity Based Costing (ABC) model. There are several other advantages of this model as it enhances the understanding of cost drivers and overheads and makes non- value and costly adding events more noticeable, permitting managers to eliminate or decease them. ABC model also enables efficient challenge of costs of operation to find improved ways to eliminate and allocate overheads.
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