This report has been prepared to delve deep into the notions of ABC Costing, more popularly known as the Activity Based Costing method, in the context of manufacturing organisation. In this case the report has been based on the MACQ Atlas Roads Group Ordinary Stapled Securities. It is one of the largest road and tunnel makers in the world (Macquarie.com, 2018). The project report deals with the implementation and the alignment of the ABC in the context of the MACQ Atlas Road group. It contains the ways of implementation, the benefits available as well as the recommendations about the successful implementation of the ABC.
Activity based costing is an important part of the scope of Management Accounting. It is one of the novel methods introduced under the wing of Management Accounting. It actually refers to a specific kind of a methodology for a more precise allocation of overhead costs to those items which actually use it more. The basic idea behind this method, is to allocate the costs of overhead to in a just and proportionate manner to those items which actually require much time, energy and costs compared to the other items of produced by the concerned company. The system can be used for specific reduction of overhead costs and it works best in more complex business setups, where allocation of costs to different products becomes normally difficult, because of the presence of a range of different factors, which needs to be taken into account. Here, the most important aspect of the allocation is that the overheads would be allocated to the different items on the basis of their consumption (Hardan and Shatnawi, 2013). The most striking revelation of this method of cost allocation remain the fact, that this method allocates and assigns more indirect costs, into the direct costs, more than the traditional costing method. This is where both are different. CIMA (Chartered Institute of Management Accountants), define ABC costing as an approach, where a close tracing and tracking of the resource consumption of the overhead items are involved. Here the majority of the cost driving work is done by cost drivers, who segregate the costs on the basis of their short term and long term implications.
The major features of Activity based costing are as follows:
MQA being a global infrastructure developer, operator as well as investor, engages in mainly production of the lifeline of each manufacturing concern, which are known as roads. It is primarily engaged in the manufacturing business of developing and operating toll roads and tunnels around the world. It has interests in various international markets in and around the world, including Paris, France, Switzerland, Germany and the United States (Macquarie.com, 2018). MQA offers various kinds of solutions to various kinds of road problems because of its robust experience in the arena of road and infrastructure building. The main objective of the company remains to continue to develop high quality roads in and around the world, with most rewarding technologies in terms of returns and investment. In accordance with the objectives of cost allocation specifically overhead allocation plays an important part in the development of roads, bridges and tunnels etc (Bloomberg.com, 2018). The cost procedures, production techniques and other working processes of road and tunnel building are all actively involved in the process of ABC costing.
MQA’s primary strategy is to deliver world class infrastructure and investment in the arena of global infrastructure assets which would generate stable and a consistent supply of cash flows for all its shareholders. The key actions to deliver on these strategies include, active involvement of the senior management in order to drive high operational performance and efficiency, efficient and disciplined capital and portfolio management, delivering and growing distributions from portfolio assets. In order to initiate and full fill all these objectives, high amount of consistent production of the goods and services are required (Autio et al., 2014). In order to full fill this, adoption of an efficient management tool like ABC costing is required, in the arena of roads and tunnel development, where MQA primary engages in. The company would in order to apply ABC, would first identify all the functional areas of infrastructure building, their cost drivers, rates of each of these cost drivers and the cost of each activity in order to ensure a robust implementation of the ABC and the fulfilment of all the objectives of the MQA.
The ABC based costing method traces all the relevant resources of the concern for the efficient performance of all its activities, in order to account the costs for each objects for a more accurate distribution of overhead costs. MQA, being an infrastructure and road developer has a range of activities and cost centres to look after the different manufacturing activities (Ruiz et al., 2013). The digging of trenches, tunnel walls, laying of steel tubes, connecting the steel tubes, laying down of the roads, all these kinds of activities goes into the play of constructing efficient roads, bridges and tunnels. In order to initiate the successful implementation of this plan of building top notch quality of roads and bridges, ABC must be implemented, by first identifying the costs related to the road and tunnel construction, loading of the primary and the secondary cost pools must be initiated in the next step. Primary cost pools include the costs associated with advertising, procurement costs, distribution and development costs and the secondary cost pools include the supporting cast, or to be precise the costs incurred of the ancillary units, which support the main company. These secondary costs are later reallocated to the primary cost pools for better overhead cost allocation. The next step, includes, identification of the different cost drivers like the amount of time required, the amount of raw materials available, cost of legal proceedings, government fillings, cost of raw material acquisitions and others need to be ascertained and assessed (Mahal, and Hossain, 2015). Allocation of these costs in the secondary cost pools to the primary cost pools is the next step to be followed. After this the charging of the costs to the cost objects is to be done, formulation of reports of the results of the implementation of ABC must be initiated and completed and consequently, the management and the company should act on the results and the information collected. It would provide many advantages such as, the company would be able to lower and consequently cut down on its distribution costs, production quality would improve, the company would be able to keep a track of all the activity costs of the company, building of quality roads would take place in a relatively short period of time would take place, which would consequently lead to various kinds of trade subsidies and incentives from the government. This would in turn motivate the senior management of the company to undertake more activities of road building, not only for producing its primary goods of road and tunnel building but also for being in the good books of the governments of various countries and most importantly for maintaining its reputation of maintaining its reputation of being one of the largest builders of roads and tunnels across continents and countries (Özkan and Karaibrahimo?lu., 2013).
The implementation of the process of ABC costing is not at all a cumbersome or expensive affair, as it is widely known to be. There are proper and diligent ways for properly implementing ABC costing in different genres of business, be it financing, costing, various departments and activities etc. The two important recommendations regarding the efficient implementation of the ABC costing method are as follows:
Absorption costing is one of the most suitable replacements for ABC costing for any kind of manufacturing organisation. It is no different for MQA either. In Absorption costing all of the manufacturing costs are absorbed by the number of units, which are produced by the manufacturing concern. In other words, the production as well as the compilation cost of a finished product in the inventory of the company would include direct materials, direct labour, along with both variable as well as fixed manufacturing overhead. As a result of which, absorption costing is also widely referred to as the full costing or the full absorption method costing. It includes any and every cost, which is directly and closely associated with the production of the goods concerned. In the case of MQA, it is no different either. The role of absorption costing in the process of application and allocation of the direct costs of the production process. The company would be able to directly assign and allocate all the direct costs including materials, labours and other expenses to the construction of roads, bridges and tunnels. Moreover, the major advantage which would be provided by absorption costing to MQA is the fact that absorption costing takes into account all of the costs of production, and its arena of influence is not just concerned with the direct costs, as variable costing or ABC costing does (Weygandt et al., 2015). Absorption costing includes a company’s fixed costs of operation (such as the cost of tunnel boring machine, tunnel building machines, laying down of tunnel walls and steel tubes),along with the salaries, rentals and various other utility bills.
Conclusion:
The most important objective of writing this report has been to highlight the importance of activity based costing, along with its uses, implementation and features. With the help of the example of the MACQ Atlas Roads Group Ordinary Stapled Securities, an enquiry into the implementation of the ABC costing in the working of one of the largest infrastructure based companies of the world has been done. Along with this, the recommendations for the successful implementation of the ABC in the company have been provided with an intention to apply the required changes, which are necessary for implementation has been provided.
References:
Adioti, A.A. and Valverde, R., 2013. Time-driven activity based costing for the improvement of it service operations. International Journal of Business and Management, 9(1), p.109.
Autio, E., Kenney, M., Mustar, P., Siegel, D. and Wright, M., 2014. Entrepreneurial innovation: The importance of context. Research Policy, 43(7), pp.1097-1108.
Bloomberg.com. (2018). MQA:ASE Stock Quote – Macquarie Atlas Roads Group. [online] Available at: https://www.bloomberg.com/quote/MQA:AU [Accessed 24 May 2018].
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Hardan, A.S. and Shatnawi, T.M., 2013. Impact of applying the ABC on improving the financial performance in telecom companies. International Journal of Business and Management, 8(12), p.48.
Kapi?, J., 2014. ACTIVITY BASED COSTING-ABC. Business Consultant/Poslovni Konsultant, 6(32).
Macquarie.com. (2018). Atlas Arteria (ASX:ALX). [online] Available at: https://www.macquarie.com/mgl/com/atlasroads [Accessed 24 May 2018].
Mahal, I. and Hossain, A., 2015. Activity-Based Costing (ABC)–An Effective Tool for Better Management. Research Journal of Finance and Accounting, 6(4), pp.66-74.Mahal, I. and Hossain, A., 2015. Activity-Based Costing (ABC)–An Effective Tool for Better Management. Research Journal of Finance and Accounting, 6(4), pp.66-74.
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Özkan, S. and Karaibrahimo?lu, Y.Z., 2013. Activity-based costing approach in the measurement of cost of quality in SMEs: a case study. Total Quality Management & Business Excellence, 24(3-4), pp.420-431.
Ruiz-de-Arbulo-Lopez, P., Fortuny-Santos, J. and Cuatrecasas-Arbós, L., 2013. Lean manufacturing: costing the value stream. Industrial Management & Data Systems, 113(5), pp.647-668.
Tibesku, C.O., Hofer, P., Portegies, W., Ruys, C.J.M. and Fennema, P., 2013. Benefits of using customized instrumentation in total knee arthroplasty: results from an activity-based costing model. Archives of orthopaedic and trauma surgery, 133(3), pp.405-411.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting. John Wiley & Sons.
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