HI5017 The Ramified Changes and Costing Methods

nt do not consume same level of that activity as it is based on the cost drivers.  Sometimes the activity consumption is also not proportional to the level of production. Hence, the allocation of costs on the basis of the level of production indicated by the consumption of machine hours or labour hours is insignificant. The allocation should be done on the basis of much realistic criteria, i.e. the level of activities used (Plank, 2018).

            This activity is named as cost driver in this method that is behind the generation of the costs. Various cost drivers are present like the number of machine setups, number of soldering points, the number of quality inspections, the number of purchase orders, the power consumption, and etc. Introduction of activity based costing method has phased out the old and unrealistic traditional costing method (Hoozée, and Hansen, 2017).

• This method has improved the cost calculation accuracy. The company is able to allocate to every department the accurate share of costs that actually belongs to that department. There are less chances of any cost allocation done wrong.
• It is able to analyse the areas that do not add value to the entity. This way the company is able to reduce the load of overall costs. Only those costs that add certain value and help in income generation are sustained. Rest other costs can be detected and worked on.
• For those entities that work on pricing the goods on the basis of a certain mark-up on the costs are able to do that process easily. This is so because an almost perfect estimation is made by this method (Cooper, 2017).
• An effective decision making system can also be put in place and the benefits of information technology can be fully exploited. A systematic approach for cost calculation shall work more effectively and error free using this costing model (Schaltegger, and Burritt, 2017).
• Even for the technique of transfer pricing this model turns to be more effective and valuable. The internal transfers in the company from one department to another are saved from incorrect pricing.
• This model is a helpful approach in helping the management to decide whether a certain product should be produced in house or whether it should be purchased. The cost that company shall incur under both the alternatives can be calculated (Christopher, 2016).
• The main advantage of the activity based costing is the right bifurcation of the costing which may be beneficial to allocate and absorb the cost in different department and process.
• The implementation of this model is not a one day affair. A lot of processes are there. Plus there are many analysis and studies required to get the feasibility of success. Hence the implementation of this model turns out to be costly.it is not in the clutches of small firms to adopt and maintain this model.
• The level of activity is an important factor that determines the success of this model. If the firm is relatively small and has a small lot of overall overhead costs, it’s useless for it to adopt this method. As this method shall uselessly add cost burden (Greasley, 2017).
• The most depressing disadvantage is the huge time consumption in adoption and implementation of this method. Further it gets difficult at times to convince the staff to get ready to adopt this method (Langfield-Smith, et al. 2017).

            This study under the particular journal tries to build a relationship that might exist between the application of the activity based model in the entity and the effect it have on the performance of the organisation. It is believed with certainty that this model provides an edge ahead the traditional costing methods and a strategic benefit is extended to the organisations. However, certain researches argue that the organisations that have not adopted this model have a higher EPS, market price and asset turnover than the firms that have adopted this method.  While the other researchers say that this is seen only in the implementation and budding stage of this model (Dale, and Plunkett, 2017).

  The main purpose of this study to determine the advantages, disadvantages of the adopted process. It is analyzed that if company should firstly adopt the cost and benefit analysis method before accepting the activity based costing method to absorb the cost in different departments. In the initial time, when organization adopts the activity based costing will have to face high initial investment cost which might negatively impact the profitability and increased business costing. There are several companies which have faced high complexity and increase business production costing after adopting the activity based costing such as Pan African resources, Pental Company and GE capital (Kumar, and Reinartz, 2018).

The complexities and the modifications that persist in the economy every day have made the traditional methods out dated. The benefit that the model provides to the entity is believed to improve the performance of the entity. Every entity is seeking to improve its performance. This is done with the objective of maximisation of shareholders wealth.  However, adoption of the activity based costing is beneficial for the organization which are having high complexity in the process (Hopkins, et al.2017).

            Does the adoption of the activity based costing model helps in improving the performance of organisation?

            The research has analysed several factors that are changed due to the adoption of the activity based model.  The activity based costing method helps in the bifurcation of different activities that are currently happening in the entity. This way it allows the allocation of costs incurred on those activities through the use of multiple cost drivers. The activity based costing model helps the management to get informed in a detailed manner about the whole working of the entity.

This information tends to be very useful to the management as far as the decision making is concerned. It is possible for the management to make decision regarding the various aspects related to costs like reducing costs by eliminating wastes and streamlining processes. This research has also made an observation that the first three years of the organisations that have successfully opted for this method provides outreaching results that are not obtained by non-adopting organisations. The most important thing to be kept in mind is that the benefits availed by this method must exceed the overall costs incurred (Arnaboldi, Lapsley, and Steccolini, 2015).

            This study focuses on the use of the activity based costing model to formulate a decision support system. More accurate costs are being computed by this model and hence it should be used to streamline the information technology function to improvise the decision making capacity. This research has focused on the intensive use of data that is used by this method. The purpose is to coordinate the benefits that the activity based costing model together with the decision support system based on computer can provide the business. More accurate costing and pricing decisions can be formulated or not is seen from this study. Activity based costing model have proved to be a success in its offline counterpart. However, the way it behaves in the online mode is to be seen with the help of this method (Dhubea, Salim, and Al-Riami, 2017).

            Is it possible to formulate a decision support system based on the activity based costing model? If it is so, can it be converted into a web based decision support system

            The feedbacks generated from this study have shown that the implementation of the decision support system has gradually improved the performance as far as the decision making process is concerned. Positive responses have been received from the management accountants. The activity based model has completely merged in the decision support system and has helped the management accountants reap the benefits of the developed technology. However the company needs to hire a software designer to get the system developed. The technicalities shall be dealt by the software designer, but the accounting requirements are to be specified by the management accountant. Bringing the decision support system on the web platform requires the company to remain updated with the system.

The staffs need to be trained to feed data timely into the system. System security needs to be maintained along with the same system. It is analyzed that if the cost account and management finds issue in the process changes in the adopted costing method then they will be properly trained and promoted to strengthen the overall outcomes and efficiency in long run  (Mohammed, Obrenovic, and Aina, 2017).  The main research finding is that the use of the activity based costing should be accepted only in the organization which is facing high complexity in the business. It is analyzed that if company could use these activities based costing then it would first focus on identifying the cost and benefits associated with the project.

            Though there exist exceptions. Not every firm that ever tried to adopt the activity based costing model have achieved success. Many a times the firms fail to achieve the results they desire from the activity based costing model. One important thing is the availability of certain features in the decision support system. They include flexibility, user friendly interface, and an adaptive approach. This decision support system has enabled the company’s management accountants to develop a successful approach that helps in determining the prices of the products, improve the performances of their respective departments and to bring optimisation in the capacity level.

            Both the studies have shown that the activity based model is an effective measure to help the management accountants in making the decisions related to the business of the entity. The benefits provided by the adoption of this model helps the organisations to achieve far reaching benefits that work on a long term basis. These both findings focus on providing the issues, challenges and benefits of adopting the activity based costing in the process system of organization.

These both articles have given similar assumptions and estimations while researching on the use of the activity based costing method in the business process. In addition to this, in these articles it is divulged that the acceptance of the activity based costing model in organization is adopted by change management which needs to be followed to optimise the benefits. The resistance from staff should be managed beforehand to avoid any kind of opposition later if the process of costing model is done in efficient manner.

            The first study from the accounting, auditing and the accountability journal highlights the impacts of the adoption of a new costing model brings in the performance of the entity. The research has brought in limelight the benefits that are accrued to help the entity achieve an overall performance improvement. However, the study of the journal of applied management accounting researched has focused just on one component that is improved in the overall performance improvement. That factor is the development of a decision support system.

This system is developed as a part of the entity’s core functional model and integrates in it the components of the activity based model. The data used and regression analysis implemented in both articles are based on the different data reflects different estimations and assumptions. However, one study has suggested that how activity based costing will be more beneficial for the economic growth of the Organizaiton and another study has also suggested how well company could strengthen the overall outcomes by adopting the activity based costing in the process (Frazier, 2014).

1. It is considered that Activity based costing method is based on the allocation of the overhead costs on the basis of the activities consumed by the different products or departments. It is ideally accepted by those organization which are indulged in complex business process and organization. The management accountants need to make a budget estimate of the cost to be incurred on the adoption of the activity based costing model and the benefits it shall provide to the organisation. After the budget is made, a decision should be taken based on the feasibility of the adoption.
2. The change management needs to be followed to optimise the benefits. The resistance from staff should be managed beforehand to avoid any kind of opposition later.
3. The proper training and development program should be accepted by company while adopting the activity based costing model in the business (Kaplan, et al, 2014).
4. The software of decision support system should be developed with the help of a professional software designer.
5. Even when the designer is developing the software, the requirements that the management accountant have from the software should be versed by them to the software designer.
6. The use of accounting software and system should be used on the basis of the skills and software program which might be easy for the employees to learn while implementing the process system of the costing after adopting the activity based costing.

Conclusion

            There are several pros and cons have been suggested under these two different journal articles. However, while the other researchers say that this is seen only in the implementation and budding stage of this activity based costing and main focus should be to analysis the other factors while adopting the costing method. It is analyzed that company should firstly adopt the cost and benefit analysis process before accepting the activity based costing method to absorb the cost in different departments.

If the cost associated with the activity based costing is higher than the benefits given by this model to organization then it should not be accepted by the management in its costing method and vice-versa.  In a layman’s words, benefits can be achieved from the adoption of this model only when the management looks from a broader and open mind, rather than from a narrow vision. Now in the end, it could be inferred that only organization which have been facing high complexity in determining the process costing and absorption of the costs of the different products and services in organization will indulge in adopting the activity based costing. These two articles have shown the different assumptions and estimations in the undertaken project.

References

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