Benefits of ABC Model

Discuss about the Costs And Benefits Of Energy And Resource Activity.

The present report is developed to provide an in-depth understanding of the cost accounting method of Activity Based Accounting (ABC) and its benefits to the management accountants for taking quality decisions. The business organizations are emphasizing on the implementation of an efficient system of cost accounting that enables them to secure their competitive position. As such, the method of ABC costing is facilitating the business managers to drive operational efficiency and therefore largely being implemented for analyzing the overall cost of production of the manufacturing process. In this context, the present report is developed on the perspective of the Board of Directors of the selected ASX listed company that is Coco-Cola Amatil. The report has provided detailed discussion regarding the use of ABC model for improving the management accounting information available to the top management team. The report, in this regard, has specifically provided an explanation of ABC model and its features and the aligning of the selected company goals and strategies with the model. It has also provided a detailed discussion of the use of ABC model for assisting in the company’s strategies. It also provides the recommendations about the implementation of ABC model for the company based on the research findings. At last, it has also provided suggestion about the other management accounting tool that is suitable to be used by the company.

Activity based costing is used largely by business organizations nowadays for developing an overall analysis of its operational cost. The costing model is proving to be largely beneficial for establishing the relation between costs, activities and products. The method is used to recognize the indirect costs to the products manufactured more efficiently in comparison to the traditional method of cost accounting used. The method is proving to be largely helpful for management accountants to allocate the overhead costs to the products in a more systematic manner. The increasing competitive pressure on the business organizations is driving them to adopt the use of more efficient cost accounting systems for gaining a control over their operational expenditure. This is because the method of ABC costing helps in allocation of overhead costs more precisely to the items on the basis of actual consumption. It is used for reduction of overhead costs and thus maximizing the operational efficiency to large extent (Goektuerk, 2007).

The model of ABC costing primarily involves identification of the costs that need to be allocated and this is followed by tracking the cost of activities. An activity in ABC cost accounting systems refers to an event having specific goals such as products designing or distribution of finished goods or services. The activities identified as consuming overhead resources are considered as cost objects. The cost drivers refer to factors responsible for driving a cost and are used for referring to an allocation base. The method of costing then assigns the costs to the activities that are actually consuming overhead and this is followed by assigning the costs to the products that actual demand the activities. The adoption of ABC model of costing is increasing to a large extent in business corporations to achieve operational efficiency and sustaining their competitive position. The major features of the ABC model can be stated as follows:

• The overall cost is classified as short term and long term variable costs in activity based costing
• Short-term variable costs are assigned on the basis of volume related cost drivers such as direct labor hour, direct material cost and machine hours
• Long-term variable costs are assigned on the basis of complexity and variety of business activities instead of volume
• The overhead costs are allocated on the basis of type of activities as per the production or service department
• The main objective of ABC costing method is to provide accurate information related to the overhead costs
• The allocation of overheads is done on the basis of activities that facilities the management in taking quality decisions within short span of time (Maingi, 2013).

Features of ABC Model

Coca-Cola Amatil is recognized as one of the largest bottlers involved in manufacturing of non-alcoholic ready-to-drink beverages across the Asia-Pacific region. It is attributed to be one of the major companies involved in production of bottles. The mission of the company is to provide refreshment and hydration to the people of New Zealand and Australia. This is achieved by the company by providing extensive beverages ranges. The company provides employment to about 15,000 people and provides its products and services across 265 million consumers. The objective of the company is to become a global producer of bottles. The company objective is to work in close relation with customers, restaurants and convenience stores for attaining a global recognition. It aims at attaining global recognition by carrying out its business activities in a responsible and ethical manner. This will help the company to strengthen its brand image across different regions of the world and securing its competitive position in the highly competitive beverage market.

The company strategic direction is to attain a position of globally recognized beverage company involved in providing bottled water. It aims to create growth and provide larger returns to shareholders by continually adopting to the changing business environment. The company strategy is developed on the basis of the following three pillars:

• Strengthening the leadership: This involves developing the portfolio of its products that are innovative and are able to continually meet the changing customer needs and expectations. It aims to strengthen the brand equity by the use of innovative marketing tactics.
• Developing efficient production system and market execution: The strategy of the company is aimed at providing best in class services to the customers to sustain its competitive advantage. It also aims at development of low-cost distribution and operational processes for improving its sales and larger revenue realization.
• Aligning with the Coco-Cola Company & the partners: It aims to develop its products and services as per the shared vision and objectives of its parent company and also maintaining a balance share of risk and rewards (Coca-Cola Amatil announces results of strategic review, 2014).

The company at present is facing large competition globally for improving its productivity and reducing its cost of production. Thus, it needs to implement a system of costing that help in assigning the costs involved in its production process accurately for maintain a control over its operational expenses. This is essential to meet the strategic objective of the company to attain a global leader position in providing bottled water with the use of a business practices. The implementation of the ABC model seems to be largely effective for the company as it will help the management accounts in gaining information about the type of resources utilized in each activity of the production. The allocation of the resources on the basis of nature of activities and its subsequent allocation to the products are carried out by the use of cost drivers in ABC costing model. Thus, the main benefit that can be realized by Coco-Cola Amatil is to gaining a control over its operational expenses by gaining the relevant information and thus ensuring that resources are utilized effectively.

The company in order to become a global leader has to effectively met the global competition and carries out its business properly in changing business environment. The changes in the business environment is driving the company to adopt the use of more accurate costing system to gain reliable information to be provided to top management for quick decision-making. The achievement of the strategic objectives of the company requires taking important decisions regarding the placement of new orders, development of new marketing techniques and designing of the production systems that need to be supported by gaining relevant and realistic information. The management accountants of the company can gain detailed information about the development of various cost activities that lead to the development of higher quality product and services. The cost involved in carrying out each activity is identified and assigned and the overall production cost is calculated by pooling up of all the cost activities. This facilitates the business managers in gaining a clear reflection about the day-to-day basis carrying out of operational activities. This help in gaining useful and relevant information for decision-making process and enhancing the operational efficiency (Berger, 2011).

Coco-Cola Amatil: Company Overview

ABC Model of costing is regarded to be highly useful for the company in achieving its corporate objectives. This is because it will facilitate the business managers in taking effective decisions regarding the business growth and expansion. As such, it can reduce its operational cost and drive the profit to be used in supporting the plan if business growth. Also, collection if realistic accounting data regarding the operational process will help in elimination of wasteful activities and thus maximizing the operational efficiency (Barrera-Hernández and Barton, 2016).

The ABC model of costing can be implemented by Coco-Cola Amatil by the use of the following two methods as followed:

Allocating the Resources to Activities

This involves gaining relevant information about the main and all the support activities involved in the production of bottled water. The completion of their survey is followed by identifying the resources consumed in each activity such as use of machines or labor hours. The cost associated with each activity is summed for gaining an overview reading the overall cost of production that has been incurred by the company. The company can effectively identify the non-value adding activities by segregating the production process in different activities. The non-value adding activities need to be removed by the use of implementation of proper strategies and actions by the business managers for driving the operational efficiency.

Allocation of Activities to Products and defining the Industrial Cost

The second phase implies the use of a cost driver that involves identifying the factors that lead to consumption of resources in each activity. This will help in taking effective steps to minimize the resource consumption in each activity. Lastly, it involves the calculation of final price of product on the basis of the values allocated to each product activity (Almeida and Cunha, 2017).

The company is also recommended to adopt the use of marginal costing method for assigning the variable cost of production as per the units of cost. The method involves charging the variable costs as per the units of cost and fixed cost are written off against their contribution for a specific period. The method is used largely for determining the additional products manufactured by the company as marginal cost is attributed to the cost involved in manufacturing of one additional unit of output (Oh and Hildreth, 2016).

Conclusion

The report concludes that ABC model is best suitable method for Coco-Cola Amatil to realize its strategic objective. This is because the company can take effective decisions reading its global expansion by collecting the operational expenses involved in its different activities such as production, marketing and sales. Also, it can utilize the increase in profits attained by the use of ABC model to drive its sustained growth and expanding its business across global level. The company is also recommended to adopt the use of marginal costing that will help it to identify the variable cost involved in one additional unit of bottled water.

References

Almeida, A. and Cunha, J. 2017. The implementation of an Activity-Based Costing (ABC) system in a manufacturing company. Procedia Manufacturing 13, pp. 932-939.

Barrera-Hernández, L. and Barton, B. 2016. Sharing the Costs and Benefits of Energy and Resource Activity: Legal Change and Impact on Communities. Oxford University Press.

Berger, A. 2011. Standard Costing, Variance Analysis and Decision-Making. GRIN Verlag.

Goektuerk, H. 2007. Activity-Based Costing (ABC) – Advantages and Disadvantages. GRIN Verlag.

Maingi, J. 2013. Advantages & Disadvantages of activity based costing with reference to economic value addition. GRIN Verlag.

Oh, S. and Hildreth, A. 2016. Analytics for Smart Energy Management: Tools and Applications for Sustainable Manufacturing. Springer.

Coca-Cola Amatil announces results of strategic review. 2014. [Online]. Available at: https://www.ausfoodnews.com.au/2014/11/10/coca-cola-amatil-announces-results-of-strategic-review.html [Accessed on: 20 May 2018].