Activity-Based Costing Method

It can be clearly observed in the 21st century that the business environment of change the lord and made it more challenging to conduct of business. The increasing demands of also holds did the banks to provide the customers with the new type of services and products that we can fulfil the market requirements. New techniques are used in order to fetch funds from the public by the banks. Technological measures have also been adopted in order to make the system efficient and free from any kind of human error.

The overhead cost of a product or service is not allocated on the basis of the time but it is allocated on the basis of all the activities that have been carried out while manufacturing of a product or service. The activity-based costing system is very helpful in order to determine the cost of the product by dividing the first into seven cost pools and drivers (Peter & Kevin, 2006). The traditional costing method is a little Complex because of the more complicated system followed by it. Cost activities are the activities which have been carried out in order to manufacturing product.

Activity-based costing method

An activity-based accounting method is the best costing model that can be used in this era to determine the rates of a particular product or service. The words are calculated on the basis of time or machine hours and also other costing methods are used in which all the expenses that have been incurred while the manufacturing of the product is recognized and assigned to the cost function of the product.

Therefore, the basic principle on which the activity-based costing depends is that every product and service can be valued only particular cost drivers are needed to be assigned to every good. The major objective of the costing process used to determine all the change in expenses so that it can be further analyzed by the manager to make decisions. The activity-based costing is said to allocate overheads to direct expenses which is completely different from the conventional costing method.

In the ABC approaches it has been observed that the first person to objects on the basis of their expected consumption. Five major factors should also be kept in mind while analyzing the activity-based costing method. Firstly, the manager should make a clear analysis of the resource that has been used in order to manufacture the product so that the value can be used to compute the expenses (Drury, 2013). Secondly, cost pools should be established so that overheads can be assigned in a much more specific and elaborated manner.

Characteristics of the ABC Method

Thirdly, it should be made clear that various cost drivers should be recognized so that it can be assigned to a particular item or service. In the fourth step, the absorption rate of the overhead expenses and the cost pools are determined or computed. Lastly, the costs are assigned to the products and services after considering all the cost pools, drivers and the absorption rates that have been incurred by the organization while producing it (Marsh, 2009).

Therefore, it is very important for the organization that is involved in the manufacturing business to engage these tools in their costing processes. The non-manufacturing organizations are not able to determine each and every caused because of the intangible nature of the goods or services provided by them. Therefore the non-manufacturing organizations should try and not adopt any of these methods in their costing process. Traditional methods of persons were used in order to frame the production of different type of goods. Different costs like direct labour and direct material were the major factors which played the major role in the earlier days (Drury, 2011). It has also been observed that the indirect expenses didn’t amount much in earlier days as compared to the current page.

In the current days, the organizations are trying to produce different products and services at the same time so that they can earn huge profits. This has made the task of assigning the indirect costs to products harder. Further, a proper costing method used by an organization will also be helpful for the company in the process of decision making. Also, it should be noticed that the traditional approach was only able to track the volume and non-volume associated costs but the costs like setup cost, material handling cost, etc. were not being calculated because of which these costs that segregated from the price of the product because of which inaccuracy was observed.

Characteristics of the ABC method

The basic objective of the activity-based costing method is to determine the total cost of the product on the basis of all the costs that have been entered by it during the manufacturing process. The identification, of course, can help the management to reduce the price of the product. Some of the more important features of the activity-based costing are as follows:

•    The ABC method divides the costs into two major categories which are direct cost and indirect cost. The allocation of this cost to the price of the product is a company or management to determine the actual cost of the product (Ehlers, 2014).
•    This makes the costume process more logical by helping the management to allocate the different type of overhead expenses and at the same time making the costs reliable for the users also.
•    In this process, any type of expenses that have been incurred by an organization for manufacturing a product in a particular time period is being identified. Therefore it is very important for the management to determine the incremental cost that has been bearded by the company while the production of a good service (Douma & Hein, 2013).
•    This method of costing also uses various types of cost drivers to assign the cost to different activities. Different cost drivers like power consumptions production orders, machine setup, etc. are determined and assigned to the products so that their actual cost can be evaluated (Douma & Hein, 2013).

In the present scenario, it was observed that the events and diversified competition within the industry has made it very hard for the companies to maintain the high position in the market and successfully earn revenue so that future liabilities can be addressed. Therefore, the form should try to adopt new and diversified costing techniques which will help it to survive in the competitive market.

Allocation of Overhead on the Basis of Activity-Based Costing Approach

Also, it has been made necessary for organizations to compare the data on the basis of the value added methods so that each and every cost related to the manufacturing of the product can be determined which can further help to improvise the decision-making process and eradicate any affairs that are not necessary for the organization. This process is said to concentrate on the different type of activities. The process does not deal with the basic process of decision making for the assistance of Management. This process helps to eradicate any non-value adding activities from the cost of the product which may help to minimize any such activities and enhance the overall effectiveness of the organization and its functions.

Allocation of overhead on the basis of Activity Based Costing approach

There are various types of overheads present all manufacturing a product or service. And it should be noted that long-term variable expenses should not be recognized by the product and a variety and different type of short-term variable expenses are to be recognized which may contain cost drivers like machine hours, direct material cost, direct labour hours, etc. the short term variable expenses incurred by the organization are generally affected with the volume of the business or the product manufactured where is the long-term variable expenses are generally not driven by the volume but are driven by variety (Ittner, Lacker & Taylor, 1997).

The similarity and difference has been studied in the light of articles proposed by Cardinaels, Roodhooft & Warlop (2004) and Ittner, Lacker & Taylor (1997).

Presence of differences and similarities in the articles

•    Value of activity-based costing and competitive pricing decisions: the buff report really mentions the significance of the activity-based costing method in the management of organization all surviving in the competitive market. The article also focuses on the effectiveness of the same on the price determination objective of the organization and the competitive market (Cardinaels, Roodhooft & Warlop, 2004). However, it should also be noted that the traditional costing methods are not so effective as a whole because the modern approach that is used by the organizations that help did to filter different costs accordingly and also have helped them to conduct the decision-making process and much more elaborated manner. Also, it was noticed that the activity-based costing method was one of the most innovative and press tools that can help to improve the performance of a company on the whole.
•    Innovation and research: the basic reason for the adoption of the activity-based costing and the management framework of the organization was the competitive environment and the need for innovation in such an environment (Ittner, Lacker & Taylor, 1997). It should be clearly noted by the management of the organization should try and implement new and innovative ways that can be very effective for the management of the organization and does may help to establish a fresh solution to the problems. these innovative action researchers have also help to remove the restrictions that were faced while using traditional accounting systems and her father also help to reconstruct a new concept like activity-based costing which can be used to implement, modify or enhance the theories of accounting (Horngren& Fosster, 2008).

Differences in the articles

•    Value of activity-based costing in competitive pricing decisions: the article clearly states the importance of the design of the activity-based costing system that has been made on the competitive market after implementation. Also, this article has helped to highlight the benefits of other costing approaches in the current competitive market. Another function of the activity-based costing system is to help and modify the prices of the commodities when the response from competitors is not very informative (Cardinaels, Roodhooft & Warlop, 2004). The activity-based costing system helps to determine the cost of a product on an unbiased basis because of which the efficiency of the decision-making process is improved.

On the contrary, the article by Ittner, Lacker & Taylor (1997) sheds light on Innovative action research and helped to highlight the new and innovative measures that can be used in the modern day costing virtual for their help improve the decision-making process and the profit earning a statement of the organization. An assessment has also been made in order to determine whether the new techniques will be able to gain a large number of audience and practitioners or not.

However, with the help of innovative action research, various factors can be determined which can help to increase the use of the activity-based costing because of the effectiveness that it provides to the users. This can also help to remove any type of loopholes present in the costing system of the organization (Ittner, Lacker & Taylor, 1997). Thus, the system will not only help to enhance and modify the theories but it will also help to implement new costing techniques in the management of the organization.

Usefulness to the banks

One of the most important problems that are being faced by the regional banks in the current market conditions is to find a cost-effective measure that will help them to maintain the portfolios of the customers and products in an efficient manner. Also, it is one of the major duties of the banking institutions to allocate the different cause of products and services accurately. This will not only help the organization to understand the business capabilities but also will help to fulfil the goals and objectives that have been determined by it (Parrino, Kidwell & Bates, 2012.

Every type of expense should be linked to the specific product so that the real cost of the operational activities can be evaluated which can further help to assess the real cost of the products. In order to fulfil this objective, many Financial Institutions have tried to build up a new costing model will help them to evaluate the data even after the existence of complexity of the reports (Cardinaels, Roodhooft & Warlop, 2004).

The basic concept of activity-based costing system is to identify and allocate the overhead expenses but it also helps to identify the labour cost so that the business can gain enormous benefit after evaluation of every cost driver (Peirson et. al, 2015). It identifies and allocates expensive so that an evaluation can be made on the profitability of the product and the demand that may be foreseen by the organization in future.

The results that are achieved with the help of these strategic objectives, the father help the firm to conduct the decision-making process in a much more elaborated form (Cardinaels, Roodhooft & Warlop, 2004). Also one of the biggest banking institutions in Australia has implemented the use of activity-based costing and its system so that proper information can be compared to the management of the organization to make further decisions.

it should be made clear that the activity-based costing system will not only help the banks to improvise their accounting systems but will also help them to explore new and possible outcomes that will help them to gain competence over the banking sector. The division of various cost and expenses on the basis of the products has helped many huge scale companies to survive in the competitive environment (Ittner, Lacker & Taylor, 1997). therefore, it is very important for the banking institution code of these methods as they will not only help to improve the quality of accounting but also will help them to improve the revenue which will for their help to increase their market share and the wealth of investors or shareholders.

Usefulness to the Banks

It was observed that a lot of new organizations have entered into the banking industry because of which the competition of increase and the introduction of new costing methods are also be implemented by them. This new costing method will not only help to improve the efficiency of the firm but will also have to at the organization to increase its market share and the wealth of the investors and the shareholders of the organization (Horngren, 2011). A clear determination of the demand of the product and services can also be made with the help of the activity-based costing system which will help the organization to increase its profit with the help of the data that will be presented to it.

Application of new accounting software has also been made in the banking institutions which have helped to conduct small-scale businesses. The software is generally termed as fresh books and is having more than 5 million users on a global scale. The major task that is fulfilled using the new software is to determine the tracking and invoicing time of the products (Ittner, Lacker & Taylor, 1997).

A lot of innovations have been observed in the industry in relation to the classic software’s that were used for the ascertainment of the payment functionalities. A lot of payment gateways have been created which can be used to pay the overdue payment by the customers. A new mobile application was also launched which have proved to be very essential and friendly for the users as it can provide round the clock service and the customer can even access it by being at his own home.

Outcomes

• The report has clearly highlighted the significance of the activity-based costing system in the organization management system in relation to the pricing decisions that are to be taken and the competitive markets. Situations have also been discussed where the activity-based costing system was not much effective and have given an unbiased decision because of which a negative outcome was established (Cardinaels, Roodhooft & Warlop, 2004).
• The adoption of the activity-based costing system will help to diagnose many different types of solutions for the managers in order to determine the reason of losses for the enterprise and for that help them to earn maximum revenue (Davies & Crawford, 2012).
• In relation to this, the innovative action and results also help to determine the performance of the activity-based costing system in the industry by stating and comparing it to the traditional accounting methods. The new system has also helped to idealize the thinking pattern the practitioners and scholars in relation to the costing methods (Brown, 2013).
• However, it can be stated that the innovative action and research have helped the Scholars to work in accordance to the client organization so as to maximize the utilization of activity-based costing in the management of the organization which will further help them to improve their financial performance.

Conclusion

After the analysis of the above report, it can be stated that the activity-based costing has been a very effective tool in this current era, and it has outperformed the traditional costing methods in many different ways. It has not only helped to determine the overhead expenses but has also helped the organization in the task of decision making. However, it should be noted that this costing method is only useful for manufacturing industries whereas if non-manufacturing industries use that, improper information will be reflected. Hence, it is very important for the organizations to use this method in their management systems for determining the costs and earn maximum profits so as to fulfil the desires of both the top management structure and the investors of the organization.

References

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Drury, C. M. (2013) Management and cost accounting. Springer.

Ehlers, T. (2014) Understanding the Challenges for Infrastructure Finance.  BIS Working Papers, No 454, BIS, Basel.

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Marsh, C. (2009) Mastering financial management. Harlow: Financial Times Prentice Hall.

Parrino, R, Kidwell, D. and Bates, T. (2012) Fundamentals of corporate finance. Hoboken, NJ: Wiley

Peirson, G, Brown, R., Easton, S,   Howard, P. and Pinder, S. (2015) Business Finance, 12th ed. North Ryde: McGraw-Hill Australia.

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Cardinaels, E., Roodhooft, F., & Warlop, L. (2004). The value of activity-based costing in competitive pricing decisions. Journal of Management Accounting Research, 16, 133-148. Available from: https://search.proquest.com/docview/210233614?accountid=30552

Ittner, C. D., Larcker, D. F., & Taylor, R. (1997). The activity-based cost hierarchy, production policies and firm profitability. Journal of Management Accounting Research, 9, 143-162. Available from: https://search.proquest.com/docview/210165998?accountid=30552.