Managerial Accounting Assignment: Activity-Based Costing Systems In Funtastic & Murray Goulburn
Question
Task:
Your managerial accounting assignment task is to review a journal article based on activity-based costing methods and evaluate these costing systems in two Australian companies.
Answer
Abstract
Many organizations adopt different accounting systems for estimating costs. In this view, the report on managerial accounting assignment has critically evaluated the Activity Based Costing systems. Additionally, two of Australian companies like Funtastic and Murray Goulburn operate in different sectors but use ABC for measuring their internal finances. Also, a peer review article by Cho and Boulianne (2005) was selected to analyse the use of ABC systems in real-time organizations. It was evaluated that ABC and advanced info4rmtaiuon system can help the companies in attaining high market share and competitive position due to efficient decision making on accurate cost analysis.
1.0 Introduction
Managerial accounting is considered to be a branch of accounting that is associated with the detection, measurement, evaluation, and interpretation of data which is further used in making efficient decisions of the company. The managerial accounting is different from financial accounting as the latter is majorly focused on the report of internal and external financial transactions; however, the former is based on internal decision-making procedures (Lepadatu, 2011, p. 52). In this view, the managerial accountants are required to evaluate different events and operational metrics for translating the data into useful information which can be further used in the management and decision-making process. Thus, managerial accounting helps in providing detailed data about the operations of the company by evaluating individuals that include a line of products, operational activities, and others. The report intends to outline activity-based costing methods through article review and evaluation of these costing systems in two Australian companies.
2.0 Part A
2.1 Features of Activity Based Costing
“ABC” or “Activity Based Costing” systems are evaluated by assigning the overhead as well as indirect costs with related products as well as services. Thus, this type of accounting system evaluates the relationships amongst costs, overhead activities, products, assignment of indirect costs of production that are less arbitrary than the traditional costing system (Drury, 2013, chap 10). However, in this type of accounting system, evaluations of indirect costs like management and wages to office staff are often challenging for assigning to a product. It is majorly used in the manufacturing units as it helps to increase reliability of cost information, thus depicting almost actual costs incurred by the organization while undertaking the process of production. It can be said that an activity is a type of “cost driver” like “purchase orders” and “machine setups” (Horngren et al, 2015, p. 150). Thus, the cost driver rate includes the cost pool that is divided by cost drivers and hence used in the calculation of overheads and other indirect costs during the conduct particular activities. It is also said that ABC costing systems help in gaining better knowledge of the costs thus helping the firm in determining the appropriate pricing strategy. The calculations of Activity Based Costing include
- Identification of activities for creating a product
- Dividing the activities into “cost pools” that further includes that individual costs that are linked to an activity like manufacturing, thus, calculating the total overheads of every “cost pool”.
- Assigning cost pool activity “cost drivers” like working hours or units (Collier, 2015, p.55).
- Calculations of “cost driver rate” by the division of total overheads in every “cost pool” by the overall “cost drivers”.
- Dividing all the overheads of every “cost pool” by “cost drivers” for obtaining “cost driver rate”.
- Multiplication of “cost driver rate” by the amount of “cost drivers” present.
In this view, there are two categories of measuring activities that transaction drivers and duration drivers. Thus, the transaction drivers involve the counting of the number timers the activity occurs while the duration drivers measure the time taken by the activity to complete (Collier, 2015, p.55). The ABC systems can be categorized into five broad categories that are "batch level activity", "unit-level activity", "customer-level activity”, “organizational- sustaining activity" and "product-level activity".
2.2 Suitability of ABC Systems in Australian Companies
ABC systems are suitable for big manufacturing and production units as the systems assign the costs in each activity of production like workers testing products. In this view, Australian companies like Murray Goulburn and Funtastic Ltd apply activity-based costing methods even though both the firms operate in different domains. Thus, firstly, the basis of allocating overheads and indirect costs are determined. Thus, common costs for both the companies are direct labor wages, labour working hours, direct materials used, and machine working hours. The managers of Funtastic and Murray Goulburn predetermine the overhead rates using estimates of different activities. These overheads rates are calculated at the end of the year for determining the costs for the following year.
The overhead rates are applied through the years thereby using the actual amount as well as the predetermined overhead expenses. In this view, direct materials costs for Funtastic Ltd will be plastics, rubber, and other inputs for the toys while material costs for Murray Goulburn (MG) will be Milk and its by-products (MG, 2019). Thus, purchasing materials for the production process are the activities that consume resources, and costs are assigned by the managers of both the aforementioned companies. In the next step, the cost drivers are linked with activity identified. For instance, if purchasing is considered to activity for both the companies, then the cost drivers will be for items ordered or the number of orders placed (Funtastic, 2019). Thus, each activity in the manufacturing process posses a different cost structure, hence, the “cost rates per cost driver units” are calculated by the manager of both the firms. For instance, the cost driver rates might include cost per purchase order and others.
The cost estimation in manufacturing units of both the countries is interesting and challenging as the managers are required to imagine and understand all the activities that are required for producing toys (Funtastic) and dairy products (MG). The activity-based costing systems imply the complex operations and activities in the business involve higher rates of indirect costs thus, increasing the prices of the end products (Drury, 2013, chap 10). Also, activities for Murray Goulburn involve storage, product testing (in case of new flavours or products), and packaging in containers (MG, 2019). These activities are different in Funtastic Ltd as the latter includes several intricate processes for completing the production of toys and other produce. It can be said that the overhead cost for both companies will be higher.
2.3 Benefits of Cost information
The business firms operating commercial incurs several direct and indirect costs that should be correctly estimated for undertaking several decisions of the company.
2.3.1 Use of Cost Information in Innovations and Developments-Cost information helps in determining the overall spending of the firm, thus helping to cut down costs that consume high finances. In recent times, cost information has helped develop new procedures in the production process that consume low finances while also improve factory efficiency (Chwastyk & Ko?osowski, 2014). It can be said that both companies that are Murray Goulburn and Funtastic might invest in the innovation in reducing the overheads and indirect costs for increasing their profit margins. Effiok & Bessong (2016, p.2) depicted that incorrect cost information, obsolete techniques of costing, and inefficient corporate governance hamper the organizational performance. Hence it can also be said that it is a challenging task for both the managers for estimating costs while developing new products and procedures. In this view, managers have to conduct in adept research for obtaining cost information thereby determining the success of innovations and market risks related to it. Achieving success in innovating new procedures and products are heavily dependent on the efficacy of the decision made in deployment procedures (Su & Tang, 2016, p.2). Thus, it is important for the managers of both companies for using the cost information in the planning, development, and operations of innovations and existing activities. Due to the development of various software and digital management systems, the managers can easily track the expenses while also help the firm in creating a competitive edge.
2.3.2 Determining prices- The prices of end-products are majorly dependent on the dependent on the cost information of the production process and other expenditures. The pricing strategies are most crucial as it is dependent on cost information, thus determining the final value of the products. If the cost information is incorrect, it might result in inadequate pricing that might impact the revenue generations (Heralova, 2014, p. 455). In this view, both the aforementioned companies use ABC analysis that showcases the usage of overheads thus helping managers of MG and Funtastic Ltd for determining which activities are necessary and which are not. Thus, it can be said that the assignment of costs for each activity helps the managers in setting the price accurately according to the costs incurred for creating the products (Sage & Rouse, 2014, chap 18). Also, cost information helps the managers of both the companies in gaining information the direct and other costs for reducing the impacts of profitability.
3.0 Part -B
3.1 Design and Implementation of Costing system
Cho & Boulianne (2005) researched US suppliers in Semiconductor die and analysed discussion making through the use of ABC systems. The authors stated that the semiconductor chip industry has pone of the most rapidly growing sectors in the US embarked by frequent technology changes that further leads to complexes and integrated products. The Units costs on per generated die from the wafers that are processed become a major factor of the competitive position attained by the firm in the die industry. Since a large number of dies on each wafer was products, the consumers often placed bulk orders. However, the price of each die was sensitive for the total bidding amount. It gradually became critical for the firm for quoting the price that would not lose the bid as well as the profitability. However, this costing process decreased the profitability as bids were lost and a significant reduction in the market share was experienced (Cho & Boulianne, 2005). Thus, the company hired designers for implementing information based on ABC.
In the initial step of identifying and describing activities, discussions were made for the activities to be involved in the processing of die. For instance, customer type was required for inputting the data, thus type A customer was defined as the preferred customer while the type B customers were determined to be a new one. Thus, relationships and formulas were designed was considering the number of shipments and receipts as it would impact the pricing. It was estimated that recurring shipments were expensive than one- time delivery while the historic data was used in tracking trends and analysing the performance. Important information on designing automated ABC systems related to the job patterns, quantities of dies, and the processed wafers. Furthermore, the VBA was chosen for creating tools and successfully implementing the Decision Support Systems. The information collected was stored in the Microsoft Sequel Server database, after which the VBA codes manipulate the data for representing the information in a user-friendly interface (Cho & Boulianne, 2005). A custom menu and toolbars were organized for quotations along with the development of the UserForm, List Box, Frame, Labels, and Textboxes. Hence, the implementation of information systems with Activity Based Costing Systems, the company managers were able to obtain three possible units per die quotations while the systems also had the calculation feature which also displayed the dollar amount per sales commission would be received by the representative for quoting each die prices. The systems were also efficient in indicating and informing the manager if the selected price level fell below the system generated amounts. The managers would receive an auto-generated email for authorising the quoted prices below the suggested one. The authors further depicted that the information system is like a catalyst for the implementation of ABC systems in manufacturing organizations.
3.2 Similarities ABC systems discussed in Articles
In Part A, detailed information about the ABC procedures and features were discussed. The article by Cho & Boulianne (2005) also discussed procedures for the calculations and evaluations of the Activity Based Costing System. The activities that were related to the die processing were identified through the verification of physical records, interviews, and questionnaires in the organization. Then, the activity costs were tracked with the product for the match of cost drivers for each performed activity. Thus, the cost drivers, in this case, included the transactions, durations, and intensity drivers. Transaction count included the number of times activity was being performed while the duration drivers measured the timeframe required for performing each activity. Also, the intensity drivers were calculated for resources that were used for performing each activity. To gather accurate information Decision Support System was used.
In part A, it was not discussed how the managers and technicians keep track of the activities and costing systems. The article made it clear that information systems are efficient in reaping the benefits of the ABC systems in large manufacturing units. Also, the article was successful in explaining the difficulties of obtaining data about the related activities in the production process. It can be assumed that in real-time organizations, data collection for estimating costs is challenging tasks as the market environment and others several factors are considered for the defining a costing system (Cho & Boulianne, 2005). The research in Part A demonstrated that ABC systems helped in providing accurate results for the managers. However, the article demonstrated that activity-based management is an essential step towards the development of Decisions Support Systems that is majorly based on the Activity Based Costing methods that will further help in making uniform decisions for improving performance while also increasing the profitability (Cho & Boulianne, 2005). Thus, the authors suggested that regardless of the philosophies undertaken by the firms, accurate information is needed for making a decision, setting priorities, allocating resources while monitoring the actions taken. Also, several prospects of ABM (Activity Based Management) were not discussed in Part A which is also crucial for the organization. This included the determination of product costs (cost per die in the article) for efficacy in product pricing along with the improvement in procedures and activities (that is bidding in highly competitive markets of the article). Part A of this report `did not close the determination and optimizations of activity capacities which was depicted by the article.
3.3 Usefulness of Cost Information for Internal Users
The company in the article was losing market shares due to inaccurate cost assumptions which meant that the managers were unable to secure bids considering the per cost unit of dies. After the implementation of the ABC system along with DSS, the accurate cost of products and cot of other activities could be estimated that helped in winning bids and regaining the market shares. Also, the cost information generated by the systems had a direct impact on the bidding outcomes that in turn impacted contracts, profitability, and competition. In earlier cases, the low quotes impacted the profit margins while bidding too high, jeopardized the opportunities to win (Cho & Boulianne, 2005). Also, the management of the dying company will be required to update the systems with correct parameters and estimates if the technology of the die tends to improve. In the later periods, the cost information systems were improved to web-based for obtaining the data whenever required. In the case of excels and systems data, the information could only be retrieved through applications and the management had to print the data for bidding and improving the internal operations and process. Thus, the up-gradation of the cost information through the internet, management could use the data through an active server page that was also secured through login user names and passwords.
It can be assumed that the cost information system was always crucial in the decision making of the organization however, due to vague cost calculations; the company has missed many opportunities for earning good bids and projects. The company used initial cost amounts from previous company reports while completely biased estimations and adjustments in the cost structure were done. Even though this type of decision making is obsolete but it was used by the internal users (Cho & Boulianne, 2005). In recent times, the company could implement MIS for obtaining accurate cost information thus, reaping many opportunities. It can be said that cost information is one of the major determinists for planning the production process, innovations, development, and another decision making in the organization.
3.4 Recommendations & Key Lesson learned
The article portrays the major theory behind the ABC that all the activities in the production and goods delivery become important while considering the costing process of production. The first key lesson learned is that the activity-based costing systems focuses on the organizations of costs into activity cost pools rather than allocating the resources to the departments. Thereby the primary factor of using ABC systems by the company in the article was too recost and reprices their end-products. Hence the contemporary organizations are requested to follow ABC systems in large manufacturing systems for estimating accurate costs according to the activities in their production process. As the industries are booming around the world, the manufacturers should understand that every strategy and difference in products or procedures can help the firm in obtaining high profits. The decision-making theoretical frameworks are often applied to real-world companies so that cotemporary organizations can reap benefits from it.
The second lesson learned is that MIS and other advanced decision-making platforms work efficiently with activity-based costing systems. The advanced systems not only help in efficient decision making but also cut the costs of training and others. Citing the example for the article, the company achieved a high level of activity-based management after implementing the DSS. The cost of training the employee or maintaining annually has reduced to minimal or null. The Decision Support Systems are user friendly thus, the additional cost of training the employees is reduced. Also, the company is highly efficient in indicating the decision that can be less profitable and requires hierarchy authorisations. This also eliminates the unethical practices of the workers while any new employee can easily grasp the decision-making procedure through these systems. As it is already established the costing information is essential for decision making hence, modern technologies should be used by large and small contemporary organizations for estimating their costs in the production process.
4.0 Conclusions
Managerial accounting is directly associated with the detection, measurement, and interpretation of data for undertaking decision making of the organizations. In this view, the large manufacturing unit often uses different costing systems for estimation of costs to recognize profitability and financial structure. In this view, an activity-based accounting system is commonly used by companies in the production process. Two of the Australian organizations like Funtastic Ltd and MG use ABC for determining the cost on an activity basis. Also, the report has analysed one per peer-review article which conducted a study on the implementation of ABC systems collaborating with Decision Support Systems. The organization experienced regained market share and improved profits. It can be ascertained that accurate cost information impacts the major decision making in the regions.
5.0 Reference List
Cho, C.H., and Boulianne, E., 2005. Development of a decision support system based on ABC for costing and pricing decisions, and its conversion to a web-based DSS. Journal of Applied Management Accounting Research, 3(2), p.37.
Chwastyk, P., and Ko?osowski, M., 2014. Estimating the cost of the new product in the development process. Procedia Engineering, 69, pp.351-360.
Collier, P.M., 2015. Accounting for managers: Interpreting accounting information for decision making. John Wiley & Sons. P.55
Drury, C.M., 2013. Management and cost accounting. Springer. Chap 10
Effiok, S., and Bessong, B., 2016. Cost information and business strategy: A synergistic approach to ensuring valid business decisions and growth. European Journal of Business and Innovation Research, 4(2), pp.1-10.
Funtastic Ltd, 2019. Annual Report 2019. [online] Available at:
Heralova, R.S., 2014. Life Cycle Cost optimization within decision making on alternative designs of public buildings. Managerial accounting assignment Procedia Engineering, 85, pp.454-463.
Horngren, C.T., Datar, S.M., and Rajan, M.V., 2015. Cost accounting: A managerial emphasis. P. 150
Lepadatu, G., 2011. The importance of the cost information in making decisions. Romanian Economic and Business Review, 6(1), p.52.
MG, 2019. Annual Report 2019. [online] Available at:
Sage, A.P., and Rouse, W.B., 2014. Handbook of systems engineering and management. John Wiley & Sons. Chap 18
Sage, A.P., and Rouse, W.B., 2014. Handbook of systems engineering and management. John Wiley & Sons. Chap 18
