Benefits of Implementing Activity Based Costing for Diversified Companies

Answer to question 1:

a) In recent years, there has been change in quality and number of competitors that has the consequence of reducing cost margin year on year making it essential to control the cost.A greater control of costs is generated by the implementation of activity based costing systemthat results in better forecasting of forecasting by increasing the competitiveness. The main focus of activity based costing is on the activities and process of organization. By focusing on the cost and benefit relationship in determining the cost of product under the method of activity based costing helps in bringing reliability and accuracy. In event of greater diversity among the manufacturing of products, such system helps in producing correct and reliable cost of products. Moreover, such costing system helps in improving decision making of managers by using the more reliable data on cost of product.

Answer to question 1:

A company is able to set much lower price for identical total fixed and variable cost for identical products produced by other companies because of the economies of scale and operational efficiencies. Economies of scale are the savings generated in terms of cost resulted from the production of more products. They can maintain the profitability level as other companies having similar fixed and variable cost by making the process of production more efficient instead of increasing the price of product. Such economies of scale are the cost saving factors that can be generated internally or externally regardless of environment or industry in which the organization is operating. Some of the internally generated factors leading to economies of scale might be due to its managerial, purchasing, technical, risk bearing capability and financial efficiency. In this case, the ability of one company to set lower price for its product compared to other company can be attributed to purchasing, managerial and technical efficiency that have the impact on increasing the overall operational efficiency. A company buying in bulk would result in dramatic cutting of cost and enjoying more bargaining power that enable them to negotiate with the suppliers for sourcing raw materials at lower price. Another economy of aspect that can benefit the company is the technical factor that would help in making the production process efficient (Said, 2017). 

Assumptions of the cost volume profit analysis are listed below:

Cost volume profit analysis is the cost accounting concept that helps in determining how the net income and operating income of company is impacted by the changes in volume and cost.

• Classification of costs can be done into fixed and variable costs

It is presumed that all the cost can be classified as fixed and variable. Fixed cost remains unchanged irrespective of level of activities and variable cost on other hand changes with the change in level of activities (De Villiers et al., 2014).

• There is no change in level of inventory from period to period

The ending and beginning inventory level does not change indicating that the entire units produced are sold during a given period.

• Constant selling price

It is assumed that the market condition and selling price of product remains constant. In addition to this, sales volume is assumed to be constant if the business sells and produces multiple products.

• Variable cost is affected by only the volume factor

It is assumed that there is no change in variable cost per unit and the only factor affecting the variable cost is volume of product produced. In addition to this, the concerns of efficiency and production are also assumed to be constant.

Analysis of Overhead Costs for Happy Cow Cheese Manufacturing Company

Cost volume profit analysis is significantly important to business as it helps in providing strong insight into the product and services profitability. Such analysis is used by many organizations for making informed decisions about their services and products. It is an essential tool available to businesses for profitability planning and budgeting by determining the maximum amount of sales that should be made by company for avoiding the losses that can be incurred (Vigneau et al., 2015). In addition to this, organization relying on the technique of cost volume profit analysis would be able to reduce the cost by reducing the profit margin and thereby increasing the profit. 

Importance of sustainable reporting by organizations:

There has been rapid growth in non financial reporting as it is apparent that organizations focusing solely on the financial results would not be able to produce broad results. Such issue is prevalent where the lack of perceived accountability and culture or poor conduct results in governance issues. The non financial reporting by the listed organization has found to correlate the cash flow and profitability to correlate with the high level of disclosure related to sustainability. An organization should place sustainability in a broader context that is considered significant for sustainable global economy. In Australia, there is growing imperatives to explicitly report on the issues relating to the climatic conditions and how the climatic change would impact assets, expenditures, liabilities and access to financing and capital. The business communities in Australia are highly vulnerable to climatic change and worsening extreme weather (Dumay, 2016). There is a greater need for transparency in addressing variety of concerns related to the climatic conditions. An organization has number of reasons for concentrating on the environmental issues that are listed below:

• Organization has easier access to reach the degree of political consensus on then factors constituting the environmental sustainability compared to the social sustainability.
• It is seen that depletion of natural resources and change in climatic condition requires an urgent action. Urgent issues of climatic change and depletion of resources have become the focal point of international attention and several measures have been taken at inter governmental and governmental level (del Mar et al., 2015).
• For the environmental factors such as such as trading schemes and emission caps and explicit financial incentives development, organizations are penalized. Most of the attention has been given to reporting on carbon as well as other emissions. The accounting professions have the most involvement in the reduction of emissions given the link to penalties and financial cost (Simnett & Huggins, 2015).
• Quantification for changes in availability of natural resources is easier that the factors of social sustainability.

In the current scenario, a methodology is piloted by the International integrated Reporting committee for companies to produce one combined environmental, finance and governance report that illustrates on creation of value over time. It is evident on global basis that investor expects to have improved climatic related disclosure in the report published by the organizations. The disclosures in the sustainability reporting are considered most effective when the organization discloses how material social, environmental and governance risks are managed identified and monitored. Such disclosures enable the community of investors to have an understanding of the evaluation of the process of company and its performance for managing environmental, economic and social risks (Rahdari & Rostamy, 2015). It is believed that there would be long term value creation and sound decision making by company if there is transparent and robust disclosure of management, environment, social and governance. This in turn helps in maintaining and establishing trust between an organization, stakeholders and shareholders. The practices of widespread sustainability reporting would help in efficient creation of market functions and transparency and helps in driving the progress of organization towards an inclusive and sustainable growth. Sustainability reporting can be seen by growing number of companies in driving greater innovation and creating competitive advantage through their products and services. Such disclosure would also enable examination and improvement of the decision making process and internal management and thereby results in cost reduction by monitoring and measurement of issues related to usage of material, consumption and wastage (H?ebí?ek et al., 2014). Furthermore, organizations measuring sustainability performance would be able to meet the requirements of regulations effectively by avoiding breaches and necessary data gathering effectively. 

How a Company can Set a Lower Price While Maintaining Profitability

Comparing and contrasting different international and local frameworks of sustainable reporting:

The corporate reporting process on social, governance and environmental issues is influenced by many regulators and reporting frameworks. The reporting exchange identifies a reporting framework that connects and summarizes the reporting requirements relating to environmental, social and governance issues and supporting external and internal decision making on risks and opportunities related to sustainability. Organizations actively involved in corporate reporting find reporting exchange quite useful as it helps in mapping reporting sustainability provisions (Acsi.org.au, 2018).

It was reported by the International Integrated Reporting council (IIRC) in year 2017 that more than 1000 companies used some form of integrated reporting. The global framework related to integrate reporting intends to improve disclosure for investors by incorporating presentation of non financial data in their financial report published annually. It has been opined by IIRC that more than half of the respondents surveyed have adopted such framework for disclosing non financial data while 35% seeking to adopt in next two to three years (Maas et al., 2016).

The most prominent reporting requirement in Australia was passed in year 2007 named National greenhouse and energy reporting (NGER) Act that created a national and mandatory reporting framework for the largest five hundred corporate entities in terms of energy consumption and production along with green house emission. The system of NGER was integrated with the mechanism of carbon pricing. The largest unbroken reporting scheme of national mandatory of green house gas emission is presented by this particular reporting requirement (Ceulemans et al., 2015).

Global Reporting Initiative was established in year 1997 for creating global common framework for voluntary organizational reporting of environmental, social and economic impacts with an intention to make sustainability reporting a standard practice by supporting and providing guidance to organization. It addresses the management of sustainability performance by organization by using the metrics that are used for computation of specific sustainability related data. There are ten principles outlined in the global reporting initiative that acts as guidance on best practice concerning sustainability reporting (Fonseca et al., 2014).  

For the largest companies of South Africa, there is a mandatory reporting requirement that has led to the development of an inclusive governance approach that take into account the interest of stakeholders in the process of decision making. Greater emphasis on sustainability was placed by issuing an integrated report that requires presentation of sustainability and statutory financial information. Integrated reporting framework of South Africa is defined by King Code III as an integrated and holistic representation of the performance of company in terms of both sustainability and finance. Such report should contain sufficient information to record how the organization has positively and negatively impacted the community and categorizing the operations as economic, environmental and social issue (Fernandez et al., 2014). 

Assumptions Made for Cost Volume Profit Analysis

The accounting for sustainability reporting developed for sustainable project in United Kingdom encourages the production of sustainability report by both private and public sector. It is suggested by the framework that reported information that the connection between the financial and non financial performance and business strategy should be explained by the reported information. Such connected reporting approach can be followed by a number of private and public sector companies in their sustainability reporting.  Minimum reporting requirements are outlined by reporting guidelines by providing the best examples and making such report mandatory. It is mandatory for sustainability report to disclose data as well as related expenditure concerning the matters such as minimization and proper management of waste and emission of green house gas along with finite resources usage (Adams, 2015). Moreover, it is required by organization to provide commentary on making the procurement more sustainable and progress against the strategy of biodiversity.

Compared to the Australian regulatory requirement for the sustainability disclosure matters, stock exchanges of Singapore, Thailand, Bursa Malaysia and Hong Kong have more prescriptive requirements. Requirements of reporting on the environmental, governance and social matters for these countries are done under the listing rule. Companies are provided training on how the sustainability matters should be integrated in the decision making process.  In addition to the frameworks, there are other frameworks of sustainability reporting such as ISO 26000, UN global compact principles and OECD guidelines for addressing the increasing trend that transcends national boundaries and improving the efficiency and comparability of the reports (Morioka & de Carvalho, 2016).

The above sections present the reporting requirements of sustainability reporting of Australia and other countries and international standard applicable to reporting entities. The major focus of such frameworks concentrates on the sectors having high exposure to climatic related risks that needs to be accounted on different aspects (Globalreporting.org, 2018). However, there are some distinctions in the reporting requirements of countries at national and international level that highlight the importance of disclosures for the sectors having likelihood of material risks. All such frameworks entitle reporting organizations to make a comprehensive disclosure of their sustainability maters and thereby addressing the sustainability risks. 

References list:

Acsi.org.au. (2018).  Retrieved 9 September 2018, from https://www.acsi.org.au/images/stories/ACSIDocuments/generalresearchpublic/2017-Sustainability-Report-FINAL.pdf

Adams, C. A. (2015). The international integrated reporting council: a call to action. Critical Perspectives on Accounting, 27, 23-28.

Ceulemans, K., Molderez, I., & Van Liedekerke, L. (2015). Sustainability reporting in higher education: a comprehensive review of the recent literature and paths for further research. Journal of Cleaner Production, 106, 127-143.

De Villiers, C., Rinaldi, L., & Unerman, J. (2014). Integrated Reporting: Insights, gaps and an agenda for future research. Accounting, Auditing & Accountability Journal, 27(7), 1042-1067.

Said, H. A. (2017). Using different probability distributions for managerial accounting technique: the cost-volume-profit analysis. ASBBS Proceedings, 24(1), 313.

del Mar Alonso-Almeida, M., Marimon, F., Casani, F., & Rodriguez-Pomeda, J. (2015). Diffusion of sustainability reporting in universities: current situation and future perspectives. Journal of cleaner production, 106, 144-154.

Dumay, J. (2016). A critical reflection on the future of intellectual capital: from reporting to disclosure. Journal of Intellectual capital, 17(1), 168-184.

Fernandez-Feijoo, B., Romero, S., & Ruiz, S. (2014). Effect of stakeholders’ pressure on transparency of sustainability reports within the GRI framework. Journal of business ethics, 122(1), 53-63.

Fonseca, A., McAllister, M. L., & Fitzpatrick, P. (2014). Sustainability reporting among mining corporations: a constructive critique of the GRI approach. Journal of Cleaner Production, 84, 70-83.

Globalreporting.org. (2018). Retrieved 9 September 2018, from https://www.globalreporting.org/resourcelibrary/Carrots%20and%20Sticks-2016.pdf

H?ebí?ek, J., Soukopová, J., Štencl, M., & Trenz, O. (2014). Integration of economic, environmental, social and corporate governance performance and reporting in enterprises. Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, 59(7), 157-166.

Maas, K., Schaltegger, S., & Crutzen, N. (2016). Integrating corporate sustainability assessment, management accounting, control, and reporting. Journal of Cleaner Production, 136, 237-248.

Morioka, S. N., & de Carvalho, M. M. (2016). A systematic literature review towards a conceptual framework for integrating sustainability performance into business. Journal of Cleaner Production, 136, 134-146.

Rahdari, A. H., & Rostamy, A. A. A. (2015). Designing a general set of sustainability indicators at the corporate level. Journal of Cleaner Production, 108, 757-771.

Simnett, R., & Huggins, A. L. (2015). Integrated reporting and assurance: where can research add value?. Sustainability Accounting, Management and Policy Journal, 6(1), 29-53.

Vigneau, L., Humphreys, M., & Moon, J. (2015). How do firms comply with international sustainability standards? Processes and consequences of adopting the global reporting initiative. Journal of Business Ethics, 131(2), 469-486.