Application Of Activity-Based Costing Model On Xero Ltd

ABC Model and its Benefits

Activity Based Costing model assists in identifying activities in the organization. This would also act as an aid in assigning the cost of each activity examining the resources and services consumed (Dale and Plunkett, 2017). It has been stated by many organizations which have already used the model that this will lead to costing and monitoring of activities that involve tracing resource consumption and costing final outputs. Present report revolves around discussion relating to the application of ABC model on Xero Ltd. Further, assessment of mission and corporate strategies of the organization has been done in order to assess the manner in which model aligns with them. The report ends up with discussion relating to recommendations which should be followed by the company along with a suggestion of another appropriate management tool.

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This model has been considered as one of the most beneficial accounting techniques. It has been explained in the model that all the products that are responsible for yielding relatively higher revenue must be distributed with high activities cost. Erhun and et al. (2015), assessed that the reason behind giving high activity costs to these products as per the model is since they provide high profit to the company and increase sales. If Xero Ltd chooses to impose the implication of the ABC model in our management accounting, management will be able to meet our long-term goals. This will help in cutting the costs which are incurring on the schemes that are not beneficial for us  (Dong, Liu and Lin, 2014). Since the company is inclined towards providing customized software; this model will help us in allocating the actual indirect cost in order to recognize the true cost of given software and its applications.


Figure 1: Activity-Based Costing Model

(Source: Dong, Liu and Lin, 2014)

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Activity-based costing method recognizes the relationship between costs, activities and products, and through this relationship, it assigns indirect costs to products less arbitrarily than traditional methods (Litman, 2018). This model has proved to enhance the reliability of the cost data. It allows any firm to produce a statistical analysis representing a nearly true cost. Xero Ltd will be able to classify the costs that will be incurred by the company during the production process. By considering the annual report of 2017, they will not be able to find any such categorical representation of the true costs that have incurred in that particular year (Xero Ltd. Annual Report. 2017). Implementation of this method in management accounting will be helpful in a demonstration of the real and unreal costs (Cooper, 2017).

Application on Xero Ltd

The year of 2017 has been a year of a milestone as per the annual reports of the company. The company have been able to experience growth and millions of new customers attaching their roots. Their global platform has been able to benefit the small-scale business owners to expand their horizon. With the advent and implementation of cloud technology, the company have been able to build a world-class team. The company’s focus is purely inclined towards filling the gaps where they lack in order to generate higher yields this year as compared to 2017. They have been able to produce 43% growth in the previous year with the constant efforts of the team. The main agenda is based on investing in long-term investment and enhancing partnerships with names like Apple, Paypal, Google, Square and several others. In order to generate more revenue and estimate the cost they are incurring on the activities in the company, they have decided to consider the Activity-based costing which is ABC Model. Since the company is mainly related with optimal delivery of software, it will help in estimating which products have been overpriced and which products need an increase in their overall rates (Phan, Baird and Blair, 2014). To be precise, the complete analysis of the project has been presented in the document.

The mission statement of Xero Ltd. states in the following manner, “Growing prosperity through making a connection between people, money and resources with beautifully proposed software” (Xero’s Mission, 2017). It is because; the company has been continuously preaching to achieve $1 billion market value. But this is a hard task in terms of soft tech companies that are in the arena to compete with us. At our full-year financial results in May, the company announced that they had achieved a staggering $257 million in annualized committed monthly revenue, with our global subscriber base now contributing a total lifetime value of $1.5 billion.

The company is also committed to managing the business to cash flow break-even within our current cash balance, enabling others to continue to invest in Xero and make it a world-beating product from our revenues. In order to keep up with all our motives, agendas and commitments, we need the Activity-based costing methodology. All the captivating undertakings place in the company are said to be consuming overhead resources and are also considered as cost objects. If we are able to grasp costs more effectively, we will end up building a fine and improved corporate focus and strategies. With the application of this model, we will be able to expand the number of cost pools that can be utilised for the purpose of assembling overhead costs. The company has become one of the fastest growing cloud accounting companies in the world while maintaining a firm focus on executing on a global strategy of high margins and diversified global revenue. But achieving a certain position does not mean we should not adhere to the ideal policies that other companies are following.

Alignment with Mission and Corporate Strategies


Figure 2: Variants considered while making corporate strategy

(Source: Cooper, 2017)

Marketing Funnel

The marketing funnel analyses the journey and touch point in order to bring a customer to the organization (Weygandt, Kimmel and Kieso, 2015). We have been focusing on this strategy since the advent of the company. As the prospective consumers transfer down the funnel, and they have the occasion to develop a relationship, by earning trust and transform them into a client, according to marketing funnel. We have a separate pack of teams that constantly keeps on working on the fact of how to get a customer into our organization . One of the prime motives of our company shall remain towards personalizing with the customers as they bring us the business.

Partnership Approach

Our aim is to invest in ideologies and team up with big names to get more people associated with us and build a strong cult in the competitive market. Our company, Xero, has built a huge add-on network with more than 500 integration and has made utilisation of their own scale to entire into partnership with companies like Apple, Dropbox, Google, and Adobe so customers can access a bunch of extra products to make their small business operate more efficiently. Our belief shall remain firm towards giving our customers the best and complete experience.

Market Segmentation

The company is one of the leading enterprises in cloud computing sector. Due to this aspect, their inclination should be sharp towards which part of the marketplace we are willing to sell to (Taylor, 2018). The company have live examples of Apple and Samsung, and they have learnt a lot from the segmentation that is developed in the market regarding these brands. Instead of chasing competition and trying harder to eliminate that from the market, the company have chosen to paint our own identity.

Implementing Process

Xero helps small and medium business enterprise to move from a disorganized shoebox full of receipts, or a spreadsheet to a more transparent accounting system which offers them real-time insights for their cash flow and financial standing of operational activities. This has helped the company to implement their processes and ideologies fairly. The corporate image has been consistently improving in the market as a company have been able to meet our requirements. Management has been able to implement our generalized plans and aims in a successful and productive manner.

Since ABC pools cost by activity, it would be much easier to expand the number of cost pools. It not only reduces cost but gives a detailed explanation of why and how the cost has been reduced. Smith (2017), asserted that it provides the users with data analyses and information related to cost of the service and the products being used. The model will assist in providing guidance to the management in our company, in the fixations and corrections of the price. This model helps a company in drawing details for the activities and their costs. They will be able to monitor in a detailed manner, what all activities were carried out in the company and what exact cost did it incur. By this, it will help us in determining where are they investing more and if that is to the advantage of the business entity or not.


In words of Dale and Plunkett (2017), ABC model of costing is inclusive of the formation of the cost statements connected to the expenditure activities to matches it with the corresponding addition. This is done to determine that concerned activities are needed to be eliminated or to be improved. A variety of commodities being used in the company. It is important for us to know where management is lacking. The company have been facing situations wherein the company failed to meet the deficits. Despite having a satisfactory result in the annual report of 2017, they have not been able to meet our agenda of $1 billion market value. In order to set a benchmark in the industry of cloud computing and software, they need to analyze our internal structuring and functioning. The ABC model will be able to let costing department know what all activities were carried by the company at what time (Siguenza and et al. 2014). It would also help them determine whether the cost incurred during that activity on goods was worth the amount or not.

Conclusion & Recommendation

By considering present study conclusion can be drawn that Xero Ltd will be able to attain its objectives through implementation of ABC model. It is because; this model will assist the company to focus on inappropriate allocation of overheads as well as reduce the overhead to the extent possible. Further, Xero Ltd. is recommended to focus mainly on the allocation of overhead to relating activities in order to attain maximum benefit.  This would further act as an aid in chopping off the extra cost and the wastage of capital. The company will be able to flourish better by cutting the unnecessary capital investments through same. Through the implementation of this Activity-based costing methodology, the company will be able to make a detailed analysis of the management accounting of the company.

In order to identify our strength and weaknesses, the company need not only one but at least two model that would be strong enough to let them achieve our desired goals and strategies. The other one apart from ABC has said to be ABM. This is the Activity Based Management tool. Eldenburg and et al. (2016) asserted that this tool would help them reach heights and differentiate between our profit and losses. The best part of this particular model is that it seeks out areas in which corporate entities are losing down their money resources so that decision can be made that concerned activities are needed to be eliminated or improved for improvisation in the overall profitability of the business. ABM investigates the various costs activities associated with the various aspects such as employees, facilities, distribution, equipment, overhead and other factors to determine overhead cost allocated to each activity (Rajan, Datar and Horngren, 2015).
The goal of the company remains in setting productive fiscal forecasts and producing best possible results at the end of that year. This model is strictly held for focusing on commercial procedures and managerial activities that are leading organizational business goals. In this aspect, a model of activity-based costing pursues to recognize and condense cost drivers in order to make optimal use of accessible assets. It will be able to reduce costs by optimization of resources with proper allocation. The fact that company has expanded focus in countries like Singapore, Malaysia and Hong Kong, where the potential for a cloud revolution among small businesses is massive. This is why the business entity is in a continuous need for implementing accounting models to maintain our position and keep track of the budget.


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