Activity-based Costing

Write a report on Activity-based costing and how it can enhance the available management accounting information to the top management of Downer Edi Limited Company. 

Management accounting is the procedure of recognizing the cost of business and operations to make internal financial records, account and report to assist the process of decision making of the managers in attaining goals of the business (Nørreklit, 2017). In addition, it is also known as the act of preparing sense of costing and financial data and decoding that data into valuable information for officers and management in of a company (Adler, 2013). This report will highlight the concept how available information of management accounting can be enhanced through the Activity-based costing model. The report will involve the overview of Downer Edi Limited Company, its mission, and objectives. Along with this strategy of the company will be discussed and how Activity-based costing can help in attaining those strategies. Recommendations will be provided for the implementation of ABC model. Apart from this suggestion of another tool of management accounting for the company will be given.

A method of accounting that recognizes the business activities and then allots cost to the products is known as Activity Based Costing. It helps in identifying the relationship between products, costs, and activities, and by this relationship, it allocates indirect cost to the product less randomly compared to out-dated methods. Few of the cost are very difficult to allot by this cost accounting method. Indirect cost like salaries of staff and management are at times difficult to allot to a specific product produced (Zeuner, 2012).

Activity Based Costing is majorly utilized in the manufacturing industry as it helps in improving the consistency of cost data, therefore creating true costs and categorizing the costs sustained by the during its process of production. This system of costing is used in product costing, service pricing, analysis of product line profitability, analysis of customer profitability. It is very famous in companies as they can develop a well corporate focus and technique if costs are effectively grasped. This system is dependent on the activities, which can be a unit of task or work, an event with a particular goal like setting production machine, products designing, operating machine, and distributing finished goods. Activities take resources of overhead and are taken as cost objects (Moisello, 2012).

Features of Activity Based Costing

• The drivers of cost direct the patterns of cost behavior
• The appropriate difference is made among the patterns of cost behavior
• The overall cost is categorized into two types that are variable cist and fixed cost which is important to offer quality information to create a proper system of cost in a company of manufacturing (Account learning, 2018).
• The patterns of cost behavior are related to diversity, time, volume, and event.
• The proper driver of cost has to be recognized for outlining the overhead to a product.

Downer Group is a company of integrated services that involve in the building, designing, and sustaining of the assets, facilities, and infrastructure for consumers in New Zealand and Australia. It is registered as Downer EDI Limited (DOW) in the New Zealand stock exchange and Australian Securities Exchange, Downer is known as ASX 100 Company that owns Spotless Group Holdings Limited 88% holdings (Downer Group, 2011). Downer Group hires around 56,000 individuals on approx. 300 sites, mainly in New Zealand and Australia and also in the regions of Asia-Pacific, Southern Africa, and South America.  

Overview of Downer EDI Limited

The mission of the company is to support authorities of government public transport, industry partners, and society through the collaborative and open approach in order to understand the challenge of tomorrow for future flexibility and to offer solutions which are innovative for a well-planned future (Keolis Downer, 2017).

• The objective of the company is to manage and understand the impact of the environment all through the lifecycle of the services and products is important for company’s long-term success.
• Operative environmental risk management is important for the method through which company do their business and entrenched into our total procedure of risk management. The company is dedicated towards the growth of a healthy system of environmental management which is created according to the necessities and place a stress on operative control and repeated development.
• The objective of the company is to attain a proper balance between environmental and economic sustainability outcomes.

The Downer EDI Limited follows various strategies in order to sustain in the market for longer time duration and offer their services and products to the customers. A corporate strategy involves an evidently definite, long-term vision that companies fix, looking for creating company value and inspire the personnel to execute to the appropriate actions to attain satisfaction of the customer (Corporate Finance Institute, 2016). Moreover, corporate strategy is a nonstop process that needs a continuous effort to involve depositors in believing in the company with their cash, thus growing the equity of the company. Organizations that achieve to supply customer value consistently are those that re-enter their business strategy frequently to recover parts that may not supply the intended results (Puranam and Vanneste, 2016). The corporate strategies of Downer EDI Limited are divided into three parts:

The company is continuously focusing on improving or enhancing their current business strategies through leveraging their brand, increasing efficiency, and productivity of the services or goods offered and enhancing management of their revenue. The development of the company is depended on their long-term strategy of creating a group of extremely corresponding skills of business that augment value to customers and reduce risk.  

The company is concentrated towards earning growth in the market by investing its major part of the ideas in the growth of the business it is done by the company through strengthening the leading position in the market, competence and IP, technology, and by maintaining a strong balance sheet. The board of the company is confident enough in the capacity of the management of the company to continue to invest in consolidating the business and it’s earning abilities. Downer EDI will frequently focus on the shareholders’ value by workable investment in the opportunities of growth and emerge the services cross-selling in the Group (Downer Group Concise Report, 2003).

Besides all above-mentioned strategies company is worried about its new position in the market, therefore, it is focusing towards geographic expansion, government outsourcing, and focusing on adjacent sectors (Downer Investor Day, 2016). The company is regularly trying to create considerable progress in structuring ability as a provider of value-adding services, with an emphasis on proposal, leading planning, amenities management and upkeep services, and are in a robust position as a favoured choice for the delivery of engineering services in the community and private road, power, telecommunications, rail, and mining sectors.

The mission of Downer EDI Limited

The diversity of company’s business will help in creating new and better position in the market. Their focus on important infrastructure will supply a comparatively steady, and rise, core earnings stream to reinforce the business. In a way, they are regularly trying to layer in “annuity-type” earnings streams that help in improving the predictability and transparency of Group earnings.

Activity Based Costing assigns costs depending on multiple cost groups (actions or budgets if department) each with its own suitable (“cause and effect”) drivers of cost, this results in creating precise costing and enhanced control over the cost of overhead (Accounting Tools, 2017). If Downer EDI Limited Company adopts this tool of management accounting in its business process then it will help it in assigning a cost to the products based on the proportion of the activity they consume.

Source [(Principles of Accounting, 2018)]

Activity Based Costing Tool will recognize various activities of Downer EDI Limited Company and will assign cost along with resources. The implementation of Activity Based Costing in the company can be done by following some steps:

Study Procedures and Cost – It has been said that ABC is process oriented. Hence, the initial step in executing ABC is a thorough study of every process of business and costs. Involvement of the employees is very important for full details in proper format such that there will be approval of the measures shaped by the system.    

Activities Identification – Once the business of Downer EDI Limited will be understood, a proper care must be given while selecting the activities of the business that will be essential to the assignment of the cost. There are different types of activities such as Unit-level activities, Batch-level activities, Product-level activities, and Customer-level activities.

Recognize Traceable Costs – Every time when a cost is exclusively connected to a precise cost object that cost must be outlined directly to the end object. The clear instance of this is the direct labor and direct material that drives into an end product.  

Allocate Remaining Cost to the Activities – After categorization of the costs that can be outlined to the objects of cost, the outstanding costs are allocated to the activities. At times it is simple and practical, and sometimes it is challenging.

Define Per-Activity Rates of Allocation – When the costs for every activity have been defined in the collective, it is then essential to unite the cost group. For instance, in the activity of catalog preparation cost group contained $500,000 and 2, 00,000 catalogs were formed, and then the assigned catalog cost will be $2.50 each.

The objective of Downer EDI Limited

Applying Cost to objects – The concluding step is to use the rates which are activity based on defining the activity cost amount to assign to every cost object. Remaining with the catalog example, it is known that the assigned cost from the catalog planning group was $2.50 each. This is not said to be the overall cost, this is only the assigned cost (E-Library, 2018). The overall cost will comprise the directly traceable amounts i.e. postage, printings, etc.   

• There is need of skilled and experienced employees in the implementation and working of Activity-based costing in the company so that they can understand and use the information from the ABC system and make a proper and strategic decision. Therefore, if Downer EDI Limited can execute the process by putting the correct tool in a correct way to the correct area, it will be very helpful in creating the positive results.
• At the time of executing or implementing the Activity-based costing to achieve company’s objectives, there must be a practical attitude. This system is just a machine it does not consider anyone, it does the job on behalf of the company and resolves the problems by itself.

Besides, Activity Based costing tool of management accounting Downer EDI Limited Company can implement Balanced Scorecard technique in its business operations. The balanced scorecard is a metric of performance utilized in strategic management to recognize and enhance different functions of the company and their external results. It is utilized to evaluate the offer feedback to the company (Person, 2013). Collection of data is important to offer quantitative results, as the data collected is understood by executives and managers and utilized to take better decision for the company. This method was initially established by Dr. Robert Kaplan who is an accounting academic and Dr. David Norton who is a business theorist and executive (Niven, 2011). 

Conclusion

In the conclusion, it can be said that Activity-based Costing is one of the best tools for management accounting which can support organization in maintaining their cost of product and activities. Downer EDI Limited is one of the best manufacturing organizations which involve various activities in its business procedure, therefore Activity-based costing will be very effective for the organization to implement and get positive results and save cost. The above report has provided various detailed information about the activity-based costing concept and Downer EDI Limited Company. Along with this proper explanation has been provided of how ABC model will assist the company in attaining its planned strategies with the recommendations about implementing ABC model. In the end, a suggestion of balanced scorecard tool has been provided that can be used by the company.  

References

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Downer Group (2011) Annual Review [online]. Available from https://www.downergroup.com/Content/cms/Documents/2010-11_Full_Year_Results/DOW001_AR2011_Review_D7.pdf [accessed 15 May 2018]

Downer Group Concise Report (2003) Rail, Teleco, Mining, Power, Road [online]. Available from            https://www.downergroup.com/Content/cms/Documents/2002-03_Year_Results/2003_CONCISE_REPORT20-202420SEP202003_20080811102555.pdf [accessed 15 May 2018]

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Person, R. (2013) Balanced Scorecards and Operational Dashboards with Microsoft Excel. 2^nd edn. U.S: John Wiley & Sons.

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