ABC system (Activity Based Costing)

You are required to prepare a report to recommend about ABC model for your company. The report should cover the followings:  

1.An explanation of ABC model and its features

2.An explanation of how ABC model aligns with the current goals and strategies of the company. This explanation should include: i) An identification of the company’s mission and objectives; and ii) An identification of the company’s corporate strategies iii) An explanation of how ABC model assist in achieving the company’s strategies.

3.Provide at least two (2) recommendationsabout the implementation of ABC model for your company based on your research findings.  

4.Apart from ABC model, suggest one other management accounting tool suitable for your company and justify it. 

Activity Based costing assigns indirect costs depending on the cost driver of the product, or the factor that makes the cost. As costs are assigned as per the product, an image starts appearing of which process of business are acting well and which ones should be enhanced (Rojas, 2018). This report will talk majorly about the activity-based costing and its assistance in attaining the company’s goals and strategies. The company on which the implementation of the cost accounting tool will be discussed is Nufarm Limited Company. Before explaining this report will provide a brief introduction to the company and its mission and objectives in the industry it operates. Besides this, this report will provide some recommendations in regards to the implementation of ABC system. Further, it will provide a suggestion of the cost accounting tool that is also used by the business to increase their productivity.  

ABC system is a specific kind of cost accounting methodology. Cost accounting is a part of management accounting. Management accounting has an interior focus because it is planned for the use by the executives with respect to making decisions (MPRA, 2011). The interior concentration of management accounting deals with the financial accounting, whose emphasis is on the external area. On the other hand, financial accounting is applied normally to accounting principles to make statements planned for the third parties who are outside the boundary of the organization (ELHAMMA and FEI, 2013). The ABC method is different from traditional method since its fundamental focus is ion activities of the business. An Activity-based costing method makes use of non-financial variables as well as financial variables as the base for cost assignment. A typical ABC method makes use of more indirect pools of cost as compared to traditional method and uses a large number of cost drivers as the base for cost allocation (Kannaiah, 2015). There is a requirement for ABC method in the business because the competition is the driving force whereas efficiency and productivity remain serious topics. Activity-based costing has 2 key elements i.e. performance measures and cost measures. ABC is said to be a practice that evaluates the performance and cost of the activities, cost objects, and resources. Resources are allocated to the activities of business, and then these activities are allotted to the cost objects depending on their usage. ABC system identifies the fundamental relationships of the cost drivers to the identified activities (Zeuner, 2012). 

Features

The common concept of Activity-based costing is that activities intakes resources to create an output. Expenses must be divided and coordinated with the activity level that intake the resources. Precisely, the expenditure that is required to make separate units of an exact product or service must be divided from the expenditures that are experienced to create different services or products to assist different spenders. This departure must be self-governing of how many items are formed or vended (Soekardan, 2016).        

• Activity-based costing helps in eliminating the cross-subsidies.
• The benefit of activity-based costing is performance measures. Requirements of the managed care normally involve some needs to evaluate outcomes. Outcome measures are said to be a performance measure and can be combined into an Activity Based Costing system.
• Activity-based costing allocated the cost of the activity to the cost objects or reunites the activity cost in all over the process of business.
• The information extracted from activity-based costing can be utilized in making market, product, customer-oriented, and channel decisions.
• This system is very effective as it is helpful in managing the procedures and any issues related to the quality of the processes.
• ABC system is the practical solution for the issues linked with traditional systems of cost management which are now understood that are misrepresenting and imperfect.
• Activity-based costing offers an assignment network of cost flow, which offers the cost of work activity and their cost of output to be endlessly reallocated, or approved on only if the customers, services, or products or sometimes work activities, really use the activity.       

Nufarm is a company of agricultural chemical with head office in Melbourne, Australia. The company was established in the year 1956; it was started by Max Fremder. It has around registration of 2,100 products and markets products in approx. 1000 countries across the world. The company manufactures phenopxies, it is a type of herbicides that manage and eliminate weeds with broadleaf. All these goods are produced in a worldwide network comprised of Austria, Netherlands, England, and Australia. Many other products of crop protection are manufactured in production facilities in New Zealand, Africa, Australia, America, Europe, and Asia. Nufarm Company has made its place in the specialty and turf markets (municipal parks, forestry weed control, lawn care, aquatic, and golf courses) (Nufarm, 2018).

In Australian stock exchange company is listed and in 2016 the value for its share capital was AUD$9.16.     

The Mission of Nufarm Limited is to make a better tomorrow. The company is responsible for the decisions and actions (Nufarm, 2018). They know that the trust is the base of every relationship and they are trying to operate ethically, responsibly, and safely in order to create that trust among its customers (Nufarm, 2018).

• The objective of Nufarm Limited Company is to ensure that its business activities should provide a high level of protection to the customers and employees, and public’s safety and health along with environment because they believe that every accident is preventable.
• The Nufarm will manage and measure the risks related with their procedures, offer safe working situations, train and define their employees in risk-free work practice and offer information for the management of hazards in the office and for environmental protection.
• Managers and supervisors are responsible for the occupational health and safety of their people and measures for the protection of the environment in the business activities over which they possess control.
• The objective of the company is to continue their business without any negative effect on their people, environment, and community and to strive for sustainable development and continual improvement (Nufarm, 2018).      

The concentration of Nufarm Limited Company is on the implementation of their strategy of delivering tough development towards justifiable business developments and organic growth in the market where they operate a business. The company’s one Nufarm Strategy is:

• The company is planning to strengthen its position in their planned market and crop segment.
• It is focused towards establishing a complete strategic foundation
• Nufarm Limited wants to create a business which is cost competitive that is capable to compete in the market effectively and provide improved outcomes for their customers and clients (Nufarm, 2015).
• They want to create a tough platform to support profitable and continue growth.
• The strategy of the company is to make a better management of working capital and a strong balance sheet (ASX, 2016)
• Nufarm Limited Company is creating a strong platform by diversifying its product positions and a direction for the market strategy.
• It is trying to give more attention to the risk management techniques
• Enhancing their earning quality (Nufarm, 2017)

ABC system is an additional technique of cost accounting that delivers the information for decision making which lacks in the method of traditional costing. Nufarm Limited Company should implement this system of costing in order to make appropriate decisions regarding the cost and resources involved in different activities of the business. Activity-based costing is not just restricted to the boundaries of business; it cannot completely displace traditional methods of cost because it mostly fails to fulfill the requirement of financial reporting for businesses. Activity-based costing concentrates on cost contribution to the product production. The steps involved in the implementation of ABC system that will help Nufarm Limited to manage the system are:

Background- Nufarm Limited Company

Searching Business Activities- In the initial step of the procedure activity of the Nufarm Limited will be identified and combined together in the group of activities. Activity group involves supporting activities that are linked to the service or product line.

Investigation of the Activities- At this step, identification of the procedure which assists a product and avoids few of the universal imprecisions of traditional costing will be done. Costing system needs analysis for the activities, same to the process mapping identified in the lean manufacturing. The analysis step will recognize the relationships of the indirect cost in the Nufarm Limited Company.

Cost assignment- On the basis of step 1 and step 2, costs are allocated to the group of activities. For instance, cost of human resource will be allocated to indirect management and indirect administration costs. 

Calculate rates of Activities- In the initial analysis indirect labor support or hours of indirect labor will be included. These activities should be allocated with a value in currency.

Allocate costs to the cost objects- The time activity groups, rates, and cost are recognized and defined, the subsequent step is to allocate the cost objects.

Distribute and prepare management reports- After completing the analysis of Activity-based costing, the information of the cost must be located in a precise and clear manner for process owners and cost object (Purchasing and Procurement Center, 2017).      

• In order to implement productive activity-based costing the purpose of the implementation must be defined first in order to avoid doubts and failures.
• For the positive results through activity-based costing system, there must be support of all the employees and management. It is being said because employees are the one who provides detail information of the activities of the business and management department is the one who uses the information that is extracted from the activity-based costing and take productive decisions.
• In order to have effective results through the implementation of activity-based costing complete information must be gathered by the management that whether the system will result in success or not.
• It can recommend that Nufarm Limited Company should not solely rely on the activity-based costing as the management tool but it should also make use of other tools in order to get more effective results for the company.
• Activity-based costing system can also utilize for understanding the profitability of company’s rival.
• Activity-based costing is not the tool which can solve complete problems of the company it is just a tool which improves and complement other tools of management like business process re-engineering, Six Sigma, etc. (Qudah and Hroot, 2017)      

From the above analysis, it can be said that activity-based costing is one of the effective tool support in enhancing the results of management tool adopted by various companies. Moreover, this tool of cost accounting helps in allocating the rates of the activities along with the resources related to them. Along with Activity-based costing system of cost accounting, Nufarm Limited can implement time-driven activity-based costing which is one more tool for management or cost accounting. The Time-Driven Activity-based Costing (TDABC) method is an innovative tool which is established for overcoming the problems of traditional costing system and activity-based costing system (Kaplan and Anderson, 2007). In time-driven activity-based costing executives of the Nufarm Limited can directly measure the resources demand by all the activities, product, deal, transaction, or service in place of assigning a cost to the activities and then to the products. 

Conclusion

In the conclusion, it can be said that Nufarm Limited Company can implement activity-based costing system in its business units to enhance the performance of tools of management and the productivity of the company. This report has discussed costing and how it can be implemented in the company to assign the cost to the activities and then to the products. The report has recommended some important points that should be considered by Nufarm Limited Company while implementing this system in their business units. Further, the recommendation of time driven activity-based costing has been provided which can be implemented as it overcomes the limitation of activity-based costing.   

References

ASX (2016) Nufarm Strategy Overview [online]. Available from https://www.asx.com.au/asxpdf/20160421/pdf/436nks5zphd8kv.pdf [accessed 26 May 2018]

ELHAMMA, A., and FEI, Z.Y. (2013) The Relationship Between Activity Based Costing, Business Strategy And Performance In Moroccan Enterprises. Accounting and Management Information Systems, 12(1), 22-38.

Kannaiah, D. (2015) Activity Based Costing (ABC): Is It a Tool for Company to Achieve Competitive Advantage? International Journal of Economics and Finance, 7(12), 275-281.

Kaplan, R.S., and Anderson, S.R. (2007) Time-Driven Activity-Based Costing: A Simpler and More Powerful Path to Higher Profits. 2^nd edn. U.S: Harvard Business Press.

MPRA (2011) The importance of activity-based costing method (ABC) In Romania’s business environment changes [online]. Available from https://mpra.ub.uni-muenchen.de/33152/1/MPRA_paper_33152.pdf [accessed 26 May 2018]

Nufarm (2015) Business and strategy update [online]. Available from https://www.nufarm.com/Assets/29223/1/2015-02BAMLConferenceUS.pdf [accessed 26 May 2018]

Nufarm (2017) Annual Report [online]. Available from https://www.nufarm.com/Assets/37567/1/NufarmAR17_Final.pdf [accessed 26 May 2018]

Nufarm (2018) About Nufarm [online]. Available from https://www.nufarm.com/About [accessed 26 May 2018]

Nufarm (2018) Health, Safety & Environment Policy [online]. Available from https://www.nufarm.com/HealthSafetyEnvironmentPolicy [accessed 26 May 2018]

Nufarm (2018) Mission, Vision e Values di Nufarm [online]. Available from https://www.nufarm.com/IT/MissionVisionValues [accessed 26 May 2018]

Nufarm (2018) Nufarm’s Mission, Vision and Values inform everything we do [online]. Available from https://www.nufarm.com/AU/MissionVisionValues [accessed 26 May 2018]

Purchasing and Procurement Center (2017) Six Critical Implementation Steps to ABC Costing [online]. Available from https://www.purchasing-procurement-center.com/abc-costing.html [accessed 26 May 2018]

Qudah, L.A., and Hroot, Y.A. (2017) The Implementing Activity-based Costing Technique and Its Impact on Profitability: A Study of Listed Manufacturing Companies in Jordan. International Journal of Economics and Financial Issues, 7(2), 271-276.

Rojas, E. (2018) The Disadvantages & Advantages of Activity-Based Costing [online]. Available from https://smallbusiness.chron.com/disadvantages-advantages-activitybased-costing-45096.html [accessed 26 May 2018]

Soekardan, D. (2016) An Analysis Of Activity Based Costing: Between Benefit And Cost For Its Implementation. International Journal Of Scientific & Technology Research, 5(6), 334-339.

Zeuner, P. (2012) Activity-Based Costing. 2^nd edn. Germany: GRIN Verla