Costing be activity based costing, as wellCosting be activity based costing, as well

Costing is used in business accounting strategies as a way
of determining the cost of manufacturing a product in relation to the revenue
generated by that product. Costing systems determine the overhead of production
and then allocate those overhead costs to a business’ products. The two type of
the costing I will be investigating will be activity based costing, as well as
traditional costing.

Traditional costing definition: According to (Atrill and
McLaney 2015.) Is the total amount of resources used and consumed to achieve an
objective. This takes into account of every resource sacrificed to achieve that
objective. This means if the objective were to supply a customer with a product
or service, the cost of all aspects relating to making of the product or
provision of the service will be included as part of the full cost.  Many manufacturing companies use traditional
costing to assign manufacturing overheads on to units that is produced. Users
of traditional costing make the assumption that the volume metric is the
underlying driver of manufacturing overhead cost.  Accountants often assign manufacturing costs
only to products and traditional accounting fails to allocate non related
manufacturing costs that are associated with the production of an item.
Companies commonly use traditional accounting in external financial reports
because it provides the value for the cost of goods sold.

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Activity based costing definition: According to (CIMA
Official Terminology, 2005). This is a costing methodology which involves
monitoring activities to which it involves tracing resources consumption and
costing final outputs. Resources are then assigned to activities and activities
to cost objects based on consumption estimates. The latter utilise cost drivers
to attach activity costs to outputs. This costing methodology assigns more
indirect costs into direct costs compared to traditional costing. Greater and
better costing accuracy is the main benefit of ABC costing. This method
involves assigning cost only to the products that are required for the activity
for production which will exclude allocating irrelevant costs to a product. ABC
also includes an easy interpretation of cost for internal management, the
ability to enable benchmarking and a greater understanding of overhead costs.

 

 

 

 

 

 

 

 

There are criticisms on both costing methods and the one I
will be focusing on this investigation will be strictly based on activity-based
costing.

According to (Atrill and McLaney 2015. Page 154). The first
theoretical criticism will be the costs of setting it up as the costs of
setting up ABC can be very high, as well as costs of running and updating it
and it must be incurred. These costs can get higher especially if a business’s
operations are complex and it involves a large number of activities and cost
drivers. The information generated in these circumstances is also likely to be
complex. If managers find ABC reports difficult to understand, the potential
benefits of this approach may be lost. There can be a lot to consider and
calculate when setting up ABC costing such as a car manufacturing business
where a lot of resources and other factors need to be considered especially if
there are different models within the workplace which needs to be produced, it
can get very complicated and very hard to see the full picture of the benefit
such as working out the exact total cost for a material used in a model and
exact units of electricity used etc. Not to mention the cost of the resources
may increase or decrease over time and that needs to be considered throughout
that operation as long is still active in order to make a fair cost for that
product and to stay competitive for big businesses while making a profit.

According to (Atrill and McLaney 2015. Page 154). If a
business sells products or services that all have similar levels of output and
involve similar activities and processes. It is unlikely that the measurements
provided by ABC will lead to a different outcome from the results obtained
under the traditional approach. As a result, opportunities for better pricing,
planning and cost control may not be great and may not justify the cost of
switching to an ABC system.

There will also be rising issues in regards to measuring and
tracing aspects of the costing method. According to (Mahal and Hossain 2015) –
(Atrill and McLaney 2015. Page 154).  Not
all the costs can be identified with a particular activity and yet all over-
heads have to be allocated to one cost pool or another. Failure for this to
happen means that not all of the overheads are taken into account. Dealing with
unallocated overheads can often be done on some sensible basis. In some cases,
however, a lack of data concerning a particular cost may lead to fairly
arbitrary cost allocations between activities. There is also the problem that
the relationship between activity costs and their cost drivers may be difficult
to determine. Identifying a cause-and-effect relationship could be particularly
difficult where most activity costs are fixed and so do not vary with changes
in usage.

ABC is also criticised for the same reason that traditional
full costing is criticised where it does not provide relevant information for
decision making.

 

 

 

 

 

I will now talk about implementing ABC and the practical
problems that may be encountered in implementing ABC in a manufacturing industry
as well as discussing techniques and how they overcome.

First of all, to implement the ABC you must get the approval
of the people in the workplace and this will be employees in this instance. According
to (Ness and Cucuzza 1995) Employee resistance is the biggest obstacle when it
comes to implementing ABC. Resistances like this is normal and is likely to
occur as managers of a unit such as  a
function, a division, or a plant tend to get understandably nervous about
revealing detailed information that could be used to affect their practices or
undermine their authority. Managers will not tend to be pleased when they are
being asked to replace a cost-accounting system they are used to with one that
could dramatically change the definitions of success and failure and having
been downsized, they sometimes often see this implementation as a threat to
their existence jobs.

As briefly mentioned previously, there are also many
administrative and technical difficulties that could arise when implementing
this methodology with the first one being internal resistance as well as lack
of top management support, human resource availability, lack of knowledge, and
expressed satisfaction with current systems. Technical difficulties also
include the problem of identification of cost driver, other difficulties
include the identification and selection of activities, assigning resources to
activities, assigning costs to products and the problems of collecting the
necessary data.

According to (Hasan 2017) on his research regarding to why
businesses is not using ABC costing. The main practical problems identified
when it comes to implementing the system is the resource available to do so
which in most cases is the money to setup as well as the necessary personnel
and time to do so, some businesses simply cannot afford risk to spend time and
change its system. As the data can be very hard to understand and shared with
most people, many managers and directors will go back and consider based on their
current state of their business to see if it is necessary, after judging the
potential changes for their business and if the outcome is not too effective
then this can lead to businesses not changing as well as it not being placed in
the top priories list.

They are techniques on how to how they can overcome the
problems when it comes to implementing ABC.

According to (Didier 2001) There are certain steps that
needs to be in place for the business to ensure a smooth implementation, the
first step is an Interdependent environment. This means there a pre-existing
process-oriented improvement program so that a disposition towards internal
change will help move the implementation along.

Security is also another step as employees will fear in
regards to replacement if their unit is found to be unprofitable, but assurance
and guarantees that their job is safe and assistance is provided then this will
help the change and implementation.

Legitimacy, this step involves senior management commitment
by leading the implementation to show employees the commitment to the effort
and it is important to make the implementation successful so that people can understand
and feel how important it is so that the effort and process does not stop if it
loses attention.

 

Critical timing, as users need timely reports in order for
successful implementation.

Coordination and integration, this involves various
departments within a business in decision-making which will ease the implementation
process once everyone agrees to this implementation at the start.

Incentive alignment as making incentives based on ABC
information instead of traditional costing means that it will encourage
personnel and employees focusing on towards a successful implementation.

In conclusion, to answer why ABC lacks impact in the UK manufacturing
industry: According to (Cheung, Tan, Tan and Sutton) 2013. It is very costly to
implement within the UK, this is mainly because there is a set minimum wage
implemented and enforced. As in order for ABC to run effectively, a detailed
cost pool has to be identified this means that a group of employees have to
work for a long time in order to develop the cost pool. During this time the
business is paying expenses in order to maintain them therefore with a minimum wage
enforced for the labour cost, this can be an expensive process to operate. According to (Bell and Ansari 1995). Management accounting
is a system of measuring and providing operational and financial information
that guides managerial action, motivates behaviours, and supports and creates
the cultural values necessary to achieve an organization’s strategic objectivesThe primary goal of management accounting is to provide
information for internal decision making, with an emphasis on planning and
control purposes. Decisions made by managers rely substantially on accounting
information because financial accounting information does not provide enough
detail for internal decisions so it must be subdivided into the detail of the
individual products or services provided by a company. According to (CIMA). Strategic management accounting was
later on introduced in 1981 and was defined as the provision and analysis of
management accounting data about a business and its competitors. The sole
purpose of SMA is to help developing and monitoring business strategies. Since
then several attempts have been made to refine this definition and identify a
set of techniques classified under the banner of strategic management accounting.
In other words this is the merging of the businesses strategic objectives with
management accounting information to provide a forward looking model that
assists management in making business decisions.

Strategic management studies how to organize the structure
of a firm such as what products the firm should sell, how it should position
itself in the marketplace, where it should get its supplies and whether it
needs to adjust or compete on costs. Strategic management also involves with
other types issues, such as human resources policies, employee compensation
plans, competitiveness and productivity. Awareness of competitive conditions is
the primary difference between strategic management accounting and traditional
management accounting systems. SMA focuses on the company’s environment. One
environment a firm focuses on revolves around its relationship with suppliers
and customers. Another environment involves a company’s current and potential
competitors. Hence, a firm’s intelligence may indicate a need to reduce prices
to compete. SMA would evaluate the organization’s up-stream (suppliers) cost
structure to determine if it can renegotiate with suppliers, or if it must seek
suppliers with lower price points.