L/508/2637 - Explaining Activity Based Costing Methods

1. Explain Activity based costing (ABC) model

Activity based costing is to assign the cost of each products, services projects, tasks or acquisition which is based on the resources consumed by these activities . It is the methodology used for assign accurately to extend the resources (Activity based budgeting, 2018). It maintain the overhead cost to activities and then assigns them to objects. The main aim is to change the demand for activities to improve the organisation profitability. ABC models provide is a most accurate method of costing. This model supports other management techniques (Hilton and Platt, 2013). Its a process of allocating the cost between this two these are cost of goods sold and inventories for overall profit. The cost accounting system is based on the that all production costs have to be aborted into the object. The previous section reviewed the concept of traditional costing. “ to reassign the cost accurately to cost objects, these are outputs, products, services and customers.” Short term variable cost are allocated to the products on the basis of volume related cost drivers. The main objectives of ABC model are to rectify the wrong or insignificant cost information, to allocate the overheads, and to help the management in to take the quality and decision on time.

There are following steps which is involved in implementing ABC model these are, To identify the functional areas of the organisations, to identify the main activities of functional areas, next step is to allocate common indirect cost to each areas, identify most suitable cost drivers, are to set the statement of expenditure according to activity wise , compare this statement with the value addition activity wise. ABC system improves the quality and ability of an analyst to estimate the cash flows statements. There are three components in ABC model these are direct labour, direct materials and manufacturing overhead (Weygandt, Kimmel and Kieso, 2015). ABC is the detailed cost calculations and analysis provide business with important information regarding how the cost should be incurred.

Features of activity based costing :

• In this model total cost is separate into two types fixed cost and variable cost which is necessary to provide quality information for designing a cost system (Needles, Powers and Crosson, 2013).
• The cost are related to volume, diversity, events and time.
• The cost driver of the company has to identify for tracing the overhead product.

2. Explain how ABC model is related with the current goals and strategies of the company?

Bluescope is a steel manufacture company in Australia. BHP steel renamed in Bluescope steel in 2003. It has its largest operating plant. Bluescope has the successful global partnership which is widely diverse in markets. This company is the global leader of painted steel products and this company has a top quality brand. Bluescope steel listed in Australian stock exchange

Bluescope's mission and objectives:

Company mission is to provide their customers with excellence products and services. Bluescope is a globally a high quality brand of steel products this company is third largest manufacturer company globally. This company committed to deliver value from steelmaking. Financial strength is the main part of their strategy and supports for creating the value for investor and it is related to good earnings , efficiently growth plans which is the main component of balance sheet. (Bluescope Steel, 2018). Company objective to they provide facilities worldwide and create more customer. This company deals with Australian steel products, Bluescope buildings, building products, North star Bluescope steel

Company's corporate strategy:

Bluescope express their fundamentals beliefs which is based on their bond and their guide to business conducts. According to the company their statement is “Our bond is reflects the characters tics of honesty and integrity that they value and aspire to live by. Our word is our bond” . They set the principle that govern how people should behave when conducting business on company's behalf. Bluescope steel company has been investing $2 billion in to make new plants to increase their markets. Their strategy is to earn high profit and more stable earnings by selling a big proportion of their steel products. This steel industry has been cyclical. Prices for steel products.This company will growth in a brand quality and steel markets globally.

How ABC model assists in achieving the company strategies

The Bluescope steel company to earn more and in higher margin profit and more stable in selling a large proportion of their products. ABC model is used to developing the managerial function. Business is influenced by globalisation and environmental changes , for sustainability of a business it is important that for creating the value in the markets so it is necessary to implement right strategy. So if this company used this model of costing , its main objectives is to rectify the irrelevant cost information, and to allocate the overheads on their activity basis, and it is help the management in taking quality decision from which company getting more profits from these (Islam and Hu, 201). ABC model is focuses on correct information about the cost of the products , services, processes. If any organisation gain through understanding of their business and cost during the analysis. And management is also using this to improve their decision making at operational and strategic levels. ABC model is more convenient method of costing and it allows for understanding of overheads and it supports other management techniques. ABC model usually has an impact on the structure of the firm's financial accounting reports. It brings improvements in margin and profitability.

3. Recommendations about the implementation of ABC model in company?

A company management is adopt the ABC model to improve costing accuracy because it is get closer to the true and true profitability . In many organisations where ABC model is implemented successfully the management use this approach to support their decision which is related to pricing, adding, deleting the items from the portfolio . The primary use of this model is shift from accounting tool to management decision system. It is a strategic tool which allows the company to achieve competitive advantage (Edmonds and et.al., 2016). In Bluescope company the implementation of activity based costing model some steps are to be followed these are activity identification, assigning the cost , calculate activity rates , assign costs to cost objects and to prepare and distribute the management report. In present time companies face strong competition globally . So there is a too much pressure to increase productivity and lower production costs. The ABC model has been proposed to the company in which establish that the resources arecompany because:

Accurate and relevant results: This model is used by the company because this give the accurate and relevant results on their analysis . It will apply on all the levels of an enterprises whether it is big or small (Bowman, Smyth and Meyerowitz, 2012)

It develop a structure for planning and managing the execution of ABC model. It is learn to use set tools and techniques to modify the effectiveness to understand the roles and responsibilities of financial managers.

Bluescope into the current worsening with low debt and it is free from an attachment to producing raw products such as iron ore and coal. This company is knowing by five year their heavy cost cutting program done . Bluescope share price has been increases to 80 percent over the past 12 months . So the company get that good profits which are important to the company. (Pudlo and et.al., 2015). Bluescope target is to make the company cash positive at the bottom of any cyclical downturn. This company hit by perfect storm of a soaring input costs in a very high dollar. Bluescope company has been built for a strong foundation for growth , with a diverse portfolio of business in the fastest growing economies of the world .

4. Explain another Management accounting tool :

Zero based budgeting: ZBB is a repeatable process to review in the annual budget . ZBB is the most efficient return on spending and its main aims to ignore unproductive cost. It is method of budgeting in which all expenses will justified for each period. This budgeting is start fro zero base and their function will be analysed for its needs and cost. This method is used for cost optimization, this approach has a long-lasting results and it has a high success rate. ZBB model is not to consider the last budget. Allocation of resources is related to needs and cost of the organisation. this approach give the increment to the organisation.

In this type of approach it should set their process related to top level strategic goals. In this budgeting requires the organisation objective which is clearly related with assesses different ways to execute the objective before it is allocated. This budgeting model focuses on objectives and results in terms of profit of the organisation . ZBB using in a large organisation is quite risky , if it is not properly execute or managed it is a organisational distraction. ZBB is not based on previous year data. Its aim is to justify resource allocation. Zero based budgeting is an activity program or department for which decision packages have been approved . In Bluescope steel company also used this model for achieving their objectives and to earn more profits.

Advantages of using ZBB:

• in Zero based budgeting budget is well defined and straight to strategy
• this supports cost reduction to avoid the automatic budget which increase and its result is to saving the funds.
• It also improves operational efficiency by challenging their assumption.
• And give a wide collaboration to the organisation.