Management Accounting

Application of Activity-based costing in an organizational performance

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 Management Accounting

Question 1, section c

Activity-based costing as provided shows the proportional allocation of the cost to every

particular element that is produce by the company therefore being able to get the proportion of

the profits from the sales. The profit of that have been posted using this system encompasses the

production overhead costs which include for machining service, assembling services, assembling

services, set-up costs, order processing and purchasing for the respective X, Y and Z products.

On the other hand, conventional absorption costing depicts that production costs in consumed by

the units that have been made by a particular company. The costs nevertheless are identified to be

expenses in the period that the company settled them. Therefore, this profit of $241,500 for X,

$101,200 for Y and $46,500 for Z do not include the direct allocation to unit elements of

products.

Question 2

Activity based costing is a procedure for distributing various costs to the elements that

are associated with it. The overall objective of this method is to significantly reduce the indirect

costs in the company. Activity based costing is more appropriate for a complex situations in

which several machines and products, and even where complex processes exist. However,

Activity based costing is insignificance in a streamlined circumstance where manufacturing

methods are reduced. It is also useful method for checking various activities that includes trailing

the consumption of the capitals and valuation final results. Capitals are appropriated to different

undertakings, and undertakings to cost elements are based on the consumption approximations.

Therefore, this paper provide a clear understanding of the activity based costing and its

application to the solving various problems in the company.

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Activity based costing is a method that have assisted different companies to precisely

appropriate the cost activity of the whole products, activities and even services (Öker &

Adıgüzel, 2016, p. 47). This therefore have greatly contributed significantly in making the

decision of the company through either identifying and eliminating various products and services

that are less profitable and thus reducing the prices of those products and service that gives

maximum price value or identifying and eliminating production or services methods that are not

efficient and hence select those activities that are directed to the similar product but then at the

favourable profits.

The Managing Director at Hurray Plc can be able to use Activity Based Costing

procedures to allocate a company’s resource elements by undertakings to the products and

services given to its clients (Shu, et. al., 2014, pp. 63). Activity based costing is wholly applied

as a method for assuming product and client costs and returns associated with the manufacturing

or undertaking methods. Therefore, Activity based costing has mutually been used to support

long term decisions for instance pricing, outsourcing, identification and evaluation of the

procedures aimed at improving various plans (Öker & Adıgüzel, 2016, p. 47).

Costing systems has also significantly offered companies simple means to estimate the

cost of the product associated to the income that generates. There are two costing systems that

used in business: traditional costing and Activity-based costing (Shu, et. al., 2014, pp. 63).

Traditional costing allocates indirect production cost based on the size of the element driver for

example the amount of direct labour hours required to create an element. An element driver is a

cause that results to use for example machine hours, direct labour hours, and direct material

hours (Öker & Adıgüzel, 2016, p. 47). Therefore, it is apparent that managing managers should
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comprehend the benefits and shortcomings of both the methods in order to meet the necessities

of the company.

Activity-based costing enables the management of Hurray Plc to produce a more precise

view of the element cost but companies generally use it as an additional costing method. The

appropriation bases employed in Activity-based costing are much different from those that are

used in for traditional costing in those Activity-based costing estimates each element associated

with creating an element and distributes a cost to the activity (Ozyurek & Dinç, 2014, p. 107).

Nevertheless, the cost that is appropriated to the activity is then attached to the products that

need the activity for manufacturing.

Activity-based costing is provides a more accurate means of costs allocation in a

company. Given this, the managing director can allocate cost only to the products that need the

activity for manufacturing. This system does not allow allocation of irrelevant cost to a product

by the company. Other benefits of Activity-based costing are simple elucidation of the cost for

interior management, the capability to provide benchmarking and better thoughtful of indirect

costs (Öker & Adıgüzel, 2016, p. 47). It is nonetheless expensive to implement an Activity-based

costing method as it needs a lot of substantial finances which in most cases have proved as a

major constraint for many companies having limited funds. It can also be misused by users who

want to give certain results in order to a particular impression.

Activity-based costing is design to track the cost of the activity in order to enable a

company monitor whether the costs are in line with the company’s standards. On the cases where

the company is not in conformity with the standards, the Activity-based costing provides a good

means for evaluating the ongoing cost to particular services as managers concentrates on cost

decline. Although, majority of the costs suffered for separate clients are merely product
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overheads, it also has an overhead element for instance up normal high client facility points,

product return supervision as well as cooperative administration contracts (Öker & Adıgüzel,

2016, p. 47). Therefore, an Activity-based costing method can arrange by these supplementary

indirect costs to assist the company in estimating which client if giving them a reasonable return.

This evaluation thus emanates to identification of unprofitable clients being rejected or even

reducing the efforts that are directed to those clients who yield the company its biggest returns.

This method of costing provides a company with a classical means of distribution mediums that

they use to sells its products, for instance retail, internet, distributors, and even mail order

catalogues (Ozyurek & Dinç, 2014, p. 107). Majority of the structural cost of sustaining a

distribution means is indirect hence the company can create an appropriate evaluation of which

channels are consuming overhead in order to allow management provides a sound decision while

in other cases permit dropping unprofitable means.

The management of the Hurray Plc can use Activity-based costing to create a

comprehensive view of every cost associated with the internal production of a product hence

they are able to observe clearly various costs that will not be absorb by the company on instances

that the element is outsourced and also when they have not. It is also apparent that given a

proper overhead distribution from the Activity-based costing system, the managing director of

the Hurray Plc will be in a position to establish the margins of different products, product lines

and entire subsidiaries (Öker & Adıgüzel, 2016, p. 47). Therefore, it makes this costing system

quite an important for determining various options to put company resources so as to realize high

returns.
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The managing director of Hurray Plc can use this method to set product pricing which is based

on the prevailing market price thus being able to avoid selling a product which will cause a

company to lose its resources on each sale that they make (Ozyurek & Dinç, 2014, p. 107).

REFERENCES

Öker, F., & Adıgüzel, H. 2016. Time‐driven activity‐based costing: An implementation in a

manufacturing company. Journal of Corporate Accounting & Finance, 27(3), pp. 39-

56.

Ozyurek, H., & Dinç, Y. 2014. Time-Driven Activity Based Costing. International Journal of

Business and Management Studies, 6(1), pp. 97-117.

Shu, F., Weidong, Z., Zhuo, L. Z., Haibin, C., & Yaohui, Z. 2014. The application of time

driven activity-based costing in fine cost management of the hospital. Jiangsu

Healthcare Administration, 6, pp. 63.