Running head: ACTIVITY-BASED COSTING 1

Activity-Based Costing

Vladimir Belyaev

Liberty University

9/6/2020
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Activity-Based Costing

Introduction

Amidst many costing methods, there is activity-based costing, and it entails identifying

organizational activities and assigning a cost to products and services. As well, this model

assigns overhead costs into direct costs as opposed to conventional costing. Argade (2020) posits

that this costing technique's overall goal is to improve a business entity's activities. Besides,

costing information is critical for strategic planning and operational management. Coca-cola is

among the renowned companies that practice activity-based costing to determine the price

points. It is due to the wide array of products that require huge inventories. For the beverage firm

to apply its strategic allocation of financial resources, the best alternative is the activity-based

costing. Budgeting, expenses, and revenue segments also require this costing product. In this

regard, activity-based costing is critical in multiple firms because it helps establish and shape a

company's culture. The ABC method of costing has advantages and disadvantages, but the pros

out way the cons. Therefore, the ABC system is worth considering to forge ahead of the firm's

objectives. This essay discusses the application of activity-based costing by the coca-cola firm in

the strategic allocation of financial resources.

Application of the Activity-based costing

As already mentioned, ABC guides a business to adapt strategies and to improve business

operations. Besides, the approach helps the business entity meet competitive pressures. Overall,

costing is utilized by the top leadership to control functions and make informed planning

decisions. Financial reporting helps the manager make accurate decisions forging the company

ahead. In this regard, the coca-cola firm introduced an activity-based cost manager's post to
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oversee the production costing, among other endeavors. There are steps towards applying

activity-based costing. The first step concerns activity-based cost calculation, and this process

involves defining activities that go to the production of goods and services. Despite ABC being a

simple process, it always devolves into micro-transactions. All employees have a role to play

during the ABC strategy (Tam & Tuan, 2020).

Matthes (2020) assets that the coca-cola company management prides itself in using the

ABC to evaluate fixed costs. ABC thus identifies the company activities and allocates the costs

to each product and service. This allocation occurs proportionally, and it's based on the estimate

of usage. This process's importance is to enable the firm to track the cost of activities needed for

production. Each activity is a cost that gets divided between the products required. For coca-cola,

the firm can decide to compare the production costs of soda and the minute maid product. These

two products are assumed to take similar production time. The costing process entails using a

standard allocation model that divides the overhead costs over units. Notably, the products

appear to have a similar production cost. The difference comes in during the evaluation of the

machines' complexity in producing these two products. The one that uses a complex machine has

a higher production cost than the other.

Based on the above example, the use of different devices gets categorized as an activity.

In this regard, ABC captures the difference in the cost of producing soda and minute maid

products. The first step considered while applying the ABC is defining the activities that go into

its production. Capturing the activities effectively in determining the ABC requires talking to

employees in the firm. Those in the plant, on the floor, or the customer service team play a

crucial role in ABC implementation. This array of staff will understand the variations in the

processes and define the different types of products and services made. The best way to make
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employees comprehend the ABC and make it work is by defining the activities. Activities are

defined as individual actions. For instance, considering that a certain machine can consume

higher electricity than the other, necessitates allocating salaries while considering activity-based

costing (Matthies, 2020).

According to Kirillova (2020), one employee can spend 15 percent of their time making a

particular product; on the other hand, they can spend only 5 percent of their time making a

different product. Besides, multiple dynamics need evaluation before reaching a consensus in

allocating internal costing. Thus, managers must make several definitions of activities in tracking

internal costing. Any activity that increases the cost ought to be defined based on the ABC

framework. However, activities are not only related to production. Other dynamics like time

taken to take orders, changing production schedules, and purchasing raw materials are worth

considering. There are other activities like warehouse managing, storage, and making sales that

influence the costing. If these activities affect the costs of production, ABC evaluation is

necessary to define the costs properly.

There is a need to allocate the activities to each product type proportionally. Despite the

complexities, the step should be easily understandable. Different production lines should be

captured. It entails aligning each portion of activity to the type of product. Remarkably, the third

step entails obtaining the cost of each activity and calculating the product costs accordingly.

Some activities are easy while estimating the costs. It includes salary calculations; however,

machine costs require the knowledge of the technical staff. As well, the accounting procedure to

assign the cost is a prerequisite. Once the costing of each product is over, there follows report

generation. This exercise highlights the significant contributors to the cost of production.

Therefore, its entire product portfolio relies on the above three highlighted steps (Messer, 2020).
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Coca-cola firm and the ABC system

Coca-cola is a manufacturing industry, and ABC helps define overhead costs. This

beverage firm has indirect costs resulting from the manufacturing process like upkeep,

maintenance, and utilities. Thus ABC is critical in differentiating the product costs. ABC is used

by the coca-cola firm to determine the price points. This is because this multinational

organization prides in multiple products like water, soda, and minute maid beverages. Therefore,

a huge amount of inventory is required and is a significant portion of production costs.

Production of multiple products is easily overlooked, but a big difference exists in the costing

and production process. As a result, ABC helps coca-cola in a big way in defining the costs of

allocating financial resources. This includes budgeting, revenue allocation, and other expenses.

Coca-cola can differentiate the value of a diverse array of products. Importantly, this

differentiation enables this beverage company to set price points globally. This step enables the

edge out competitors by establishing a rich and loyal clientele base. Rizkia & Oktafani (2020)

contend that this is how the coca-cola firm earns marginal profits.

Pros and cons of the ABC method

There are advantages of practicing ABC; the first pro is about increased precision in the

pricing of products and services. This increases revenue due to realistic pricing. As well, ABC

provides specific information about cost drivers. It is critical to the managers when

understanding the overall costs of production. The other advantage is identifying high-cost and

low-value activities—this aids in cutting down unnecessary costs, thus improving production

efficiency. Coca-cola company benefits by improving the manufacturing process and other

processes; thus, this process reduces waste through thoughtful resource allocation. Nonetheless,
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the method comes with disadvantages. According to Pietrzak et al. (2020), the implementation

complexity is the first undoing of the method. It's also complex to analyze, thus adding costs

because the firm must provide higher accounting experts. Regardless, the advantages out way the

disadvantages of making ABC a worth undertaking.

Conclusion

In conclusion, amidst many costing methods, there is activity-based costing, and it entails

identifying organizational activities and assigning a cost to products and services. As well, this

model assigns overhead costs into direct costs as opposed to conventional costing. The overall

goal of this costing technique is to improve the activities of a business entity. Besides, costing

information is critical for strategic planning and operational management. Coca-cola is among

the renowned companies that practice activity-based costing to determine the price points. This is

due to the wide array of products that require huge inventories. For the beverage firm to apply its

strategic allocation of financial resources, the best alternative is the activity-based costing.

Budgeting, expenses, and revenue segments also require this costing product. In this regard,

activity-based costing is critical in multiple firms because it helps establish and shape a

company's culture.

References
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Argade, S. L. (2020). Purposes and Benefits of Activity Based Costing.

Kirillova, L. K. (2020, May). Logistic Foundations of Conducting Transnational Business in the

Regional Market. International Scientific and Practical Conference (pp. 92-99).

Springer, Cham.

Matthies, B. (2020). Assessing the Automation Potentials of Management Reporting Processes.

Messer, R. (2020). Making a Lot of Decisions. In Financial Modeling for Decision Making:

Using MS-Excel in Accounting and Finance. Emerald Publishing Limited.

Pietrzak, Ž., Wnuk-Pel, T., & Christauskas, Č. (2020). Problems with activity-based costing

implementation in Polish and Lithuanian companies. Inžinerinė ekonomika, 26-38.

Rizkia, R., & Oktafani, F. (2020). The Effect Of Storytelling Marketing On Purchasing

Decisions Through Brand Equity As Intervening Variable On Gojek In

Jakarta. International Journal of Management, Entrepreneurship, Social Science and

Humanities, 3(1), 48-55.

Tam, N., & Tuan, L. (2020). Factors influencing the adoption of activity-based costing in

developing countries. Management Science Letters, 10(14), 3331-3338.