Activity-Based Costing: Measuring Business Performance And Enhancing Decision Making
Measuring Business Performance with Activity-Based Costing
Measuring the performance of a business is critical in establishing its business progress. In this essence, it is important to note that activity based costing is a key management accounting method that can be deployed to measure the performance of a business entity in real-time (Kennedy and Affleck-Graves, 2001, 33). This is achieved by evaluating the business in terms of the cost associated with each resources and activity (Hoozée and Hansen, 2017, 143). Deploying activity-based costing can help a management accountant to carry out the rough estimates of the future business processes, thus being able to estimate the expected cost of running crucial business operations such as production (Noreen, Brewer and Garrison, 2014, 12). This implies that understanding resources used for production activity in a company is enhanced by the determination of the corresponding costs. This paper will outline the presentation of activity-based costing as presented in various studies with the aim of helping accountants determine the appropriate framework of determining key costs of running companies routinely.
Activity-based costing is the appropriate framework that is deployed to enhance the determination of various costs of products. In most cases, this is achieved through the evaluation of corresponding costs assigned to various resources used in the active running of a business. Such cost determination is further established by examining all the overhead costs that may be associate with a given resource or product (Hoozée and Hansen, 2017, 143). Across the board, it is crucial to note that activity-based costing can be used by accountants in any given business organization to establish the existing relationship between overhead activities, resource costs and product costs. Such establishments are necessary when it comes to assigning indirect costs that need to be considered in the effective manufacturing of products. Activity-based costing is also a key and effective technique that can be deployed when assigning product costs based on the activities being undertaken in a business (Kennedy and Affleck-Graves, 2001, 49). However, there are cases where it may be difficult to effectively assign overhead costs such as management costs, product costs, staff costs and employee salary when there is no appropriate framework to facilitate the same. Furthermore, it should be acknowledged that activity-based costing is mostly used in the manufacturing industry. In this case, it helps in the effective assignment of costs to the manufactured industrial products based on the established framework factoring in all the processes of manufacturing.
Assigning Indirect Costs to Production
Nonetheless, activity-based costing can also be deployed as an appropriate technique when analyzing the profitability of any company on the basis of product costs, profit amount and service costs (Hoozée and Hansen, 2017, 144). Therefore, it is a viable method that can be deployed by the management in an organization for effective costing and management of all the costs incurred in the routine running of an organization. Whereas activity-based costing was primarily introductive to facilitate cost accounting in many organization, there are several processes that are involved for any product to be manufactured in an organization. This is because it may be difficult to accurately determine incurred business costs using the conventional process costing methods. However, with the activity-based costing, accountants in manufacturing organization can be able to document the costs incurred by each department, thus being able to track down the entire cost of manufacturing a product (French, Guzman, Rubio, Frenzel and Feeley, 2016, 176). Even though this may not be easily achieved, activity-based costing has helped in providing the needed framework for meeting such achievements among the manufacturing firms. For instance, activity-based costing has introduced approaches that can be used for effective allocation of all the incurred direct and indirect costs in the process of production. As a result, a management accountant in any given organization will be able to determine costs that might have been incurred by an organization in the entire process of manufacturing any given product.
The established costing system due to the application of the activity-based costing can also help managerial accounts in organizations to accurately set the prices of manufactured products. This can be achieved by ensuring that the correct price limit has been set factoring in crucial aspects such as staffing and administration costs that may be incurred in the manufacturing process. It is for this reason that accounts have been using activity-based costing to establish the actual costing of products (Hoozée and Hansen, 2017, 146). This has been facilitated by the access to crucial information necessary for making such decisions, a phenomenon that is facilitated by the deployment of activity-based costing to help in tracking down all the incurred costs in the entire product manufacturing process.
The conducted study has illuminated on how decision making process in an organization can be influenced by activity-based costing. However, it has been reiterated that such decisions are usually made on the basis of available business resources given that the primary target of many organizations is usually to maximize on the generated profits (Sembiring, Wahyuni, Sinaga, and Silaban, 2018, 309). In this essence, it has been pointed out that the deployment of activity-based costing can help an organization to maximize its generated profits specifically by monitoring the incurred actual costs in the manufacturing process of any given product. In this essence, it is a crucial method that can be relied upon by the management in an organization to make some key decisions necessary for continued operation of the business (Hoozée and Hansen, 2017, 148). According to the conducted study, the management of an organization can get crucial information generated through activity-based costing, thus enhancing the comprehension of the prevailing business trends (Bataineh, 2018, 475). Therefore, such gathered information and insights can thereafter be used by the management to make key business decisions in terms of staffing costs and planning costs aimed at aligning major business operations. In all such undertakings, it has been demonstrated that activity-based costing is crucial for their successful execution given that it provides frameworks for measuring incurred overhead costs as well as any other indirect cost that may be resultant from the production and the manufacturing process (Hoozée and Hansen, 2017, 149). As a result, a managerial accountant in any organization will have the basis of measuring production outcomes in an organization based on the collected cost information.
Analyzing Profitability with Activity-Based Costing
The Role of Media on Making Financial Decisions
The study has further diversified its approach with the aim of illuminating on the role that is played by activity-based costing in the entire decision-making process. In this regard, it has been emphasized that the use of crucial accounting information garnered from different media outlets can be utilized by a professional managerial accountant to evaluate the progress of an organization (Neto, Feitoza, Agostinho, Almeida, Moreno and Giannetti, 2018, 36). However, this has to be achieved in the view of the prevailing business environment and financial performance. Besides this, the study has also adopted a multi-faceted approach aimed at outlining how the deployment of activity-based costing can be used to help managerial accountants in any given organization to set product costs aimed at increasing their productivity. This argument has been based on the principle that the deployment of activity-based costing can help lessen the amount of time that can be spend by accountants garnering for needed information (Hoozée and Hansen, 2017, 150). In this consideration, its deployment in an organization can help collect accurate information that may be needed by accounts for the determination of costs of various products. It is for this reason that the study has outlined key differences that exist between activity-based costing and other traditional costing methods that may be utilized by a business (Joseph and Maheswaran, 2018, 67). However, the bottom-line is that activity-based costing has been demonstrated to be an appropriate technique whose role in making major decisions at an organization level cannot be underestimated.
The conducted study has extensively illuminated on the role that can be played by activity-based costing on the general financial performance of an organization. Besides this, the study has also dedicatedly demonstrated the role that can be played by effectiveness brought about by the implemented activity-based costing (Hofmann and Bosshard, 2017, 45). In this essence, it has been reiterated that activity-based costing will play a major role in enhancing such effectiveness due to the valuable accounting information that will be gathered during the entire manufacturing process, thus facilitating the work of professional accountants who will be responsible for evaluating the performance of such organizations. It has further been argued that the activity-based costing also will require several business operations to be coordinated to enhance the collection of related crucial data that will be utilized by managerial accounts when conducting business evaluation to determine different aspects. However, the study has suggested that a traditional information system can also be deployed concurrent with the activity-based costing for successful product cost evaluations within a short period (Kennedy and Affleck-Graves, 2001, 35). Even though there are cases where the collected results may not be the actual reflection of the reality as it is the case with most traditional accounting frameworks, it is important to note that the overall as well as the routine activities undertaken by the firm will be considered during the entire manufacturing or production process to track down key costs that may be incurred along the way.
Enhancing Decision Making with Activity-Based Costing
Furthermore, it has been demonstrated that the deployment of activity-based costing can also make it possible for an organization to accurately determine the cost of its products. This implies that the respective organization will be able to explore appropriate measures that can be implemented to enhance the maximization of its profit levels while at the same time limiting unnecessary production processes that may not add any significant value to the final product being produced by an organization (Kennedy and Affleck-Graves, 2001, 34). On this basis, the performance of an organization can effectively be enhanced upon incorporation of the activity-based costing into its routine operations, a phenomenon that will enable it to accurately measure the incurred business costs.
Comparison of Business Performance of Among Organizations Adopting Activity-Based Costing and Non-Adopters
The conducted study has focused on extensively comparing the performance of firms adopting activity-based costing to those that do not deploy this framework in their routine operations. For instance, it has been pointed out that firms are using activity-based costing to determine the cost of their products whereas other firms have been keen to use traditional accounting methods in the establishment of the cost of their products (Langfield-Smith, Smith, Andon, Hilton and Thorne, 2017, 56). However, it should be noted that such comparison has been undertaken with the sole reason of comprehending the impact of activity-based costing on the performance of the business. Based on the conducted comparison, it is evident that activity-based costing play a crucial role in the overall progress of an organization (Kennedy and Affleck-Graves, 2001, 25). This has been reiterated by the study by outlining the role that can be played by activity-based costing upon being implemented in the operation framework of the present-day business organizations. Conducted research has also outlined the acceptability of activity-based costing among several business organizations through the analysis of the financial performance of firm that has adopted it compared to other firms using traditional accounting systems in their routine market operations.
Established Similarities
The two studies that have been considered for this paper has been focusing on illustrating how activity-based costing can influence the performance of an organization. Similarly, both studies have also focused on outlining the impact that can be played by the deployment of activity-based costing in the process of a business or an organization (Hoozée and Hansen, 2017, 155). Nonetheless, the two considered studies have also emphatically demonstrated the improvements that can be attained by a business organization once it deploys activity-based costing in its routine operations (Kennedy and Affleck-Graves, 2001, 23). For instance, it has been demonstrated across board that activity-based costing is usually deployed by most businesses for the purposes of maximizing their profits.
Established Differences
Whereas study 1 has extensively focused on highlighting the impact that activity-based costing can have one the decisions that can be made in an organization by the management, Study 2 has focused on demonstrating on how activity-based costing can enhance the effectiveness and overall performance of an organization (Kennedy and Affleck-Graves, 2001, 22). Furthermore, it has been outlined in study 1 that decisions regarding action-based costing are mostly undertaken based on models and theoretical framework whenever important decisions has to be made (Hoozée and Hansen, 2017, 160). This is contrary to study 2 that has focused on outlining how the performance of an organization with regard to activity-based costing can be evaluated on the basis of opinions expressed by the managerial accounts of such organizations.
Outcomes for Study 1
According to study 1, it has been demonstrated that activity-based costing is a crucial tool among the accounting managers in organizations given that it forms the basis of making vital business decisions (Cole, 2019, 128). Importantly, the deployment of activity-based costing can be essential to a business such as the manufacturing organizations for due to its effective projection of all the costs that may be incurred in an entire manufacturing process. On this basis, there is need for a deployed activity-based costing system in an organization to be accurately designed for the purpose of relaying accurate financial information and outcomes (Hoozée and Hansen, 2017, 163). Furthermore, it has been implied by the presented information that the managerial accounting officer in an organization will of no use if at all he/she does not have competency knowledge and skills of how the activity-based costing system can be used to carry out the routine evaluation of a business organization. It is on this basis that it has been expressed in the study that the activity-based costing technique has been outlined to be important for enhancing the progress of an organization (Diavastis, Anagnostopoulou, Drogalas and Karagiorgos, 2016, 757). However, there are cases where some organizations are still deploying traditional accounting methods based on their desired outcomes at the end of every process. Generally, it has been outlined in the study that the information collected by the activity-based costing can help the managerial accountant in any given organization to make key decisions within a short period due to the accuracy and dependability of the relayed information. For instance, product costs as well as new production lines can accurately be estimated based on the specifics projected by the deployed activity-based costing system.
Another key outcome of study 1 is that managers of an organization can be able to diagnose business problems based on the relayed accounting information. This implies that the management will be able to monitor the likely problems that may derail the routine business operations early enough (Otley, 2016, 62). This implies that the likely impact of such problems can be prevented by the management before blowing up to disrupt the routine business operations. For instance, the managerial accounts in organizations deploying activity-based costing systems will rely on the projected accounting information to detect any likely problem likely to befall an organization and subsequently formulate relevant motivation measures of alleviating such problems. Considering the accuracy of the captured information, the management will be able to establish the financial health of a given organization, thus being informed on the specific key decisions that should be made to enhance the routine operation of such an organization (Hoozée and Hansen, 2017, 143). Through the delayed feedback, the management accountant in an organization will be able to comprehensively master the production process and be in a better position to propose likely measures that can be implemented to achieve maximum results. Given that decision making is crucial for business performance, activity-based costing system will help in ensuring that relevant decisions are made by a business based on the garnered accurate financial information.
Outcomes for Study 2
The key outcome of study 2 is that action-based costing has an overall impact on the organizational performance. In this essence, it has been demonstrated in the study that comparing the financial performance of firms utilizing activity-based costing systems as well as those that do not utilize it in their routine performance can help in establishing the role that can be played by activity-based costing on the performance of an organization (Kennedy and Affleck-Graves, 2001, 19). For instance, the conducted survey among firms deploying activity-based costing systems in their routine market operations established that that such firms had accurate accounting and financial information compared to other firms using conventional and traditional accounting techniques. Considering that such accurate financial information can help in giving a clear picture of the financial health of an organization, then it is clear that organizations embracing activity-based costing system are likely to establish their accurate performance in the market based on the relayed financial information (Kennedy and Affleck-Graves, 2001, 32). However, this may not be achieved among the firms deploying traditional accounting techniques since such organizations are likely to conduct their overall performance evaluation based on the estimated financial information, a phenomenon that is likely to give a misinformed perspective regarding the performance of such organizations in the market (Popat, Gracia, Guzman and Feeley, 2018, p.76). Therefore, this demonstrates the role that can be played by activity-based costing in the accurate management of financial information among firms, thus subsequent transparent evaluation of their performance in the market.
Besides this, another key outcome of study 2 is that the deployment of activity-based costing system in an organization can help the relevant managerial accountant to measure the relayed financial and accounting information in relation to the prevailing business and market trends. Considering that the collected information is empirical, this will enable such an accounting manager to establish how the business compares with others in the market and establish necessary adjustments that need to be made to realize the desired outcome (Kennedy and Affleck-Graves, 2001, 20). This is because organizations deploying activity-based costing will be able to evaluate their business performance accurately based on the relayed market analytics and trends compared to those using traditional accounting methods that may in most cases relay on approximations and invalid information (Kren, 2018, 61). Therefore, the obtained performance statistics from the embraced activity-based costing technique can play a key role in helping to scale up the market operations of a respective organization under consideration.
Conclusion
It the presented report has established that activity-based costing technique is a crucial tool that can be relied upon by the managerial accountants in organizations for accurate projection of incurred product costs. As such, it has become an invaluable technique that is massively being implemented by organization with the aim of maximizing the profitability of the respective organization while at the same time scaling down unnecessary costs that may be incurred by the firm in the entire process. Furthermore, activity-based costing also plays a crucial role in accurate determination of business performance based on the prevailing market dynamics and business trends.
References
Bataineh, A., 2018. Applicability of activity-based costing in the Jordanian hospitality industry. International Journal of Economics and Business Research, 15(4), pp.475-489.
Cole, S.A., 2019. Managing Activity-Based Funding Using Costing Data and Activity-Based Budgets. In Clinical Costing Techniques and Analysis in Modern Healthcare Systems (pp. 128-143). IGI Global.
Diavastis, I., Anagnostopoulou, E., Drogalas, G. and Karagiorgos, T., 2016. The interaction effect of accounting information systems user satisfaction and Activity-Based Costing use on hotel financial performance: Evidence from Greece. Accounting and Management Information Systems, 15(4), p.757.
French, K.E., Guzman, A.B., Rubio, A.C., Frenzel, J.C. and Feeley, T.W., 2016, September. Value based care and bundled payments: anesthesia care costs for outpatient oncology surgery using time-driven activity-based costing. In Healthcare (Vol. 4, No. 3, pp. 173-180). Elsevier.
Hofmann, E. and Bosshard, J., 2017. Supply chain management and activity-based costing: Current status and directions for the future. International Journal of Physical Distribution & Logistics Management, 47(8), pp.712-735.
Hoozée, S. and Hansen, S.C., 2017. A comparison of activity-based costing and time-driven activity-based costing. Journal of Management Accounting Research, 30(1), pp.143-167.
Joseph, C.S. and Maheswaran, R., 2018. Implementation of Activity Based Costing in Information Technology Company–A Case Study. Research Bulletin, 43(4), pp.67-74.
Kennedy, T. and Affleck-Graves, J., 2001. The impact of activity-based costing techniques on firm performance. Journal of management accounting research, 13(1), pp.19-45.
Kren, L., 2018. Activity Based Management (ABM) and Control System design. Accounting and Finance Research, 7(2), p.61.
Langfield-Smith, K., Smith, D., Andon, P., Hilton, R. and Thorne, H., 2017. Management accounting: Information for creating and managing value. McGraw-Hill Education Australia.
Neto, M., Feitoza, H., Agostinho, F., Almeida, C.M., Moreno García, R.R. and Giannetti, B.F., 2018. Activity-based costing using multicriteria drivers: an accounting proposal to boost companies toward sustainability. Frontiers in Energy Research, 6, p.36.
Noreen, E.W., Brewer, P.C. and Garrison, R.H., 2014. Managerial accounting for managers. New York: McGraw-Hill/Irwin.
Otley, D., 2016. The contingency theory of management accounting and control: 1980–2014. Management accounting research, 31, pp.45-62.
Popat, K., Gracia, K.A., Guzman, A.B. and Feeley, T.W., 2018. Using Time-Driven Activity-Based Costing to Model the Costs of Various Process-Improvement Strategies in Acute Pain Management. Journal of Healthcare Management, 63(4), pp.e76-e85.
Sembiring, M.T., Wahyuni, D., Sinaga, T.S. and Silaban, A., 2018, February. Study of activity based costing implementation for palm oil production using value-added and non-value-added activity consideration in PT XYZ palm oil mill. In IOP Conference Series: Materials Science and Engineering (Vol. 309, No. 1, p. 012059). IOP Publishing.