Answer:

Introduction:

In this report the discussion has been done about the different aspects of method for activity based
costing. The method is usually used in the allocation and bifurcation of overheads costs to several
departments and products. This is a more practical and logic based method for allocation. The
report explained the method properly and consist several details about the method. In this report
effort has been made to explain the meaning, advantage and disadvantage of such method. After
explaining the concept of method a research based on two articles is made. After entire analysis
of each study a research related question is framed. Also the similarities and difference between
these two studies are made in the further part of report. The studies help the accountants of
management to cope with the issue of management accounting. The analysis of both studies
shows their ability to resolve the problems regarding costing in business. The report focuses on
the outcomes of learning from these studies. Further the analysis of whole report includes the role
of the activity based costing method in an organisation. It performs as a tool in any organisation
because it helps to determine the cost on business. Both of the studies are included in the report
to provide a clear view about the benefits of adopting the method of activity based accounting in a
business. With the help of this study we can properly understand that how this method could be
used by a business to determine costing of different departments and processes.

In the process of identify the Activity based costing first it is necessary to identify the cost that we
need to allocate. It is critical step in the complete process as it is not possible to waste time on big
project scope. For example, if we want to identify the cost of distribution channel, we will not see
the research cost as it is related to the product not channel, after this advertising or warehousing
cost will be identified. Cost pools will be created to calculate the service cost of the different part
of the organisation. Secondary cost pools may be included which is depending on its nature that
how it will be allocated. There is a need for the creation of cost pool at each distribution channel
and facility at the batch level. In batch level, cost is assigned on the size of the batch. This kind of
cost pool creation is aligned with the production of goods or services. To allocate the cost in
secondary cost pool to primary pool and to the cost objects, there is a need to measure the activity
drivers. These activity drivers will allocate the content of primary pool to cost object. The result of
these reports is converted for the management consumption. Management can ask to reduce the
quantity of drivers which will help in reducing the overhead cost. This Process of Activity based
costing is grown because of increasing manufacturing overhead cost and the diversity of products
and customers’ demands.

Use Of Activity Based Costing

In Activity based costing, company calculates the cost of resources of each activity. This cost is
assigned to the products that are in need to activities. This process of Activity Based Costing will
be better understood with the help of this example: if a company is manufacturing two products
which product 123 that is low volume item and needs certain activities like; additional engineering,
special engineering and others as it is ordered in small quantity and another similar product,
Product 999. This second product is running continuously and high volume product and requiring
little attention. If traditional costing is used in this company, it will allocate its overhead to products
on its machine hours. In this process little overhead cost to Product 123 as it does not have Many
machine hours but requires a lot of testing, servicing and setup activities. In other way, Product
999 will be allocated a lot amount of overhead but less overhead activity. This will come as a
miscalculation of cost of manufacturing overhead. By using Activity Based Costing shortcomings
will be overcome as it will assign overhead on more than one activity. This process of costing
causes the company to use its resources by calculating the cost of resources used in activity and
assign the cost to the products that demand the activity.

Worldwide this procedure is adopted in a low rate and no new adaptation was there. In Australia
organisations have implemented this approach in comparison to traditional cost management
system and found it successful. This result is stronger than the usage of this approach in the US.
In Australian companies there was support of top management, organizational support and internal
champion who were associated with the process of Activity Based Costing. One organisational
factor that can support or reject the Activity Based Costing which is associated with it is its internal
champion.

In today’s world of intense competition and automation this method of Activity Based Costing is
approached generously in the Australian market as it is most accurate form for the cost allocation.
It is claimed by many authors. Many authors have a view on this that it provides to the company
an improved profitability and reduction of the cost. Activity Based Costing is an innovative step in
the management of the Australian company as it claimed to offer benefits to the companies in the
way of better decision-making, cost control and many other cost reduction methods were
introduced in that. It creates a competitive approach in the management. The implementation of
Activity Based Costing required a big change in the internal system of the company in its cost
allocation to the products. But this theory also has some lacuna in the way of not having different
cultural setting and stages for the development of the industry. The implementation of this theory
required support and level of education of the people involved in the company towards the solving
of problem (Robin, et al. (2015).

The Concept For Adopting The Activity Based Costing

Every organisation wants to reduce its cost to gain more profit. In order to which, the management
accountants of every organisation try to use the best method of accounting for ascertaining the
cost for their business. The activity based accounting method of cost accounting is proved to be a
good method to reduce the cost and to ascertain the effective outcomes from business. It helps to
strengthen the roots of cost allocation. In order to get the accurate results about the operational
level of several products and their performances, the cost allocation is to be done. It is not possible
or quite tough to determine the performance of any particular product or department unless the
costs regarding respective departments are allocated properly (Subramaniam, &Watson, 2016).
When the management thinks about an accurate method of cost allocation then the first name
which appears in their mind is activity based cost accounting method. Although, before going for
this method, the management should analysis each and every aspect of such method. Because
this is not mandatory that method provides the same benefits to all the organisations. If the cost
engaged with the execution of ABC method is more than the benefits derived by this method then
this is not advisable for company to adopt such method. The main objective of such method is to
enhance and strengthen the structure of organisation which provides effective outcomes in overall
aspects. Apart from that it also ensures the accurate bifurcation of cost among all the departments
and functions of an organisation (Kaplan, et al. 2014).

Activity based costing is a more logical way for assigning manufacturing overhead cost to the
products than the traditional approach which was in a way of allocating cost on the basis of
machine hours.

The method of Activity Based Costing was developed in the United States. Robert Kaplan is known
as the founder of the theoretical principles of this activity in cost management.

This type of costing spends cost on the activities which are the real cause of overhead.

It assigns cost on the products which are demanding the activities. It works best in complex
situations where processes are tangled and not easy to sort out (Kaplan, et al. 2014).

It is not easy to use in the environment where production process is abridged.

This method was introduced to eliminate the traditional calculation of cost pricing which was based
on the volume of products (Langfield-Smith, et al. 2017).

 The method of activity based accounting is depended upon the several activities of an
organisation which is to be identified and segregated by their nature or type.
 Once the identification of these activities is done then as per the basis of consumption and
utilization level of different departments, the accumulation of costs is to be done.
 Usually it decides the costs engaged in several processes and determine the cost drivers
behind all activities (Kaplan, et al. 2014).
 It is time consuming and complex for the organization.
 It is hard to determine the cost drivers in the process system of Organizaiton so that the
cost could be absorbed in other departments.
 If the cost of adopting the ABC model is set high as compared to the benefits provided by
the model then it would be hard for Organizaiton to accept the ABC model as its costing
method.
 The costing drivers would be different and unique in each and every Organizaiton based
on their nature and complexity of the work (Kumar, & Reinartz, 2018).
STUDY 1: Journal Of Management Accounting Research

This study focuses on the adoption of the activity based costing and other influencing factors which
may impact the use of activity based costing in process. It would be hard for the organization to
determine the activity based costing in process. It is analyzed that approval from the department
would be required for adopting the activity based costing model (Kuo, & Yang, 2014).

 Certain stages of approvals and changes in the business policies would be done in
Organizaiton while adopting the activity based costing (Anzai, et al. 2017).
 The proper level of cost and benefit analysis would also be required before implementing
the activity base costing in process.
 It helps the company to distribute the specified cost in different departments or activities.
Mostly such method is used by the manufacturing companies because the functions of this
industry based on the overhead costs (, et al. 2017).
 All the activities are related with different overheads such as the number of happening of
an activity or the total product or unit derived from an activity etc. Generally, these are
known as cost drivers on the basis of which the cost is to be allocated. The purchase order,
consumption of power, quality inspection of unit etc. are the commonly used cost drivers
in an entity (Robin, et al. (2015).
After analysing these two articles, following research questions have been formulated which
focuses on the adoption of the activitity base costing and stages involved in adapting with the
activity based costing.

 What stages would need to be followed by organization for adopting the activity based
activity?
 Explicit the complexity of the organization and related factors which may impact the
adoption of the activity based costing model?

STUDY 2: Journal Of Applied Management Accounting Research

This study focuses on the use of activity based costing and how organization could be benefited
by using the ABC model in the business process organization. In this journal, the main focus has
been made on the cost drivers and other influential factors which may be required for the
Organizaiton while adopting the activity based costing in the process. It is analyzed that there will
be following steps would be followed while adopting the activity based costing method (Sakao, &
Lindahl, 2015).

 Initiation stage- In this stage, organization would analysis whether it would be feasible to
adopt the new ABC costing in its process.
 Adoption of ABC Costing process: In this stage, Organization needs to arrange the finance
and new job process for adopting the ABC costing model (Agarwal, & Jain, 2014).
  Changes in the process and policies: This may requires changes in the policies and rules
which company need to make in order to adopt the ABC costing model.
 Adopted activity based costing: This is related to undertaken activities which could be
useful to set up proper cost drivers to absorb the cost in the different process (Schaltegger,
& Burritt, 2017).
The success of the activity based costing in Australia is too high due to its increased benefits.
However, due to the lack understanding and complexity of adoption of the activity based costing,
it might be hard for the organization to adapt with the activity based costing (Sekaran, & Bougie,
2016).

How far organization has changed for the adoption of the activity based costing in Australia. How
activity based costing cold be beneficial for the organization?

The main similarities between both articles are that they both are focusing on the increasing
outcomes in the costing process of organization. They both focuses on the integrated use of the
activity based costing in the process so that organization could easily bifurcate the costing in the
related department. However, these both articles show that the activity based costing is totally
based on the set cost drivers. These cost drivers plays pivotal role in the business success of
organization. These articles have reflected that adoption of the activity based costing is based on
the adopted business model (Dong, Liu, & Lin, 2014). If it is not suited with the ABC costing then
company will have to make the changes in its activity based costing. Both journal articles focus on
the use of the cost drivers and set parameters. In context with the practical example, by using
Activity Based Costing, shortcomings and discrepancies involved in the costing process will be
overcome as it will assign overhead on more than one activity. This process of costing causes the
company to use its resources by calculating the cost of resources used in activity and assign the
cost to the products that demand the activity. These both articles have focused on the issues,
benefits and cost associated with the ABC costing models adoption in business process of
organization (Najjar, Strickland, & Kaplan, 2017).

These two articles are different from each other as they both are prepared on the basis of different
facts, estimation and regression of the undertaken work. In the first study, implementation of the
main factors related to the organization, and environment have been assed. It allows company to
formulate the strategies and business policies to implement the ABC costing model. Another study
focus on the benefits and cost associated with the ABC costing model. If company implement the
ABC costing model then what benefits and problems it would have (Dong, Liu, and Lin,
2014). Another difference which has been found in both articles is related to the use of data. One
article focussed on using the complex data and program based on the regression analysis and
other article used the general information which might positively and negatively impact the costing
method if ABC costing model is adopted. The cost and benefit analysis is very much required for
adoption of ABC costing model in organization (Gangwar, Date, & Ramaswamy, 2015).
These leaning outcomes have been set to determine whether the adoption of the activity based
costing would be beneficial for the Organizaiton or not (Fenn, et al.. 2015).

 The accountant before accepting the activity based costing must undertake the feasible
study plan.
 They should also evaluate the business process and integration process to align the
activity based costing with the process (Kumar, & Reinartz, 2018).
The second learning outcomes focuses on mitigating the process issue while implementing the
activity based costing teaching the cost employees to learn the ABC costing model

 Company should analysis the issues and malfunctioning which is faced by other
Organizaiton while implementing the activity based costing model. It is the best way to
mitigate these issues for the future outcomes (Kaplan, 2014).
 There should be proper supporting back up plan
 Use of the proper costing method and training and development for employees.

Conclusion
This report has reflected the key understanding on the activity based costing and how important it
has become for absorbing the costing in different jobs of organization. the crux of these two articles
is that company could have lot of benefits if it adopts activity based costing in its process
department. The main thing which has been observed is that only big organization which is facing
complexity and issues in bifurcating the costing in its different department should adopt the activity
based costing. The main reason behind is that it is highly costing and may result to higher initial
outflow therefore, small business organization might not be benefited if they install activity based
costing in their costing process methodology due to the associated cash outflow. The proper cost
and benefit analysis should be adopted by company before accepting the activity based costing
model. Nonetheless, company also needs to change its business process costing policies and
methods of undertaking the process system while adopting the activity based costing model in its
business.

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