The Research Inquiry

Title : Implementation of the Activity-Based Costing Model for a Farm: An

Australian Case
Authors : Cedric Lu, V.G. Sridharan, and Michael S.C. Tse
Source : Journal of Applied Management Accounting Research, 14(2) retrieved from
https://search.proquest.com/docview/1861776380?accountid=31259
Date of Publication: Summer 2016
ISSBN : 1443-9905
No. of Pages : 8

Theoretical and Conceptual Framework

The study is about developing an Activity-Based Costing (ABC) model in a family-operated

Australian agricultural firm. The agricultural firm is unique, as compared to manufacturing,
especially on its product costing model. Traditional costing (i.e., job order costing), which
uses pre-determined overhead rates are not suited to agri-business due to time-lags and
other factors. Time-lag is the period from incurring costs to harvest of the products. This
time-lag of an agri-business involves multiple stages from soling, sowing, watering, planting,
cultivating, and harvesting. These activities usually run across more than one financial
accounting reporting period; therefore, determining the product cost is difficult. Since the
ABC model can be the solution to an agricultural firm's woes, especially on product costing,
the authors would like to know the issues associated with its implementation. Due to the
unique nature of agricultural production, they examined whether technical and behavioral
factors identified in prior studies influence the successful implementation of the ABC model
in the agri-business. Figure 1 depicts the author's conceptual framework.

Figure 1: Conceptual Framework

Technical and Behavioral Successful Implementation
Factors of ABC Model

Management of Accounting Problem or Concept

As discussed above, the authors laid experiences in the prior years’ production
down the two types of costing models – and the standards as used in the industry.
traditional and ABC. Traditionally, Since farm production usually spins across
product costing of farms' produce used multiple financial periods due to its
either job order costing or process numerous stages to produce the product
costing. The model often used pre- – from soiling to harvesting, attributing
determined overhead based on their costs incurred in a particular financial

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period to agricultural produce is very
difficult to identify.

Another managerial accounting problem facing the agri-business is the use of fair value. As
the authors opined, farms' produce may not be possible to determine the fair value of all
inputs like seeds derived from existing plants, which entail no additional cost incurred to
produce the material. They may not be available for sale in an open market as farm
operators may opt to keep them for future use.

Prevalent Internal and External plants, flowers, and berries at its 21 acres
Environment property. The farm employed one full-
time staff who multi-tasked and a few
seasonal staff who mainly involved in
pruning and potting. The 21 acres
property has produced more than one
hundred types of flowers, berries, and
fruits distributed to recreation centers,
The study was a case study of one family- supermarkets, and local nurseries. The
operated Australian agricultural farm in owner admitted that he has no idea of
the State of Victoria, Australia. They the individual products' exact cost and
engage in the production and sales of price the produce on a guesstimate.

Managerial Accounting Analysis, Approach, and Model

The authors identified the farm as the subject of the study based on three reasons: 1) the
site exhibited characteristics of a typical farm in Australia; 2) the site had a strong stimulus
towards the implementation, and 3) the site was able to supply quantitative information
that allowed for the implementation of the ABC model.

The study used both quantitative and qualitative information. The authors used empirical
data gathered from direct observation, interviews, and financial records for the ABC model.
They triangulate these multiple sources to provide the necessary validity of the study. They
have one site interview and three telephone interviews for two months. The owner
responded positively in the interview and expressed a strong desire to know how to
properly prepare accounting information to improve the business's operational efficiency.
The interviews have paved the way for collecting the necessary data to develop the ABC
model for the farm.
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Through field observation and interviews, the authors identified twelve activity pools that
were related to normal activities that sustain the farm's operations regardless of climate
situations. After identifying the activity pools, drivers for the resources were identified.
Data on resource costs and resource drivers were then used to allocate resource costs to
activity pools.

Managerial Accounting Implications of the Study

The study has a significant influence on the following:

a. Farm's owner and other industry players – the study will help them understand the
appropriate way of costing their produce and not use guesstimate. Through this, they
could adjust the price of their produce based on the cost of producing the product to
improve its bottom figure.

b. Academe – the study will provide a practical way of presenting the ABC model in the
class as applied in the real world. Through this, students will appreciate more the model
as the teacher presents it.

c. Future researchers – the study will be a good start for future researches to study the
ABC model and know other factors (not found in the study) that influenced the model.

The Critique
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Point of View

In making my critique, I used my knowledge and experience in the ABC model as an

accountant and an academician. Also, I read several studies related to the subject,
especially Noor, A. I. (2010), and Schneider, A. (2005).

Thesis Statement

The study of Lu, C. et al. (2016) is different from the study of Noor, A. I. (2010) and
Schneider, A. (2005) in terms of sector/industry. Lu's study was on agricultural business,
Noor was on higher educational institution using software, while Schneider, A. (2005) was
on real estate management. Both Lu and Schneider used manual computation, and Noor
used SAS ABC model software. With the three identified studies, I want to prove the
following:

1. Is there a difference in developing the ABC model over the years – from 2005 to 2016?
2. Is there a difference in developing the ABC model from a different industry?
3. What are the challenges faced by the accountants in developing the model?

Critiquing

Table 1 shows the activities used by the authors in developing the ABC Model:

Table 1: Activities in ABC Model Development

Lu, C. et al. (2016) Noor, A. I. (2010) Schneider, A. (2005).
Activity analysis was conducted Step 1 – Obtain expenditure Step 1 – Obtain cost items from
to identify the activity pools for data the financial statements.
the costing model. Step 2 – Identify resources
Step 3 – Identify activities Step 2 – Identify the list of
After identifying the activity Step 4 – Identify resource activities.
pools, the types of resources drivers and resource driver
consumed by each activity pool, quantities Step 3 – Arrive with the
and drivers for the resources Step 5 – Assign resources to distribution of expenses.
were identified. activities
Step 6 – Identify cost objects Step 4 – Assign activities to cost
Data on resource costs and Step 7 – Identify activity drivers objects.
resource drivers were then and activity driver quantities
used to allocate resource costs Step 8 – Assign activities to cost
to activity pools. objects

Activity costs were

subsequently allocated to cost
objects based on their usage of
activity drivers.

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Table 1 depicts the comparison of ABC development of the three industries. As observed,
from 2005 to the present, there were no significant changes in the development of the ABC
model. The steps were the same for more than a decade now, even with the use of
technology, as in the case of Noor (2010). The development has been tested by time, and it
can be concluded that the result of using the steps, as described above, will result in a
reliable computation and analysis.

Also, there was no significant difference in developing the ABC model across the industry.
Regardless of how complex the industry is, the development of the ABC model is still the
same.

As an academician, I used the same steps or approaches in teaching the ABC model in my
Advanced Accounting class as prescribed in the textbook. I was amazed by knowing that our
students will encounter the same approach when they are working as a professional
accountant. As a practitioner, I have not handled an actual consultancy on the ABC model
yet. But this knowledge will help me in my future consultancy work.

Table 2: Challenges in ABC model Development

1. Obtaining financial data from relevant units.
2. Accurately determine accurate costs.
3. Accurately determine the allocated percentage of activities.
4. Appropriately determine resource driver to quantity for the activities.
5. Obtaining the necessary data to measure activity performance.

As shown in Table 2, three studies identified the accountants' challenges or the developers
in developing the ABC model.

I agree with the above challenges. I believe that my colleagues in the profession will agree
that it would be very difficult for us to get the necessary information for analysis.
Miscommunication and misunderstanding will always arise along the way. Sometimes, the
people we get information with, either intentionally or unintentionally, provide us limited or
worst, wrong information. My engagement in the DOST Region XI as an RTEC member
responsible for evaluating the financial feasibility of the Small Enterprise Technology
Upgrading Program (SET-UP) loan facility has proven these challenges.

The technical experience of the accountant will significantly affect the reliability of the
results in using the ABC model. The accountant should have a full grasp of the operation of
his or her client to identify relevant activities and resource drivers and do away with
heuristics or trial and errors in allocating costs using the ABC model.

It would also be best to analyze from a different perspective. The study of Lu, C. et al.
(2016) was under the normal climate situation, and the result would be different if
otherwise. We need to be cognizant of the different climate conditions in developing the
ABC model to provide a more accurate estimate of the costs.

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Even though the study is just for one agricultural firm, the result is totally the same as the
study of Noor, A. I. (2010) and Schneider, A. (2005). This means that the sample is not an
issue, as reflected in the three studies. I believe that if we replicate this study in the
Philippines, the result will still be the same. As a practitioner and an academician, I will
recommend the ABC model to all business entities regardless of the industry. The
advantage of the ABC model compared to the traditional costing model outweighs its
disadvantage.

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References:

1. Cengiz, E., & Ersoy, A. (2017). Decision on cost reduction: A holistic view. Muhasebe Ve
Finansman Dergisi, (75) Retrieved from
https://search.proquest.com/docview/1927019679?accountid=31259

2. Lu, C., Sridharan, V. G., & Tse, M. S. C. (2016). Implementation of the activity-based
costing model for a farm: An australian case. Journal of Applied Management
Accounting Research, 14(2), 29-36. Retrieved from
https://search.proquest.com/docview/1861776380?accountid=31259

3. Noor, A. I. (2010). Activity-based management system implementation in higher

education institution. Campus - Wide Information Systems, 27(1), 40-52.
doi:http://dx.doi.org/10.1108/10650741011011273

4. Schneider, A. (2005). Greenfield hills apartments: Activity based costing in a service

setting. Journal of Applied Management Accounting Research, 3(1), 67-73. Retrieved
from https://search.proquest.com/docview/200860968?accountid=31259