Activity Based Costing (ABC): An Essay To Accurately Identify Costs.

Background and Importance of ABC

Discuss about the ABC Emerald Group Publishing Limited.

The Activity Based Costing (ABC) model could be considered as an accountancy method that can accurately attribute each and every cost which an organization incurs during its operations. It defines the relationship among the resources that are consumed during the operation of various business unit of a particular company (Allain and Laurin 2018). This method simply improves the product costing by making it much more accurate then it was. This method also helps the managers of the organization to understand their costs and act accordingly. In other words, it provides the managers with competitive edge while making business strategies. Hence, when an organization lags behind, then this method supports the decision makers when needed.  

This paper will highlight the position of Woolworths Pty Ltd, which is a respected brand in Australia within retail business that offers quality clothing, beauty products as well as homeware goods. Moreover, it also in partnership with Asba Bank provides financial services. Woolworths Pty Ltd is headquartered in Australia and is listed under Australian Stock Exchange (ASX) (Alles 2015). Hence, Woolworths with some diverse business operations have various indirect cost which it need to ascertain and this nature of business provides a room for activity-based costing to identify the various costs accurately.

Understanding the various costs incurred by the business and the drivers of the same is desired by the organizations. However, a catch remains when it comes to the method for assessment of the costs incurred by various operations within the business. Without a perfect method it becomes difficult for the organization or its managers to keep the track of the various indirect costs which the organization incurs (Angelopoulos and Pollalis 2017).

The activity-based costing model has been adopted by numerous firms around the globe and hence it has been considered as one of the prominent accosting techniques among the managements across the globe. Though it is used within many organizations but the primary use of this technique is within the business with various operational unit which deals in range of products and service. In a firm with various range of product, it is difficult to identify the cost than the firms with single product. It happens that in such firms the costs are sometimes over-costed and sometimes under-costed.  

The companies with competitive business environment encompassing technological advancement generally needs to understand their costs in order to manage them in a better way (Balakrishnan, Blouin and Guay 2018). The traditional method failed to provide the accurate costing for the company’s products previously but this new model has made it possible to determine the cost of product at each and every level. Mostly, the active cost of production is attributable but the direct cost is generally hidden. Hence, this method reveals all the indirect cost associated in the production process.

Woolworths Pty Ltd - Company Profile

Woolworths aims to become the most renowned brand especially the preferred retailer for the youth, families and kids. It looks forward to improve its stock turnover and enhance its reach in the global retail market. It also looks forward to improve its distribution network as well as supply chain. Woolworths does have several strategic points so as to achieve its long-term business goals. Moreover, the organization also desired to take a leading position in liquor and food markets. The primary motive of Woolworths is to maximize its shareholder’s value (Dong, Liu and Lin 2014). In order to do the same, the company needs to build a competitive position in the market. It focuses on profitability through strategic supply chain improvement as well as the growth. Moreover, the organization also focuses on hiring talents both domestically and internationally.

Woolworths has dedicated its attention towards satisfaction of existing customers, enticing new customers and eventually enhancing perception of the people towards them. As it believes in sustainable growth, the organization has also enhanced its operational efficiencies. Establishment of premium worth preposition by using its business efforts in a positive way is also included in the objectives of Woolworths (Kim, Han, Yi and Chang 2016). Hence, it focuses on hiring skilled employees and maintains a strong human resource base.

The strategy which the organization follows includes the business operations to be supervised, designed as well as redesigned so as to improve the production of the goods as well as the services. The design of the company’s system is effective as well as efficient which uses the resources to its optimum through the assistance of the technologically advanced machineries and skilled employees. Woolworths corporate strategy aims towards providing the quality product and services to its customers (Lyons et al. 2014). The operations division of the company undertakes the its operational strategy and it mainly focuses on the supply and distribution. The organization also invested in enhancement of information technology.

The company does not have any manufacturing plant as it sub-contracts its suppliers. Hence, it focuses a lot on the choice of its suppliers as their product determines the value of the company to its customers. The company maintains its relation with the suppliers and it does not buys from the open market as the company buys from them only. The company also believes in reducing material waste. Moreover, it also focuses on saving money without compromising its quality as the quality products provides the company a competitive edge over its rivals.

Benefits of ABC for Woolworths

Cost reduction is not only the strategy but is included in the objectives of the company. Woolworths tries to make deals wherein it gets the quality product but at an affordable price. Hence, the managers have been focusing on controlling the operational cost through minimization of waste of the business units (Rai, Hoskyns and Thomas 2014). Moreover, they also focus on pricing strategy of the product while keeping its quality at its best so as to satisfy their customers and maximize its value in the market. They also maintain a decent speed of delivery with creating strategies to improve the same. Woolworths believe in proper delivery of product to the customers to earn their trust and loyalty while keeping them satisfied with their service. The company maintains its quality of product and services such that the customer relies on them heavily which eventually increases the company’s worth in the market. The company also emphasizes on its flexibility so as to adapt chances and respond quickly to change in demand within the predictable timeline. Woolworths is well known for its effort towards innovation. The company continuously researches on the improvement in its product or the process. It might be enhancing existing product or innovating a new product at all as per the demand of the customers (Subramaniam and Watson 2016).

An effective strategy for the corporation is only possible if the managers of the company have a better understanding of the several costs included in the operation. Through ABC model of costing, it is possible to keep track of every cost incurred in each and every step. It is a common belief among the accountants that the inventory cost includes every cost but the case is not the same as it does not include every indirect cost incurred by the business (Shoaib et al. 2015). The ABC model of costing identifies all the cost associated with the business in the whole process of production and then concludes the total expense of the product per unit. In the tradition model of costing, all the direct overhead was considered but the indirect cost remained hidden. Hence, the true value of the of the product remained unknown as it had indirect cost hidden in itself. Therefore, this model of costing traces every cost associated within the production process and hence provides the management a clear view of their position which eventually helps them to make business decisions more precisely (Yan et al. 2016).     

ABC Implementation for Woolworths

Many companies seldom engage in activities which does make desired profit and hence this method actually identify such activities on which resources get wasted as those does not add to the value significantly. There are generally three goals of the cost accounting system which includes identification of various costs associated in order to make the financial statement, providing the cost managers with appropriate information and calculating the budget.

Woolworths, being a huge organization have a need for the implementation of activity-based costing model to enhance its operations. Companies such as Woolworths could enhance its pricing strategy to satisfy its clients up to optimum, but for the same, the company needs to understand all its costs and take decisions accordingly (Dale and Plunkett 2017). Moreover, management may identify the profitable as well as non-profitable operations run by it. A high inventory turnover is also very necessary for the organization which could be possible for Woolworths through usage of activity-based model as it may also be reliable for the company to manage its stock efficiently. Woolworths could also be able to enhance their processes with the assistance of this costing method.

The support from top management of the company is necessary to implement the model in the processes of Woolworths. The support is need to include their model in the core values of the company. The implementation of this method will require a change in whole costing process and a proper training will be needed for the department which would use the same so as to make the staff responsible to absorb the design of this model (Cannavacciuolo, Illario, Ippolito and Ponsiglione 2015).

An implementation of the same throughout the cross-functional team would turn out to be more fruitful rather than implementing the same in a single department i.e. the accounts department. The activity-based costing model will be more successful in an organization if every department of the team have the idea to use the data generated from the ABC model. Hence, in order to execute the same efficiently, the management should create a team including people from every department of the business units. However, hiring an expert on ABC model is a basic requirement who can consult the various teams on how to use the models to its optimum.

The management of Woolworths should implement the ABC model because the same could assist the managers during some situations where the support from senior management is not available. Furthermore, in order to include it in the core values of business, the management should communicate its significance to the subordinates as they may not value the model without proper guidance (Cooper 2017). Moreover, the usage of the model may enhance the financial reports of the organization and provide them with better strategies for the future.

Cost Accounting System Goals

The budgetary controlling method might turn up to be fine for Woolworths. This method identifies the various costs associated with the company and helps the management to plan and control the activities at various organizational levels. With managers find the budget estimates of utmost importance as it helps them to take decision, there are a few ways in which budgetary control could benefit Woolworths (Bobryshev et al. 2014).

• The organization could calibrate the efforts of various employees towards the organizational goals.
• It can identify which department is within the budget set by the management and which all departments exceed budget. In such cases the company might take appropriate action to curb the costing.
• While setting budget, this method will show the company its previous budgets and allow the management to decide from the success or failure of past. This might prove to be easy for Woolworths to decide it business strategy (Vanderveen, Stephens and Park, Qualcomm Inc, 2015).

Conclusion

This paper highlights the importance of ABC model as the method which derives the cost of production in each step of operations. With an aim of gaining a leading position in the market it operates, Woolworths might find the ABC model to be very efficient in reaching its goals. ABC model will identify all the hidden indirect cost which is important for taking important business decisions. Budgetary control is another tool which Woolworths might use so as to estimate its budget and work towards its progress. These costing model can reflect their significance through the financial statement of the Woolworths Pty Limited.

References

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