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Implementing Activity Based Costing (ABC)

Question:

Discuss about the Implementing Activity Based Costing (ABC).

Answer:

Introduction

Management accounting comprised of making and offering statistical and financial information to the managers of the business such that they can take daily managerial decisions (Debitor, 2018). It is different from financial accounting. In financial accounting statements are organised for the internal stakeholders of the company and in management accounting reports are prepared for external stakeholders (Freedman, 2018). This report is being prepared in order to explain how much the management accounting and its tools are important for a company to survive in the market for the longer time period. Therefore, Activity-Based Costing tool of management accounting will be used in this report to explain its support in achieving the strategies of Webjet Limited. The report will be comprised of the concept of Activity-Based Costing and its important features. Besides this overview of Webjet limited, its mission, objectives and corporate strategies will be provided to identify whether Activity-Based Costing will help in attaining the strategies or not. Further, the report will provide the recommendations for implementing Activity-Based Costing and suggestion of one more management accounting tool.    

A technique of accounting that supports in recognizing and allotting the overhead cost and then allots those costs to the products is known as Activity-Based Costing (Accounting Tools, 2017). A system of ABC detects the relationship among overhead activities, manufactured products, and costs, and by this relationship, it allots indirect costs to products less randomly than out-dated approaches of costing. Some of the cost becomes hard to assign by Activity-Based Costing (Business case, 2018). The indirect costs like salaries of office staff and management at times becomes hard to allot to the products of the company. Therefore, this costing method is useful in the manufacturing companies.

Activity-Based Costing is significantly used in the industry of manufacturing because it enhances the cost data dependability; therefore, creating appropriate costs and well-classified cost arisen by the company in the process of production. This system of costing is used in product costing, service pricing, target costing, analysis of product line profitability and analysis customer profitability. It is also famous because companies can create better corporate strategies and focus on the costs (Adler, 2013).    

Activity-Based Costing features

  • ABC system is said to be a practice that helps in recognizing the activities of the company and allots cost to every activity with resources.
  • This cost accounting method provides best results in a complex business environment such as companies with various products, and machines (CGMA, 2013).
  • This tool of management accounting works best in the manufacturing sector
  • The Activity-Based Costing supports techniques of performance management like scorecard and continuous improvement.
  • It takes a challenge of operating costs to search effective ways of eliminating and allocating overheads.
  • The forms cost behaviour is diversity-related, time-related, volume related and diversity related.
  • The overall cost is distributed into 2 kinds that are fixed cost and variable cost which is important to deliver superiority data to create appropriate system of costing in the business (Account Learning, 2018).
  • The cost drivers imitate the cost behavior patterns
  • The proper cost drivers can be recognized for tracing the overhead to a product.

Overview of Webjet Limited

Webjet Limited is an Australian company deals in the business of digital travel and covering wholesale market as well as global consumer markets. The company operates its business in New Zealand, Hong Kong, Singapore, Australia, and North America. The registered office of the company is in Melbourne, Victoria (Australia). The company was established in the year 1998, it is an agency of online travel in New Zealand and Australia. Webjet provides travel products and services in domestic as well as international flights, holiday, packages deals, travel insurance, hotel accommodations, cruises, and car and motor-home hire (Webjet Limited, 2018). 

Webjet acquired one of the online travels booking group i.e. the Online Republic, in 2016 for $NZ83 million (Webjet Limited, 2017). Online republic is a known worldwide e-commerce group situated in New Zealand, focusing on online bookings of cruises, motorhomes, and rental cars

The mission of Webjet Limited Company is to provide benefits to the users of their services by confirming increased confidence and trust through the removal of user misperception and pledge of brand genuineness. The company will function as a limited registry, in which Webjet Ltd. can make and monitor domain names that endorse the individuality and genuineness of its brand (Public Now, 2018).

  • The objective of Webjet limited is to offer information, resources, and services to the customers in a way that result increased brand awareness, convenience, and trust.
  • It will provide a commanding internet space for the Webjet Limited, its associates, and buddies that are linked with the brand.
  • In the Webjet domain space, the second and third level domain name will be used to adapt services to involve customer on precise product classes, with internet users guaranteed of brand genuineness (101 Domain, 2018).

Corporate Strategies of Webjet Limited

Corporate strategies involve corporate action of a firm with the aim to achieve objectives of the company while gaining the competitive advantage. A corporate strategy involves an evidently definite, long-term vision that companies set, looking to make corporate value and inspire the personnel to execute the correct actions to attain satisfaction of the customers (Corporate Finance Institute, 2018). Webjet Limited Company’s strategy is to increase share in every market in which they operate and they have set three-year booking development targets for both web beds and B2C businesses (Webjet, 2018).

B2B Growth Strategy- Webjet Limited Company believes that they are better positioned considering the on-going growth of bookings as the B2B market endures to move towards online and they are regularly concentrating on enhancing visitations and conversions. They look at the substantial opportunity of growth in the business of Webjet OTA from both international and domestic flight bookings, along with packages. Along with this, they are regularly looking for the opportunities to increase the brands of Online Republic into other international and regional markets (Elliott, 2018).

B2B Strategy of Growth – The aim of the Webjet Limited Company is to become the leading player in the B2B sector. They look for significant opportunities to increase market share in every region and anticipate to the WebBeds business to get advantage from the network of increasing their worldwide inventory offerings. Together with their low-cost model of a multi-supply combination strategy, they believe they can pursue to provide the greatest depth and breadth of inventory at inexpensive prices to their B2B clients (Webjet Limited, 2017).   

Achieving Strategies of Webjet Limited through Activity-Based Costing

Activity Based Costing allocates the cost depending of the multiple cost pools with their cost drivers; this results in creating specific costing and improved control on the overhead cost. If Webjet Limited Company implements this cost accounting or managerial accounting tool in the business operations then it will support in allocating the cost of the activities depending on the consumed proportion of activity. Activity-based costing tool will classify different activities of Webjet Limited Company and will allocate the cost of all the activities along with resources. The execution of ABC system in the business can be processed through some important steps i.e.

Study cost and processes – Activity-based costing is famous because it is process oriented. Therefore, the first step in the implementation of Activity-based Costing is a detailed examination of each procedure and cost of the company. Employee’s involvement is one of the essential steps to receive complete details in an appropriate format so that there can be acceptance of the measures formed by the costing system.

Identification of the Activities – The time when the operations of the Webjet Limited Company will be understood, a proper care should be provided while choosing the business activities that are important for the cost allocation. There are various activities in a business like Product-level activities, Unit-level activities, customer-level activities and Batch-level activities (Finance and Control, 2015).

Determining Rates of Per-Activity of Assignment – The time costs of each activity determined in the collective form, it can be observed that it becomes important to unite the pool of costs.

Applying cost objects – In the end the final step of applying cost objects this can be done by utilizing the rates depending on the activities for determining the cost of activities to each cost object.       

Recommendation for the Implementation of Activity-Based Costing

  • If there will be lack of proper planning in the starting the implementation of the Activity-based costing will fail.
  • Without evaluating the role and scope of proposed Activity-based costing system, it should not be implemented in the business.
  • Besides the fact that Activity-Based Costing performs excellently in front of other traditional methods in the matter of its efficiency and reliability, but it disregards capital costs.
  • In order to implement Activity-based costing Webjet Limited Company needs to ensure that they have required experienced and skilled employees in its business operations because they are the one who can understand the know-how of the overall system, and utilize the information effectively to take appropriate decisions.
  • While implementing activity-based costing in the system company should ensure that all the employees in the company are in the support of the system and are ready to use the information which will be extracted from it.

The suggestion of Managerial accounting tool

Activity-based costing system is very effective and support in terms of allocating cost to all the activities in the company along with its resources. Along with this, it helps in decreasing the unnecessary cost of the unnecessary activities which are not important for the business to perform in present time period. However, on the other side, there is another tool of managerial accounting that can be utilized by Webjet Limited Company in order to enhance the performance of the business is Balanced Scorecard.

The Balanced Scorecard is said to be a metric of the performance of business utilized at the management level to classify and develop various operations in the company and their external outcomes. This system is utilized in the business to measure the feedback of the company. Collection of the information is very important to deliver quantitative outcomes because the data that has been gathered is understood by the managers and administrators and then used to make effective company’s decisions. In the starting, this method was introduced by Dr. Robert Kaplan who is a renowned accounting academic and Dr. David Norton which is a business philosopher and supervisory (Niven, 2011).

Conclusion

In the conclusion, it can be said that Webjet Limited is one of the growing and money making company in its field, however, every organization cannot be operated without implementing various techniques and tools so that objectives can be achieved. Therefore, the above report has provided the detail explanation of the management accounting tool i.e. Activity-based costing which is one of the most effective tools and is utilized by many business organizations. The above report has suggested Webjet Limited Company implement ABC system of cost accounting to measure the cost of all the activities that are being performed in its diversified business field and can reduce the unnecessary cost of unwanted activities. Moreover, the report has recommended some important points that should be kept in mind while implementing the system i.e. Activity-based costing. Along with this suggestion of another management accounting tool has been provided that is balanced scorecard which is also very helpful in not just measuring the financial perspectives of the business but also includes non-financial perspectives so that all the areas of the business can be improved by providing objectives.

References

101 Domain (2018) Webjet Domain [online]. Available from https://www.101domain.com/webjet.htm [accessed 23 May 2018]

Account Learning (2018) Meaning of Activity Based Costing (ABC) [online]. Available from https://accountlearning.com/activity-based-costing-meaning-features-objectives-implementation/ [accessed 23 May 2018]

Accounting Tools (2017) Activity Based Costing [online]. Available from https://www.accountingtools.com/articles/2017/5/14/activity-based-costing [accessed 23 May 2018] 

Adler, R. (2013) Management Accounting. 3rd edn. U.K: Routledge.

Business case (2018) Activity Based Costing and ABC Management [online]. Available from https://www.business-case-analysis.com/activity-based-costing.html [accessed 23 May 2018]

CGMA (2013) Activity based costing [online]. Available from https://www.cgma.org/resources/tools/essential-tools/activity-based-costing.html [accessed 23 May 2018]

Corporate Finance Institute (2018) What is Corporate Strategy? [online]. Available from https://corporatefinanceinstitute.com/resources/knowledge/strategy/corporate-strategy/ [accessed 23 May 2018]

Debitor (2018) Management accounting - What is management accounting? [online]. Available from https://debitoor.com/dictionary/management-accounting [accessed 23 May 2018]

Elliott (2018) Webjet [online]. Available from http://www.elliott.org/company-contacts/webjet/ [accessed 23 May 2018]

Finance and Control (2015) Implementing Activity-Based Costing [online]. Available from https://executivefinance.nl/wp-content/uploads/2015/02/Implementing_Activity_Based_Costing11.pdf [accessed 23 May 2018]

Freedman, J. (2018) Why Management Accounting Is Important in Decision-Making [online]. Available from http://smallbusiness.chron.com/management-accounting-important-decisionmaking-53947.html [accessed 23 May 2018]

Integrating performance (2018) Balanced Scorecard [online]. Available from http://www.integratingperformance.com/pages/integration/systems/balanced-scorecard-10.html [accessed 23 May 2018]

IPS Business (2018) Activity based costing [online]. Available from https://lpsbusiness.weebly.com/3-activity-based-costing.html [accessed 23 May 2018]   

Niven, P.R. (2011) Balanced Scorecard: Step-by-Step for Government and Nonprofit Agencies. 2nd edn. U.S: John Wiley & Sons. 

Public Now (2018) Webjet Limited [online]. Available from http://www.publicnow.com/view/5C3B6667467BCADD26698027DEE4B2582C0752A7?2018-03-05-05:30:10+00:00-xxx4405 [accessed 23 May 2018]

Webjet (2018) About Webjet [online]. Available from https://www.webjet.com.au/about/ [accessed 23 May 2018]

Webjet Limited (2017) Annual report [online]. Available from https://www.webjetlimited.com/wp-content/uploads/2017/07/FY16-Full.pdf [accessed 23 May 2018]

Webjet Limited (2017) Company Review [online]. Available from https://www.webjetlimited.com/wp-content/uploads/2017/11/Webjet-Ltd-2017-Company-Review.pdf [accessed 23 May 2018]

Webjet Limited (2018) Our Story [online]. Available from https://www.webjetlimited.com/ [accessed 23 May 2018]

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