How a Small UK Education-Sector Organisation Might Use ABC to Produce Product Costs for Services - Essay Example

Discuss How A Small UK Education-Sector Organisation Might Use ABC to (A) Produce Product Costs For Services, And To (B) Evaluate the Internal Efficiency, Quality and Profitability per Product or Service Line Table of Contents Introduction 3 Utilisation of ABC Method in Producing Product Costs for Services 4 Benefits of Producing Product Costs for Services through ABC Method 7 Drawbacks of Producing Product Costs for Services through ABC Method 8 Utilisation of ABC Method in Evaluating Internal Efficiency, Quality and Profitability per Product or Service Line 9 Benefits of Evaluating Internal Efficiency, Quality and Profitability per Product or Service Line through ABC Method 11 Drawbacks of Evaluating Internal Efficiency, Quality and Profitability per Product or Service Line through ABC Method 12 Conclusion 13 References 14 Introduction Activity-Based Costing (ABC) is fundamentally regarded as a procedure of determining accurate costs that are incurred by organisations while performing their respective operational functions. This particular accounting method has been of much significance amid the modern services organisations, principally owing to its ability to relate various organisational activities with costs and products of those activities, offering a more accurate and in-depth understanding to the organisation’s profitability. It is fundamentally regarded as a process-oriented approach through which, the organisations belonging to this modern day context are able to identify the incurred costs and take adequate steps for mitigating the problems accordingly. It is worth mentioning that the modern organisations and institutions often use this method to analyse and control product costs for the services that they offer to the customers as well as to develop their internal efficiency, quality and profitability per product or service line. It can be affirmed that the modern organisations as well as the institutions have to incur substantial expenses or costs due to increased level in the prices of the materials, excessive production along with distribution charges and costly marketing techniques among others1. Evidently, the present business market and the preferences of the customers along with their demands are incessantly changing in this modern day context, resulting in making the organisations and the institutions to adopt ABC method at large, while its effectiveness remains subjective to the size of the organisations owing to complexity issues within larger organisational operations. With this concern, this essay intends to discuss about how a small UK education-sector organisation might adopt and use the ABC method for producing product costs for services and evaluating the efficiency, quality as well as the profitability per product or service line. With this aim, A.S Neills Summerhill School has been selected for this assignment, which is located in England. The school was established in 1921 and had to face many ups and downs since then2. Accordingly, as a small school, the organisation also had to face various financial problems, wherein the implementation of the ABC method shall be worthwhile3. Correspondingly, the benefits and drawbacks concerning the usage of the ABC method for the above-discussed functionalities by the organisation will also be considered in this essay. Utilisation of ABC Method in Producing Product Costs for Services Prior to discussing about how Summerhill School may use the ABC method for determining product costs for services, it is quite indispensable to understand the significance of the same. According to a report published by Board of Trade of Metropolitan Montreal (n.d.), determining product costs for services is related to business growth, which affects the product sales and most importantly, the cash flow within the organisation being subjected to its execution efficiencies. As per this report, proper determination of product costs for services has eventually facilitated modern organisations to towards making effective decisions about determining their service prices and the ways of attaining greater profitability4. In this similar context, the significance of determining product costs for services linked with Summerhill School will be noteworthy in developing its operational efficiencies in terms of sales and revenue growth. Moreover, proper determination of the product costs for services might help Summerhill School in keeping track of the expenses that have been incurred while offering education services to the pupils. This would certainly support the organisation in raising its profitability and most vitally, attaining the desired level of growth through more efficient functioning. It would be vital to mention that there are certain vital steps through which, Summerhill School might use the ABC method or analysis towards producing product costs for services. In this similar context, Heisinger & Hoyle (2013) elaborated that the identification of the costly activities persisting within such organisations is one of the prime steps, which might be used by the organisation to produce its product costs for services involving the aforementioned method. As stated by Heisinger & Hoyle (2013), the costly activities of Summerhill School can be apparently observed as rents, salaries for the teachers and printing costs of the learning materials. Moreover, the other activities of the organisation that are not much costly but play an effective role in determining business growth include meeting with the learners, reviewing the applications made by the students and submitting their feedback through technological means5. Certainly, similar features can be observed in Summerhill School when analysing its financial cost overheads, which shall be possible to be accounted and quantified through the implementation of the ABC method. According to Heisinger & Hoyle (2013), the other step through which Summerhill School may use ABC method to produce products costs for services is assigning the overhead expenses to the activities that have been recognised in the above-discussed step. For instance, the costs that are assigned to one of the above-identified activities in Summerhill School, i.e. reviewing the applications made by the students, entail various items. These comprise wages of the staff members who are held responsible for reviewing such applications, depreciation of certain operational equipment’s such as computers and supplies that are required for conducting the overall review procedure. In addition, gathering of adequate funding is also noted to be of immense significance for the proper functioning of the school, which further necessitates proper accounting measures to ensure that the obtained limited amount of funds are used proficiently3. Following this particular step, Heisinger & Hoyle (2013) noted the step of identifying the cost drivers for each activity as one of the preliminary and key steps to gain cost effectiveness, with the application of the ABC method. Illustratively, the cost driver relating to the activity of meeting with the learners can be identified as the “hours of meeting time.” Again, another cost driver linked with the activity of reviewing the applications made by the students can be identified in terms of the “number of applications reviewed”. In this similar concern, with regards to the activity of submitting students’ feedback through technological means such as computers, the cost driver would be “number of hours spent on accessing such machines” in Summerhill School6. Another important step suggested by Heisinger & Hoyle (2013) for producing product costs for services through ABC method emphasises calculating a prearranged overhead rate for each of the above-identified activities. To be mentioned, relating to the activity of reviewing the applications made by the learners, the calculation results in the form of rate per application reviewed, which should be taken into concern by Summerhill School when applying the ABC accounting method. Moreover, concerning the activity of supplying learners’ feedback through technological means like computers in Summerhill School, the calculation results would be considered in the form of the number of hours spend on accessing such machines (Heisinger & Hoyle, 2013). To be summarised, by following the aforesaid steps, Summerhill School might use ABC method for producing product costs for its education services maintaining adequate accuracy, resulting in attaining greater business growth and raising superior profitability through better cost control. Benefits of Producing Product Costs for Services through ABC Method Based on the above discussion, it can be affirmed that Summerhill School may use the ABC method or analysis to produce its product costs for services with the aim of attaining several significant benefits. In this similar concern, the report published by IMA (2012) demonstrated certain potential benefits that the organisation can attain through determining product costs for services engaging the ABC model. According to IMA (2012), one of the major benefits, which can be attained by Summerhill School, is making better as well as effective decisions related to its requirement for funds and resourceful use of its finances. This can be justified with reference to the fact that more precise cost information will ultimately lead towards making better decisions in Summerhill School. The steps, which have been defined above would certainly enable the organisation to gain accurate information about the costs that it incurred during its operations, resulting in making better decisions from a futuristic point of view. It is worth mentioning that the organisation would be able to make effectual decisions on various areas that include changes in product lines, i.e. adding or discarding service fees, product pricing and decisions relating to product mix among others. Apart from making better and effective decisions, the organisation can also attain the benefits of improvising various operational or business procedures, which would in turn raise its business growth as desired and planned7. Drawbacks of Producing Product Costs for Services through ABC Method Despite several benefits that can be attained by Summerhill School, there are certain drawbacks observable in the process for producing product costs for services through the ABC method. This has been clearly depicted by the report published by IMA (2012). According to this report, the ABC method can be identified as costly for the organisation as the process require numerous staff for carrying out certain prime activities. In this similar context, the report of IMA (2012) deciphered that a huge figure of staff members is required to recognise the costly activities that pertain within an education-sector organisation, tracking the cost drivers and most vitally, assigning costs to the products of the organisation. This process involves teamwork at an expanded circle and thus, shall prove to be costly. This increased level of cost can be duly considered as one of the major drawbacks of producing product costs for services through ABC method in Summerhill School, which has already been reported to face financial problems owing to insufficient funding from the government3. In accordance with the report published by IMA (2012), the limitation of the ABC model in terms of time consumption can be apparently observed as the other drawback of the above-discussed aspect8. Utilisation of ABC Method in Evaluating Internal Efficiency, Quality and Profitability per Product or Service Line As observed in the recent past, Small-To-Medium Size Enterprises (SMEs) are undergoing through immense pressure in this modern business scenario due to certain crucial factors that encompass prevalence of extreme business market competition, increased level of globalisation, incessant change in customers’ preferences and augmenting momentum of internationalisation among others. These crucial factors eventually affected the internal efficiency, quality as well as the profitability per product or service line of the SMEs by an extensive level. Thus, the SMEs in this modern day context have been observed to intend to adopt and implement certain effective strategies in order to cope up with the pressures that they are currently experiencing in the modern business scenario. In this regard, the SMEs are often identified to adopt the strategy of evaluating their respective internal efficiency, quality and profitability per product or service line through the ABC method for cost control9. It is worth mentioning in this context that Summerhill School might use ABC to evaluate its internal efficiency, quality and profitability per product or service line successfully, only after obtaining a detailed understanding about its improvement requirements within the same area. As per the standpoints of Hall & McPeak (2011), one of the prime reasons for which contemporary organisations, specifically the SMEs, lack adequate potential for evaluating their respective internal efficiency, quality and profitability per product or service line, is the non-existence of economies of scale. It can be apparently observed that the SMEs often do not possess adequate economies of scale from a cost-effective viewpoint, for which, they fail to conduct the same in an effective manner7. According to Hall & McPeak (2011), in such case, the ABC method might play a significant role in enabling Summerhill School to evaluate its internal efficiency, quality and profitability per product or service line through the ABC analysis method. In this similar context, Hall & McPeak (2011) affirmed that the organisation might use ABC method for assessing the aforesaid aspects through various ways. These ways comprise deducting product costs from the expenditures incurred in serving each customer or client, examining the costs while delivering educational services to the clients and most vitally, segregating the activities that are valuable and non-valuable from the perspective of the organisation. Based on the above discussion, it can be affirmed that Summerhill School can determine its profitability per product or service line specifically with the adoption of the above-described ways in an effective manner. Besides, the aforesaid ways would also support the organisation in reshaping its educational products or services that might further result in developing its internal efficiency and quality at large6. It would be vital to mention in this similar context that certain benefits can be acquired by following the above stated ways effectively, which have further been elaborated in the following discussion. Benefits of Evaluating Internal Efficiency, Quality and Profitability per Product or Service Line through ABC Method As mentioned above, there are certain significant benefits that Summerhill School can obtain from evaluating its internal efficiency, quality and profitability per product or service line based on the aforesaid ways of the ABC method. One of such benefits is enhanced product pricing. It is likely that Summerhill School would reap the benefits of improving its product pricing, owing to the consequences of acquiring better cost information through the conduct of the above-discussed ways. It is worth mentioning in this regard that by evaluating the various aspects of internal efficiency, quality and profitability per product or service line, Summerhill School can make more effective utilisation of costly activities such as printing costs of the learning materials and rent among others. Apart from these benefits, as per the ideas of Heisinger & Hoyle (2013), Summerhill School can design its broad array of services in a cost-effective manner by acquiring cost related information and identifying the cost drivers with utmost precision. Correspondingly, it can be affirmed that the benefits, which would be obtained by evaluating the internal efficiency, quality and profitability per product or service line through using ABC model, might assist the organisation towards attaining superior competitive position in the respective industry. Drawbacks of Evaluating Internal Efficiency, Quality and Profitability per Product or Service Line through ABC Method Summerhill School might experience certain setbacks when evaluating its internal efficiency, quality and profitability per product or service line with the use of the ABC method. In this similar concern, the organisation might face problems in deriving accurate cost information due to inadequate details gathered from the above-described procedure. It would be vital to mention in this similar context that there are few probable chances of deriving inappropriate cost related information owing to the involvement of the ABC method due to its costly and time-consuming nature or modus operandi. It has been evident that the SMEs in this modern day context have to face similar problems while performing their respective operations in diverse business markets. In order to address and mitigate this particular problem, the SMEs have been mainly focussed on developing their respective product pricing policies rather than solely depending on the ABC method. Moreover, in order to remain much competitive in the industries wherein the SMEs are operating, they emphasise lessening product costs or enhancing operational productivity at large, which might also become a noteworthy problem for Summerhill School4. Conclusion As per the above analysis and discussion, it can be affirmed from a broader understanding that ABC method is largely used by SMEs for attaining benefits in gaining better understanding of the cost variables and therefore, obtaining cost control at a higher margin of efficiency. It can be apparently observed that there lay certain ways in the form of steps through which Summerhill School might use ABC with the aim of producing product costs for services. These ways or steps include recognising its costly activities and identifying the cost drivers among others. Accordingly, Summerhill School might use the ABC method to evaluate its internal efficiency, quality and profitability per product or service line through numerous ways. These ways might encompass deducting product costs and examining the costs that are incurred while offering services to the customers among others. Apparently, certain advantages along with disadvantages can also be noted on account of following the above described ways or steps as likely to be faced by the Summerhill School. In this regard, the advantages include enhanced product pricing and better allocation of accessible resources. On the other hand, the disadvantages entail increased level of costs and time consumption in the accounting procedure. Thus, it is suggestible that prior to its final implementation, the organisation focuses on gaining an in-depth understanding of the various features of the ABC method along with its improvement needs so that the disadvantages or limitations raised by this method is managed effectively ensuring better reliable results for the same. References Board of Trade of Metropolitan Montreal, ‘Price Your Product or Service’, Home, , n.d., (Accessed 22 March 2014). Chea, Ashford C, ‘Activity-Based Costing System in the Service Sector: A Strategic Approach for Enhancing Managerial Decision Making and Competitiveness’, International Journal of Business and Management, Vol. 6, issue 1, 2011, p. 3-10. Gopalakrishnan, P, & Sundaresan, M, Materials Management: An Integrated Approach, US: PHI Learning Pvt. Ltd., 1977, p. 6. Heisinger, K, & Hoyle, J ‘3.5 Using Activity-Based Costing (ABC) and Activity-Based Management (ABM) in Service Organizations’, Managerial Accounting, , 2013, (Accessed 22 March 2014). Hall, O. P., & McPeak, C. J., ‘Are SMEs Ready for ABC?’, Journal of Accounting and Finance, Vol. 11, number 4, p. 11-22. IMA, Wiley CMA Learning System Exam Review 2013, Financial Planning, Performance and Control, + Test Bank, US: John Wiley & Sons, 2012. Read More