Activity-Based Costing for Montclair Paper Company - Case Study Example

Activity Based Costing Task Introduction The paper presents the analysis and discussion of the significance of implementing activity-based costing system in the organization. The Company selected to aid the analysis is Montclair paper Mill. The paper will contain a brief description of the ABC application, the benefits of the ABC system, and discussion of the implementation of an ABC project. Montclair paper Mill The company started operations back in 1892. It is one of the papers producing companies managed by General Paper Company. Montclair is headquartered in Millburn, New Jersey, United States. The company operates in the paper industry. The Company is an example of the many that adopted target costing, which relies on the concept of the ABC, to replace the outdated standard costing, with the main goal of reducing the production cost as will be discussed later in the paper (Zbib, Rakotobe-Joel & Rigoli, 2011). Description of ABC application Action Based Costing is an expense bookkeeping system created and spearheaded by Roben Cooper, Robert Kaplan, and H. Thomas Johnson, which follows overhead expenses, specifically to cost objects, i.e., items, procedures, administrations or clients and help directors settle on the right choices with respect to item blend and focused systems. Activity based costing is a refinement of the conventional costing frameworks of allotting assembling overhead to the units created. The traditional costing frameworks dependably utilize volume-related measures, e.g., direct work hours or machine hours to assign overhead expenses to items produced. Then again, ABC dispenses overhead expenses to items on the premise of the assets devoured by every action included in the outline, generation, and appropriation of a specific item (Letza and Gadd, 1994). ABC is a bookkeeping strategy that permits an association to focus the genuine expense connected with every item and administration delivered by the association without considering the authoritative structure. A critical capacity of ABC is to characterize the exercises of an organization as value adding or non-value adding exercises. Worth included exercises are assignments attempted by the organization for which the clients are typically eager to pay for the administration. Then again, non-value added exercises make waste, bring about the postponement, add expenses to the items, or for which cost clients are not eager to pay. ABC helps an association in discovering chances to streamline or diminish the expenses, or wipes out the whole activity, particularly if it does not add value (Letza and Gadd, 1994). ABC empowers managers to see whether the assets are being utilized successfully and which exercises contribute worth to the item or administration. The exercises performed which require more assets for productivity can be defended by breaking down these exercises. A noteworthy point of preference of utilizing ABC is that it evades or minimizes deceptions in item costing that outcome from irregular allotments of roundabout expenses. It coordinates the genuine aggregate expense of the assets devoured to the aggregate yield delivered. ABC framework could help directors in recognizing the worth included exercises that they could further enhance to meet clients requests and upgrading the item quality and procedure improvement and productivity (Gagne and Discenza, 1992). Assessment of the Benefits of the ABC for Montclair Paper Company Initially, Montclair Paper Company implemented the standard costing system. The profitability levels started diminishing, and the administration was worried about what to do. They identified one item, Carnival Uncoated Cover Paper in woods green shading, as a conceivable explanation behind the issue. The Montclair plant purchases dry mash, which it shows into covered and uncoated fine papers for premium applications, for example, indexes. Supervisors at the plant had been utilizing standard costing for a long time. The plants standard cost for the woodland green Carnival was $2,900 per ton, and the offering cost was $2,200. The Montclair division was losing $700 per ton. Subsequent to including warehousing and capital charges, the misfortune was $1,020 per ton. The test was to figure out what should be possible to tackle this issue (Zbib, Rakotobe-Joel & Rigoli, 2011). The directors at Montclair began by researching whether it was a value, expense or a bookkeeping issue. The business administrators did not think it was a business or value issue. Assembling guaranteed that expenses were in view of entrenched creation procedures and material necessities. Accordingly, the misfortune was not because of assembling. Besides, the accounting office guaranteed that the misfortune was not a bookkeeping issue. None of the offices consulted considered the plants misfortune on Forest Green Carnival as starting from their units (Zbib, Rakotobe-Joel & Rigoli, 2011). After intensive examination, the administration at Montclair decided that an expense of $2,900 was too high. They decided to try different things with target costing to compel cost down. Target costing included deducting ordinary expenditures and edges along the value bind back to the factory. Montclair needed to re-design the whole assembling process and uprooted the standard costing framework. As indicated by the plant administrators, target costing brought down their assembling expenses radically. Target costing constrained administration at Montclair to change the way they conveyed quality to clients (Zbib, Rakotobe-Joel & Rigoli, 2011). As mentioned above, the company managed to reduce the production costs to an acceptable level by introducing target costing. Target costing is a concept referring to pricing an item after conducting a market analysis to identify the most affordable price suitable for the potential consumers. In order to achieve a successful implementation of target costing system, the concept of the activity-based costing must be adopted. Therefore, it is rational to give credit to the ABC system for a functional target costing system. The advantages of the activity-based costing system to Montclair Paper Company are as follows: first, activity based costing enhances the administration of operations in the company. As said over, two discriminating strides in the ABC framework are the distinguishing of expense pools and cost drivers. The present day framework then provides for the apportionment of the overhead costs to the cost pools and exercises. The capacity to assign the production cost to the separate expense pools makes it simple to manage and control the pertinent expenses and accordingly, diminish the total manufacturing costs. Evidently, the cost pools are diverse (Gagne and Discenza, 1992). In this way, the definition of control measures ought to be custom-made to each of the cost pools. The traditional absorption costing system makes the methodology inconceivable. Nonetheless, because of the presentation of the activity based costing framework, it is conceivable and simple to define control measures customized at every expense pool. The methodology enhances viability with which the organizations operations are improved, thus, improves decision-making (Letza and Gadd, 1994). Second, the activity based costing framework enhances the viability and productivity of the company. The way that the framework makes it simple to determine the wellspring of undesirable results amid the manufacturing process makes the detailing and execution of the fitting restorative measures exact. The capacity of the organization to instantly execute medicinal measures is a showing of the viability. The cutting edge framework is more productive in expense administration than the traditional absorption framework. Hence, the ABC is the proper system for lessening the working expense. The methodology hence makes the organization more productive (Letza and Gadd, 1994). Dynamic organizations work at negligible cost and keep up the quality of items. In marketing, the consistent conveyance of value is an effective strategy. In light of the intense competition among adversary organizations, the reliable quality conveyance is an aggressive quality. Along these lines, the procurement of unrivaled quality is a discriminating fixing in building up a resolute stage for supportable profit. It was likewise said that productivity means working at a negligible expense (Cohen, Venieris, and Kaimenaki, 2005). The ABC framework makes it simple to decrease the working expenses, hence expanding the productivity levels. Gainful organizations appreciate gigantic budgetary adaptability and flexibility. Such organizations are fit for seeking after productive ventures that build their future worth, thus, development rate. The execution of the ABC framework makes this conceivable. Hence, the ABC system facilitates effective decision-making (Letza and Gadd, 1994). Third, the activity-based costing gives supervisors less demanding and more exact access to important expenses for settling on basic inventory network choices, empowering them to enhance their focused position. ABC gives the directors of the supply chain the knowledge into how well the exercises are being performed. Fourth, the activity based costing gives dependable and legitimate estimations of action related expenses. Such measurements help supply chains enhance item and procedure choices through quality included exercises. Last, the activity-based costing provides managers of the supply chain with more significant and useful item costs, which bring about better productivity estimations. Thus, directors can settle on better inventory network choices about evaluating, markets, and capital speculations (Zbib, Rakotobe-Joel & Rigoli, 2011). The Implementation of an ABC Project The implementation of the activity-based costing process has the following steps: activity identification, doling out the expense of assets to exercises, yield identification and allocation of activity expenses to yields (Sartorius, Eitzen and Kamala, 2007). Amid the first step (activity identification), the company ought to take part in a more profound examination of the working procedure of every responsibility center. Every procedure may include one or more work methods needed to deliver a yield. Amid the second step, appointing the expense of assets to exercises, the business takes part in following expenses to cost questions with a specific end goal to determine their reasons. Amid the third stage, yield identification, an association participates in the distinguishing proof of exercises that utilization its assets. Finally, the fourth step, assigning action expenses to yields, the activity expenses are allocated by action drivers to the yields in light of the level of interest in such exercises (Sartorius, Eitzen and Kamala, 2007). Conclusion As mentioned above, Montclair Paper Company successfully lowered the manufacturing costs by adopting target costing system. A successful implementation of target costing is based on the concept of the activity based costing. The advantages of the ABC system are but not limited to enhancing the administration operation in the Company, it enhances the viability and productivity of the company, it provides precise cost information, it enhances cost estimations, and it facilitates decision-making. References Cohen, Sandra, George Venieris, and Efrosini Kaimenaki, 2005. "ABC: Adopters, Supporters, Deniers and Unawares." Managerial Auditing Journal 20.8 (2005): 981-1000. Gagne, Margaret L., and Richard Discenza, 1992. "Accurate Product Costing in a JIT Environment." International Journal of Purchasing and Materials Management 28.4 (1992): 28. Letza, Steve R., and Ken Gadd, 1994. "Should Activity-Based Costing be Considered as the Costing Method of Choice for Total Quality Organizations?" The TQM Magazine 6.5 (1994): 57. Sartorius, K., C. Eitzen, and P. Kamala, 2007. "The Design and Implementation of Activity Based Costing (ABC): A South African Survey." Meditari Accountancy Research 15.2 (2007): 1-21. Zbib, I. J, Rakotobe-Joel, T. & Rigoli, R. (2011). Target costing: The Key to Supply Chain Excellence. International Business & Economics Research Journal, 2 (11). Retrieved from http://www.researchgate.net/profile/Imad_Zbib/publication/266493646_Target_Costing_The_Key_To_Supply_Chain_Excellence/links/54b517f30cf28ebe92e4bdd1.pdf Read More