Activity Based Costing System's Efficiency in Operational Activities of Textile Firms in Australia - Research Proposal Example

Activity Based Accounting Proposal Name Institution Name Date Abstract Proponents of Activity Based Costing systems claim that conventional costing systems are misleading and thus not reliable. Due to this, Activity Based Costing system is regarded as the improved and competitive systems that enhance efficiency particularly in manufacturing firms. The paper is a proposal seeking to investigate the effectiveness of Activity Based Costing systems particularly in providing better customer service together with keeping operational cost at marginal level. Introduction Business environments are constantly changing at an exponential rate forcing business organizations to re-think and restrategize particularly in their cost management systems in order to maintain their competitiveness in the marketplace. The difference between successful organizations and under-performing ones is mainly attributed to the organization’s ability to improve quality, lower operational costs while enhancing operation efficiency as well as eliminating services and products that incur costs. The cost management system of a company is one that empowers the management with the planning strategy. Such a system plays a significantly important role in especially providing consistently accurate cost information with regard to customers and products. For instance, cost management system should be one that provides quality and timely cost information that is essential in helping managers in their decision making processes. Given this broad understanding, the current business organizations are shifting their focus from traditional and/or conventional costing systems to cost methodology system referred to as Activity Based Costing (ABC) (Bamber & Bamber, 2006). ABC is a system that has the ability to identify cost pools in the organization. It is responsible for collecting cost in functional activity cost pools after which it applies costs to products and services by using individual cost drivers. Accordingly, it assigns costs to services and products based on the number of transactions taking place in the process of providing those products and services. Since its introduction in early 1980s, Activity Based Costing system has proved its prevalence particularly in the manufacturing context (Kim 2008). This paper is a proposal to investigate the effectiveness of the Activity Based Costing system particularly in providing better customer service together with keeping operational cost at marginal level. Semi Structured will be designed to conduct a field survey, descriptive statistics will be used to present the survey findings in Australia. Statement of the Problem Analyzing how Activity Based Costing system improves Manufacturing Company operations as well as meeting customer needs in a more cost effective manner. In Australia, there is minimal research with regard to Activity Based Costing and thus the research is interested to conduct the study in this field. Study Objectives The main objective of this study is to investigate the application of Activity Based Costing in the Australian Manufacturing Sector; the study will be conducted mainly on textiles and garments companies to determine whether ABC system provides effective cost control as compared to conventional costing systems. The following are specific objectives of the study: i. To determine whether ABC system provides the efficiency and effectiveness in all operational activities of textile firms in Australia ii. To determine whether ABC system has the ability to identify and evaluate new activities that are essential in enhancing future performance of the firms iii. To determine whether ABC system is capable of identifying and eliminating non-value added costs. Theory and Previous Practices Over the recent past it has been observed that company operations are continuously changing; automation of production process which has resulted into decreasing demand of unskilled labor force while the demand for specialists is constantly increasing. The emergence of the importance of secondary processes is also increasing going around production. Significantly important, companies have resorted to outsourcing many of their services like logistics, and tax advising (Bamber & Bamber, 2006). For instance, some experts in this area identified that a few decades ago; organizations have been increasingly providing various products and services together with using more sales channels and distribution types. Similarly, business organizations were used to servicing different types of clients something that introduced a wide variation and diversity in organizations while at the same time creating complexity together with extended overhead expenses to manage. Due to the above establishment, the cost structure of operations within manufacturing companies was completely changed (Frost & Wilmshurst, 2000). Businesses have increasingly become complex with cost elements replacing the direct costs. Given this understanding, using traditional costing methodologies in calculating cost was found to result into products’ unit costs distortion (Bamber & Bamber, 2006). For instance, it was established that traditional cost allocation can only work better in instances where There few very similar production of products and services Low overheads Homogeneous production and conversion processes Customers, their demands and marketing channels are homogeneous Selling, distribution, and administration costs are low Before the introduction of ABC systems, various companies in the manufacturing sectors were accustomed to using conventional or traditional costing system that was referred to as volume based costing system whereby volume based cost drivers including direct labor hours, labor costs and/or machine hours (Cardinaels, 2008). This system classified cost into two main parts; product costs and period costs. The traditional costing system allocated manufacturing overheads to products. By using the ABC costing system, manufacturing costs are initially collected into cost pools after which they are attached to products through a unit volume of production methodology like direct labor hours. In this regard manufacturing cost is dependent on the type of resources that products consume in their production. The more the product consumes the resources the higher the overheads are attached to the product based on a singular activity base like direct labor hours, direct labor cost or machine hour. Accordingly ABC allows distortion of cost which is vital in business units having higher overhead cost proportions. Activity Based Costing mechanism is mainly associated with linking consumption of resources to the activities that the company performs and assigns these activities their associated costs to customers and products. The benefits of an Activity Based Costing system include: a. Identification of the highly profitable customers, products and channels b. Determination of the true detractors from and contributors to financial performance c. Predicting accurately the costs, profits, and resource requirements that are associated with changes in volume of production, organizational structures together with cost resources. d. Ease of identification of the root causes of poor or dismal financial performance e. Enables the tracking of costs associated with activities and work processes f. It equips managers with cost intelligence that is essential in enhancing performance g. It also facilitators superb marketing mix h. Helps the company to achieve better product position in the marketplace Using Activity Based Costing; it is now possible to ascertain the cost of serving an individual customer (Jamaliah & Maliah, 2008). In essence, by deducting product costs and the cost of serving an individual customer, the company establishes the profitability of a singular customer. For this reason ABC empowers manufacturing companies to identify the profitability of an individual customer as well as position its products and/or services in the marketplace. Furthermore, ABS has equipped manufacturing companies with the capacity to meet the needs of the market by providing better products at competitive prices (Bamber & Bamber, 2006). By having the capacity to analyze the profitability of the customer and the products, ABC mechanism contributes largely to the effectiveness for decision making process of the top management. Accordingly, companies with ABC systems have the capacity of improving their operational efficiency while at the same time reducing their costs of operation without compromising the value of their products and/or services for their customers (Baykasoglu & Kaplanoglu, 2008). Overall, ABC system is a dynamic method for continuous company improvement; companies have in-built cost advantage which allows them to unendingly add value to both its customers and stakeholders. ABC starts with the products of the company by determining the activities used in their production together with their delivery while computing the costs of various activities at the same time. Activity costs are then used in production of a product are assigned to that particular product in a way that approximates a causal relationship (Frost & Wilmshurst, 2000). Due to this, proponents of ABC system, suggest that the system provides essential information for managing costs as compared to traditional or conventional costing systems. It should be noted that the aforementioned difference applies to companies with large amount of overheads, high product diversity, and multiple products (Bamber & Bamber, 2006). The current competitive business environment, manufacturing companies need reliable and comprehensive cost systems together with cost information that is relevant. Through the implementation of ABC system, managers are empowered to obtain accurate and consistent cost information with regard to product costs, cost of services, cost of processes, activities costs, distribution channel costs, customer segment, projects, and contracts costs. The use of ABC lost its initial enthusiasm in 1990s due to its alternatives including the Keplan’s balanced scorecard and economic value added. The subsequent years that followed, the latter came to stagnation. For instance, some experts concluded that ABC was an inefficient resources use; it was difficult to implement and expensive for dismal gains, poor value and hence alternative methods should be used in its place. It was found out that implementation of ABC is not easy due to the fact that it requires a special software to install and make it operational something that can be costly to the company. It is also eluded that regardless of the massive benefits that ABC comes with, it can result into systematic miscosting particularly in the event where overheads are not volume driven. Some researchers found out that ABC costing system failed to exhibit or reflect other cost or resources of activities that added production value. Overhead allocation that is based on activity centers was found to avoid the disadvantage of conventional output-based costing system especially under cost low volume products (Gray & Bebbington, 2001). Consequently, some studies confirmed that overheads based on activity centers necessitates the unnecessary targeting and wasteful usage of resources which results into costly effects over the complex ways of business process running (Bennett & James, 2010). The Activity based costing system focus its attention on different costs of dissimilar activities needed to produce a service or a product. However, the system has undergone continuous integration thus making it to provide solutions to different operations and produce better results. Successful implementation of ABC make employees various cost involved; this empowers them to analyze the cost, identify adding value activities while eliminating those that have no value (Frost & Wilmshurst, 2000). Methodology Definition of Population This is generally a collection of individuals or objects that is the researcher’s main focus of a scientific query. Some experts define research population as the complete group of entities sharing similar or common set of characteristics (Bamber & Bamber, 2006). The research population is a vital source of data and thus the researcher must properly define it (Christopher, Timothy & George, 2011). Through sampling process, only a small section of the population is used in the research to make conclusions about the entire population; accurate and careful definition of the research population is vital in acquiring data that will represent the views of the whole population (Frost & Wilmshurst, 2000). This particular Activity Based Costing research targets accounting and finance management staff of textile manufacturing companies in Australia. As already mentioned, the main objective of this study is to investigate the application of Activity Based Costing in the Australian Manufacturing Sector. Sample size and plan The accounting and finance management staff of textile manufacturing companies have been chosen as the target population for this study. In order to obtain the sample size, the researcher will design a questionnaire which will be distributed online through a private portal that the researcher will create via Facebook; Activity Based Costing effectiveness Facebook (Bennett & James, 2010). This will be made available to accounting and finance management staff of textile manufacturing companies in Australia. For any individual to take part in the survey, he/she will have to subscribe to the link (Abdel-Kader & Luther, 2008). The members of the site will be sent private messages via their inboxes. The participants to the survey will be selected through stratified sampling. For this matter, the researcher will forward 100 questionnaires to potential respondents. The link will be designed in a manner that when the sample size is met, the online software automatically closes the access to the questionnaire. The researcher intends to use 100 participants as the sample size. Data collection methods As already established from the above section, a questionnaire is a vital data collection instrument in different research fields (Bennett & James, 2010). For instance, various researchers have used this particular data collection tool in collecting massive amounts of information. Accordingly, there are high volumes of data with regard to questionnaire development, pilot testing as well as data collection methods. The researcher in this research will singularly use quantitative research methodology which is very essential in determining the outcome in numbers and hence it provides the basis for measuring the outcomes. Similarly, the researcher will collect data from accounting and finance management staff of textile manufacturing companies in Australia. According to sample size and plan section above, the researcher will distribute the questionnaire online through a private Facebook portal; Activity Based Costing effectiveness Facebook (Bamber & Bamber, 2006). This will tremendously help the researcher to use minimal time in conducting the research. Accordingly, the researcher will be able to reach many respondents within a very short time given the fact that this data collection methodology increases participant confidentiality. Research Limitations i. The research only focuses on three objectives that are perceived to measure the effectiveness of Activity Based Cost system; this does not provide a holistic measure for the ABC costing system. ii. The researcher only targets accounting and finance management staff of textile manufacturing companies; for instance the target population is 100 individuals in Australia. Similarly, the target population only comprises of accounting and finance management staff of textile manufacturing companies and hence cannot fully represent the views of other sectors or industries iii. The online survey gives the participants an opportunity to give false information thus it is largely unreliable. Similarly, the inconsistencies like logic set of questions cannot be excellently monitored. References Abdel-Kader, M., & Luther, R. (2008).The impact of firm characteristics on management accounting practices: A UK-based empirical analysis. The British Accounting Review, 40(1), 2-27 Bamber, E. M., & Bamber, L. (2006). Using 10–K reports brings management accounting to life. Issues in Accounting Education, 21(3), 267–290. Baykasoglu, A., & Kaplanoglu, V. (2008). Application of activity-based costing to a land transportation company: A case study. International Journal of Production Economics, 116(2), 308-324 Bennett, M., & James, P. (2010). Environment-related management accounting current practice and future trends. Greener Management International, 97(17), 32-41 Cardinaels, E. (2008). The interplay between cost accounting knowledge and presentation formats in cost-based decision-making. Accounting, Organizations and Society, 33(6), 582-602 Christopher P. A., Timothy, S., & George T. (2011). Principles-based versus rules-based accounting standards: The influence of standard precision and audit committee strength on financial reporting decisions. The Accounting Review, 86(3), 747-767. Frost, G.R., & Wilmshurst, T.D. (2000). The adoption of environment related management accounting: an analysis of corporate environmental sensitivity. Accounting Forum, 24(4), 344-365 Gray, R., & Bebbington, J. (2001). Accounting for the Environment (2nd edition). London: Sage Publications Ltd. Jamaliah, A., & Maliah, S. (2008). Implementation of activity based costing in Malaysia: A case study of two companies. Asian Review of Accounting, 16(1), 39 – 55 Kim, L. (2008). Strategic management accounting: how far have we come in 25 years? Accounting, Auditing & Accountability Journal, 21(2), 204 – 228 Read More