Competitive Advantage Of Management Account - Myassignmenthelp.Com

Question: Discuss about the Competitive Advantage Of Management Account. Answer: Introduction: Activity-based costing method was originally introduced in the year of 1980, and it address various issues related to traditional standard-cost systems. Traditional methods of costing only use three categories of cost that were labor, materials, and overhead. It must be noted that manufacturing companies generally smidgen the factors related to labor and materials which were used by the products on individual basis. Cost systems of these companies allocate the indirect and support cost with those measures which had been already decided such as direct hours of labor and direct labor dollars. Later, various issues are faced by the organization because of which new approach related to ABC model was introduced by the experts. This new approach was developed by Kaplan and Anderson and it was named as Time-Driven Activity-Based Costing (TDABC) (Kaplan Anderson, 2004). TDABC is a simple and elegant option available for companies for the purpose of determining the cost and capacity utilization of their process and it also help the companies in determining the profitability of orders, products, and customers. It provides better cost management which automatically improves the cost management systems and address all issues related to this system. Managers obtain accurate information in context of cost and profitability which help the managers in managing the project. TDABC also justify the product variety and mix, price customer orders, and it also manage the relationship between customer and company which provide benefits to both the parties (Akhavan, ward Bozic, 2016). This paper states meaning and different elements related to TDABC and also discuss the reliability of private organization in Australia on this model of costing. For the purpose of understanding this new approach in better way, we chose Wesfarmers Limited as case study. About Wesfarmers: Wesfarmer is originally incorporated in the year 1914 and it incorporated as Western Australian farmers' cooperative, and later this company has grown as one the largest listed companies in Australia. Headquarter of this company is situated in Western Australia and diverse business operations of this company includes supermarkets, hotels, liquor, and convenience stores. It also includes home improvement, office supplies, department stores, etc. Wesfarmers also diversified its business in different industries that are chemicals, energy and fertilizers, industrial and safety products and coal. Wesfarmers is considered as largest private sector employers with almost 220,000 employees employed in Australia. It must be noted that this company has shareholder base of almost 530,000 employees (Wesfarmers, n.d.). The main object of this company is to provide satisfactory returns to its shareholders by ensuring discipline in financial matters and effective management of a diversified portfolio of businesses. Wesfarmers mainly focus on effective and efficient management of each activity of the group which is ensured through strategy development and execution of strategy and also through the day to day operational performance. Each and every decision of the organization is taken and guided by the divisional board of directors or relevant committee which includes the Wesfarmers Managing Director and Finance Director (Wesfarmers, n.d.). TDABC its different aspects: Traditional model of ABC creates issues for various organizations, especially for those organizations which operated its business on large scale. It is difficult to implement this model because of high cost related to interviews and survey or people. This model is costly because it involves costly-to-validate time allocations. Maintenance and updating of this model is also difficult in following manner: Difficult to change the processes and resource spending. Addition of new activities. It is complex to diversify the individual orders, channels, and customers (Kaplan Anderson, 2007) . For the purpose of dealing with the above stated issues, Kaplan and Anderson introduce new version of traditional model of ABC, and this model mainly consider only two elements: Unit cost related to supplying capacity of resources. Required time for performing any activity. In other words, TDABC is the updated version of original model of ABC which helps the organization in identifying the cost and profit enhancement opportunities. Some relevant features of the TDABC are stated below: TDABC helps the organization in easy estimation of costa and it is easy to install this model. It is easy to update this model for the purpose of showing changes in processes, order variety, and resource costs It incorporates the resource capacity and also highlights the unused resource capacity for the action of the management. It reflects thee time equations which ensures variation in orders and handle customer behavior. TDABC simplifies the process of costing by removing the requirement of interview and survey employees for the purpose of distributing the cost to the activities before taking them to the objects of cost. This model helps the organization by directly assigning the resource cost to the cost objects by using an elegant framework which considers only two factors. First it calculates the cost related to supply resource capacity, and secondly it uses the capacity cost rate for driving departmental resource cost to cost objects by estimating the demand for resource capacity which is required by each cost object (Santana, et al. 2014). Difference: Above stated section of this report states different features of the TDABC which help the organization in achieving effective cost management in the organization. This costing technique is considered as updated version of traditional method of ABC model and it is completely different from other techniques of costing. Difference between TDABC and ABC TDABC and other traditional methods of costing is discussed in detail below: TDABC ABC: Activity based costing is the method which is accurately considered by the management of the organization for allocating the cost to the consumers and products in different departments and processes. There are number of organizations which failed in implementing the ABC model because of the resistance related to behavior and organization in context of introduction of new idea. The main reason behind the pitfall of ABC model is, it treats most variable organizational costs as variable and radiant in acknowledging the chances of unprofitable customers. The difference between ABC and TDABC is stated below: TDABC ABC It is not an expensive model and very easy to update. This model is very expensive in nature and not easy to update. It is very simple to implement this model as it considers only two easy parameters for determining the cost. It is not easy and simple to implement this model because it considers various factors. This model helps the organization in identifying cost and profit enhancement opportunities (Hoozie, 2014). It does not identify any such opportunities. Traditional costing system TDABC: Under traditional costing methods allocation of factory overheads to products is actually depends on the production resources consumption. In this, overhead generally applied is relied on the amount of direct labor hours consumed or machine hours used. Issue related to traditional costing is that factory overhead is generally higher in comparison of basis of allocation, so that little change occurred in the consumption of the resources volume initiates big change in the amount of applied overhead. There are number of manufacturing organizations which use these traditional costing methods for the purpose of allocating the manufacturing overheads to the units produced. Those organizations who use traditional costing method makes the assumption that element related to volume are the underlying driver related to manufacturing overhead cost. In this type of costing methods accountant allocate the manufacturing costs only to the products. In other words, traditional costing methods do not allocate non-manufacturing costs which is associated with the production of an item such as administrative expenses. Generally, organizations use this method in external financial reports because it defines the cost of goods sold. TDABC is the model which determines the cost by identifying the capacity of department and process. Under this technique of costing, cost is mainly allocated by relying on the capacity of resources and time required for performing any activity of transaction. This model is very effective in nature and eliminates all the issues raised by traditional methods of costing. If demand or work in context of these activities reduced, then also TDABC performed its work effectively by estimating the volume related to resources released. After considering various aspects of TDABC, it can be said that this model of costing is very simple in nature and it is easy to update this model. This model shows different characteristics of an activity such as capacity of resources and time equations. TDABC model is suitable for both large and small scale organizations and also a best technique for present environment of business. Difference between the two is stated below (Ratnatunga Balachandran, 2012): Traditional costing techniques TDABC It fails in considering the non-manufacturing cost. It considers all types of cost and does not depend on single cost. Different elements are considered in this. Only two elements are considered in this. Allocation of factory overheads to products is actually depends on the production resources consumption. Both large and small scale organizations can rely on this model. TDABC and Wesfarmers: Wesfarmers Annual report for the year 2016 states that resource business of the company faces various difficulties in this year. Organization is focusing on reducing the cost and take actions to manage their cash flow at the time when prices related to coal are low. Organization considers the fact that it is possible to create value in the industrial division and its business. Wesfarmers operate their business in such a way so that they can derive the best value for their shareholders. It is possible for Wesfarmers to achieve all their targets and maintain all their cost by implementing time-driven activity-based costing system. This system of costing helps the organization in reducing their cost and managing their business in better way. TDABC helps the Wesfarmers in following way (Wesfarmers, 2016): After implementing the TDABC, organization eliminates the requirement of interview-and-survey process in context of different resources. This method of costing helps the organization in maintaining reliable accounts which are accurate in nature by dealing with different issues occurred in manufacturing process. Organization can reduce the time of processing needed for analyzing the data. It simplifies the cost management system of the organization which helps the organization in addressing different issues. Updating and maintenance of this costing method is very easy (Pernot, Roodhooft Abbeele, 2007). Conclusion: Activity based costing is the traditional and important method of costing, but it has various shortcomings. ABC is considered as original model of costing and it is not suitable for every organization. New version of original model of ABC is introduced by Kaplan and Anderson, and this new version is named as time-driven ABC. This new and improved model of ABC reduce the requirement of data, and it consider two significant factors of organization that are capacity and cost in lieu of resources, and time required for the purpose of performing any activity. References: Akhavan, S. ward, L. Bozic, K. (2016). Time-driven Activity-based Costing More Accurately Reflects Costs in Arthroplasty Surgery. Clin Orthop Relat Resv., Volume 474(1). Hoozie, S. (2014). A comparison of activity-based costing and time-driven activity-based costing. Available at: https://calhoun.nps.edu/bitstream/handle/10945/47751/Hansen-A-Comparison_2014-08.pdf?sequence=1. Accessed on 23rd January 2018. 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