Activity Based Model or ABC Model is a method of accounting, which assigns the cost in manufacturing a product and other activities, and later sums the total cost all these activities in order to determine the cost of making of that product. ABC model is based on the concept of products consuming activities and then activities consuming the resources. ABC Model is a system of costing which helps the organisation to estimate the cost of the product in a much accurate process than the other traditional systems. Hence, ABC Model is a very useful method, which helps in controlling, planning and managing the costs of the Aveo Group, which are subjected to design the product.
This model of this costing system has typically replaced the traditional system of costing for the organisations, which require more reliable and accurate pieces of information costing (Siguenza et al. 2014, p.79). Moreover, this ABC Model constantly keeps an eye on the activities, which are related to cost, analyses and classifies them to non-value adding or value-adding activities (Kaplan et al. 2015, p.46). It also simplifies a typical method in an understanding of reducing cost, improving the profitability of the business and monitoring ongoing performances. In addition, this model also helps as a reflector into the processes of business in order to obtain the allocation of cost and good efficient resources. ABC Model is a tool, which is much widely used by a huge number of organisations (Gulati et al. 2018, p.50). Aveo Group is also one such organisation which aims at using this ABC Model.
Workings of ABC Model
ABC Model decomposes and deems the Aveo Group broadly pertaining to the activities instead of concentrating on the divisions, branches and the structure of the department (Yangyang et al. 2017, p.1048). This model helps in determining the total cost of a given product according to the resources and activities, which are used throughout such as selling, producing, distributing and promoting the product. According to Dale and Plunkett (2017, p.18), ABC Model typically focuses on identifying the costs of various activities and then allocating the same to the objects of the cost based on the activities' usage (Siguenza et al. 2014, p.77). Aveo Group needs to use this system so that they can improve their management accounting information.
The characteristics or features of the ABC Model are accounted below:
● The total cost is distributed into two types, which include- variable cost and fixed cost. This is of much importance as it provides good quality pieces of information in designing or building a suitable cost (Yun et al. 2016, p.767).
● A proper comparison is prepared in between the behavior patterns of the cost.
● The behavior patterns of the cost are related to the events, diversity, volume and time too.
● The pattern of cost behavior is dictated by the cost.
● An appropriate cost driver needs to be identified in order to trace the products overhead.
The ABC Model helps the Aveo Group in identifying the mission and objectives in the following ways:
● It helps in rectifying and correcting the cost pieces of information, which are inaccurate and are not relevant.
● It helps in allocating the overheads based on activity.
● It helps the management in taking a timely and quality decision.
ABC Model helps the Aveo Group in identifying the corporate strategies by developing the Activity Based Costing in the following ways:
● The primary aim of the model identifies the primary functional areas of the Aveo Group.
● There are separate activities for each functional area of the Aveo Group (Kim et al. 2016, p.290). Therefore, in order to go ahead with the corporate strategies, the main activities of the whole lot of activities need to be identified as for example, purchase regarding the packing of the materials and purchase of the raw materials.
● The support activities of those main activities of the Aveo Group need to be segregated as for example, maintenance and repairs of the machines, quality testing, and maintenance of the power supply (Laviana et al. 2018, p.110).
● The factors, which influence the support activities and primary activities of the Aveo Group, are to be taken care of as for example, drivers cost.
● All the data pertaining to direct labor, overheads and material costs of the Aveo Group need to be collected accurately (Crott et al. 2016, p.2625).
● The rates of the cost drivers of the Aveo Group need to be fixed on a priority basis according to the overheads incurred.
● The cost of each activity of the Aveo Group required being found in order to find the cost of each product separately (Kim et al. 2016, p.288).
The strategies of the Aveo Group can be achieved with the assistance of the ABC Model (accountlearning.com, 2018). The implementation of this above-mentioned model is as follows:
● The functional areas of the Aveo Group need to be identified.
● After that, the primary of the main activities of every functional area of the Aveo Group needs to be prioritised (Kaspina et al. 2014, p.358).
● The indirect common costs to every functional area of the Aveo Group needs to be allocated on a suitable basis.
● The suitable cost driver for every activity of the Aveo Group under the functional areas needs to identify accordingly.
● Then after that, an expenditure statement should be prepared according to the activities (purchasing-procurement-center.com, 2018).
● A brief comparison of this statement should be done which will add more value to activity wise.
● Lastly, the irrelevant activities, which are required to eliminate or to improve, need to chalk out for better performance of the Aveo Group.
1. Six Steps Process for the implementation of the ABC Model
Study Costs and Processes
As opined by Burns et al. (2018, p.19), ABC Model is highly process oriented. Hence, it is the very first step, which symbolises in implementing ABC suggests a detailed study of all the costs and business processes.
Identification of the Activities
After understanding the business, enough care should be taken in choosing the business activities, which shall be centralised while allocating the costs (Yangyang et al. 2016, p.1965). If there are too many activities, then there is a chance for the system to become unmanageable, however, if there are lesser activities, then the information will become meaningless too. Hence, it becomes wise to think the activities at different levels, which include:
● Batch Level Activities
These are the activities, which must be performed in order to relate one or more than one units of output. In a few cases, shipping is an excellent example of this batch process. Assuming Aveo Group is going to deliver some products through courier (Schutzer et al. 2016, p.585). Hence, these products need to be shipped even if it requires delivering multiple products to the same place at the same time. Therefore, it is clear that the same activity is repeated without considering the number of books to be kept in the box.
● Unit Level Activities
These are the activities, which involve a one-to-one correspondence with the output unit (Inverso et al. 2015, p.674). Taking an example that the Aveo Group needs to perform some calibration activity for some of its finished products (May it be an advanced device or an entry-level scope too). Thus, calibration is viewed as an activity.
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