SOU- MAY- 120518- 0356PM- Prakesh_assingment_gimira.doc
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 basically based on the concept of products consuming activities and then activities consuming the resources. ABC Model is a system of costing which hel ps 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 which helps in controlling, planning and managing the costs of the Aveo Group which are subjected to design the product.
Findings and analysis
(a) ABC Model and its Features
This model of this costing system has typically replaced the traditional system of costing for the organisations which requires more reliable and accurate information’ s of costing. ABC Model is based on the philosophy of allowing the overheads to allocate to the pools of cost as per their requirement of actual resources consumption. Based on this above philosophy ABC Model aims in providing much useful and accurate information of cost for cost control, performance measurement as well as operational and strategic decision making improvement. Considering operational decisions, the information’s are used in developing cost-effective design of the product and also hel p in improving the overall process too such as improved quality, lower costs and decreased time of manufacturing cycle. Now taking the strategic dimension, the information’s of these costs a re obtained from the ABC Model which supports in product mix, pricing and also sourcing the decisions.
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. It also simplifies a typical method in understanding of reducing cost, improving the profitability of the business and also 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 also good efficient resources. ABC Model is a tool which is much widely used by a huge num ber of organisations. Aveo Group is also one such organisation which aims in 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. This models hel ps 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. ABC Model typically focuses in identifying the costs of various activities and then allocating the same to the objects of the cost based on the activities’ usage. Aveo Group needs to use this system so that they can improve their management accounting information.
Features of ABC Model
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 information’s in designing or building a suitable cost.
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
The pattern of cost behavior is dictated by the cost.
An appropriate cost driver needs to be identified in order to trace the products
(b) Alignment of ABC Model with the strategies and goals of the Aveo Group
Identification of the objectives and mission of the Aveo Group
The ABC Model helps the Aveo Group in identifying the mission and objectives in the following
eIt helps in rectifying and correcting the cost informations which are inaccurate and are not relevant.
It helps in allocating the overheads on the basis of activity.
It helps the management tn taking timely and quality decision.
Identification of the corporate strategies of the Aveo Group
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. Therefore, in order to go ahead with the corporate strategies, the main activities of the whole lot of activities needs 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, maintenance of the power supply.
The factors which influences 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 labour, overheads and material costs of the Aveo Group
need to collected accurately.
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 activities of the Aveo Group required to be found in order to find the cost of each and every products separately.
Assistance of the ABC model in achieving the strategies of the Aveo Group
The strategies of the Aveo Group can be achieved with the assistance of the ABC Model (account I earning.com, 2018). The implementation of this above mentioned model are as follows:
The functional areas of the Aveo Group needs to be identified.
After that the primary of the main activities of every functional areas of the Aveo Group
needs to be prioritised.
The indirect common costs to every functional areas of the Aveo Group needs to be allocated on suTta ble basis.
e The suitable cost driver on every activities of the Aveo Group under the functional areas needs to identified accordingly.
Then after that, an expenditure statement should be prepared according to the
A brief comparison of this statement should be done which will add more value on activity wise.
Lastly, the irrelevant activities which are required to eliminate or to improve needs to
chal ked out for better performance of the Aveo Group.
(c) Two Recommendations about the Implementation of the ABC Model
Six Steps Process for the implementation of the ABC Model Study Costs and Processes
ABC Model is highly process oriented. Hence, it is the very first step which svmbolises 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 the centralised while allocating the costs. 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 informations will become meaningless too. Hence, it becomes wise to thin k 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, snipping is an excellent example of this batch process. Assuming Aveo Group is going to deliver some products through courier. Hence, these products needs to be shipped even if it requires to deliver multiple products to the same place at the same time. Therefore, it is pretty 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 involves a one-to-one correspondence with the output unit. Ta king an example that the Aveo Group needs to perform some calibration activity for some of its finished finished products (may it be an advanced device or an entry level scope too). Thus, calibration is viewed as an activity.
Customer Level Activities
These are the activities may take various forms as these include sales calls, technical support hel plines, catalogs and so on. This category grows on expanding with the increase in the base of the total number of customers.
Product Level Activities
These type of activities are typically processed at the product level without considering the final volume of the production. These activities include product marketing, designing the product, branding of the product and so on.
Identification of the Traceable Costs
ABC Model helps in identifying the costs solely which are related to any specific cost object, however these needs to be identified at the end of the object. A product catalog consumes more number of hours of internal resources or indirect labor while getting prepared which includes related cost activity pool. However, it involves the outside printer and that cost need to be identified to the cost object of the customer.
Assigning the Remaining Costs to Activities
On sorting out the costs which can be traced to cost objects, the remnants should be assigned to the activities. Moreover, the cost of this activity is also assigned to the whole set up activity of the machine.
Determination of the Pre-Activity Allocation Rates
Once all the costs for several activities are determined, it is the time to unitise the pool cost. As for example, it the cost pool of the catalog preparation activity contained $100,000 and total number of catalogs produced be 2000, then the total allocated cost of each would be $5.00 each.
Application of Costs to Objects
The final step involves to utilise the activity based rates in identifying the amount of cost
activity required to allocate each cost object.
Process for the implementation of the ABC Model Motivating and training staffs
An alternate process for the implementation of this model is to motivate and train the staffs so that they become more eligible for their role. Hence, it will also hel p them in performing their best in the company too. It is of much importance to involve the employees of the Aveo Group in order to have the system route its path in a correct manner. This helps in accepting measures by the whole system. Moreover all the employees of the Aveo Group should rely on the results.
(d) Other management accounting tool apart from the ABC Model The CAM-I ABM Model
This model aims in providing services or products to the customers through several contractual relationships or distribution channels. Since the servoices and the products consume much resources at various rates and also takes different levels of support, hence the costs need to be determined accurately. This is much vital for the company in selecting the segmented the segmented individual markets.
Accurate service cost information of the product is vital information for the output of this system. The final output of this system is the information of the cost driver. Hence the quality of the parts affects the resources which is required to proceed with the activity. However, an activity may have several cost drivers attached with it.
This project has highlighted the ABC Model and its features which hel ps in improving the management informations in accounting. This report has clearly explained the role of the above mentioned model and its alignment with the objectives and goals of the Aveo Group. Moreover, this report had also highlighted and analysed the corporate strategies of this Aveo Group and its assistance in achieving the strategies of the company. Necessary recommendations are analysed while implementing the ABC Model for the Aveo Group. Lastly, it highlighted an alternating accounting tool which can be also used to improve the management informations.
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