In this report a brief analysis on the management accounting tools has been elaborated. Commonwealth bank has considered for making study of the different accounting tool. This report concludes that implementation of ABC model brings significant efficiency in the costing model of the organization. This ABC model of managerial accounting differentiates the relation between the cost incurred, the performance and the production cost. These costing methods infuse the indirect method to the product and thus it is not much arbitrary unlike the traditional methods of costing. Commonwealth Bank has been considered in this report and two of the accounting management tool has been recommended for the bank is ABC model and budgetary control technique. This report analyses the usefulness of the management accounting tool in enhancing the business performance. Based on the company’s strategy, mission and objective ABC model and budgetary control has been considered for study. The company has aimed to achieve desired success using these tools.
In the modern era changes in the business environment has triggered by the technological innovation and global competition. This, in turn, led to the innovation of nonfinancial and financial information within the organizations. The new business environment demands relevance data and information about the performance and costs of the organization process, services, products, activities, and customers. In this report, an organization named as Commonwealth Bank has been considered for the study. The ABC model has been implemented in the organization that was expected to improve the business performance. It has been also expected to improve the management accounting information using the ABC model.
According to Edmonds et al. (2016, p.23), accounting-based costing (ABC) is the method of accounting that defines the operating system of the firms and its way of implementing the indirect method for production of cost. This method is sometimes difficult in assigning to the accounting of indirect cost in management and salaries to the office staff. The ABC costing method is thus much more appropriate for applying in manufacturing cost accounting, as it is not suitable in finding costing of some product related to the office expenses (Öker and Adıgüzel, 2016, p.42).
Features of ABC Model in Managerial Accounting
● The ABC costing method is based on the performance and activities of the firm accounting for any kind of events or number of work with particular objective. It assists in product scheming, machine setup, operational procedure, allocation of goods and machine. This work incurs overhead expenses and resources, so it is considered as the cost of objective to the manufacturing firm.
● The Activity costing activities by the name concerns the cost-driven transaction related accounting based on the allocation of product. The cost-driven purpose is to maintain the machine operation, power consumption, order of purchasing assets. The ABC models describe the management of accounting in two categories (Edmonds et al. 2016, p.23).
a. Transaction- it defines the number of times the activities or transaction that has taken place.
b. Duration- the time period taken by the activities and transaction is to be completed.
● Traditional method of cost accounting was vastly dependent on the cost of the object. It measures the hours of the machine took to produce and the hour of direct labour involved in the production process. The ABC model defines the activity of the firm in five different levels which are not related to the units of production. The level of batches of production, the number of production activity, the number of customer level, the sustainability level of the firm and the level of production are also defined clearly.
The ABC model improve the process of costing
According to Öker and Adıgüzel, (2016, p.18), this model of cost accounting assembles the cost of the overhead expenses incurred by the firm. It pools the cost of accumulation on overhead not in accordance with the company activity. It establishes new structural base for allocation of the generated cost instead of the measurement of volume production cost. The model of ABC does not measure the volume of the cost of direct labour and the machine hour in the cost accounting.
This model is widely accepted by the manufacturing industry as it produces the reliable data costing incurred in the production and allocation of the products. It undertakes the entire process of production and the activities while producing products. The model helps the firm is focusing on the strategy and its implementation for the better cost of production and allocation in the manufacturing market. This method targets the profit analysis and pricing of the services after manufacturing.
Company’s mission and objectives
The mission of the Commonwealth bank includes enhancing the financial status of the people of Australia, its communities and the business (commbank.com.au, 2018). The bank wants their customers to own homes and provide substantial protection to their families. As commented by David et al. (2017, p.253504), the main mission of the bank initiates into the management of the generations in context to managing money.
The Commonwealth bank initiated several foundation programs to focus on the services related to its consumers. The bank also deciphers reporting and risk practises in context to the business area. The bank initiated a The Commonwealth Bank Foundation StartSmart program which delivers financial literacy in accordance to the citizens of Australia. The bank deciphers the goal to improve literacy rates in financial terms.
The main focus point lies on prioritising the strategy of the Group which is substantially supported by the people. Technology and productivity form an effeminate capability of the bank.
Integrity, accountability, and excellence of service are determined by the culture of the commonwealth bank. As commented by Harrison and Rouse (2016, p.386), the external stakeholders are treated in good terms to maintain the quality and effectiveness of the bank.
The competitive advantage of the bank is assured by the behaviour, knowledge, and skills of the employees. The focus is entirely laid on the customer value, continuous improvement, judgments and effective results. Driving the positive results through hard work is a strategic core that the bank abides by. The financial well being of the Australian citizens is what the bank is aiming up to.
Explanations of the strategies of the commonwealth bank
The main priority of the bank lies in the customer focus. As commented by Ewing and Jensen (2016, p.136), the security of the customers is the main profound variety interest of the bank. Providing the Australian citizens with high-quality customer experience is the main focal point of the bank.
As commented by Hu et al. (2015, p.1018), the Commonwealth bank employs innovative and efficient technology to procure best quality work. The bank officials and developers are installing various new applications for the development of real-time services. They are building on software which can enable customer interaction in accordance with the bank’s analytic insights. Technology is used to enhance the productivity of the good quality services to the consumers.
The bank focuses on the high culture integrity which initiates the success of the bank. The bank deployed to invest in people development and talent management to procure the best quality results.
As commented by Ušpurienė et al. (2016, p.513), the outcomes are determined on the basis of the long-term objectives. The management of the Commonwealth bank is continuously taking steps for the betterment of their productivity. They are continuously making sufficient efforts to reduce errors and unit costs.
The strength of the Commonwealth bank is directed towards the population of Australia who trusts the bank. A very flexible balance sheet is sought important to ensure the qualitative support of the consumers.
As stated by Karpov (2015, p.1300), the Activity-based costing model is a method that in turn assigns an indirect cost to each product and to the activities. Activity-based costing is mainly based on the premises of activities consume resources and products consume resources.
Figure 1: ABC model Implementation steps
(Source: Bemmels et al. 2016, p.4900)
In order to implement the activity-based costing model below recommended steps needs to be followed by the Commonwealth Bank.
Significant activities involved in the department of Commonwealth Bank needs to be identified. The interview needs to be arranged with the directors and staff members. The key activities need to be identified at this stage of the implementation of this model. Once the key activities are identified, flow chart needs to be created in order to identify the value-added service activities. It is highly recommended to eliminate the non value added services during implementation of the model. In order to monitor the non value added activities, nonfinancial measures need to be identified. At this point of time cost needs to be identified for each of the activities and the cost needs to be allocated to the cost objects. At final the management reports are recommended to distribute among process owners.
Direct method allocation of Activity-based costing can also be recommended for Commonwealth Bank. Using this model the costs are allocated directly from the support departments to operating departments which uses the services. The overhead cost needs to be allocated based on eth number of working employees in the organization. This recommended method is very simple and easier to implement in the business process. It considers total cost drivers of operating departments. Based on this model personal department costs has been allocated only to the operating departments whereas the employees of maintenance, service, personal, engineering and any other support service departments are excluded. Once the allocation of the support cost in the operating system is complete the drivers of costs are allocated to the units of services and existing goods.
Budgetary control tool can be suggested to the Commonwealth bank for controlling its overall budget in the operational sector. As stated by Aithal and Kumar (2016, p.200), using budgetary control technique, the future financial needs of the organization can be arranged and estimated as per orderly basis. This tool helps the organization to control financial performance of the business concerns. In order to implement the budgetary control system in the Commonwealth bank following major steps are recommended.
Figure 2: Budgetary control tool
(Source: Uspuriene et al. 2016, p.529)
In order to establish the responsibility of the budgetary committee, the managers must be invited to the meeting. This budget committee consists of senior representatives of production and sales. The budget officer assigned in order to carry out the task is termed as an accountant. The guidelines need to be communicated in which a brief description of the strategic planning and business objectives are mentioned. Through the interactive process, the heads of the departments are asked to draw the planning documents. The draft budget of following years is developed by the departmental section. Once the budget plan is designed the limiting factor has been identified. The key limiting factor existing in the commonwealth bank may be related to the sales, labour, supplier or available materials. It is highly recommended while following this model the cash flow issues need to be clearly examined and the overdrafts need to be managed carefully. Based on the limiting factor the budget needed to be prepared. Market research needs to be done to prepare the sales budget. Following the top down and bottom up approach the draft budget needs to be developed. The budget needs to be placed in front of the budget committee for scrutiny. The master budgets are prepared based on the profit and loss accounts. Using the budget statement the cash flow and balance sheets are prepared for the organization. The budget needs to be communicated to the individual managers, throughout the management layer, and to the respective budget holders. The sales manager in the bank goes through the overall sales budget target and reduces the pricing strategy to sell a higher volume of units. The generated targets are controlled and monitored by the junior managers.
One of the main advantages of budget control techniques is to facilitate the budget throughout the organization. This technique shifts the management attention for the future operations. The external environment trends also forecasted using the technique. This tool measures the budget performance. Personal efforts of the managers are integrated through this tool and also help in achieving common goals.
In the modern era, banking industry produces a wide range of products and services to the market. This, in turn, creates major competition among their competitors. In this regard, the overhead plays the major role. Simple method overhead is generally based on the direct labour. The activities like to set up, material handling is important to take proper decision making. In this regard costing plays significant role. This report concludes that implementation of ABC model brings significant efficiency in the costing model of the organization. Commonwealth Bank has been considered in this report and two of the accounting management tool has been recommended for the bank is ABC model and budgetary control technique. These tools help the organization to enhance the better performance in the operational sector.
Aithal, P.S. and Kumar, P.M., 2016. ABC Model of Research Productivity and Higher Educational Institutional Ranking., pp.125-300
Aithal, P.S. and Kumar, P.M., 2016. ABC Model of Research Productivity and Higher Educational Institutional Ranking., pp.125-300
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