HI6006 Competitive Strategy Editing Service
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The report will be prepared in order to develop an understanding of the professional accounting for various users operating in the field of accounting in the current business scenario. The unit will help the users in developing a thorough understanding of the management accounting concepts and the costs issues related to those management accounting concepts in accounting. In this report, an organisation will be chosen considering the current market situation and a brief description of that enterprise will be given. The discussion will be made about the different features and concepts related to Time Driven Activity Based costing adopted in an enterprise. The approach of this cost accounting will be analysed in comparison to other methods of costing and traditional costing systems in management accounting. The various advantages and disadvantages will be described for adopting this type of cost accounting and the significance will be discussed in an organisational context. For the same purpose, the suitability of these methods will be discussed in respect of the organisation chosen in this report.
Visy Industries Australia Pty Ltd
For the purpose of analysing the suitability of Time-Driven Activity-Based Costing in an organisation Visy Industries Australia Pty Ltd has been chosen in the report and the same will be taken for evaluation and analysis purposes. Visy Industries Australia Pty Ltd is a privately owned company which is a packaging and resource recovery company and is engaged in various activities like recycling the corrugated and Kraft papers for the purpose of packaging and building the industries in Australia and globally (Öker, &Ad?güzel, 2016). The company is engaged in manufacturing steel food cans, fiber packaging, cardboard boxes, plastic performs and shelf ready packaging materials in the industry. The company has also been providing and manufacturing the plasterboard liner to gypsum board manufacturers in the country of Australia and other parts of the world covering a large part of northern areas. The company has been developing and distributing systems and technologies and supplying various products marking applications and also engaged in running collection and recycling services in Australia and across the world. There are various decentralised units of this company which is working as associates and subsidiaries in many countries across the world (Laviana, et. al., 2016).
The production process of the company contains a wide variety of operations and requires a different and wide variety of raw materials and ingredients of recycling the finished goods as obtained by the company. Therefore it has been noticed in few recent years that there is a requirement of developing an appropriate costing system in the company which can enable in classifying the costs according to their nature and occurrence (Van, 2013).
Time Driven Activity Based Costing:
The traditional activity-based costing system attempts to examine the various business processes and activities and breaks the same into different discrete components. The aim here is to identify and calculate the basic information points which include the cost of various activities and the concerned business processes, the cost associated with various non-value added activities, different performance measures for business processes and activities, and identifying the major cost drivers in the production process(Öker, &Ad?güzel, 2016).
In the modern business environment and current business scenario, time-driven activity-based costing system has been developed in order to measure the necessary cost to time concept. The major questions that are concerned in TDABC are ‘ how much cost per time unit is required by the company to supply resources for each of the business processes of company' and ‘much time is required for performing the work needed for the product of company and its operations and transactions. The information and segregation about this aspect will be sufficient for the business decision makers to take important decisions. The estimation of two things becomes possible in this type of approach to be followed in costing method of company which involves (Christopher, 2016):
1. The practical and actual capacity of various committed resources in the organisation and their cost associated.
2. The unit time required to perform the transactions in the company.
The revised approach of time driven activity-based costing system enables the managers of the company to estimate the resources in demand for performing the activities and transactions rather than first assigning resource cost to each of the activities and then to related customers and processes. The implementation of this approach in cost accounting also enables in providing more accurate and correct cost driver rates by allowing the unit times to be estimated for various complex and specialized form of transactions in the company(Schutzer, et. al., 2016).
The major features of time driven activity-based costing system of the enterprise are determined and explained appropriately as under:
1. The innovative system of time driven activity-based costing system can be estimated and installed very quickly without any complex issues ascertained in its installation process.
2. The system is flexible in the sense that it is very easy to update the system for reflecting the changes in processes, order variety cost and resources costs of the company.
3. The system can be represented as a data fed form transactional ERP and customer relationship management system of company.
4. The new cost accounting system can be validated easily by direct observation of the models estimate form the unit time (Schutzer, et. al., 2016).
5. The system has enormous capacity to handle and can scale easily in order to handle the millions of transactions happening in a company and it's manufacturing process while still able to process timely and adequately and providing real-time reporting to the responsible managers of company.
6. The system is able to explicitly incorporate resource capacity and also helps in highlighting the unused resource capacity to be made in attention for the management action and responses.
7. The system is able to exploit time equations that incorporate variation in orders and customer behaviour without the need for expanding the model complexity.
8. The model adopted will also help the company in managing the customer relationship with more comprehensive approach as the customers can be classified on the basis of their different propositions and order summary(Laviana, et. al., 2016).
The key algorithms involved in time-driven activity-based costing method is building an appropriate time-based algorithm in one facility will be used as a facility or a template that can be correctly applied and implemented to various others plants and other companies in the concerned industry and processes. The time required and the resources to be implemented in this type of approach will be very less and minimum and it will be easier to maintain the cost structure in relation to the manufacturing process and supply chain management of company.
Time-driven activity-based costing is an advanced form of activity-based costing in which along with determining the cost drivers for different activities the time spent by employees or workers in performing these activities is also allocated to the activities for evaluating the cost of the products manufactured or produced. The traditional costing system which relates to calculating the total cost of production and dividing the total cost by the number of products manufactured to calculate the unit cost of product is different from activity-based costing and time-driven activity-based costing (Meng & Tian, 2013). The differences in these costing systems are explained as follows:
Method of calculating cost – Under the traditional accounting system the cost of products is calculated using the per unit cost calculation method in which the total production expenses are added and the sum is divided by the number of units produced whereas under the activity-based costing system the cost drivers are identified for different production activities and the costs are allocated to each activities using these cost drivers. Under TDABC system apart from allocating costs through cost drivers, the time spent by workers in performing the activities is also allocated.
Basis of cost allocation – In traditional costing system cost is allocated on the basis of number of units products, under ABC system cost is allocated on the basis of cost drivers and under TDABC system cost is allocated on the basis of time spent and cost drivers.
Cost centre - Under ABC and TDABC cost is assigned to activities while under traditional costing cost is assigned to units.
Financial reporting – The reports which are generated by the activity-based costing system and TDABC are not aligned with the reporting requirements under the legal and accounting framework such as Generally Accepted Accounting Principles (GAAP) whereas the reports under the traditional accounting system are prepared in accordance with the accounting policies and principles applicable to the companies using this system.
Use of system – Activity-based costing and TDBAC system is used by the companies which have high overhead costs and expenses related to production since the decision regarding small product cost can create huge consequences for business whereas when overheads are low and decision making regarding the business is not crucial then in such case traditional costing system is used effectively by manufacturing companies.
Decision-making and planning – Traditional costing system are used for external reporting by the companies to provide reports on cost data and financial information to the external users for decision making since it incorporates compliance of accounting laws and principles. However, the ABC system is used for internal decision making by the managers of the company while TDBAC is used by the lower level management of the company for strategic decision making (Schutzer, et.al, 2016).
The company Visy Industries which is engaged in the business including multiple operations and variety of business functions will have to adopt modern accounting system for its business in order to ensure effective decision-making and proper monitoring and improvement in the business performance. The business segments of Visy Industries include recycling, pulp and paper manufacturing, packaging, automation, tech systems and logistics. Therefore, the business of the company involves multiple activities. The cost of all these activities is included in the cost reports of the company in order to determine the selling price of the products to be charged from the clients of the company. Therefore by using the TDABC costing system in which the cost allocation is made on the basis of time spent n each activity the company will be able to make effective pricing decisions for each of its business segments and a number of production activities involved.
The logistics business operations of the company related to effective supply chain system involving procurement of goods from the manufacturers and distributing them to the wholesalers and retailers. Thus by adopting the TDABC system of costing the company will be able to define effective prices of supplies to its clients and therefore the company will be able to survive in the supply chain (Christopher, 2016). Also by using the TDABC system, the company will be able to control and reduce the costs of its products and services which will enable the company to achieve competitive advantage by offering the products and services at lower costs. In this way, the company will be able to retain and attract more customers and clients. Also, the other activities of the business such as packaging and recycling can be ranked by the business on the basis of time spent by the workers on these activities. By defining the ranking of the business activities on the basis of time allocated to each activity the company will be able to make decisions regarding the contribution made by each activity in generating revenues and earning profits for the business. This will help the company in making investment and divestment decisions. Also, this will help the company in deciding about the contracts to be entered with the clients and suppliers. This will enable the clients of the business to identify the services which are offered at the low costs by the company and in this way the clients of the company will be able to avail the services in the most effective manner. Therefore the adoption of TDABC costing system by the company will be helpful for the company in attracting and retaining the clients for long-term (Thomas & Gilbert, 2014). Also, this system will be most suitable for the clients of the company in availing the services and products offered by the company.
The overall report prepared for professional counting concludes that management needs to carefully adopt and implement the innovative way of costing techniques for determining the cost stricter and various elements of cost in the product development of company. The adoption of time driven activity-based costing will be much more effective and will bring more value for the company in current business scenario as there are number of cost classifications and drivers involved in determining the appropriate pricing strategy of company and the same will require adoption of this technique to standardize and equally the amount and level of activities to be performed. There is number of differences noticed in traditional way of cost accounting and adopting this new way of cost for the company and the management needs to identify and select the appropriate costing technique in relation to the current situation and market pressures. The suitability of this thing will depend on number of factors however there will be overall benefit realised for the company as a whole in the industry.
Christopher, M. (2016). Logistics & supply chain management. Pearson UK.
Christopher, M. (2016). Logistics & supply chain management. Pearson UK.
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