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Managerial Accounting 

Introduction to Activity-Based Costing System

The learning objectives acquired from activity based costing system are to analysed in this report. The ABC method of costing seemed interesting as its applications helps in gaining understanding about the cost drives and major activities of the particular organization. In this report, the stability of ABC costing in regard to the two Australian organization will also be discussed. The usefulness of this system of costing in undertaking decisions will also analysed.

The traditional system of costing the products is seemed irrelevant when I came to know about the activity based costing method. It is now largely applied in many organizations to evaluate the cost of different products and services. This method helped me in obtaining effective understanding with regard to the major activities performed in the organization and the cost drivers (Almeida and Cunha 2017). I came to know about the concept of cost accounting. Cost accounting helps in ascertaining the cost of different products that further helps in estimating the selling prices of the products. Through this topic, I was able to categorize different items under A, B and C. The items listed under A category require high level of control, the items in B category require sufficient control and items under C category requires minimum control. This method is regarded as successful for the companies producing different categories of products. I have analysed that ABC costing method is regarded as an efficient tool to control cost of products in comparison to the traditional costing system (Altawati et al. 2018). It is considered essential to differentiate among the patterns of products in accordance with their cost. These behaviours of cost is in relation to diversity, time, events and volumes. The cost of the product can be derived accurately by obtaining understanding about the overheads or the cost drivers. I estimated that this method is helpful in reconciling the cost with other several criteria and has the ability to generate accurate information about the cost.

Initially, I faced difficulty in identifying the major activities and then the overhead allocation rate related to those activities, but after exercising various practical questions, I was able to perform such analysis in context of two Australian companies, Coles Group and Woolworths Group. With context to Coles group, the ABC method of costing can be used for ranking different customers. Under A category, highly valuable customers are listed and are considered to be of utmost importance as they will fetch high contribution margin and valuable amount of revenue. Average valued customers are put under the B category and left over customers under C category. I get to know about the Woolworths operations and analysed that the ABC costing system can be greatly used in this organization for inventory management purposes. The ABC analysis can be successfully applied to the business model of Woolworths and can be separated into price, demand and selling ratio that can be further regarded as A, B and C categories. In category A, the most demanded products are listed, in category B, average demanded products and under C category, lower demanded products are listed. I analysed that the management of Coles Group can use the method of ABC analysis for understanding the mindset of different categories of customers and then can prepare the business model and strategies as per the lifestyle of its customers and on the other hand, Woolworths Group can apply the ABC analysis for the industry optimization and can effectively derive the pricing policies and procedures. ABC costing system helped me in studying the inner most and valuable operations of both the organizations. I gained understanding with regard to the pricing of products after analysing fixed and variable costs associated with the products. The activity based costing system helps the management in generating accurate cost of the product and therefore, will led to the adequate pricing decisions (Foroughi et al. 2017). It helped me in raising the understanding of overheads and cost drivers and clearly visualise the non value adding activities so that the management can undertake suitable measures to eliminate them.

This assignment helped in effective reading of annual reports of the company. I enjoyed reading those reports for different years and helped me in evaluating the changes in their business models and strategies with the passage of time. In the recent stages, I faced difficulty in applying the ABC analysis to both such companies. Annual reports are lengthy and took me time to get the relevant page with regard to costing information. But after thorough devotion, I found all the material that is relevant for the ABC analysis. The study of this system made me realise the drawbacks of traditional system of costing the products and services. Before starting the ABC analysis for the specific company, it must be ensured that some numerical questions must be performed based on ABC costing method. This will help in realising the correct procedure for computing the overhead allocation rate based on major activities carried out by the organization. Accurate costing of product raise the efficiency of pricing policies and procedures and therefore, affect the contribution margin earned by the organization on different products and services.

Conclusion on Activity-Based Costing System

I can conclude that activity based costing system is an efficient method of determining the accurate cost of the products and services offered by the organization. Cost accounting helps in ascertaining the cost of different products that further helps in estimating the selling prices of the products. Products can be categorized under A, B and C. The items listed under A category require high level of control, the items in B category require sufficient control and items under C category requires minimum control. This method is regarded as successful for the companies producing different categories of products. The activity based costing system helps the management in generating accurate cost of the product and therefore, will led to the adequate pricing decisions. It helped me in raising the understanding of overheads and cost drivers and clearly visualise the non value adding activities so that the management can undertake suitable measures to eliminate them.

References for Activity-Based Costing System

Almeida, A. and Cunha, J., 2017. The implementation of an Activity-Based Costing (ABC) system in a manufacturing company. Procedia manufacturing13, pp.932-939.

Foroughi, A., Kocakulah, M., Stott, A. and Manyoky, L., 2017. Activity-based costing: Helping small and medium-sized firms achieve a competitive edge in the global marketplace. Research in Economics and Management2(5), pp.150-171.

Altawati, N.O.M.T., Kim-Soon, N., Ahmad, A.R. and Elmabrok, A.A., 2018. A Review of Traditional Cost System versus Activity Based Costing Approaches. Advanced science letters24(6), pp.4688-4694.

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