Student new and improved version of various cost

Student Name 
: OSAMA AHMED KHAN           

Student ID  
:  VSS30990    

Course ID :  HI5017M – Managerial Accounting

Assignment  : Individual
Assignment

 

 

 

 

 

 

Time-driven activity based costing (TDABC)

 

Contents
Description of firm’s client. 3
Time-Driven Activity Based Costing. 3
Time-Driven Activity
based costing (TDABC) models. 4
Features of Time
Driven Activity Based Costing (TDABC) Model: 4
Difference
of TDABC from ABC and traditional costing systems. 6
Traditional costing
systems. 6
ABC costing. 7
Suitability
of TDABC. 9
References. 11
 

 

Description
of firm’s client

This report reviews various systems of cost accounting and
scrutinizes the fill-in construct known as time-driven activity based costing
(TDABC). As it is the demand of the time to familiarize with the new and
improved version of various cost and management accounting systems and its
suitability in the dynamic business environment. The purpose of this paper is
to communicate the relevancy of the time driven activity based costing to a
specific manufacturing organization. Our selected organization is XYZ chemical
manufacturing company based in Melbourne, Australia. The report also provides a
description of TDABC and its core features. Our report also compares TDABC,
traditional systems of cost accounting and Activity based costing (ABC).
Moreover, it also provides a discussion on whether TDABC is suitable for the
proposed client.

Time-Driven Activity Based Costing

By taking
the demand for clip devouring interviews and employee studies that were
unfastened to mistake and costly to keep Time Driven ABC has made the
traditional ABC much more simple. A research conducted by Kaplan
and Anderson (2013) focuses on developing the Time-driven
activity based costing (TDABC). They had an idea that ABC has some drawbacks,
such as, excessively expensive to construct, couldn’t capture the complexness
of their operations and also extremely long to implement and this eventually
forced many companies to abandoned ABC (Stefea
et al. 2013). In spite of these drawbacks they believe
that by abandoning ABC companies won’t be able to resolve their issues in this
regard reason being through ABC various companies have been able to identify
net income sweetening chances and import cost. Hence, instead of completely abandoning
ABC, they have suggested a revised version of ABC which is known as time-driven
ABC. By providing an apparent, scalable and practical analysis which is uncomplicated
to execute and revise, time driven ABC manages to rectify the drawbacks of the
traditional ABC. Moreover, it also offers directors significant profitableness
and information, economically and swiftly.

Time-Driven Activity based costing
(TDABC) models

There
are various factors which determine the utility and feasibleness of an uncharacteristic
cost system to a director. The reason behind why the first task in TDABC is to
estimate the cost of providing activity is because the bosom of a time-driven
activity based costing system is capacity (Hopper & Bui, 2016).  The purpose is test the intake of capacity which
the activities consumed, carried out by organizations for services, merchandises,
and clients.

The
research of Kaplan (2014) emphasizes on the fact that
when compared with traditional ABC, TDABC is much quicker and uncomplicated to
cipher. Through this the directors can approximate as to how much each merchandise,
dealing or client demands the resources. Even though it’s a preferable
methodological analysis in certain state of affairs and also has a topographic
point in ABC, it still has some limitations. The core principle that underlies
TDABC emphasizes on the fact that most disbursals are not stable. They can be
allocated to time-driven activities that could seem towards disregarding
disbursals that are non-assignable (Drury, 2013). It can also overlook or
ignore the placement of cost to which additional mark-ups can be applied. This
could be evident in instances where very little or possibly no market monetary
value tends to exists.

Features of Time Driven Activity Based Costing (TDABC) Model:

The
core features of TDABC model are as follows:

 

User friendly

It
can be anticipated swiftly and easily. The transactional ERP and CRM systems
can easily and swiftly fed information into it. Moreover, it is simple and
swift to revise for the purpose of reflecting the modifications in the order
assortment and resources costs.

Cost pooling

More cost pools are generated for allocating
the overhead costs to individual units. Organizations can have several costs
pools and drivers instead of having one pool with a single driver. Tracing
overhead costs becomes easier as managers are now very careful about
controlling the activities which generate extra costs. This system helps in
making better decisions. 

Expensive Implementation 

Setting up such a system requires money and
time. As activities are analyzed, they are broken into components. The valuable
resources are used for collecting and measuring data. Using software here can
be expensive too.

Data manipulation

Reports generated through an ABC system may
contain information which may vary from older systems of costing. Some activity
based costs may be irrelevant in the scenarios. Also, ABC system is not in
confirmation with accounting rules and must not be used while reporting
externally. The system may also lead to bad decisions.

 

Difference
of TDABC from ABC and traditional costing systems

Traditional costing systems

It is important to recognize the fact
that the traditional form of costing is of massive significance in a wide
variety of ways. This method has illustrated its expediency for successful
management of the business and accounting operations of associated
organizations. When compared with TDABC, the biggest advantage of traditional
costing is that it can help in maintaining the integration with the most common
accounting principles. The system of traditional costing is highly compatible
for organizations for matching with old principles of cost accounting
practices. According to the research of Özyürek and
Y?lmaz (2015), the method of traditional
costing allows an organization for accurately calculating the projected cost of
the production for a specific unit of each product. This method can help in
providing significant insight for estimating the cost of other factors that can
be used for the process of manufacturing and production process (Cuganesan et al. 2012). The traditional method of costing can be highly
beneficial when units of production have been effectively using the associated
cost of labor.

If process of manufacturing or production
comprises of cost of labor, then companies can successfully use conventional
costing system for calculating employee cost. Moreover, traditional costing methods
are beneficial for organizations that focus on using cost of manufacturing as
fixed cost (Mahal and Hossain, 2015).  This can help in providing massive benefit if
direct cost tends to be high and is associated directly with overhead expenses
such as unit and material cost. When compared with TDABC, conventional system
of costing can be highly effective where line of production is not complicated and
an organization deals with a specific type of product.

Another significant advantage of
traditional accounting when compared with TDABC is its simplicity. Traditional
accounting makes it simpler for calculating overhead expenses and doesn’t require
expertise level (Özkan and Karaibrahimo?lu, 2013).  This essential trait associated with
traditional costing has made it highly popular among manufacturing companies. It is certainly easier to understand the associated
applications of this particular principle of accounting (Drury, 2013).  Through
the help of traditional systems of costing, it is relatively easier for an
organization to calculate the direct cost that had incurred during the manufacturing
or production of a product.

ABC costing

The
concept of ABC has helped a number of companies to successfully achieve ideal
cost-profit relationship by highlighting pricing strategies for unprofitable
customer relationships, business process improvements, cost effective designs,
and ideal product variety mix. This concept can be further simplified through
an approach called the time driven ABC, which has helped more than a hundred of
our clients achieve higher profits (Hall & McPeak,
2011). This new approach gives control to the
managers, who directly estimate the requirements of resources for transactions,
products, or customers equally as compared to conventional approaches where
resources are distributed to activities, products, and customer in that order
respectively.

Within
the aforementioned approach, two parameters are needed to be estimated: cost
per time unit of supplying resource capacity and the unit times of consumption
of resource capacity by products services, and customers (Nawaz, 2013).
This allows more accurate cost-driver rates as it incorporates unit times to be
estimated no matter how complex or specialised a transaction.

One specific
feature of the new ABC model is the easy way it can be updated to incorporate
changes of the operating conditions. Managers do not have to conduct interviews
of personnel to add more activities into a specific department or region. They
can simple estimate unit time required for the new activity (Hopper & Bui, 2016).  In the same way, to reflect improvements in a
business process, managers simply need to recalculate the unit time estimates.

Managers can also
change cost-driver rates to incorporate changes due to:

Change in cost of resources (resulting in change in
cost per time unit of supply capacity)Change in rate of efficiency due to quality programs,
continuous improvement efforts, reengineering, or new technology

According to the research of Fleisch & Tellkamp (2005), updating a costing
model on the basis of events and real life changes instead of planned calendar
changes allow a more realistic reflection of current working and cost
conditions. The model can be updated anytime the analyst becomes aware of
changes or shifts in costs or capacity of resources or change in the estimated
requirement of resources or a permanent shift in efficiency. The research of Parker (2012) illustrates the fact that newly developed paradigms in cost accounting methodological analysis
frequently make it intricate to which system provides best information for
determination devising. Consequently, the cost accounting system don’t rank
normally high in organizational hierarchies, although the information generated
through this system contribute a lot in the decision making procedure.

According
to Otley & Emmanuel (2013), an
important part of the managerial accounting literature compares the benefits
and significance of ABC system over the traditional cost accounting systems. On
the whole, the ABC system can manifest considerable deformation in merchandise
costing as compared to the traditional costing systems that are less expensive
to implement, and directors, advisors and faculty members should predominantly
acknowledge the ascendency of ABC over traditional one.

The
standard process for ascertaining a simple ABC theoretical account commence
with sorting of all the resources (Christ
& Burritt, 2015).  Once the
major organizational activities are identified, then measures have been taken
to make cost pools or cost centers and seeking of cost drivers for each major
activity. Further, base rate is developed for each cost pool according to the
activity’s cost driver. Finally the operating expense cost per unit of end
product is computed. Notably, the clip and cost demands of making and keeping
an ABC theoretical account is a major barrier to widespread acceptance in most
companies (Burns & Scapens, 2000).
Systems are place in topographic point can be updated consistently due to the
cost of viewing and resurveying and inaccurate estimation of theoretical
account of procedure merchandise. In general, conventional ABC theoretical
account frequently fails to grasp the complexity of existent operations.

Suitability
of TDABC

It is evident that traditional costing as well
as activity based costing has empowered organizational managers for discerning
the fact that not all revenue is worthwhile and not all customers are
lucrative. However, the difficulties of implementing and maintaining
traditional ABC system have prevented them from being adopted on any
significant scale. There is no doubt in the fact TDABC has overcome these
difficulties by offering a transparent, scalable methodology that would be easy
to implement and update. Moreover, it draws an existing database for
incorporating specific features for particular orders, processes, suppliers and
customers. On the whole, Activity based costing is no longer a complex,
expensive financial system to implement. Moreover, TDABC allows managers to
acquire business information in a cheap and cost efficient manner

 

References

Burns,
J., & Scapens, R. W. (2000). Conceptualizing management accounting change:
an institutional framework. Management
accounting research, 11(1),
3-25.

Christ, K.
L., & Burritt, R. L. (2015). Material flow cost accounting: a review and
agenda for future research. Journal
of Cleaner Production, 108
(1), 1378-1389.

Cuganesan,
S., Dunford, R., & Palmer, I. (2012). Strategic management accounting and
strategy practices within a public sector agency.Management Accounting
Research, 23(4),
245-260.

Drury, C.
M. (2013). Management and cost
accounting. Springer.

Fleisch, E.,
&Tellkamp, C. (2005) Inventory inaccuracy and supply chain performance: a
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production economics, 95(3), 373-385.

Hall,
O. P., & McPeak, C. J. (2011). Are SMEs ready for ABC? Journal of Accounting and Finance,. 11(4), pp 11-22

Hopper, T.,
& Bui, B. (2016). Has management accounting research been critical?. Management Accounting Research, 31, 10-30.

Kaplan,
R. and Anderson, S.R. (2013). Time-driven activity-based costing: a simpler and more powerful path to higher
profits. Harvard business press.

Kaplan,
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Mahal,
I. and Hossain, A. (2015). „Activity-Based Costing (ABC)–An Effective Tool for
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Nawaz, M.
(2013). An Insight Into the Two Costing Technique: Absorption Costing and Marginal
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in Accounting, Negotiation, and Distribution, 4(1), 48-61.

Otley, D.,
& Emmanuel, K. M. C. (2013). Readings
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Özkan,
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