Management Accounting

 Executive Summary

The following research report takes into account two different research papers that give insights into how the activity-based costing method of accounting has been helpful in the long term, when the competition has increased greatly and that not all strategies have been as effective. We look at how both research papers agree at some points and how they give seemingly contrasting results and implications. Having looked at other literature reviews, we are also in a better position to take a stand when it comes to choosing if the given approach is more effective over the others. In the traditional system, we have witnessed the basic costs being allotted to the product or service which would be apparent to have been linked, but there is no allocation as per their activities. More such insights are analyzed in further discussion.

 overview of the report

The relevance of the suitable costing method that is utilized for accounting purposes is one of the significant ways through which an organization can look at bettering their performances. An incorrect or inefficient methodology might lead to severe losses, as it may not be able to reflect the true standing of the firm’s position. By way of this research report, we are looking at two research papers that are based on the activity-based costing method, such that we are in better position to see how this method has been of utility in different fields. First, we look at the implications on the agriculture industry and then go into more specific industry which is that of Hotel. Overall despite of many industries facing these challenges, healthcare field specifically comes under the radar because of many obvious reasons. These being: each individual client or subject may not be treated or entertained by a single cost center individually or on its own. There is an involvement a whole number of people which are each a part of different teams, which together are in a position to grant the buyer a better deal and product. 

Introduction of the two Research papers 

1.) First research paper takes into account a casino production bakery unit that is one of the 5 support kitchens in the casino. Here they analyze whether the ABC method can be utilized to eliminate the monthly allocations for all production kitchens. The main activity areas for the bakery include the mixing, shaping and baking kitchen, the packaging area, the delivery process, and the office administration. The purpose of this research is to examine the ABC method as a feasible and appropriate tool for the casino and hotel industry to apply to support kitchens in order to remove the monthly allocation of overhead based on changing costs. The first step was to gather the financial documents from the bakery and study the same for the period. The second step was to examine the bakery using established CM/ME. ME is used to examining which menu items need to be re-positioned, re-priced, eliminated or re-worked to increase profitability. The third step was adapting the ABC model for the bakery. The steps included identifying all activities, analyzing each activity for a value process, categorizing similar activities, and creating an activity dictionary. [10] Garrison and Noreen (1997) also suggest that all activities should be detailed in a flow chart and all steps should be labeled as value-added and non-value added. Value-added activities involve the actual processing of goods, while non-value-added activities consume resources without adding value to the product. The fourth step involved decomposing the general ledger into activities center and major cost pools.The bakery cost pools were labor and facility-sustaining. finally, after that, this organization was changed into a bill of activities for the top 20 production line items and included all the costs associated with the items. An ABC ME analysis was performed and included the popularity and profitability of each item. Moreover, the ABC analysis resulted in six items that were not profitable. Every time the bakery makes these items, it is losing money. Management needs to examine these items to increase prices or rework the recipe to reduce the ABC cost. The study showed that half of the items are neither popular nor profitable. These items need to be re-examined. Some of these items may need to be eliminated or prices may need to be adjusted to increase profitability, and some items need to be promoted to increase popularity.

2.) In order to observe how this works differently for the agriculture industry we have taken up a research paper that looks at the importance of the accounting methods especially the relevance of activity-based accounting for the increasingly developing and growing agriculture industry. This research paper presents a case study on the development of a costing Activity-Based Costing (ABC)-based costing model in a family-operated Australian farm. aside from technical factors, the application of the ABC model in farms is also determined by the degree of communication between developers of the casting models and operators of farms.. The innate divergence between accounting and agriculture professions exaggerated the gap in communication between accountants and managers.  The objectives of the study are to develop an understanding of how the ABC model can be put in farms and to examine issues related to the application of the ABC model in farms. An activity examination was guided to identify the activity pools for the costing model. later, recognize the activity pools, the types of resources consumed by each activity pool and drivers for the resources were identified. Data of resource costs and resource drivers were then used to assign resource costs to activity pools. Activity costs were later assigned to cost objects based on their use of activity drivers. In any particular financial period, a number of uncontrollable factors such as quality of seed, weather conditions, and timely provision of working capital could affect the quality and quantity of unharvested agricultural products from both current and previous financial periods. As such, production volume was examined as unseemly for the allocation of agricultural product costs.

Differences and Similarities

For farms, a major accounting challenge is the cost of agricultural products. Similar to manufacturing organizations, farms typically have diverse ranges of products (Rosset, 1999). Due to advances in technologies for agricultural production, many farms in developed countries have simultaneously increased the use of machinery and reduced the use of labor in late 20th century. With a diverse range of products and increasing weighting of overhead costs, overhead cost allocation becomes an important issue for the cost of agricultural products. However, the unique nature of agricultural production increases the difficulty in the allocation of overhead costs to agricultural products. The production of agricultural products often spins across multiple financial periods. Additionally, some agricultural products may remain unharvested after they mature. Attributing costs experienced in a particular financial period to agricultural products is so difficult.

Basic ABC methodology, “defining the activities that support output, defining the links between activities and outputs, [and] developing the cost of activities” ([29] Rotch, 2000, p. 61), adjusted to fit the foodservice industry, provides restaurants with the same benefits that have been achieved by manufacturing. The benefits were more accurate costs, because the overhead is traced to individual activities, and a better understanding of the strategic options available when designing products and processes (Rotch, 2000)

The features of the ABC model put it in a better position to cope with issues in the costing of agricultural or bakery products. Production is characterized by a large proportion of overhead costs, time lags between incurrence of costs and harvest of products as well as significant variations in resource consumption under different operating environments. The two-stage allocation process of the ABC model enables farms and bakeries to avoid forced allocation of all overhead costs to products and the ability to use non-volume driven activity drivers enables the organization to select cost drivers that better reflect the resource consumption patterns.

Another key difference can be attributed to the importance on the physical presence of the location, ambiance place, and the layout fort the customer in the case of the agriculture sector, which is not the case for the casino. he site is selected for three reasons. First, the site exhibited characteristics of typical farms in Australia. It was owned by the same family for a substantial period, relatively small in size and had few permanent employees. Second, the selected site had a strong stimulus towards the implementation of the ABC model as the owner was aware of the lack of relevant cost information for decision making. Third, the research site was able to supply quantitative information that allowed the implementation of the ABC model. On the other hand, Buffets, while popular in Las Vegas, have a notorious reputation among operators as a necessary evil. The casino industry believes a casino will not be profitable without a buffet, even though the buffet, generally, does not show a profit. 

Some similarities are in contrast to these differences, but they are also on the basis of the costs, costs like that of people or labor finds the same significance for both. In case of Restaurant sectors, the bakery is very labor intensive, and restricted by a collective bargaining agreement affecting wage and benefit costs while allowing only narrow schedule flexibility. Management has a limited ability to impact this cost pool. The only avenue available is to limit overtime and to lessen the use of part-time workers. The same applies to farmers but they are trained more on the mechanical skills, as due to advances in technologies for agricultural production, many farms in developed countries have simultaneously increased the use of machinery and reduced the use of labor in late 20th century

The research paper takes backing of its analysis thereby applying an example of an insurance company and drives us through its complete value chain. As expected, there are conjectural examples being accepted which gives away the Genuity of the research and for experimental researches, although we say physical and authentic evidence are a must but also for qualitative researches we might not have support by way numerical figures, yet we prefer having living and real-life example in place of taking hypothetical example as it spoils the purpose of comparing one result from the other to draw our inferences. So despite of having compared the hypothetical example that take into its purview cost pools and the associated activity drivers, we choose to look at costs that are compared while determining the cost objects.

Research Outcomes

1. The ABC analysis revealed that some restaurants were being allocated considerably more of the bakery’s overhead than they were utilizing. A process value analysis of the bakery revealed that 66.7 percent of the activities performed at the bakery did not add value for the customer. These included the administration processes, receiving and storing goods and moving the product. It was determined that 33.3 percent of activities added value, including all actions needed to make, package and deliver the bread. In contrast to the manufacturing industry, the bakery analyzed in this study offers a chance of improvement at all levels of activities, because manual labor represents a crucial part of the production processes. Furthermore, technological advances that have changed production processes dramatically in the manufacturing environment have not had the same impact on bakeries. 
2. Second, this study is a modification of the ways traditional ABC design suggests to identify activities and to establish activity centers. This study confirmed suggestions made by the ABC literature by some authors (Bert and Koch, 1995) that it may be possible to apply ABC concepts to the hospitality industry by combining traditional methods with the ABC concept.
3. The purpose of this study was to determine if the ABC method can be used to eliminate allocation from support departments, which was successfully accomplished. The application of ABC in this study also resulted in reliable per unit cost information, therefore, eliminated purchase decisions based on false cost knowledge and allowing managers to obtain products that contribute to their departments’ profitability. 
4. Based on a triangulation of multiple sources gathered from the research site, it is found that the successful implementation of the ABC model is influenced by various technical factors. he studies present a case study on the implementation of the ABC model in an Australian family-owned farm.
5. Two limitations of the study are acknowledged. First, quantities for a number of activities based are based the owner’s estimates rather than records in the accounting system. Unlike large organizations with established information systems, S Ltd does not have resources to deploy those sophisticated management decisions making tools.
6. Second, the study is unable to demonstrate the impacts of ABC implication on future performance of S Ltd as the model is abandoned after the completion of the project.

One limitation discovered with the process is that if the ABC costs are used to charge each outlet, the cost of goods sold increasedAnother limitation of this study is that only the top 20 items were analyzed, and that the results of the study are not generalizable to support kitchens of other hospitality firms. However, the study created a model that can be used in similar settings if organization-specific modifications are applied.

Looking at advantages, one should also understand that the magnitude if cons will also be as long as both improvements and uncertainties are known to go hand in hand. If one wants to check how and what challenges an approach so widely accepted can bring then the basic question of implementing will project that as the activities for services are highly connected giving a rough estimate for different activities would point out to the need of an experienced professional who not only knows the business in and out but also understands the concepts of finance and accounting to a very deep extent such that they can provide guidance and not get carried away by inaccuracies because of the unspecialized group of professionals.

Conclusion

Having paralleled the two industries to understand how they have been implementing the activity-based costing for their accounting methods and what trials that had brought along, we are in a decent position to understand how effective it has been. Despite facing some flaks, firms in both the industries and sectors irrespective of their operational magnitude, and technological competence they have made noteworthy progress and show commendable improvement in their cost saving, revenue optimization and resource allocation such that the operations are proficient and they make better profits by decreasing any wastages that they might have endured, before having such direct access to the corresponding costs, which is all thanks to the analysis done for better cost allocations, relevant to each specific activity. We see that hotel and agriculture sectors are two spokes of the same wheel, but they somewhere fall at the opposite ends. Each represent a substantial share of the bigger pie and they have been able to independently utilize this accounting method and have significantly improved their performance since the departure of the outdated setups that were previously used for accounting. Regardless of the sector we can say that ABC has seen massive acceptance and over the time it has seen many modifications as well like for example that of time base activity costing, and organizational specific changes, which are necessarily communicated to the investors by way of public announcements if it is publically listed.