The main purpose of this report is to examine the application of Activity-Based costing in different firms.

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In managing an enterprise, managers require accurate information regarding profitability and other operational cost structures to assist them in decision making. To provide up-to-date information, a cost calculation system should be used to show how the organization has allocated its available resources to supply its services (Mortaji, Bagherpour&Mazdeh, 2013, p. 65). Some costing approaches include Activity-Based Costing, Standard Costing and Budgeting. Standard costing is a system that involves substitution of expected costs for actual costs in the records and then periodically identifying and recording any variances between the actual and expected costs (Sedevich, 2012, p. 339). Furthermore, in budgeting, a company develops a financial plan which identifies its expenses for a specific duration. Some organizations also prefer assigning costs to different tasks, acquisitions or services. Such a method is called Activity-Based Costing. In this report, two journal articles on Activity-Based Costing have been analyzed. The first analysis has been derived from a journal article written by Basuki and Riediansyafon the application of Time-driven ABC in the hospitality sector, while the next case study has been extracted from a journal article written by Askarany and Franklin-Smith on cost benefit analysis of compost waste management using a Time-driven ABC
Activity-based Costing
ABC (Activity-based costing) is an approach used to assign costs to products, tasks, services, acquisitions or projects based on differentactivities conducted by an organizations and resources consumed by each activity. The method is different from traditional volume-based systems which assign costs using arbitrary proportions for indirect costs (Lindemann et al., 2012, p. 8). Therefore, ABC and traditional cost accounting can give different estimates of gross margins and cost of goods sold for individual products. Uncertain and contradicting cost estimates can be problematic especially when the management is required to differentiate profitable products from those that are selling at a loss. Cost accountants understand that traditional cost accounting may distort or hide information on product and service costs- especially in cases where the actual resource usage is misinterpreted by the local cost allocation procedures. As a consequence, the move to adopt ABC by companies is usually caused by the desire to determine the true costs of products and services in a more accurate way.
Time-Driven ABC
ABC has become dominant in management circles and business writing. Organizations implement ABC to improve production efficiency, reveal unnecessary costs that should be eliminated, identify unprofitable products and adopt an appropriate product pricing technique (Adioti&Valverde, 2013, p. 109). However, computing baselines for activities, formulating the model and retesting the model after it is implemented is costly and time-consuming. Consequently. Kaplan and Anderson made improvements in the process by developing the Time-driven ABC. Time-driven Activity-Based costing reduces the amount of data required and only needs two variables to compute- the unit time periods for conducting transactional activities and the practical volume of resources committed by the firm.
TDABC typically computes costs to a relatively granular level. With this system, the total time is computed based on a time equation. The time equation enables managers to use multiple drivers, as opposed to the traditional ABC that was driver-based (Hoozée, 2013, p. 126). Managers are therefore, able to flexibly capture more variability in the behavior of a cost object. For example, if a specific department could use a time-driven assignment approach that is dependent on time units to process different invoices, meaning that time differs depending on whether the invoices where processed by phone, fax or Web, these time-based variables can be captured using a formula based on the duration of time taken to process each invoice. The actual amount of money available can then be charged to each invoice depending on their processing time and the total time taken to process all the invoices.
The Purpose of the Two Studies and Research Questions Explored
To gain a better understanding of TDABC, two case studies from two peer-reviewed journal articles have been used. The first case study has been taken from a journal article written by Basuki and Riediansyaf (2014, p. 27), while the next case study has been extracted from a journal article written by Askarany and Franklin-Smith (2014, 59). In the first article, Basuki and Riediansyaf (2014, p. 28) sought to analyze the application of TDABC costing in the Hospitality industry. In the second article, Askarany and Franklin-Smith (2014, p. 60), aimed at conducting a cost-benefit analysis of organic waste composting systems through the lens of TDABC. The researchers have performed an empirical study, by working with Envirofert LTD's management to establish a costing approach that could assist them in identifying their product costs, while tracking the link between the cost hierarchies, resource pools and their cost objectives.
Basuki and Riediansyaf (2014, p. 30) have provided an explanatory case study of Hotel GrahaCakra, found in Indonesia. The study aimed at answering two research questions- how can TDABC be applied in the hospitality industry? Is TDABC a more efficient approach to calculating costs in the hospitality industry than the simple volume-based system? Situated in a luxurious residential area, Hotel GrahaCakra is one of the leading 4-star hotels found in Malang, Indonesia. The hotel has been using a very simple target pricing approach to determine their room cost. Therefore, to evaluate the most efficient costing method, the study has used a Time-driven ABC to recalculate the direct and indirect costs incurred by the firm and then compared the values with those that were obtained by the hotel using their traditional method in 2011.
The second article has evaluated the application of TDABC in the agricultural sector. Specifically, the researchers have used Envirofert LTD as a case study firm. Envirofert is a firm that controls one of the largest composting facilities in New Zealand (Askarany& Franklin-Smith, 2014, p. 62). It specializes in superior compost combinations for farmers, horticultural growers and landscape professionals operating in the upper and central North Island. The emergence of environmental sustainability concepts in the past decades has highlighted the role of cost accounting in evaluating the economic viabilities of processes like waste management. As such the study sought to answer two research questions using TDABC- what are the costs and benefits of forced aerated and turned pile systems as organic waste composting systems? Which is the most cost-effective approach for composting organic wastes between the forced aerated and turned pile approaches? By answering these questions, the study aimed at recommending the most sustainable system to be adopted by all composting firms in New Zealand.
Similarities in the Findings of the Two Studies.
The findings from the two journal articles are similar in different ways. First, both articles outline some practical solutions to real world problems using TDABC approach. In the first case study, the researchers have proposed that inaccuracies experienced in cost allocation and cost determination by different companies in the service industry can be avoided when companies adopt the Time-driven-ABC in calculating their costs (Basuki&Riediansyaf, 2014, p. 32). In the second case study, the researchers have successfully used the Time-driven ABC to uncover that the forced-aerated composting system is more cost-effective as compared to the turned pile approach. As a result, they have recommended that farmers and other companies can reduce operational costs and ensure environmental sustainability by adopting the forced-aerated system to prepare fertilizer from organic wastes.
Both studies have applied the Time-driven ABC method to address the shortcomings of ABC. A primary limitation of ABC explored by the two journals is the fact that it requires resource consuming and complex formalities in gathering data. For this reason, many firms that adopt ABC with great expectations may suddenly abandon it for the traditional method. Another weakness explained in the two journals is that ABC managers may face tough challenges in attempting to alter the structure of their organizations to provide an accommodative environment for ABC to function (Basuki&Riediansyaf, 2014, p. 38). An enabling environment where ABC can thrive without challenges needs to be developed before the system is adopted. It is also difficult to assign costs that lack solid drivers using the ABC method. After examining the weaknesses of ABC, the two journals have unanimously recommended that firms should adopt the Time-driven ABC to accurately calculate both direct and indirect costs.
The two journals have analyzed some benefits that companies can enjoy by adopting TDABC method. First, it is easier and faster to establish an accurate TDABC mode. Second, the model integrates well with existing information from ERP and CRM (customer relationship management systems), thus making it less employee intensive and more dynamic (Askarany& Franklin-Smith, 2014, p. 65). Third, the model can be run monthly to incorporate the economics of most current operations. Forth, it predicts resource demands, permitting firms to budget for resource capacities based on the predicted order complexities and quantity. Finally, the method provides visibility to capacity utilization and process efficiencies. Based on these benefits, the researcher in the two journals have recommended that TDABC is more efficient that ABC.
It is also worth noting that both studies were subject to some limitations. In the first journal, the researchers only discussed the room cost in the Hotel GrahaCakra, and ignored other cost centers (Basuki&Riediansyaf, 2014, p. 40). Besides, the research limited itself to the hotel sector, making it difficult to gauge the application of TDABC in other sectors. In the second article, the study was limited to the agricultural sector in New Zealand, and the researchers acknowledged that the forced-aerated system should be applied by other organizations with caution. In both cases, the researchers called for further studies on the application of TDABCin other sectors, given that it is a relatively new concept that has not been explored by many scholars.
Differences in the Findings of the Two Studies
The two studies were based on different sectors. The first study was based in the hospitality industry, while the second study was based on the agricultural sector. Although the two studies used TDABC in doing their analysis, they were conducted for different reasons. The first study was conducted to prove the efficiency of TDABC method in calculating hotel room costs in the service sector (Basuki&Riediansyaf, 2014, p. 42). Conversely, the second study was conducted to suggest the best organic waste composting system to be adopted by agricultural companies. Notably, the first study sampled and based its analysis on one department, which was the hotel room, as shown in Figure I, while the second study concentrated on all the cost centers and used multiple cost drivers to conduct its analysis as shown in FigureII.
Room Type IDR (Room Cost)
(Company Original calculation Method) Time-driven ABC Method
Reservation Go Show
Deluxe 590302 430141 430664.77
Royal Suite 1176166 497976.8 498762.44
Superior 443836 405764.65 406550.28
Junior Suite 736768 439957.87 440743.5
Figure I: Adopted from Basuki and Riediansyal (2014, p. 40)
In the above table only the hotel room been used. The researchers explained that they based their study on the hotel room because it contributed more than 80 percent of the total revenues generated by the hotel. Therefore, they considered it as a major revenue generator of the firm.



Figure II: Adopted from Askarany and Franklin-Smith (2014. P. 66)
In the above diagram, it can be noted that the researchers conducted an evaluation of different cost centers and not a single cost center like in the first case study. The costs were analyzed in different levels like batch, facility and unit levels. Also, the costs incurred by the firm related to labor, fuels and machines, compost testing, depreciation of machinery, maintenance, security costs and other administrative overheads.
Another difference between the two studies is that the first study was point based, while the second study took into consideration many places where wastes were being generated. Ideally, the first study was conducted at a single point in the hotel room, and all the costs analyzed related to hotel room expenses (Basuki&Riediansyaf, 2014, p. 44). Also, the first study did not consider some environmental factors that could affect the production costs, while the second study considered some economic and social factors in formulating the final decision concerning the implementation of the composting system. The second study considered social and economic conditions, because, it needed to analyze the economic and commercial benefits of the two composting systems and then recommend the most appropriate system, whereas the first study only aimed at recommending the use of TDABC to calculate costs in the service sector.
The last difference is that the first article relates to efficient cost calculation in cost accounting using TDABC, while the second article considers both cost efficiency and sustainability in cost accounting. The first article has compared the results of the traditional costing system used by Hotel GrahaCakra, with the costs calculated using TDABC to find the most appropriate and cost effective method. Conversely, although the second article used TDABC to calculate the costs,its main aim was to determine the costs and benefits of the two composting approaches- forced aerated and turned pile and then recommend the most cost effective approach to be adopted by Envirofert (Askarany& Franklin-Smith, 2014, p. 68). The researchers, therefore, used TDABC to identify the costs associated with the two approaches basing on the fact that TDABC is more efficient and easy to use as compared to other systems.
Lessons learned from the two studies that may be useful to Management Accountants in Australian Companies.
Cost accountants occupy primary positions in different organizations because they are responsible for the overall cost determination and management. Cost accountants are responsible for maintaining cost information on products produced by the company, providing management operational controls and cost reporting and working on cost-related projects just to name a few (Mortaji,Bagherpour&Mazdeh, 2013, p. 70). The two journal articles therefore, provide some lessons which may be utilized by cost accountants, especially in Australia to ensure effective cost calculation and management as discussed below.
Lessons from the First case Study
The case study has provided an analysis of limitations of ABC. This should sensitize cost accountants in organizations still using ABC and other conventional methods to upgrade to a Time-based ABC to control costs better. Adopting a Time-driven ABC will enable cost accountants to spend less time in interviewing employees and assigning cost to different activities before allocating them to cost objects as explained in the article (Basuki&Riediansyaf, 2014, p. 50). In the simple ABC, the cost of resources are allocated to activities and then assigned to different object costs. However, in the Time-based ABC, system, resource costs are directly allocated to cost objects that only need two sets of estimates- the capacity consumption rate and the capacity cost rate.
The second lesson from the case study is that TDABC enables companies to identify and eliminate some hidden costs, like those incurred in non-productive time. The study has also suggested some important practices that should be adopted by cost accountants to ensure efficient cost calculation and control(Basuki&Riediansyaf, 2014, p. 52). Such practices include, regular evaluation of activities performed by each department to allow for continuous improvements, assuming control over activities that consume resources to enhance cost-efficiency and calculating the initial costs based on ‘management judgment' and then making adjustments based on different prices to enable the firm to operate profitably. These suggestions are essential to cost accountants in controlling costs and ensuring that some instances like over-costing and under-costing are avoided.
Lessons from the Second Case Study
A primary lesson from this case study is that TDABC can be used to assess the economic viabilities of different projects. By conducting a cost benefit analysis, cost accountants are able to identify the most cost effective projects to adopt (Askarany,& Franklin-Smith, 2014, p. 70). Specifically, the researchers in the article have used a Time-based ABC to analyze the economic viability of two composting systems. Sustainability is a major issue in different countries including Australia. Therefore, managers tend to concentrate on designing sustainable operational and production strategies. However, some managers may shy from adopting some strategies because of uncertainties with regard to costs. At this point cost accountants may determine the costs associated with different projects using TDABC and then propose the most cost effective project for the firm to adopt.
Another lesson from this case study is that TDABC can be used by cost accountants to derive two types of information for decision making purposes. First, TDABC can demonstrate the correlation between resource pools and cost hierarchies (Askarany, & Franklin-Smith, 2014, p. 71). Cost hierarchies entail a collection of individual costs typically grouped according to service centers or departments. Accountants tend to make cost allocations from a cost pool. For instance, maintenance costs may be accumulated in a cost pool and then assigned to the relevant departments that make use of its services. Therefore, the knowledge of the link between cost and resource pools may enable cost accountants to effectively accumulate and charge costs to the relevant cost centers. The study has also proved that TDABC can identify the cost of objects but not accurately. Therefore, it can be used by cost accountants to get the cost estimates of different objects.
In summary, this report has examined two journal articles on Activity Based Costing approach. In the two articles, the authors have expressed their views concerning the weaknesses of ABC. Some limitations of ABC proposed in the first article are that a lot of time is wasted in interviewing and surveying employees, data from the model are biased and difficult to verify, it is expensive to store, process and report cost information and that the model cannot incorporate changing circumstances. The second article has also acknowledged that TDABC is an approach that was developed to address the weaknesses of ABC. Moreover, in the first article, the researchers have calculated the hotel room costs using TDABC and then compared results with the costs calculated by the company using the simple conventional approach. After conducting the comparison, the researchers have recommended that TDABC should be adopted by the firm because it is more accurate compared to the simple traditional method. Finally, in the second article, the researchers have used TDABC to calculate the costs associated with two composting systems- forced aerated and turned pile. They have thus recommended that Envirofert should adopt the forced aerated method because it is more cost-effective as compared to the turned pile method. In both case studies, the researchers have recommended that TDABC should be used instead of ABC in calculating costs because it is more accurate and easy to use.


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