ACTIVITY-BASED COSTING (ABC) MODEL

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Maher (1997) defines ABC model as the costing model that allocates the costs during manufacturing of product to activities that are utilized in making product and the summation of cost of the activities determines the total cost in making the product[1]. ABC model is the accounting method in which the activities that a firm performs are identified and the indirect costs are assigned to the product[2]. The model is best used in recognizing the relationship between the activities, product and indirect cost is assigned according to identified connection. ABC model is popular in manufacturing company because it improves the reliability of cost data which helps in classifying the cost during the production process. Cooper & Kaplan (1998) explained stages in ABC model as:

FEATURES OF ABC MODEL 

The features of ABC model are described below:
  • Total cost in accounting as per model is driven by fixed and variable costs which are important tool to design the appropriate cost system in manufacturing based industry.
  • The differentiation is made between the behavior patterns of cost
  • The behavior pattern of cost is related to volume, diversity, event and time
  • To trace the overhead to product, cost driver is needed to be identified
  • Cost drivers state the pattern of cost behavior

ASSISTANCE OF ABC MODEL IN ACHIEVING THE STRATEGIES 

Traditional approach of management accounting uses mainly one cost driver as direct cost for allocating overhead cost in manufacturing business[1]. Overhead cost is the portion of product cost. The researchers explain that the incorrect information about the product cost may lead to poor decision.  ABC model improves the accountability of accounting information[2]. ABC model fosters the process of costing in three various ways as:
  • It expands the pools of cost to be used in assembling overhead cost. The model polls cost according to activity rather than accumulating all cost in product.
  • It assists in creating the bases for allocation of overhead costs on the basis of activities
  • ABC model amends the types of indirect costs associated with inspections, depreciation and so on.
At the company, the management accounting team can identify the activity centers in supply chain, origination and processing of grains, malt and oils in consultation with the top managers. In these activities, the team can find the overhead cost for all activity. The overhead cost related with supply chain is most important overhead cost of company that can be controlled. The supply chain activity includes of source, handle, storage and transportation of grains. The overhead cost consumption for supply chain activity includes of souring cost, labor cost, equipment related cost, renting fees, parking fees, other transportation cost, storage cost and material handling cost. The labor cost, equipment cost related to transportation is difficult to decide. Fuel cost us also accompanied within supply chain because the company itself transports foods to many countries.
The range of sources and suppliers and cost associated with storage and transportation are major cost drivers associated with supply chain. The distance between storage and destination of supply is possible cost driver because farther the distance, cost associated with supply will be high. Each cost drivers can be evaluated by team based on ABC model and chose appropriate cost driver/drivers based on the principle of ABC model as mentioned in figure1. The cost associated with t
The strategy of the company is to use the competitive advantage of supply chain of edible oil, grain and malt in serving customer throughout the world.  ABC model assists in reducing the cost of manufacturing by identifying the unit cost of product and service for each cost drivers. When the global market is competitive, it will be critical to have focus on customer demand through efficient supply chain. ABC model reduces the cost to attain competitive price.
[1] https://www.marshall.usc.edu/sites/default/files/wtlin/intellcont/10-IJM-Chinese%20Oil%20Company%20ABC-1.pdf
[2] https://executivefinance.nl/wp-content/uploads/2015/02/Implementing_Activity_Based_Costing11.pdf
[1] http://search.ror.unisa.edu.au/media/researcharchive/open/9915952052401831/53111928240001831
[2] https://ac.els-cdn.com/S221201731300114X/1-s2.0-S221201731300114X-main.pdf?_tid=979fe6f9-a309-4b2d-abce-6f78b3ef9b9e&acdnat=1527011302_9e6b65e71c17ef407bddd14ebc709a92

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