H15017 MANAGERIAL

ACCOUNTING
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Contents
Executive summary:....................................................................................................................................3
Introduction:...............................................................................................................................................3
ACTIVITY BASED COSTING (ABC) model and its Features:...........................................................................3
COMMON WEALTH BANK and ACTIVITY BASED COSTING:..........................................................................5
Recommendation:.......................................................................................................................................6
Suitable accounting system for Bank:..........................................................................................................7
Conclusion:..................................................................................................................................................7
Works Cited.................................................................................................................................................8
Executive summary:
Activity Based costing is a accounting tool that companies used to identify the activities and the total
cost that is attributable to a product. In this report the implementation of ABC in CommonWealth Bank
and the main feature of the ABC are presented. This report will also help in analysing the difference
between the accounting the traditional accounting method and the ABC. ABC method improves the
company understanding of its activities and help is achieving the company goals. ABC is a simple method
and it is easy to understand.

Introduction:
ABC is accounting methodology that assists the company in identifying activities that are attributable to
product and all indirect costs which are increasing the cost of the product. ABC costing is easy method
and can be useful tool for the company. The traditional methods of allocating cost are not accurate as
ABC because it assigns each activity a specific cost which is attributable to the product. It also includes
the comparison between the ABC and the traditional costing method.

In this report the core factors of the ABC that benefits the Commonwealth Bank are analysed. It also
includes the company’s objectives and mission aligned with the ABC and impact on the company
performance.

ACTIVITY BASED COSTING (ABC) model and its Features:

The method of identification that is performed by the company and the assigning these activities to the
product is called Activity Based Costing. To produce a product there are specific activities that help the
company in allocating these cost to the product. By using Activity Based Costing it is easy for the
company to identify relationship between the products, the cost and the activities that are performed.
By using this relationship between product, cost and the activity it assigns the indirect cost by using the
activity to product that present meaning full results as compared to traditional method.

Activity Based Costing is used in manufacturing industry. The reason for this is that ABC increase the
reliability of the cost data. This means product represent true costs which are incurred during the
completion of the product. The main purpose of the activity based costing is to assigning the product
overheads in more logical manners. This is not shown in then traditional approach.

There are some costs where we cannot assign ABC method. These include management and the office
staff salaries which are difficult to assign to the product that has been produced. This is the reason ABC
system has importance in the manufacturing industry as compare to other industries.

ABC model and its features:

The main features of the ABC are as follows:

 1) in ABC system the cost is divided in to two portions. This allows the quality information
of the cost. It divides the cost in fixed cost and the variable cost. This is necessary
because it provides the quality information and also provides the accurate accounting
system in manufacturing concern.
2) ABC system divide the cost in to two types, this makes the proper calculation of the
cost. And it help in identifying the direct and indirect cost related to the product.
3) The behavior of the cost is related to the following things:
 Volume related
 Diversity related
 Event related
 Time related.

This means that the cost to the product is related to the volume of the product, the
diversification of the product and the cost is event related in which the cost has occurred.

4) In Activity based costing system the cost driver are identified. The cost diver is that cost
which is increasing the product cost (activity). This help in tracing the true overhead to a
product.
5) The cost driver on the other hand shows the behavior of the cost and help in identifying
the true cost.

The objectives of the Activity based costing system are to identify or eliminate the inaccurate
cost or false cost information. This will help the industry to minimise the cost of the product
and assign the unnecessary cost to the product that is related to it. In ABC system the
overheads are allocated to product on the basis of the activity eg. The product machine cost is
assigned to it the usage of the machine hour, similarly the labor cost is also assigned to product
on the basis or it utilised the labor hour.

The main object is to decision making as the tradition costing method not accurate and the true
cost of the product is not easily identified. ABC shows most accurate cost behavior and the
company also makes decision quickly related to product cost and identifies the areas which are
creating the extra cost to the product.

The Commonwealth Bank is non manufacturing industry. The main business of the bank
investing in shares, interest cost and interest income. But in the new release is that the
Commonwealth Bank is using ABC accounting method in manufacturing its two new head office
buildings. This would help the company in identifying true source of cost.
COMMON WEALTH BANK and ACTIVITY BASED COSTING:
The Commonwealth Bank is moving toward the culture that is flexible which is Activity based
costing method. It also assign the cost align to each activity while helping the company is
moving new offices. The head office are designed that help the bank in identifying the cost
activity and helping them in true cost of the bank activities.

For this purpose the company has separated the activities that comprise the two eight story
building which is covering the area of 52,000 square metres. This will accommodate the 6200
staff of which 3000 staff has been installed already while the other are moving at the rate of
250 per week.

The Commonwealth Bank CFO said that there is a framework of work style and that varies each
days. It will help the company in identifying these activities. There are different activities to
complete the different tasks that varying level between concentration and collaboration.

With the help of the activity based costing system the staff finds the working environment and
also help the staff to choose the best work styles. This suits the work activity. This also helps in
completion of the activity and empowering them.

The implementation of the activity based costing in banking sectors for all activities is crucial
one and it may or may not support the all activities of the bank. The implementation of the
activity based costing in Common Wealth bank take following steps.

 it help in identification of the main functional areas of the organisation.

 The other main thing in ABC is identifying the main activities off the functional areas.
 It also help the Bank in identifying the indirect cost to each of the functional activity.
 It help the Bank in preparing the statement of all expenditures on the basis of the
activity. This help in finding the true cost of all expenditure which has been incurred.
 The statement is then comparing to the activity which is utilised by each of the product
and activity.
 At the end of the process the Bank will analyse the activity which should be eliminated
as it is creating extra cost. The elimination of the extra cost will help the company in
performing well and reduction of the cost and the product price as well.

The Bank initiative in activity based costing is that providing the paperless work environment.
For this initiative the new equipment are installed in the new offices which help the bank in
identifying the main activities such as acquiring new tools and other activities. This will provide
the bank new height as the company mission is to paperless work and provide new equipment
to all employees the main area of focus of the company is towards the IT system of the
company.
Changing the costing tools will help the bank in these areas and activity:

 The changing into paperless work environment

 The installation of tools as required by the activity
 The total increase in the IT cost and minimizing the cost of other material such as paper
and other costs.
 The collaboration between the staff will increases and the staff will perform efficiently.

The traditional costing method in the banking system was to allocate the total cost and
assigning this total activity to the products. This will increase cost of each activity even if the
activity is less and the company has not spent money which is relevant to that activity. This is
drawback of the tradition based accounting method.

On the other hand the activity based costing has also some drawbacks in it. The bank has other
activities such as the salary of employee and management is irrelevant and using Activity Based
costing method the allocation of these activities is difficult.

So the company objective such as paper less environment and the changing the company new
head offices and other activities are more accurate in using activity based costing as this
method will help the company in achieving different targets. Such as eliminating the costs, and
the allocation of the cost to each activity.

Recommendation:
The commonwealth bank has chosen the activity based costing for the new office building. For this
purpose the company has many initiatives such as paperless work environment it will increase the
activity such as communication between the departments is important. To initiate this activity the cost
attributable to this plan this work is identifiable so it will be beneficial for the Bank to adopt ABC as it will
provide the Bank information which activity should be eliminated.

The bank is keen to provide the high collaboration between the staff for this purpose the IT expertise are
increased in the bank so that the cost of initiating this activity will also be easily identifiable.

Suitable accounting system for Bank:

The bank is not manufacturing industry so the ABC system may be not suitable for the bank. Because the
main purpose of the ABC is to identify the activities in the manufacturing industry and allocate the
activity in each product. On the other hand the Bank has many department and section which are
contributing the cost of the bank.

The traditional costing system assign the cost to the cost centers. The cost centers are normaly the
department based on the structure of the organisation. So it measures all the cost which is measure and
it allocates this cost to each of the department and center. In this way the cost of salaries are also be
part of department and each staff member salary is than allocated to the department.

In this way the Tradition costing method has edge over the activity based costing that ABC is suitable for
the manufacturing industry and not for the banking sector but in some areas the ABC is suitable for
banking as the Bank is initiating new strategies and implementation of new strategies will help the bank
to achieve its objectives.

Conclusion:
The activity based costing method is helping the Commonwealth Bank whereas the bank in
some areas to achieve the goals and the strategies. It will identify the company cost drivers and
the company costs which is allocating to the specific department and area of the bank. But in
other hand there are some activities in the bank which are problematic and difficult to find any
activity such as the salaries of the management and other things.

The drawback of ABC is that it is used in the manufacturing industry. Commonwealth bank is
adopting ABC for its new offices and has designed the new offices so that activity based costing
could be easily determined.

The other traditional costing tools has no tools which divide the cost indirect and direct to any
activity this assign the cost of the activity high even though minimum activity has been
produced. But this accounting method is suitable for Commonwealth Bank after the new office
building are fully utilised and the bank should move towards the traditional costing method.

Works Cited
(n.d.). Retrieved from traditional accounting: https://strategiccfo.com/activity-based-costing-abc-vs-
traditional-costing/

ABC. (n.d.). Retrieved from accounting coach: https://www.accountingcoach.com/activity-based-

costing/explanation

ABC and impelmentation. (n.d.). Retrieved from investopedia:

https://www.investopedia.com/terms/a/abc.asp

Activity based costing. (n.d.). Retrieved from Account learning: https://accountlearning.com/activity-

based-costing-meaning-features-objectives-implementation/
common wealth bank. (n.d.). Retrieved from
https://www.cio.com.au/article/401530/commonwealth_bank_shifts_activity-
based_work_culture_swanky_new_head_office/

teaditional vs activity based. (n.d.). Retrieved from http://smallbusiness.chron.com/traditional-costing-

vs-activitybased-costing-33724.html