TUNKU PUTERI INTAN SAFINAZ SCHOOL OF ACCOUNTACY

BKAM5043 STRATEGIC MANAGEMENT ACCOUNTING

January Semester 2020/2021 (A202)

ASSIGNMENT 2 : INDIVIDUAL

PREPARED FOR

PROF MADYA DR RAPIAH BT MOHAMED

PREPARED BY

SRILECUMY MARAN

(828080)

DATE OF SUBMISSION

6/2/2021
1.0 Summary of the research method

In this section, method that used is gathered and evaluated information

from the previous researcher and articles. Information were collected by
several article and journals regarding activity based costing. We decided to
examine the literature review from the authors. The data extracted from article
and its online platform. The data was collected using qualitative approach by
using previous journal. Previous studies provide information regarding the
ABC research until 2020.

The factors used by previous research to investigate the effect on ABC

are advantage and disadvantage of ABC, factors influencing for
implementation are summarized, and financial benefits also is outlined. The
result of the study revealed that those factors which relationship with ABC.

2.0 Overview of Activity Based Costing

According to Cooper and Kaplan (1991), activity based costing (ABC),
is a management accounting technique that allocates cost to products and
services based on the resources. Therefore ABC is an approach to monitoring
of activates which involves tracing resources consumption and costing of final
outputs, thus focuses on cost drivers and that cause the activities to increase.

Activity-based costing (ABC) is a costing method for optimizing cost

and time. ABC assigns manufacturing overhead costs to products in a more
logical manner than the traditional approach of simply assigning costs on the
basis of machine hours. Once costs are assigned to activities, the costs can be
assigned to the cost objects that use those activities. The system can be
employed for the targeted reduction of overhead costs.

Besides measuring the performance of an activity, this cost accounting

technique helps to identify all the costs related to every unique activity (Zhang
& Isa, 2010). ABC can be placed anywhere within an organizational structure,
comprising of a project or process. In ABC, resource costs are allocated to
activities that consume resources, and activity costs are assigned to the cost
objects like services, products, and customers.
3.0 Literature review

Akram Hossain (2016) studied about an effective tool for better

management of activity based costing. The research have measured the ABC
more accurately than other volume of cost and management accounting. It’s
changed the traditional view of cost and management accounting.

The research (Sudhashini & Tan, 2018) conducted to study the

relationships of the external environment, cost saving mechanisms, user
attitude and company size on the implementation of ABC among SMEs in
Malaysia. They found that all the four factors have a important positive
relationship on the implementation of ABC among SMEs in Malaysia.

A study by Merlita and Durana (2016) conducted a case study on

research review on activity based costing system (ABC) based on ABC’s
development, applications, challenges and benefits. Based on the study, the
factors – top management support, performance evaluation and training
resources have been influences on ABC success. It’s also mentioned that
contextual factors where competition, environment uncertainty, organizational
structure, size, strategy have relationship with adoption of ABC.

Metin (2012) conduct a research on Activity based costing system with

differences of traditional systems. In his research, ABC afforded that the
flexibility, planning, and behavioural consideration make significant
improvement over traditional approaches. There is useful guide to
management action that can transfer directly increase the profit by ABC.

Nair and Yee (2001), the number of employees in the organization

hence organization size also can be measured by organisation. Size of the
company is the factor that implementation of ABC uses could be greater
resources. Greater the companies, more the information can lead to effective
ABC.
4.0 Advantage of ABC
The company uses activity based costing generally because its gives
advantages for company itself. In the advance manufacturing, many
companies adopt ABC system because its can provide more advantageous
offer in order that that can reduce misuse in product costs. ABC can provide
more logical, relevance and accurate information to help company calculation
more accurate cost of product and evaluation the performance, and also
resigning the products.

To be profitability, a company must determine its product costs to

create its pricing decision (Polomeni et al 2002). Therefore, ABC system is a
good product costing system more appropriate to accept. It can provide
management to identify the vital information, and profitability of product and
to designed standard costs to check the variance between actual costs.
Management can identify the error and can help to take action of variances. It
can minimize the danger of error estimate product cost.

To remain ahead of rivalry, the company must be offer goods and

products of the great quality and precise price for retain customers. Thus, the
company is in interest the costs competitors set of their products (Horngren
and Foster: 416). ABC is an often main factor for the company to determined
cost of product and making decision whether may be a right time to enter a
new market. If the damage set too high result in loss plenty of loyal customers
and damages the company image. Thus, the company duty prepare possibility
plan for changing desires of the market.

Hilton (1994) studies shows that ABC system mostly improving the
ability the users of ABC to evaluate the cash flows in the firms. By separating
costs into activity pools and identifying a cost driver into each pool, it can
more accurate to conclude the levels of various costs that incurred. The ABC
also used well to analysis obtaining department and the facts will provides
with exact cost of data.
 Lastly, ABC provide to analysis the customer profitability, distribution
channel, brands, region, and other than that directly influenced the firm
profitability. ABC consumed the organisation resources of specific activities.
ABC systems makes opportunities to product designers to make for cost
reduction.

4.1 Disadvantage of ABC

There also found some demerits of ABC uses. First different

organisation, ABC has different levels of utility such as large manufacturing
firm can use it more unfortunately smaller firms cannot use it. Similarly, it is
probable that firms depend on cost-plus pricing can take advantages from
ABC as it gives accurate product cost. But those small firms who use market
based prices may not favour ABC. The level of technology and manufacturing
environment dominant in different firms also affect the application of ABC.

Kaplan (1991) indicated that all cost accounting systems are problem
of timeliness of information. Activity based costing could not have solved this
problem. A manager couldn’t solve the problem. A manager might need on a
daily basis information. Instead of that, there is always a gap between the time
information were reported and also important for the questionable of the
quality of the information. An additional, the collecting data consuming time,
especially in the beginning, what kind of information is that need to set up an
ABC system and where to find it takes a while.

The core costs and boundaries of an ABC system are the measurements
necessary to appliance it (Ness and Cucuzza, 1995). Activity based cost
systems need the management to estimate costs of activity pools and to
identify and measure cost drivers to serve as cost allocation bases. It require
several calculations to determine costs of products and services in basic ABC
systems. These measurements are costly and also need to be updated regularly
the activity cost rates.

ABC has several cost pool and multiple cost drivers and thus it can be
more complex than traditional product costing systems. It can prove costly to
manage ABC system. There is a cost to collect and analyse cost driver
 information as well as to allocate overhead on the basis of
multiple cost drivers that because it more expensive. An ABC system takes
more to implement and operate, as information on cost drivers must be
collected in an objective manner.

5.0 Factors influencing for implementation of ABC

From the previous studies, factors that influencing the ABC adoption
are external environment, cost saving mechanism, user attitude and also size
of the company (Sudhashini & Tan, 2018). External environment is market
competition and perceived environment uncertainty which forces from outside
of organization can influence the organization(Chenhall,2007). The
implementation of ABC system incorporating their objective of gaining
competitive advantage to grow bigger. To improve customer satisfaction,
improve productivity and increase the profit of company, cost management of
ABC concentrate on target costing and searching possibilities to achieve it.

Cost saving mechanism is a company use as tool to save the money

through reduce the expenses of the company. In cost saving mechanism, use of
ABC has been firms to achieve cost saving and transparency in their
operations especially when the firms attempt to achieve competitive benefit in
the phase of globalization (Kocakulah, 2017). In other research, ABC used as
a Total Quality Management (TQM) and Just in Time (JIT) which contributed
to the implementation of ABC (Caqwin and Bouwman, 2002).

User attitude is individual’s feeling whether positive or negative with

accomplishment particular behaviour (Ajzen, 1975). Shortage of cooperation
within the organization effect on implementation of ABC (Xu, 2012). It’s also
could modify the adoption and right way to use of ABC system. According to
Machado (2012), user attitude and personal characterises influences
employment of ABC system to create awareness.

Finally, one of factor is company size influencing the implementation

of ABC. Size of company means the quantity of the employees in the firms and
also paid up capital of the organisation (Nair & Yee, 2012). The more the
company size gets, the more amounts have to be handle where ABC system
 becomes suitable in exact representation of how activities perform the making
of a product or service. The Pokorna (2016) stated that size of the company
moderately effect the ABC on financial performance. To conclude, size of the
company influence the use of ABC system (Elhamma, 2012).

6.0 ABC success and financial benefits

Foster et al (1997) stated in his studies that studying in success of

activity-based cost management and the factors of that success. The authors
survey that effect of using substitute methods to measuring success in that
research. The two approaches are an a priori classification approach and
second is a factor analysis method. The study found that top three decision
uses which are identifying opportunities for improvement, product
management decisions, and driving process improvement decisions.

Shields and Young (1989) stated that as success factors for ABC
implementation are culture, controls, champion, change process, commitment,
compensation and continuous education. The author’s discovery the support
for success determinants such as top management support, and the use of ABC
data in performance evaluation and also incentive systems. The authors did not
explain about the reasons on lack of support from the study for the success
factors for ABC uses.

R.Cooper and R.S.Kaplan (1991), research that profit priorities come

from activity based cost systems. The managers can get the biggest benefit if
they allocate expenses wisely to the product by using ABC. ABC promotes the
effectiveness of the company by focusing on activities that contribute
significantly to profits.
According to Yi Fei (2010), there has been rise income in indirect
costs with the beginning of technology. Beside the only cost such like labour,
there are fixed costs of technology replacing the labour cost. Technical
problems due to the introduction of technologies have been greater than
before.
7.0 Conclusion and future research

Activity based costing has already come up as a new generation

concept in occupation and business or market. According to some researches,
there is some disadvantages of using ABC in firms which impact the
company. At the same time, the ABC system also has some advantages and
benefits on financial of company where could increase the profits.
There also factors that influencing for implementation of ABC which
study about relationship between the external environments, cost saving, cost
saving mechanisms, and user attitude and company size. The external
environment produce a good significant positive occurs with the implement of
ABC system.

Cost saving has been encouraged to incorporate cost saving methods

such like JIT and TQM technique where it could be used to support ABC in
generating data of value adding and non-value adding activities. It’s also let for
the detection of upgrading possibilities in product and service of firm. The
study also find that to change user attitude where provide knowledge, skills to
employees and allow to better usage of the ABC systems. Lastly, size of
company also implement to understand better regarding the both customers and
product profitability.

Activity based costing is a tool that provide benefits of financial for the
company. Its increases the profitability of the firms. The information that
gathered also can used for all the firms.

Future research should unravel about the advantage or disadvantages

of ABC. Besides that, maybe could research regarding the comparing activity
based cost relationship with activity based management. Comparing both sides
 could give insight into understanding and important of the ABC and ABM
uses in company.

8.0 References

Nair,S & Tan.X (2018) Factors influencing the implementation of Activity

Based Costing : A study on Malaysia SMEs, 10(2) (Vol.11)
Kennedy, T. and J. Affleck-Graves, The impact of activity-based costing
techniques on firm performance. Journal of Management Accounting
Research, 2001. 13: p. 19-45.
Kocakulah, M. C.,Foroughi, A.,Stott, A,& Manyoky, L. (2017). Activity based
costing: Helping small and medium sized firms achieve a competitive
edge in the global marketplace. Journal of Accounting &
Marketing,6(3), 1-9.https://doi.org/10.4172/2168-9601.1000245
Shield, An empirical analysis of firms' implementation experiences with
Activity-based costing Management Accounting Research 1995. 7: p.
148-166. [4] Innes, J. and F. Mitchell
Innes, J., F. Mitchell, and D. Sinclair, Activity-based costing in the U.K.'s
largest
companies: a comparison of 1994 and 1999 survey results.
Management
Accounting Research, 2000. 11(3): p. 349-362.
Khozein, A., & Dankoob, M. (2011). Activity based costing system and its
succeed implementing in organization. Australian Journal of Basic and
AppliedSciences, 5(10), 613-619.
Brierley, J. A. (2009). An examination of the factors influencing thelLevel of
consideration for activity-based Costing. International Journal of
Business and Management, 3(8), 58-67.
https://doi.org/10.5539/ijbm.v3n8p58
Cooper, R., & Kaplan, R.S. (1991). Profit priorities from activity-based
costing.
Harvard Business Review, 69 (3), 130-35.
Guzman et al. (2013). Recent Evolutions in Costing Systems: A Literature
Review of Time-Driven Activity-Based Costing. Review of Business
and Economic Literature, 58 (1).