Performance Measurement And Costing System - MyAssignmenthelp.com

Question: Discuss about the Performance Measurement And Costing System. Answer: Introduction: With rise in competition among the firms, it has been highly essential for the managers to understand the importance of cost for their firms irrespective of its size. Whether it is a big multinational organisation or a small firm, it is important to understand the costing method (Hemmer and Labro 2016). Main goal of understanding the costing is to provide proper information regarding the internal decision-making and provide much needed outlook for the control and planning purpose of the firm (Cooper 2017). Besides this, knowledge regarding costing aids the mangers to assess the alteration in the market scenario and trace out changes in trade. This report considers the TDABC method of costing and highlights its various importances. Besides this, an overview regarding different methods of costing that include ABC and traditional method of costing will be given in this analysis. Along with this, the report will try to draw difference between TDABC, traditional costing system and ABC met hod of costing. Moving further, the report will highlight the suitability of TDABC in the ADCO construction and provide details regarding implementation of TDABC in the firm. Description of the clients firm: The ADCO Construction is one of the leading construction companies of Australia that has been serving national project since 1972 (Adcoconstruct.com.au, 2018). According to the words of ADCO Construction, until 2017, the company has served almost 3,500 completed projects and it is valued at $10 billion. With its annual revenue figure of $1 billion and almost 600 employees, ADCO is one of the top 50 private organisations of Australia. Main service of the brand lies in the construction industry and its high level of resources enable the firm to remain aligned with the latest techniques of construction. Besides this, the firm is well known for its practical utilisation of materials and products that provides the firm efficiency, which is at par with the commercial manner. Continued success of the ADCO Construction has enabled the firm to find its customer from blue chip base of client that comprise state, federal and local government agencies (Adcoconstruct.com.au, 2018). Besides this, the firm has served various institutional and private corporate with their service of construction, making the firm a market leader in the construction industry. The firm has wide base of 580 to 600 direct employees and 40% of them are engaged in operation with the firm for more than 7 years (Adcoconstruct.com.au, 2018). With their efficient allocation of human capital and resource allocation, turnover rate is lower than its competitors that have lead the firm to a better goodwill. ADCO Construction guarantees delivery to their clients, according to the manager of the firm, which has been gained through combination of unique techniques, skilled labour and idea of costing. Description regarding TDABC and its features: Until 1984, firms used to prefer traditional method for costing, however scenario changed when Activity Based Costing (ABC) came into action. Traditional mechanism of costing was introduced during 1920, and it used to consider only three costing parameters, which are materials, labour and overhead (Weygandt, Kimmel. and Kieso 2015). However, with change in market scenario and economy of business, traditional costing mechanism started to become complex and traditional accounting failed to calculate the overheads. By the time of 1984, firms started to utilize distorted information regarding orders, customers, products and profitability that has crippled the standard method of accounting. Thus, during 1984, a new mechanism of costing was introduced, which was known as the ABC (Plank 2018). Activity Based Costing mechanism was presented as the completed method of costing that not only addresses the pitfalls of the traditional methods moreover enable the mangers to customize it depending upon the requirement of the present scenario. However, many firms rejected it due to various complications leading to search for another model of costing that addresses the drawback of the ABC mechanism. According to the Prasad (2014)Major reasons for rejecting the ABC model were its organisational and behavioural resistance. Besides this, the ABC model was intricate to sustain, hard to customize according to the need and expensive to introduce in the firm. It need rigorous survey and interviewing of the employees that makes it complex and expensive to be implemented in the firms. Moreover, if any customization required, then reinter viewing and resurvey need to be done, making it complex. Success came in 2004, when one of the initiator of ABC model, Kaplan, brings in another new mechani sm of costing, which is known as the Time Driven Activity based Costing (TDABC) (Kaplan 2014). According to him, TDABC is more accurate, elegant and simplified approach for costing. Besides this, TDABC is cost effective mechanism of costing and it aids the firm to customize the model deepening upon the requirement. TDABC offers better information regarding the earnings of the firms and it accurately demonstrates the frequency of profit. Utilizing the cost difference among the customers who have higher demand along with complex client preference than those who have lower demand along easy customer preference, TDABC highlights accurate result of profitability of the firms (Afonso and Santana 2016). Simplifying the process of costing compared to the ABC method was one of the main reasons for bringing in the TDABC and it successfully does so. This new model of costing does not require any surveying or interviewing for resource allocation for the activities of the firm before inserting them into the cost objectives; instead, TDABC model using a comprehensive framework, assigns the cost of resources directly toward the cost objectives. Utilizing two set of factors TDABC calculates the costing details of a firm and enables the managers to assess their optimal outcome, profitability and various other f actors that affects the firms business. Two factors of computing TDABC are as follows (Stouthuysen et al. 2014): Rather than using the information from survey and interview, it computes the cost of resource supplying TDABC utilizes the Capacity Cost Rate in order to bring in departmental costs into the computation of cost through estimation of resource capacity for demand. Using the time requirement for performing an activity, TDABC is highly efficient to recognize the cost of every unit including the cost of allocation. Various features of the TDABC are as follows (AhmadPour and AzimiMoghadam 2016): It is a complete strategic model, which is fast, easy to build and inexpensive in nature This model successfully identifies the opportunities for capacity management and process efficiencies One of the best features of this model is that it can be customized and updated easily depending upon the requirement of the firm The model is based on the individual customer orders, suppliers, process and transactions, thus it is efficient and effective for cost calculation of the firm This model allows forecasting demand of resources that permit the companies to frame their budget and trace out ideal level of output utilizing the database technologies and application software TDABC integrate Enterprise Resource Planning (ERP) information though an efficient way and enables the TDABC to become a vibrant system for Customer Relationship Management Difference among traditional costing mechanism, TDABC and ABC: Utilizing the imitation of equation ad variable TDABC projects numerous forecasts for the firm. Compared to the ABC method, it determines the cost allocation for every department depending upon the cost object of every department (Namazi 2016). These are the various differences between the traditional costing, TDABC and ABC: .Traditional Costing ABC TDABC Traditional costing method aids to allocate overhead cost for each unit produced. Various overhead activities are identified in ABC method for proper calculation of the costing. Finding out numerous clusters of resources is the focus of TDABC. It considers only three variables for computation of the cost, which are materials, labour and overhead. This mechanism of costing considers the survey and interview of firms employee to chalk out the costing. This framework of the costing needs only the information regarding cost of resource supplying for cost (Santana, Afonso and Rocha 2014). Cost of productions is allocated only to the products. It finds the cost driver for different activities and then allocates then calculates the cost. It includes the Capacity Cost Rate in order to bring in departmental costs into the computation of cost It is not potent to differentiate between non-manufacturing cost with the item produced It divides the total amount of activity by the practical amount of activity for each task in order to compute the cist driver. It finds the cost driver by dividing the each unit cost with the practical capacity of each group. Table 1: Difference among traditional costing mechanism, TDABC and ABC Source: (Created by Author) Traditional mechanism of costing was introduced way back during 1920s and uses direct labour hours for deciding the costing overheads for manufacturing of each product. However, it fails to differentiate between the non-manufacturing cost and the manufacturing cost that makes it unable for the customizations. One the other hand, new mechanism of TDABC aids the firm to measure effectiveness in production of the goods and services of the firm. According to the Gunasekaran, Williams and McGaughey 2015, TDABC requires time projection for the process in order to process the customer orders and it does not mandatorily follow the principal of traditional accounting system, where customer cost need to be equal with the projected cost. Suitability check of TDABC for firms clients: Utilizing the traditional framework of costing for the ADCO Construction the firm can distribute the cost of its resources towards the activities before sending them toward the cost objects. One of the important consideration need to look out in this regard is that the TDABC mechanism will be beneficial for the firm because it uses smart framework for the estimation of the profit (Todorovic 2014) . TDABC uses Cost Capacity Rate for finding the resource cost by utilizing the demand of the resources, which will help the ADCO Construction in time estimation for customer order process. Moreover, it would aid the firm to have a watch on the variations in the market and alert the firm regarding the projection of storage, capital and production requirement (Namazi 2016). Additionally it would help the firm to sustain in its business ventures proving it better sustainability. Thus from the above analysis it can be stated that if the ADCO Construction used the TDBAC framework, then it would help the firm to have better profitability and smooth transformation of its business from ABC to TDABC (Hoozee and Hansen 2014). Smart framework of the TDABC would be beneficial for the firm to upgrade and customize the accounting mechanism for the firm and enable it to forecast the demand properly. Additional benefits of utilizing the TDABC for the ADCO Construction is that it if the firm uses TDABC, then it would cost less for accounting because it does not require any survey and interviewing of the employee of various departments and enhance the ERP (Ai-Min et al. 2016). Moreover, it is also required to highlight that being a flexible framework of costing; it would enable the firm to customize the model for further alteration in future depending upon the requirement. Conclusion: The report has analyzed the various aspects of TDABC and compared it with the ABC and the traditional mechanism of auditing. From the comparison, it has been found that TDABC is far more superior and complete mechanism of costing calculation. It not only simple and inexpensive, moreover it aids the firms to forecast their demand and make budgetary framework accordingly. This report was meant to analyze if an organisation like ADCO Construction imply TDABC into its framework, then how would be the suitability of this implementation. The report has found that TDABC, being the easiest framework of costing, would be highly beneficial for the firm. TDABC model will help the firm to avoid costly mechanism of costing and saves lot of time on behalf of this computation. Moreover, the report has found that TDABC will help the managers of the ADCO Construction, to overcome the problems related to their CRM and ERP system. Though TDABC analyzes the historical data, however, it can effectively d etermine the future trend and help the firm like ADCO Construction to forecast their future. To conclude, it can be said that, TDABC is a complete mechanism of costing and if the ADCO Construction implement it in its framework, then it would help the firm to become more successful with its ventures by utilizing the cost effective mechanism of costing and forecasting. Reference: Adcoconstruct.com.au. (2018).Overview | ADCO. [online] Available at: https://www.adcoconstruct.com.au/about-us/overview/ [Accessed 25 Jan. 2018]. Adcoconstruct.com.au. (2018).Projects | ADCO. [online] Available at: https://www.adcoconstruct.com.au/projects/ [Accessed 25 Jan. 2018]. AhmadPour, J. and AzimiMoghadam, A., 2016. Identifying operational improvements during the design process of costing system based on time-driven ABC (TDABC)(The role of staff public participation and leadership style).Bulletin de la Socit Royale des Sciences de Lige,85, pp.999-1016. Ai-Min, D.E.N.G., Hong, L.I. and Hao, T.I.A.N., 2016. Based on the Cloud ERP and TDABC for the SMEs Logistics Cost Accounting.DEStech Transactions on Engineering and Technology Research, (sste). Cooper, R., 2017.Target costing and value engineering. Routledge. Gunasekaran, A., Williams, H.J. and McGaughey, R.E., 2015. Performance measurement and costing system in new enterprise.Technovation,25(5), pp.523-533. Hemmer, T. and Labro, E., 2016. Productions and Operations Management Management Accounting. Hooze, S. and Hansen, S., 2014. A comparison of activity-based costing and time-driven activity-based costing.Journal of Management Accounting Research. Kaplan, R.S., 2014. Improving value with TDABC.Healthcare Financial Management,68(6), pp.76-84. Namazi, M., 2016. Time-driven activity-based costing: Theory, applications and limitations.Iranian Journal of Management Studies,9(3), p.457. Plank, P., 2018. Introduction. InPrice and Product-Mix Decisions Under Different Cost Systems(pp. 1-5). Springer Gabler, Wiesbaden. Prasad, A.D., 2014. Must Make Cost Management Accounting Key to Building National Competitiveness.The MA Journal,49(8), pp.9-10. Prasad, A.D., 2014. Must Make Cost Management Accounting Key to Building National Competitiveness.The MA Journal,49(8), pp.9-10. Santana, A., Afonso, P. and ROCHA, A., 2014. Activity Based Costing and Time-Driven Activity Based Costing: Towards an Integrated Approach. InICOPEV-2nd International Conference on Project Evaluation, Guimares/PT. Stouthuysen, K., Schierhout, K., Roodhooft, F. and Reusen, E., 2014. Time-driven activity-based costing for public services.Public Money Management,34(4), pp.289-296. Todorovic, M., 2014. Key Aspects of Building and Application of Time Equations in Costs Calculation. Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015.Financial Managerial Accounting. John Wiley Sons.