Critical Evaluation of Activity Based Costing

Question: Discuss about the Critical Evaluation of Activity Based Costing. Answer: Introduction In this paper, the researcher investigates and presents an in-depth critical evaluation of the use of Activity Based Costing (ABC) in modern manufacturing organizations in the Asia Pacific region while giving relevant citations on real life instances to back up the arguments. The main focus is not on the merits and demerits of Activity Based Costing neither is it about calculating product costs nor its utilization nor what is used for but rather delves deeper into showcasing the experiences that actual organizations in Asia Pacific region utilizing or attempting to employ Activity Based Costing have alongside its impacts on these companies (Cobb, Innes Mitchell, 2012). This article presents 2 case studies on the ABC. The first case is specialty chemicals firm located in Hong Kong. The second case is ABCs adoption in Xu Ji Electric Co. Ltd. These two case studies deliberate the ushering of ABC system along with the benefits as well as the glitches experienced at the implementation point per Company. Anchored on these experiences, factors critical to successful ABCs implementation are defined. Manufacturing firms currently remain extremely complex compared to the 1960s and previous years. Managers of manufacturing firms need information that is relevant, accurate as well as readily available. Information is required for the formulation and operationalization of functional strategies as well as decide on product mix besides costs of production (Cooper, 2013). Despite systems of production being altered to accomplish the altering needs of the market, in several organizations, the interior management accounting schemes as well as information systems stayed unaltered. Both Accountants and Managers have increasingly become dissatisfied with conventional costing thereby expressing concerns regarding their suitability in the contemporary manufacturing surrounding. ABC has evolved as the option to conventional costing system. ABC system varies from initial conventional costing based on the systems treatment of non-volume linked to costs of overhead by using activities that drive overhead cost for both production cost as well as process control. It remains anticipated that the two firms experiences explained in the article offer valuable lessons for the management weighing options to embrace ABC systems. Case Study One: Ciba Specialty Chemicals This is a principal chemicals manufacturer and remains part of the freshly designed global life science cohort Novartis established in 1996 from the merger amongst Ciba-Geigy and Sandoz (pharmaceutical company). The case study circumvents Ciba Additives Hong Kong (CAHK) that is portion of the Additives Division of Ciba Specialty Chemicals. The cost of operation alongside expenses remained initially allocated based on shared allocation premises (sales value as well as volumes). Ciba had initially tested with ABC systems in additional divisions thereby learning certain significant lessons. HR support, availability of time of project champion, support of top management, benefit-cost analysis, comprehensive planning of project, and partaking of user along with outside proficiency had already been acknowledged as essential triumph variables. When CAHK was considering ABC adoption, the Hong Kong Polytechnic University was ushering a study project emphasizing on Manufacturing Information Systems. It followed a collaboration of academia, government and industry to develop as well as embrace new-fangled manufacturing information systems in domestic businesses and create such sources sites for upcoming projects. Problems Encountered During Implementation The critical staff engaged in ABC system project remained sometimes underneath substantial gravity because they stayed as well engaged in various other key structural alterations undertaken within the CAHK. Thus, availability of time remained a problematic. It is acknowledged that permanent obtainability of essential individuals remains a necessity to ABCs implementation achievement. There remained also certain confrontation from a good amount of workforce memberships. This could have emerged from entire structural along with managerial alterations which were ongoing at the period of ABC project as well as to certain degree the indecision in the upcoming years. The sustenance alongside the engagement of top management remained energetic in overwhelming confrontation as well as distress amidst certain workers. Benefits of ABC system at CAHK The implementation of ABC project adopted at CAHK provided additional accurate costs allowing managers to analyze healthier customer base as well as offered healthier services. The system further empowered CAHK to endorse increasingly fittingly pertinent product lines besides making effective commercial decisions, especially those linked to subcontracting. Following the adoption of ABC systems besides collaboration with the Hong Kong Polytechnic University, CAHK has established several capabilities. These included superior expertise in project planning, effective leadership as well as managerial expertise amidst its staff, aptitude to study self-possessed, learning to stay enduring as well as erudition to delegate duties as well as trust others to become accountable. CAHK is presently expanding the ABC scheme to capture its manufacturing regions that is being created in Southern China. The Hong Kong ABC adoption knowledge has given the CAHK a lesson to comprehend the various culture which exists in China and also assimilate the various values which respective part of the firm holds. Open communication, admiration for the individuals, education, team working, career development and training remain unconditionally critical whereas personal or professional development is essential in establishing a pleasant-sounding working condition. Xu Ji Electric Co. Ltd. is an enormous Chinese manufacturing organization. It was initially a state-owned enterprise (SOE) but future twisted to public limited company (PLC). The organization steered ABC in 1 of its core production divisions in 2001 December at the time ideas of ABC stayed at a theoretic degree in China. The company began from a self-same primary degree, construction of financial accounting systems as well as office automation before ABC scheme implementation that covered direct cost as well as variable manufacturing overheads prior to processing. The core accomplishment of the companys 10 year ABC implementation remained the fact that ABC altered drastically the SOE, curved PLCs outdated costing systems and ushered standardization in respective working rehearses as well as processes. The ABC system further served as a catalyst to the companys Information Technology (IT) developments-1st accounting and office computerization and 2nd the implementation of ERP. One distinguished characteristic of this Companys ABC experience remained the top-down instigation as well as enthusiasm of attempting innovative notion along with induction of corporate-vast learning. Whereas such a top-down strategy remains unpopular in west, it remains relatively conjoint amidst SOE, especially in northern portion of China. The method functioned effectively in Xu Ji, permitting it to shift swiftly from reproducing western notions to the development of Xu Jis own. It independently developed Relays ABC system- as well as make informed decision based on the analysis of sales activity. Before ABCs implementation in Xu Jis first production division, the Company employed traditional Chinese state-enterprise accounting system that encompassed an enormous amount of manual book keeping work. The external financial reporting purpose predominantly drove the accounting leading to inevitable inaccuracy of product costs. Xu Ji, at this point, underwent a sequence of flotations arising from the introduction of free market competition by China. The old-style costing information inaccuracies extremely obstructed the ability of Xu Ji to contest on pricing. The Company swiftly needed a healthier costing scheme thereby commissioning ABC application (Drury, 2015). The ABC project was tasked with tracing direct labour costs straightly to product as well as clients contracts as well as to allocate manufacturing overheads based on up-to-date direct hours of labor to agreements. Xu Ji successfully implemented ABC system in 2003 following solutions to certain teething glitches. These problems entailed information systems compatibility and misinterpretation of the concept of ABC. Xu Ji also implemented ABC system in sales division though faced resistance during the stage of mapping exercise and analysis of activities (Innes Mitchell, 2012). The resistance was in part because of inherited idea that sales companies remained extremely observed by executive management as the bread-winner. The respective sales management and workforce saw ABCs workout as a threat to their self-sufficient status, even though they remained portion of Xu Ji. Moreover, non-standardized practices implied that the mentioned projected noticeable costs remained unachievable. There was also implicit as well as complex association between sales activities alongside efforts (expenses) besides winning contracts (sales). Conclusion In summary, the article has described the implementation of activity on the basis of two manufacturing organizations. It is evident from review of literature and the 2 case scenarios provided in the above discussion that ABC provides significant welfares over conservative accounting systems; nonetheless, it has a fairly low adoption amidst organizations. Several of the glitches along with complications linked to the introduction of ABC system relate to managerial elements instead of technical elements of the ABC system (Corrigan, 2014). It is self-evident that ABC systems can work more efficiently in fairly sturdy atmosphere even though might not work effectively in fluctuating atmosphere. Moreover, major organizational events encompassing acquisition as well as ERP implementation, may have substantial impacts on the commitment of management to develop the ABC system thereby negatively affecting the utilization of information provided by ABC (Chung et al., 2013). Xu Jis observed ABC systems remained inconspicuous, because they only spoke to direct costs along with variable manufacturing overheads. The ABC implementation have complete noticeable development and permitted them to acquire certain correct product cost info provided Xu Jis old-style costing scheme remained unable to directly match direct labor cost to products (Chenhall Langfield-Smith, 2011). The Xu Jis analysis of sales activity remained a good trial since ABC information permitted the Companys top management to comprehend sales activities effectively. Such trials remained significant as they noticeable the start of ABC system being employed as an instrument for management to allow executive management to exercise increased knowledgeable control over sales expenses as well as sales businesses. References Chenhall, R.H. Langfield-Smith, K. (2011), "Adoption and benefits of management accounting practices: an Australian study", Department of Accounting and Finance, Monash University, Clayton, VIC, Australia, unpublished paper. Chung, W.W.C., Lee, W.B., Chik, S.K.O. (2013), "Technology transfer at the Hong Kong Polytechnic University", Proceedings of the 13th Annual Hawaii International Conference on Systems Science, Vol. III pp.96-105. Cobb, I., Innes, J., Mitchell, F. (2012), Activity Based Costing - Problems in Practice, Chartered Institute of Management Accountants, London. Cooper, R. (2013), "The rise of activity based costing - part one; what is an activity based cost system", Journal of Cost Management, pp.45-54. Corrigan, J. 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