ABC Model for Wesfarmers Limited-Free-Samples-Myassignmenthelp.com

Question: You are required to prepare a report to recommend about ABC Model for your Company. Answer: An explanation of ABC model and its features Activity Based Costing (ABC) is a method used in accounting for allocating the extent of resources consumed and the indirect costs which are incurred for the production of a product or service based on value addition. Thus it is the accumulation of the data related to fiscal and operational activities which can be used to track the crucial activities of the firm to analyze the cost of production (Pel, 2015). The features of the ABC model is that total cost is classified into fixed and variable cost which assists in providing quality information to form a suitable cost system in the company. Furthermore, the patterns related to cost are based on volume, events, time and diversity. The cost behavior pattern is dependent upon cost driver. Furthermore, proper cost driver has to be recognized for finding the overhead of the cost (Blokdijk, 2015). Regarding the Activity Based Costing, the costs are divided into short and long term variable costs. The short term variable cost is allotted on the basis of cost drivers which are volume based. The examples are direct labor, material cost and machine hours. Hence, before allocating the overhead costs to the drivers, the nature of costs should be understood in the context of production and service departments. Introduction to the company Wesfarmers Limited is a company based in Australia and it is headquartered in Perth, Western Australia. It deals in variety of industries such as retail, coal mining, chemicals, fertilizers, industrial and safety products. Its revenue was AUS$ 65.98 Billion in the financial year 2016, thus being the biggest Australian company in terms of revenue. Besides, this , it is the largest private employer with employees numbering to 2,22,000 serving in Bangladesh, Ireland, New Zealand , United Kingdom apart from Australia. Founded in 1914 it was listed on the Australian Securities Exchange in 1984. It has shareholder base of around 53000 (Wesfarmers, n.d.). So, in this report, the focus would be on how the company has imbibed the characteristics of ABC model of accounting in its accounting methods. Besides this, whether the policies , procedures , mission , vision and objectives of the company are in alignment with the ABC model would be assessed . The recommendations about the implementation of the ABC model would be evaluated along with the suggestions to apply one more management accounting principle would be justified in order to improve the working of the company. An explanation of how ABC model aligns with the current goals and strategies of the company An identification of the companys mission and objectives According to Wesfarmers (n.d.) the mission of the company states that it wants to provide satisfactory returns to its stakeholders. Its main objective is to provide satisfactory returns to its stakeholders through proper allocation of costs to the various cost drivers and managing the activities of the business through a various portfolios of business. The primary objective of the company is to build strong management abilities which are responsible for the evaluation of strategies and executing them to govern the routine performance of the company. Each of the department of the company is supervised by Managing Director, Finance Director who are assisted by the governance framework of Wesfarmers. The Wesfarmers Way is the agenda for the business model of the company and it includes the core values, value creating strategies and growth enablers which are focused to accomplish the primary objectives of the company. An identification of the companys corporate strategies The value creating or corporate strategies of the company are the empowering the current business of the company through gaining expertise in the commercial activities of the company and fulfilling the necessities of the customers. The company aims at obtaining the growth opportunities through entrepreneurial initiatives. It wants to ensure its sustainable development through management which is accountable for the activities of the company. It aspires to revise and upgrade its portfolio with the help of value added transactions. The core values of the company are integrity, responsibility and openness and the growth enablers amount to developing strong financial capabilities of the company with people who have gained expertise in their domains as well as endowing values in the culture of the organization. It wants to enhance its commercial activities through introducing innovative products in the market and assimilating the values of social responsibility on its operations. An explanation of how ABC model assist in achieving the companys strategies The ABC model of accounting can assist the company in accomplishing its objectives and implementing the strategies in the following ways: Forecasting the demand for the raw materials in advance: With the help of ABC model, the purchasing department can predict the demand for raw materials in advance and manage the stocks appropriately. Since the maturity and decline phase of every product is different from the other, so it would be a wise decision to decrease the stock levels accordingly to decrease the carrying cost and eliminating dead stock. So in this way the company can achieve its goal of profit maximization by reducing eth cost of production and focusing on products which are in the growth phase (Kannaiah, 2015). Optimization of the stock: It is one of the crucial advantages of ABC model. The purchasing department can organize the prioritized items by aligning them with the demands of the customers. Depending on the demand of the products, the inventory is stocked to fulfill the necessities of the customers. Low stock would be procured for products with less demand in the market. As the strategies of the company aim at obtaining growth opportunities so the ABC model will assist the management in lowering the cost of production and increasing its revenue (Bajus and Staov , 2014). Pricing policy of the company: The ABC model assists in setting the pricing policy of the company and thus bringing more worth to the company. The company would be monitoring those products which are high in demand and on the basis of this data, it would increase their prices which would have a great influence on the profit of the company (Pokorn,2015). The other strategic option is to consider the policy of bulk purchases from a single supplier. By purchasing raw materials from a sole supplier would decrease the carrying costs associated with the products. Allocation of resources: With the help of ABC model, allocation of resources can be an easier process which can help in tracking the class A items regularly. Since these items are the most prioritized amongst all the products of the company, so their stock must always be aligned with the demands of the customers. Analyzing the levels of customer services: The service levels for various products can be dependent on factors such as cost, quantity sold and the margin on the product. The ABC model can assist the management to align the service levels based on classification of the products which will help in improving the overall performance of the supply chain level of Wesfarmers (Cannavacciuolo et al., 2015). The two recommendations about the implementation of ABC model for Wesfarmers Limited based on the research findings According to Almeida and Cunha (2017) the first recommendation in implementing the ABC model in Wesfarmers Limited should involve change management process prior to its implementation. The aim of this process is to make sure that there would be coordination amongst all the levels of the organization for the implementation of ABC model. Through the implementation of the ABC model, the business processes would be improved. As ABC model allots indirect variable costs which are based on products cost drivers, the management can analyze which business processes are performing well and which one needs to be improved. According to Wesfarmers (2017) for example the company should adopt the ABC model of accounting in the valuation of its long and short term variable costs. The raw materials, work in progress and finished goods should be valued at the cost of raw materials , labor and on a proportion of manufacturing overheads excluding the borrowing costs. The work in progress goods must be valued at the value of coal stocks comprising of production cost of drilling, blasting and overburden removal. The retail and wholesale finished goods should be valued at purchase cost on weighted average basis after deducting discounts, rebates given to suppliers and including logistic expenses incurred to bring the inventory to their current location (Manrquez , Colomina and Pastor,2014). Besides this, the second recommendation is that there should be a suitable plan for the implementation of the ABC model of accounting. The revenues and expenses of the company should be recognized in the first instance. If the main aim of the company is to gain buy in for ABC, then estimated revenue and expense can be used. Also, the manufacturing, selling and marketing activities and their coordination should be realized. The cost drivers and volumes should be identified and activity costs should be calculated. The success of the implementation of ABC model should be used to analyze the steps to be taken in future (Intakhan, 2014). The use of this approach shall enable the organization to achieve awareness of the new cost design system throughout the company. The management can use the enhanced information provided by ABC model to increase the performance of the company. In this way, the managers would be able to analyze the results which would also enhance the learning process (Mahal and Hossain, 2015). Apart from ABC model, suggest one other management accounting tool suitable for Wesfarmers Limited and justify it The other management accounting tool used for decision making by the managers is Lean Manufacturing or Lean Production. It is a systematic method for elimination of waste within the manufacturing system with the emphasis on producing quality goods. It considers the waste which is created through overburden on the processes or through inconsistency in the work loads. Lean Manufacturing can help Wesfarmers to add value to its products and minimize the wastage in their processes. It is originated from Toyota Production System (TPS). It is based on two ideologies viz. recognizing and eliminating the wastage processes and producing only those products which are valuable to the consumers. Through efficient planning and application of the lean manufacturing, the lead and work in progress time will be minimized and the quality will be improved. It will also help in improving flexibility of the production processes and simplifying the scheduling. This would result in enhancing the sales of the company and optimum utilization of the production processes and spaces (Lpez, Requena and Lobera, 2015). In the context of lean manufacturing, there is a 5s system focused on improving the profitability and efficiency of the processes. The first element is Sort. It implies that the work area should be cleaned and only those placed which are needed to perform the process. All the extra items should be sorted out from the work area. The second component is Set in Order. Every item at the work place should be designated a particular location. The third component is Shine. The workplace should be clean which will help in improving the appearance of the work area. The fourth component is that the personnel should perform the tasks in a similar manner . They should follow the practices in the same manner every time and everywhere (Dilanthi , 2015). The last and the fifth component is Sustain. It involves transforming the culture of the organization. The transformation should be assimilated at every level of Wesfarmers (CGMA Tools, 2015). Conclusion Hence, to conclude, it can be said that Activity Based Accounting (ABC) is an accounting method which recognizes the commercial activities performed by the various departments of the company and allocates indirect costs to them. It identifies the correlation amongst the cost, activities and products and on the basis of the analyses , it allocates the indirect costs to the raw materials . Furthermore, the ABC model can assist Wesfarmers in enhancing the reliability of cost data thereby helping the company to classify the costs incurred by the company and helping it in product line profitability analysis. References Almeida, A. and Cunha, J.(2017) The implementation of an Activity-Based Costing (ABC) system in a manufacturing company. Procedia Manufacturing .13 (2017), pp. 932939. Bajus , R. and Staov , L.H.(2014) Implementation Of The ABC Model In A Company Dealing With Extraction Of Raw Materials. Business, Management and Education. 12(2),pp. 228244. Blokdijk, G.(2015) Activity Based Costing - Simple Steps to Win, Insights and Opportunities for Maxing Out Success. International Monetary Fund. Cannavacciuolo, L., Illario,M., Ippolito,,A. and Ponsiglione, P. (2015) An Activity-based Costing Approach for Detecting Inefficiencies of Healthcare Processes. Emerald. CGMA Tools (2015) Lean Management Techniques[online] Available from: https://www.cgma.org/content/dam/cgma/resources/tools/downloadabledocuments/lean-management-techniques.pdf [Accessed 21st April 2018]. Dilanthi , M.G.S.(2015)Conceptual Evolution of Lean Manufacturing a Review Of Literature. International Journal of Economics, Commerce and Management.3(10),pp. 574-585. Intakhan, P.(2014)Direct and indirect effects of top management support on ABC Implementation success: Evidence from ISO 9000 certified companies in Thailand. Procedia - Social and Behavioral Sciences .164 (2014), pp. 458 470. Kannaiah, D. (2015) Activity Based Costing (ABC): Is It a Tool for Company to Achieve Competitive Advantage? International Journal of Economics and Finance.7(12),pp. 275-281. Lpez, E.A., Requena, I.G. and Lobera, A.S.(2015) Lean Service: Reassessment of Lean Manufacturing for Service Activities. Procedia Engineering .132 ( 2015 ),pp. 23 30. Mahal, I. and Hossain, M.A.(2015) Activity-Based Costing (ABC) An Effective Tool for Better Management. Research Journal of Finance and Accounting.6(4), pp. 66-73. Manrquez , M.R., Colomina, C.I.M. and Pastor, M.L.R.V.(2014) Is the activity based costing system a viable instrument for small and medium enterprises? The case of Mexico. Estudios Gerenciales. 30 (2014), pp. 220232. Pel, T.W.(2015) Management Accounting Innovations: The Case of ABC in Poland. Jagiellonian University Press. Pokorn, J.(2015) The Expansion Of Activity-Based Costing/Management In The Czech Republic. Central European Journal Of Management.2(1-2),pp. 35-49. Wesfarmers (2017) 2017 Annual Report [online] Available from: https://www.wesfarmers.com.au/docs/default-source/default-document-library/2017-annual-report.pdf?sfvrsn=0 [Accessed 21st April 2018]. Wesfarmers (n.d.) The Wesfarmers Way[online] Available from: https://www.wesfarmers.com.au/who-we-are/the-wesfarmers-way [Accessed 21st April 2018]. 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