Activity Based Costing (ABC) was an approach that was adopted by a very few organizations few times back. But in present scenario where competition is rising without any upper limit, it has to be ensured by the organizations especially operating in service sector that they possess enough internal strength to take care of competition in an appropriate manner. For this purpose, ABC provide a tool to the companies to identify the cost associated with various activities that are being carried out in their premises and mark a check over their efficiency. This had been explained by taking Abu Dhabi National Hotels (ADNH) and Emirates NBD into account for the purpose of analysis. (Activity Based Costing, 2010)
Statement of the Problem
Problem Statement: Whether application of Activity Based Costing is justified over ADNH and Emirates NBD.
Purpose of the Study
Based over above mentioned problem statement, we have to ensure that we have enough evidence to reach at a conclusion that will prove whether application of ABC is justified or not. Also the level of usage of ABC is increasing at a rapid pace that signifies that it is highly profitable for the organization which justifies the analysis.
Research Questions/Hypothesis
H0: Application of Activity Based Costing is not justifiable in service industry.
H1: Application of Activity Based Costing is justified in service industry.
Definitions of Terms
Cost Allocation: It is a procedure of attributing cost to certain specific cost centers, i.e. assignment of a common cost associated with various cost objects. It makes analysis easier as cost associated with entire process can be observed at once. Allocation process makes an implication that assignment of cost is somewhat capricious in nature.
Fixed Costs: Fixed costs are the costs that are independent of the level of goods or services that are being produced in the business operation. One aspect over which they are dependent is time and facets that are to be taken into consideration include rent, salaries, etc. Basic difference between variable cost and fixed cost is that variable cost is dependent over volume of production while fixed cost is independent of that parameter.
Variable Costs: Expenses that change along with proportion of business activities that being carried out by the organization. It is represented by the summation of marginal costs that are related to the number of units produced, thus also referred to as normal costs. Total cost can be divided into fixed cost and variable cost. Not all the variable costs can be categorized as direct cost as direct cost is the cost that can be associated with a specific cost object, like varying manufacturing overhead cost is an indirect cost.
Cost Driver: Cost driver can be reflected as a unit activity that brings the change in the activity cost. It can also be considered to an activity that makes cost to come into picture. ABC helps in establishing relationship between various activities and indirect cost that is associated with them in an explicit manner.
Chapter 2: Literature Review
According to B.B. Turney, Activity Based Costing (ABC) is a technique that had been in existence for over two decades. But over this tenure, it has evolved tremendously in order to meet increasing requirements that are associated with it. Solutions to the pertaining problems in present scenario could not be solved by the ABC two decades ago. Though potential related to ABC was realized in 1980s, but with the help of development, it has reached to such a supreme position in financial analysis and is capable of providing highly competent costing methodology. There are various stages of ABC hype cycle that are to be taken into consideration in order to make it complete, like
Cost allocation
Profit improvement
Activity based management
New application
Resource and capacity planning
Performance management
As both Abu Dhabi National Hotels and Emirates NBD are substantially large organizations, there is a need to make an integration of ABC in its functioning as without this particular aspect, it will become highly difficult for the management responsible for this particular activity to carry out their operations. It is also required that a check is put at all the stakes of ABC as it will ensure that these organizations are able to take care of their cost management without any ambiguity. ABC is utilized by ADNH and Emirates NBD in channelization of some of the most relevant activities, i.e. sustainability, financial planning, performance measurement, profitability management, and human capital management. All these aspects are such that they define organizational growth in one form or the other. (Turney, 2008)
Suntichai Shevasuthisilp and Kosum Punsathitwong depict application of Activity Based Costing over service industry as it has become one of the elementary aspects in their functionality. An important facet which had been described in this analysis is regarding continuously increasing competition in the market especially in service sector. Thus it has become inevitable for the organizations operating in service sector to take care of their customer satisfaction at every possible level of organizational hierarchy. One important aspect that is competent to attract more number of customers is cost. It allows organizations to gain competitive advantage if utilized properly. ABC provides organizations with such an opportunity to provide optimally priced service and products to its customers. As overpriced and underpriced cost related to a service or product may lead to adverse situations in terms of organizational productivity. Like if products are underpriced, company will not be able to attain desired echelon of profits despite of apposite market share, and if its product is overpriced, company will lose its ability to compete in the market hence loss of market share despite of optimum resources.
Both tourism and finance sector in UAE are encountering a boom, there are a number of new entrants in these sectors specifically. These entrants are both domestic and international players. Thus there is a need to make sure that appropriate costing technique is used that will provide company with highly suitable cost for its service and products. In traditional ways, production related factors of cost analysis were taken into consideration increase in which were encountered along with number of batches and variety of products. But now there are various other factors that are to be taken into consideration that are associated with ABC so as to fulfill augmented demand of the organizations. As ADNH and Emirates NBD are significantly large organizations, there is a need to perform appropriate segmentation while performing costing operation. Like each department’s work is bifurcated into different activities and then cost associated with those activities are calculated with the help of cost drivers. This segmentation helps in ensuring that various complications in costing method could be sorted out without any ambiguity and all financial decisions can be taken in a hassle free manner. (Punsathitwong, 2009)
Derya Eren Akyol, Gonca Tuncel, and G. Mirac Bayhan depicted through their research that ABC has become an essence for service organizations in defining their performance that reflects cost and resource consumption in detailed manner. It is sometimes also referred to as alternate approach to traditional cost & accounting systems, while some refer to it as augmentation of traditional approach of accounting. This research paper is based over the comparison between traditional approach and ABC in terms of the results that are attained by them. Final analysis shows that traditional costing approach comprise of a number of weak points due to which ABC has become a highly favorable approach to be followed by service organizations operating at large scale.
When this comparison is analyzed with respect to ADNH and Emirates NBD, we come across a fact that following methodologies are to be considered, i.e.
Cost allocation
Fixed cost
Variable cost
Cost driver
Cost driver rate
It is a combination of all these parameters that ultimately define efficiency of ABC as compared to traditional approach of costing. Also in case of ADNH, there is a need to make high end division of departments as departments operating in it are substantially large and need high end coordination. Thus there is a requirement for dividing each department on the basis of activity, which can then be clubbed on the basis of similarities that can be seen in different departments which will make their costing easier. ABC is widely followed as it helps in identification of inefficient products, activities, and departments. Also when proficient departments are identified, more number of resources can be allocated to them at both individual and department level so as to increase organizational productivity. As it helps in finding and violating unnecessary costs, this helps in ensuring that profits are also enhanced. (Derya Eren Akyol, 2005)
Chapter 3: Research Methods
Population and Sample/ Participants
Population that has to be analyzed over previously mentioned hypotheses are specifically employees working in various departments of Emirates NBD and ADNH. In order to obtain results to accept or reject the hypothesis, we chose a sample of 20 that will depict the result of entire population. In order to retain an element of legitimacy, diversity in the chosen sample is maintained so that it will represent entire population.
Primary Data Collection
Data is collected through primary sources as level of accuracy required in this report was significantly high. Also the fact that there is a high end requirement of precision in this report in order to reach to the final result, we cannot rely over secondary data. Thus primary data had been collected with the help of questionnaire. This questionnaire was distributed to various employees working in various departments of Emirates NBD and ADNH such that sufficient level of evidence could be included in the discussion. For this purpose assistance from Human Resource Manager as he had maximum level of accessibility in the organization along with ample dominance to help in collection of appropriate data without any difficulty.
Design and Procedures
Designing of the survey was based on the recent ongoing of the organization as they will provide best possible outcome to present conditions and prerequisite of organizations in relation to ABC. Also the design and procedures are created such that problems related to costing of various departments will be represented over which analysis will be performed. In order to make an inclusion of all the departments, questionnaire is designed so as to take elements of all the departments in relation to their cost factor. This factor is given higher preference as ABC focus over analyzing cost associated with various activities along with ensuring that appropriate steps could be taken to minimize variable costs.
Questionnaire
Age
20-25
25-40
40-60
Sex
Male
Female
Income
Below AED 10,000
AED 10,000 - AED 25,000
AED 25,000 â€" AED 50,000
According to you traditional techniques of costing are better than Activity Based Costing.
Strongly Agree
Agree
Neutral
Disagree
Strongly Disagree
Application of Activity Based Costing will increase efficiency of costing system presently being followed.
Strongly Agree
Agree
Neutral
Disagree
Strongly Disagree
In last few years, according to you costing have become more difficult in nature.
Strongly Agree
Agree
Neutral
Disagree
Strongly Disagree
Level of complications has increased due to more number of factors getting associated in costing process.
Strongly Agree
Agree
Neutral
Disagree
Strongly Disagree
Analysis of costing by individual departments has increased pressure over each department to put more focus over cost related activities.
Strongly Agree
Agree
Neutral
Disagree
Strongly Disagree
This has provided central authorities responsible for costing of entire organization with more level of flexibility to take further initiations.
Strongly Agree
Agree
Neutral
Disagree
Strongly Disagree
Activity Based Costing has provided each department to mark a check over their expenditure and also identify various forms of their expenditure.
Strongly Agree
Agree
Neutral
Disagree
Strongly Disagree
According to you, more number of people is becoming liable towards costing process that may increase ambiguity if not handled properly.
Strongly Agree
Agree
Neutral
Disagree
Strongly Disagree
Data Analysis
Results related to various questions had been depicted below,
Overall result is depicted below,
From above attained it can be showed that more of the responses are positive in nature and also in such a manner that employees are more intended towards using ABC in organizational functioning. It can also be depicted from the results that ABC has increased organizational productivity as most of the employees are in the favor of applying this technique in organizational functioning without any dilemma.
Chapter 4: Results
Demographic Data
When age factor of sample selected was analyzed, it was observed that about 80% of the sample was in the category of 25-40 years. For age group of below 25 years and above 40 years, 5% and 15% were accounted.
Out of 20 people that filled the questionnaire, only 40%, i.e. 8 were female and rest 12 were male.
In relation to income of employees, 25% employees lied in the category of below AED 10,000, 60% in middle segment, i.e. AED 10,000 to AED 25,000, and rest 15% in above AED 25,000 category.
Hypothesis Testing
H0: Application of Activity Based Costing is not justifiable in service industry.
H1: Application of Activity Based Costing is justified in service industry.
Hypothesis Test: Mean vs. Hypothesized Value
3.0000000
hypothesized value
3.1083333
mean Data
0.4636492
std. dev.
0.1639247
std. error
8
n
7
df
0.66
t
.5298
p-value (two-tailed)
α= 0.05
Probability = 52.98% (two-tailed)
From above mentioned results it can be shown that we have enough evidence to reject null hypothesis and accept alternate hypothesis, i.e. application of Activity Based Costing is justified in service industry.
Chapter 5: Discussion
Summary of the Findings
From the above discussion it is clear that Activity Based Costing has become a mandatory feature for companies operating in service sector. This had been depicted using example of ADNH and Emirates NBD. Also the level of applicability of ABC is increasing due to higher benefits which this particular approach has provided to the organizations in relation to their costing. ABC has made it possible to identify cost associated with various steps of organizational functioning, and thus eliminate unnecessary costs in order to make sure that profitability of the organization could be increased. Another feature that can be integrated with this approach is better hold of management over costing of the company. Employees working in different departments have confirmed that it helps in identification of highly prominent activities in their department based on the costing and make sure that people are able to take care of those activities in a better manner along with proper assignment of priorities.
Limitations of the Study
Primary limitation of the study is that our entire result formulation is based over sample and their response. There might be a possibility that chosen sample is not depicting entire population in an accurate manner, which can bring deviation in the results that obtained. Also there is a possibility that outcomes recorded through sample are biased through certain parameters like age, income, and gender which can also stray results.
Another limitation of the study is that this study has generalized the outcome regarding service industry, while there is a possibility that ABC is not applicable in an exact manner over a particular organization, and in that case results obtained in this study will also not be applicable in an exact format.
Recommendations
Recommendations in context to the above performed study are,
First of all an in-depth analysis of the organization has to be performed before implementing ABC so that all the positive outcomes related to this technique could be brought into organizational structure.
There is a possibility that ABC is not entirely applicable in intact manner, thus molding could be done in accordance to the requirement possessed by the organization or specific section of the organization.
There could also be mix of traditional approach of costing and ABC that will prove it to be more beneficial to the organization, thus this particular option should not be discarded at any operational level.
Activities should be analyzed on a regular basis so that essence of ABC could be retained as an activity which is beneficial in present scenario may not remain the same afterwards.
Implications
From above conclusion it is clear that ABC is highly applicable over service industry as they comprise of large number of segments, thus require a dedicated management to take care of cost related matters of every department. Also with increasing reach of service organizations in the industry along with rising level of globalization, there is a high end need to make sure that companies are making suitable implication of ABC in their working such that they are able to mark a check over their expenses on the basis of information available in detailed manner.
Future Research
For future research following aspects can be taken into account,
Benefits related to ABC could be analyzed to ensure that applicability of this approach of costing increases on a continuous basis.
Profitability achieved through application of ABC could be accounted on a separate basis in order to determine efficiency of this approach in relation to organizational functioning.
This approach of costing will also provide us with a tool to analyze efficiency of different departments along with putting a check over amount of resources utilized by it.
