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214
Summary, Conclusion and Findings
CHAPTER I
Introduction
Activity-Based Costing (ABC) developed in the 1980s due to limitations in
traditional cost accounting method. When ABC was not developed, it was just
cost accounting which was used to ascertain the cost of the goods produced.
Cost accounting worked well for item or service-based businesses to generate
the true cost of the production of an item or completion of a service. The direct
costs of completing a project were added in with the indirect costs of overhead
to arrive at the true cost. Over the years, many methods of cost accounting
developed because of the inadequacies of the simple cost method.
Significance of the study
In this context, the four important factors that have influenced the Iranian
business environment which include: (i) market dynamism; (ii) production
dynamism; (iii) management innovation and (iv) cost dynamism. To equip
with the above dynamisms and to reduce the cost of production, it is essential
to renovate the cost system in competitive environment. On the other hand,
the problem of traditional cost systems is not only confined to manufacturing
costs but, also overheads including marketing costs are hidden under the
traditional cost system In most of the traditional costing promotional
overheads being allocated on the basis of sales which create further typical
215
problems of over allocation or under allocation. Keeping in view, the
importance of the study, an attempt is made to study the ABC and its
applicability for food industry i.e., KSFIC, Iran.
Objectives of the Study
The main objective of the study is to analyze the application of the ABC
system of accounting for Komaj Saba Food Industrial Complex (Khootka), Iran
.
The specific objectives of the present study are as follows;
1. To analyze the growth and development of KSFIC, Iran
in implementing an ABC system of accounting.
2. To study the cost accumulation procedures and
practices under Volume Based Costing (VBC) KSFIC,
Iran;
3. To assess the application of the ABC system of cost
accounting and its impact on the profitability of KSFIC;
and
4. To make a comparative analysis of VBC system and
ABC system of accounting and their effectiveness in
terms of profitability and cost reduction along with
some measures for effective implementation of ABC
system.
216
Research Methodology
The present study is an applied research in nature and uses both the primary
and secondary sources of data. Primary data are collected through personal
discussion with executives of KSFIC of Iran. The study mainly relies on
secondary data for which secondary data have been collected from the annual
reports of the company, other published data from the company records,
websites, etc. first by use of ABC and VBC techniques, EBIT and indirect cost
can be obtained, finally the data will be tested by paired samples t- test to
validate the proposed hypotheses.
Scope and Period of the Study
It is a micro-level study, pertaining to Komaj Sabah Food Industrial Complex
(KSFIC) of Iran. The study examines traditional cost accounting practices of
the select company. Hence, the study does not make extensive study of ABC in
the corporate sector across the globe. The present study is confined to the
existing VBC accounting system and compared with ABC which is proposed
accounting system as an application of activity based costing system in Komaj
Sabah Food Industrial Complex of Iran as a case study and covers a period of
six years from 2005-06 to 2010-11 .
217
Limitations of the Study
The data has been collected from more than one source and there may be
discrepancies in the data on account of their reporting. While computing the
percentages and averages, the figures are approximated. Therefore, sometimes
the totals may not tally exactly.
Plan of the Study
Chapters . The chapter details are given as below.
Chapter –I Introduction
Chapter – II An Overview of Activity Based Costing
Chapter – III Profile of KSFIC, Iran
Chapter – IV Volume-Based-Costing Practices in KSFIC
Chapter – V Application of ABC and its Impact on Profitability
Chapter - VI Comparative Analysis of VBC and ABC Systems
Chapter - VII Summary, Conclusion and Findings
CHAPTER-II An Overview of Activity Based Costing
This chapter covers the conceptual framework of ABC system, process of
activity based costing, logic and assumptions.
1. ABC is a method of measuring the cost and performance of activities
and cost objects. It assigns cost to activities based on their use of
resources and assigns cost-to-cost objects based on their use of
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activities. Based on this definition, ABC is more than product costing; it
provides a means to measure activity performance in order to
determine how well work is done in that activity.
2. The goal of ABC is to improve the accuracy of product costs and
provide a means for the improved management of process and support
activities. It is part of a process of continuous improvement aimed at
improving the value received by the customer and enhancing
profitability of the Company.
3. It is observed that a multidisciplinary team must be assembled to
design the ABC system to reflect correctly the workings of the
company. This team should be selected and assigned to the project on
full time. Training is essential for effective implementation, execution,
use, and acceptance of an ABC system.
4. A vital component of the ABC implementation is, identifying the
information requirements of its users. Each phase of information
gathering should include a member of the implementation team and
the user. The requirements of the system and the information needed
should be explored.
5. The process of converting the organization chart to an ABC flowchart
by breaking down tasks into divisions, resource centers, and activity
centers is called functional decomposition. Activity centers should be
established and all activities related to accomplishing a particular
attribute should be grouped.
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6. ABC is an accounting method that identifies the activities that a firm
performs, and then assigns indirect costs to products. An activity based
costing (ABC) system recognizes the relationship between costs,
activities and products, and through this relationship assigns indirect
costs to products less arbitrarily than traditional methods.
7. Some costs are difficult to assign through traditional method of cost
accounting. Indirect costs, such as management and office staff salaries
are sometimes difficult to assign to a particular product. For this reason,
ABC method has found its importance in the manufacturing sector.
8. ABC is a multi-faceted algorithm and database of financial and
organizational information. It supports performance management
systems where business users can access ABC-derived decision relevant
information from their desktop. Understanding this journey provides
important lessons as organizations continue to adopt and use ABC to
create value.
CHAPTER – III
PROFILE OF KSFIC, IRAN
Komaj Saba Food Industries Complex (KSFIC) was established under name of
Khotka under Registration No. 899 on 14 May 1995 and was registered in the
notary office of Amol. Central branch of the company is situated in the
industrial city of Amol, Imam Zadeh Abdullah. The path of expansion is as
under:
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� Saba Health and Packaging Industries Complex by production of all
kinds of carton in the first phase
� Establishment of Komaj Saba in 1995
� Started to produce Biscuit in 1997
� The first export in 1997
� Starting to produce macaroni in 2002
� Wafer production line commissioned in 2003
� Started to produce chocolate in 2003
� Establishment of Saba Plastic Company in 2003
� Establishment of Saba Health and Packaging Industries Complex in
2003
� Establishment of Diana Unit in 2004
� Establishment of ShekarShekan in 2004
� Started to produce layered cake in ShekarShekan in 2004
� Commissioned candy line in 2005
CHAPER- IV Volume-Based Costing Practice in KSFIC
Traditional cost accounting combines overhead (indirect) and direct (materials
and labour) costs and allocates those expenses to each product. It assumes a
consistent ratio between overhead and production costs; in other words, the
more products create the more overheads. This chapter deals with the role of
VBC in costing, Computation of VBC in KSFIC for six years i.e., from the year
2005-06 to 2010-11.
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1. The total overhead cost of the Biscuit, Wafer and Chocolate’ product
lines are more in comparison to the total overhead cost of the Candy,
Cake and Spaghetti. The reason for increasing the indirect cost of the
first three products are due to the high volume of direct labour cost ,as
the number of units of these product lines are more, overhead cost per
box shows almost a lower quantity which indeed are not the actual
overhead cost . (Table 4.4)
2. The income under VBC method shows, that indirect cost consumption
on the product lines of Biscuit, Wafer and Chocolate are more than
consumption of indirect cost of production lines of Candy , Cake and
Spaghetti. The reason is due to the high direct labor cost of the first
three products, which caused the more indirect cost to be absorbed in
comparison with the three others products. (Table 4.8)
3. Under VBC system of Accounting, though overhead cost per box in
some product lines are less, the overhead cost attributed to those
product lines is shown more due to higher number units sold.
4. Similarly, the product lines whose per box overhead cost of those
product lines is shown low due to less number of units sold. The
resultant gross income and EBIT are unrealistic. Besides, it is also
observed that, indirect cost consumption on the product lines of Biscuit,
Wafer and Chocolate are more than consumption of indirect cost of
production lines of Candy, Cake and Spaghetti. The reason is high
direct labour cost in the first three products, which caused the more
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indirect cost to be absorbed in comparison with the three others
products ,it is also noted that the depreciation is a major component of
overheads during the study period.
5. The biscuit line consumes highest overheads followed by Wafer and
Chocolate due to the high volume of production. The other three
product lines have shown low volume and their consumption of
overhead cost also low. The EBIT in Spaghetti line is high during the
study period due to low absorption of overhead cost and low volume of
production followed by Candy and Cake. The EBIT of the other three
products lines is low which is attributed to high absorption of overhead
cost. It is also noted that under the VBC method, overhead costs are
allocated according to the volume of production, depreciation on
machines and buildings which include the overhead costs are allocated
to different product lines as per their volume. (Table 4.16)
6. There is a danger that the non-productive activities consuming a high
amount of overhead cost under VBC method. Hence, it is concluded
that profit presented under VBC system of accounting may not depict a
realistic profitability position, therefore, it advised to explore and
examine other methods like Activity Based Costing (ABC) and best
practices of costing for ascertaining the cost of production thereby
arrive at a pragmatic picture of profitability. In this direction, an
attempt is made to study the ABC system for a confectionery industry
like KSFIC in the fifth chapter.
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CHAPTER - V Application of ABC and its Impact on Profitability
From the study made in this chapter, the following conclusions can be drawn;
1. As the allocation over head costs are based on activity but not on
volume, so the actual profit in six products in the order of Biscuit, wafer
Chocolate, Candy, Cake and Spaghetti because of actual allocation of
over head costs under ABC methods. The reason for profit in all
products is optimum use of activity and there is no non value added
activity. In ABC method, the profit of products is real that is because of
appropriate allocation of over head costs. According to the above
mentioned results the profit on products like Spaghetti , Cake and
Candy is low in ABC method, similarly the profits of products like
Biscuit, Wafer and Chocolate is high in ABC method due to optimum
use of activities. (Table 5.32)
2. Activity-Based Management methods have a broad range of uses,
permitting the empowering utilization of ABC information for a wide
variety of company functions and the operations such as process
analysis, strategy support and time-based accounting, monitoring
wastage, as well as quality and productivity management. The
implementation of ABC/M is a collective process and brings new cost
calculation rules. Implementation showed that despite limited impact
in the field of overhead cost allocation, the benefits in the areas of
process and activity analysis meant it proved a success.
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3. It is noted that in ABC method, overhead costs allocated based on
activity, but not on volume. ABC system is a costing model that
identifies activities in an organization and assigns the cost of each
activity resource to all products and services, according to actual
consumption of each. The profit of products is real because of
appropriate allocation of overhead costs. The study shows that, the
profit on products like Spaghetti , Cake and Candy is low in ABC
method. This stems from the proper allocation overhead costs in ABC
and the profit of Biscuit, Chocolate, and Wafer products is almost closer
to VBC method and this is because of the high volume of production
and appropriate use of different activities and there are no non value
added activities in those product lines. (Table 5.24)
4. The reason for profit on some products in different years is of actual
allocation over head costs in ABC method, the study results shows that
this system can use optimum activities and there are no non value
added activities in these products (Biscuit, Wafer and Chocolate) the
reason of low profit or loss for some products (Candy, Cake and
Spaghetti) can also be observed non-use of optimum activities.
(Table 5.40).
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CHAPTER-VI COMPARATIVE ANALYSIS OF VBC AND ABC SYSTEMS IN
KSFIC
From the study and analysis made in this chapter the following conclusions
can be drawn:
1. The profit on biscuit in VBC method is less than the ABC method due
to high overhead costs. Similarly, the profit on wafer in VBC method is
more than the ABC method and profit on chocolate in VBC method is
less than the ABC method, similarly, the profit on Candy, Cake,
Spaghetti in VBC method are higher than ABC method due to less
overhead cost. Under ABC method overheads are actually allocated to
products. The cause of loss on Spaghetti, Cake and Candy is the lack of
using existed capacity toward the product lines. As a result non value
added activities are caused a decrease in profit and increase in cost.
(Table 6.1)
2. The profit on Biscuit, is lower in VBC method due to high overhead cost
but, for the products lines Wafer and Chocolate is low. Similarly, candy,
cake & spaghetti are higher in VBC method because the overheads are
actually allocated to products. The reason for loss on Spaghetti and
Cake is lack of using existed capacity. As a result, non value added
activities caused decrease in profit and increase in cost. (Table 6.2)
3. It is observed that inappropriate cost allocation has influence on the the
profit and cost of production .The reason for profit on products such as
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Spaghetti and Cake is transferring the indirect costs to products like
Biscuit, Wafer, Chocolate and Candy.
4. The profit on Biscuit, chocolate in the VBC method is less than the ABC
method because of high overhead cost but, for wafer, Candy, cake and
spaghetti, profit is more under VBC method than ABC method. The
reason of loss on Spaghetti in ABC method is the lack of using existed
capacity. As a result, non value added activities caused decrease in
profit and increase in cost. (Table 6.4)
5. By comparing the all years and products, it is concluded that the
overhead cost per box allocated under VBC method in three products
namely: Biscuit, Wafer, Chocolate, are more than under the ABC
method. But, for the other products namely: Candy, Cake, Spaghetti,
the over headcost per box allocated under ABC are more than the VBC
method. As the cost of direct material and labour are the same in two
methods, the difference is attributed to the difference between the
overhead costs.
From the above, it is concluded that, the overhead cost per box allocated by
the VBC method in three products viz; Biscuit, Wafer, Chocolate, were more
than the ABC method. But the other products namely: Candy, Cake, Spaghetti,
the over headcost per box allocated under ABC were more than the VBC
method. As the cost of direct material and labour are the same in two
methods, so the difference derived from the overhead costs. The result derived
227
from all products in different years indicates that the diversity arised from the
indirect costs. Diversity in three products, biscuit, wafer and chocolate is not
considerable. This shows the company could manage its cost to some extent.
This can be due to optimum utilization of machineries, building and other
indirect costs, viz; Candy, Cake, and Spaghetti. On the other hand, the
observed difference in products candy, cake and spaghetti significantly has
increased. This indicates that the company could not manage the costs
successfully. This can be due to failure to use optimally of machineries,
building and the other indirect costs, for these three products are observed
many none value added activities.
Scope for Future Research
From the present study, the following areas have been identified for future
research work.
1) ABC in service sector in India
2) ABC in hospitals in India
3) ABC impact on profitability in a manufacturing organization
4) ABC in electricity industry
5) Application of ABC in universities in India.