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ABB in business of ASC Pty Ltd

HA2011 Managerial Accounting

Background: 

You are recently employed as a graduate consultant in a management consultancy firm and are assigned to a team. One of your firm’s clients is currently evaluating its budgeting system. The CEO of your client had recently attended a seminar on Activity-Based Budgeting (ABB) in private companies and would like to know whether ABB is suitable to the company. Your manager has asked your team to prepare a report for the client.

Required: 

Your group is required to prepare a report to comment on the suitability of ABB for a company of your group’s choice (your firm’s client). The report should cover the followings: 

a) A description of your firm’s client 

b) A description of the ABB and its features 

c) In what ways ABB is different from traditional budgeting systems 

d) A discussion on whether the ABB is suitable to your firm’s client

Answer

Executive Summary

This report is based on analysing importance of activity based budgeting in maintaining financial accounting standards. It includes detailed description of activity based budgeting (ABB) system while underlining its features that includes cost effectiveness of budget planning along with strategic approach to maintain operating costs and revenue of a particular business. In order to understand importance of ABB, a comparison has been drawn in this report between traditional budgeting and activity based budgeting to determine effective budgeting system. The report also contains a detailed idea on applicability of ABB in business of ASC Pty Ltd that is involved in warship and submarine manufacturing in Australia. Evaluation of this report is beneficial in forming an idea of managerial accounting in respect with activity based accounting to enhance area of business in international market.

Introduction

Expansion of business in international market propagates opportunity to consider managerial accounting as an important aspect. The term managerial accounting refers towards cost accounting that identifies, evaluates, interprets and measures accounting process to achieve goals of an organisation. This report is based on assessing managerial accounting of ASC Pty Ltd which is an Australian Government organisation and operates its shipbuilding business. The current report is destined to underline its managerial practices of this company while stating impact of new activity based budgeting (ABB) system within business operations to enhance area of business.

Description of client 

In order to conduct a successful business in global market, it is mandatory to focus on partners and clients of respective business (Charaf & Rahmouni, 2014). This report is destined to determine applicability of activity based budgeting within business of ASC Pty Ltd which was founded in 1985 and is conducting a smooth business under the leadership of CEO Stuart Whiley while having its headquarter in Osborne (Asc.com.au, 2018). As ASC Pty Ltd is involved with naval ship building, it has provided Royal Australian Navy with maintenance services of Collins-Class Submarine. 

ASC Pty Ltd is one of the leading shipbuilders of Australia producing most complex warships for Australian Navy along with manufacturing submarines and steel hulled warships. Application of effective business plan along with budgeting system as per changing business requirements, ASC Pty Ltd has gained an annual revenue of ASD 811.1 million in the year 2015 while annual tax rate of this company is ASD 29.2 million in that year. Moreover, net profit of this company in year 2017 is ASD 29,177 million (Asc.com.au, 2018). [Refer to Appendix 1].

In order to enhance business while implementing effective planning for business development, ASC Pty Ltd has focused on Performance and Accountability Act 2013 which depicts importance of accountability while determining standard of performance (Legislation.gov.au, 2013). However, it has been identified that this company has conducted its business while following the traditional accounting method which presented several issues of managing the business. Hence, this report focuses on application of activity based budgeting system within this business to ensure effective growth of business.

Description and features of ABB

Activity based budgeting (ABB) is considered to be an effective budgeting method that provides greater transparency in budgeting of a particular business. Cokins & Dybvig (2018) stated that implementation of effective budgeting system facilitates effective managerial accounting. This results in measuring business operations in an expertise manner which enables a manager to meet goals of a business. 

activity based budgeting

Figure 1: Overview of activity based budgeting (ABB)

(Source: Noreen, Brewer & Garrison, 2014)

Activity based budgeting system can be applied to established companies as well as start up companies with significant customers or new subsidiaries. According to Kenno & Sainty (2017), activity budgeting system is helps to determine the cost drivers that are responsible to control both the expenses and revenue of an organisation. Basic features of this budgeting system can be listed as following:

  1. Activity based budgeting system prepares budget of a company of basis of delineating cost per unit regarding every activity. It allows controlling the budgeting system which is essential to prepare improved budget for respective company. Dokulil et al. (2016) stated that as activity based budgeting system focuses on individual business operations of an organisation, it is liable to trace actual level of expenses and revenue of a particular company.
  2. Prime focus of this budgeting system revolves around preparing expense and revenue planning which enables scope to consider detailed evaluation of both the revenue and expense through producing detailed projection of business operations (Miculescu, 2013).
  3. Despite being costly to implement within a business, activity based budgeting and planning propagates opportunity to hold a greater control over budgeting process of an organisation.
  4. Another important feature of this budgeting can be described as its ability to provide chance to look towards a business in a holistic manner. It allows managers and executives to look into business segments and areas of business as a complete process rather than considering individual departments of a business. Thus, it allows managers to prepare budget as per the requirement of the business (Mahieu, Vroman & Calluy, 2015).
  5.  Application of activity based budgeting system allows employees to rejuvenate customer focused business operations that enhances productivity of a particular business. 
  6. As this budgeting system is effective in circulating a sense of holistic business, it is also beneficial in encouraging teamwork (Berisha & Asllanaj, 2017).
  7. Implementation of ABB helps an organisation to focus on a customer oriented service which readily activates strategic planning to meet expected goal of business (Fischer, 2013). It also makes strategic planning easier to implement as customer becomes centre of business operations.
  8. Another important feature of activity based system is its feature of removing extra activities from budget planning that helps to implement the money in other areas of development.

However, it can be included that adoption of this activity based budgeting can be effective through implementing costing techniques. 

Difference between ABB and traditional budgeting system

The term traditional budgeting refers to conventional budgeting system that has been used by a large number of accounting farms and business organisations to prepare planning for spending money. This includes planning to spend money to satisfy financial obligations including insurance, entertainment, rent including all kind of business expenses. It helps to spend income of a particular company as per prepared plans (Cristian, 2014).

On the other hand activity based budgeting system (ABB) focuses on expenses and revenues of a company that helps to prepare planning to focus on individual business activity to ensure cost effective budgeting. However, extensive research on both the above-mentioned budgeting process presents several differences between these two that is presented below:


Traditional budgeting
Activity based budgeting (ABB) 
  1. It is the easiest budgeting system that has been adopted by a great number of business organisations to meet business objectives.
  2. It provides planning based on changes of previous year’s budget plan of a particular company (Patil & Kshatriya, 2016).
  3. Traditional budgeting prepares planning for a business organisation on basis of its all business operations.
  4. This budgeting system provides planning for every business activities. 
  5. It focuses on planning of expenses in accordance with income of an organisation.
  6. Both the reliability and effectiveness of traditional budgeting system revolves around information gathered from previous year’s budget as it is prepared on basis of that budget planning (Noreen, Brewer & Garrison, 2014).
  7. Traditional budgeting is prepared on basis of previous year’s budgeting which refers to its reliability on historical record.
  8. It is cheaper to incorporate within business.

  1. This budgeting system is a modified budgeting process that has been preferred by a number of business organisations to expand their area of business.
  2. It allows opportunity to prepare strategic planning regarding resource allocation and business expenses.
  3. Activity based accounting prepares budget planning while focusing on important business areas.
  4. It prepares the budget through eliminating or incorporating certain elements of a particular business (Wongjinda, Ussahawanitichakit & Janjarasjit, 2015).
  5. It allows more control over business operations as it focuses on important business areas.
  6.  This is based on customer oriented fields which emphasises on areas of profit.
  7. It is prepared through evaluating revenue and expenses of a business while focusing on cost effective strategy.
  8. Activity based budgeting is costlier than implementation of traditional budgeting system (Shalaby & Eltobgey, 2016).


Table 1: Difference between traditional budgeting and activity based budgeting (ABB)

(Source: Created by learner)

Detailed analysis of the above-mentioned table provides a clear idea on differences between traditional method of budgeting and activity based budgeting which is indicative to state that adoption of the later mention budgeting system can be beneficial for a business organisation to enhance area of business. Besides, it has also been mentioned that activity based budgeting focuses on evaluating expenses and revenues of a particular business organisation to prepare effective planning to spend income of that specific organisation. In the opinion of Oura et al. (2013), adoption of effective budgeting can help a company to expand its area of business through implementing cost effective planning while generating a sense of unity among the employees.

However, growing competition in international market along with changing business policies has instigated opportunity to implement strategic planning. In order to ensure an effective business in global market while focusing on increase in net profit, it is mandatory for a company to consider budgeting as an important aspect of managerial accounting. Thus, close analysis of the two budgeting process has provided the information that focus on adoption of activity based budgeting can help a company to promote teamwork while considering business growth through justifying importance of proposed product of a particular industry.


Applicability of ABB on ASC Pty Ltd

Increasing competition in global market along with changing business policies have enhanced opportunity to focus on accounting methods. Considering the current issues of maintaining financial operations of ASC Pty Ltd, it has been identified that current accounting method of this company has been bothering its business in a significant manner which requires attention of managerial accounting to improve business condition. Implementation of effective accounting method can help an organisation to explore new method of preparing plans to ensure effectiveness of financial planning. 

In order to conduct a business in Australian market it is necessary to follow the guidelines of Public Governance, Performance and Accountability Act 2013 (PGPA) that refers to guidelines of conducting a business while following proper method of financial accounting (Legislation.gov.au, 2013). This PGPA Act 2013 focuses on accountability and performance of an individual farm. The financial management framework presented in the guidelines of this Act includes instruction on tax rates maintenance along with guidelines of public resource management.

Introduction of several accounting standards including AASB 112, AASB 107, AASB 9 and AASB 118 have presented scope for ASC Pty Ltd to consider its accounting policy for modification. Detailed evaluation of the above-mentioned guidelines has been presented below to produce a clear idea on importance of adopting a new financial accounting system.

Incorporation of Government policies regarding maintenance of certain standards of accounting method has presented several issues of financial accounting of this company. As per Australian Accounting Standard Boards (AASB), amendment to AASB 112 changes in tax rates are a serious matter to consider for organizations to run business in Australian market (Aasb.gov.au, 2018). In order to follow the guidelines of AASB 112, ASC Pty Ltd has to modify the current accounting model that follows a traditional budgeting. Application of activity based budgeting would be helpful for this company to focus on tax rates which falls under the operating expense of this company. In addition it would also help to measure the value of assets in accordance with current fair value which would allow this company to expand further area of business.

This guideline of AASB would be effective from financial year of 2018 which indicates that adoption of an effective budgeting system would allow ASC Pty Ltd to implement strategic planning for business expansion while focusing on resource allocation and maintaining operating expenses including tax rates (Weygandt, Kimmel & Kieso, 2015).

Another requirement of considering activity based budgeting (ABB) as accounting method lies in amendment to AASB 107 which restructure guidelines regarding disclosure of liabilities (Legislation.gov.au, 2015). Thus, in order to implementing effective  managerial accounting, it is mandatory for ASC Pty Ltd to consider activity based budgeting system as it would provide opportunity to revise expenses and revenues of this company. It would also be effective for this company to consider its liabilities as an important factor which can be used in a strategic manner to ensure effective accounting method. 

Besides, above-mentioned regulation of AASB, AASB 9 Financial Instruments is also an important factor to consider while suggesting budgeting system for ASC Pty Ltd. As per this guideline credit risk of the above-mentioned company is also liable to be affected besides tax rates and liability (Aasb.gov.au, 2014). This legislation focuses on measurement of financial assets which directly impacts credit risk of a company. Hence, implementation of activity based budgeting can be effective for this company to focus on its revenue and expenses to reduce credit risks. It would also be beneficial for this company as it would be able to focus on fair value of business assets of this company. In addition, this regulation of AASB is likely to be applied from financial year of 2016 and hence, application of ABB would be effective for ASC Pty Ltd to implement effective budget planning. 

Apart from previously mentioned regulations of AASB, AASB 15 Revenue from Contracts with Customers is another reason that has made this company to consider alteration in accounting process. According to the guidelines of this accounting policy, revenue is a subject to be controlled as per provided services to customers (Aasb.gov.au, 2014). Though this regulation would be applicable for business organizations from financial year of 2019, adoption of ABB would help ASC Pty Ltd to focus on customer centered services. As this regulation of AASB would replace guidelines of AASB 118 which provides guidelines for revenue covering contracts for services and goods, implementation of new accounting procedure would help ASC Pty Ltd to measure rewards and risks.

 As a result of these changes in financial accounting standards, it has become necessary for ASC Pty Ltd to focus on contract with customers while determining performance obligations for separate business activities (Asc.com.au, 2018). Detailed evaluation of financial report of 2017 of this company has provided the information that existing accounting standards of this company has not been able to match requirements of proposed guidelines of AASB. This readily indicates requirement to adopt the new activity based accounting system. Implementation of this accounting system would be effective for this company to focus on maintaining previously mentioned guidelines of AASB.

Attempt to incorporate activity based system within business of ASC Pty Ltd can help this company to focus on preparing a modified budgeting system that would be able to produce strategic planning as per the requirement of business. Besides, it would also help this company to concentrate on major business areas including important customers. Implementation of ABB could also be able to prepare budget planning through incorporating or including important areas of business. In addition, as ASC Pty Ltd is determined to follow the guidelines provides by AASB, it needs to focus on transaction price of a contract. Hence, ABB would be helpful to prepare budget planning while focusing on transaction of a contract as it is able to hold more control over business areas of this company. 

Core business of ASC Pty Ltd revolves around manufacturing submarines and warships including maintenance of the same. Hence, activity based budget system would be effective for this business to prepare budget while focusing on requirements of customers. In addition, as one of main features of ABB system is to sort areas of business on which an organisation should focus, it would be effective for ASC Pty Ltd to focus on requirements of customers. 

Another important aspect of focusing on net revenue of this company has been found from annual report of above-mentioned company of year 2017 (Asc.com.au, 2018).  Thus, intention to satisfy individual performance obligation, it is necessary for ASC Pty Ltd to consider ABB system. This new budgeting system would also be effective for this company to consider assets and liabilities of this company as a major factor to conduct further business in international market.

Apart from the previously mentioned guidelines of AASB, introduction of AASB 16 has also influenced ASC Pty Ltd to prefer a new accounting system. As per the guidelines of this regulation, the company should focus on aspect of lease accounting (Aasb.gov.au, 2016). This guideline is liable to replace AASB 117 leases. This new standard of lease accounting emphasises on leased assets that are considered to fall under assets of a company that helps to generate revenue. Despite its period of applicability would start from financial year of 2020, ASC Pty Ltd can adopt ABB system to evaluate importance of focusing on lease payments while following standards of accounting. 

Introduction of activity based budgeting system within business of this company can be effective to prepare budget plan as per intercompany transaction and transaction between its partners and suppliers. In addition, this budgeting system would also be helpful for ASC Pty Ltd to balance with the accounting policies adopted by its subsidiaries while reducing chances of inconsistency of financial performance. Along with this, it would also facilitate opportunity to consider operating expenses and annual revenue of this company to ensure growth of business. Prime feature of activity based budgeting is to prepare planning to expense companies income in a strategic way that follows financial standard of respective company. Thus, adoption of ABB in financial accounting system of ASC Pty Ltd would be beneficial for this company to focus on contract with customers while maintaining balance with annual revenue generation.

Conclusion

The current report is premised on depicting importance of activity based budgeting (ABB) system as a method of financial accounting. In order to determine impact of ABB on financial accounting of a company, implementation of this budgeting system has been discussed in light of ASC Pty Ltd. Intention to sketch a clear concept of planning and budgeting has provided to differentiate traditional budgeting system and activity based budgeting which primary points towards acceptability of the later budgeting system due to its strategic approach in planning and budgeting procedure. 

Besides, cost effectiveness of activity based budgeting system has also been highlighted to consider it as effective budgeting and planning method. In addition, guidelines of Australian Accounting Standards Board (AASB) has also been considered in this report to determine importance of activity based budgeting system within warship and submarine manufacturing business of ASC Pty Ltd. Detailed analysis of this report presents that adoption of activity based accounting system within business of above-mentioned company can be effective to address business goals of this company while maintaining accounting guidelines provided by AASB to enhance area of business in international market.

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