Activity based costing 

Executive summary

The activity based costing is more useful for the business which are having the complicated process and work program. Thus, for overall organisation there is need to establish program, make basic policies, set goals and objective by uses the process of planning. To satisfy the company’s objective and goal there is need of planning process in which budgeting is one of the main components that coordinates the detail of many activities needed to implement the particular work process. Nonetheless, the activity based costing also helps in proper absorption of the costing in the particular work process which helps in proper bifurcation of the process costing in each and separate process program. On the other hand, traditional based costing method are less aligned with the automated technologies and advance program which also lower down the complex issues and set process which may result to high costing for the proper bifurcation of the cost in different process department. With the implication of the activity based budgeting costing method, the unnecessary cost is reduced by eliminating unnecessary activities which ultimately beneficial for an organisation

Introduction

This report reveals the key understanding of the activity based costing and how it is more effective than the traditional based budgeting costing method. In this report, Common Wealth Bank Company has been taken into consideration. In the starting of this report, description of the activity based costing and its features have been taken into consideration. After that, the implications of the activity based costing and how it differ from the traditional based costing have been assessed. afterward, the discussion on the whether the activity based costing and its suitability in terms of the implication f the ABC costing method for the Common Wealth Bank have been assessed. Therefore, this report reveals the practical implication of the ABC costing method and how company makes the better implication of this method to strengthen the business outcomes (Common Wealth bank, 2019).

Description of the Common Wealth Bank Company

Commonwealth bank of Australia is an Australian multinational company operating in Australia, New Zealand, Asia, United States, and United Kingdom. The bank was founded in 1911, headquartered in Sydney and got registered in ASX in 1991. Currently the bank market cap of AUD150.382B and stock are traded at ASX. This is one of the 'big four' of Australian banks. The beta of bank's stock is 0.49. The bank operates in various industries of financial services sector in above mentioned locations (Common Wealth bank, 2019). The industries in which bank operates include banking industry consisting retail, business, premium, and institutional banking, insurance, superannuation, fund management, and superannuation products and other financial services. Operations of the bank are divided in six major segments and it operates with 1100+ branches 4300+ATMs. The segments of the bank are retail banking, business and private banking, institutional banking and market related to core banking; and fund management, New Zealand and international financial services (Common Wealth bank, 2019).

Description of the Activity-Based Budgeting and its features

The activity based budgeting is the method budgeting which shows the implication of the proper bifurcation of the costing method which helps in absorption of the costing in the different process. It helps in proper bifurcation of the costing in the different process department.  Budgeting is the phenomena which is required to prepare the detailed projection of future amounts. It is process of the company for making the financial goal and for achieving that goal create the plan for it.  The Activity Based Budgeting is the particular type of budgeting in which budgets are made based on the activity cost. Activity based budgeting is the process which is the management accounting tool is used to provide the resource for the activity for this  activities that incur the cost is critically analysed and researched. This type of budgeting does not consider about the previous year’s budget for making the current year’s budget. Using the activity based budgeting is help to earn more profit from sales by reducing cost and using the amount in an appropriate and effective manner which is beneficial for any organisation  (Common Wealth bank, 2019). 

Activity based budgeting can be implemented by dividing it into three components that are as follows:

• Firstly, identify the effective activity
• Secondly, for calculation determine the number of unit related to each activities.
• Thirdly, making the boundaries for the cost per unit of activity.    

Implementing this activity based budgeting is mainly useful in the newer companies and firms undergoing material changes. Thus, the activity based budgeting is not function oriented but it is activity oriented. Budgets are prepared after considering the cost driver. The cost drivers includes different activities are prevalent such as how many number of times a work is to done, or the total unit in an activity, or the number of time set up are made and other related to the activities requirement  (Common Wealth bank, 2019).

Advantage of activity based budgeting 

1. Evaluation- Each and every cost driver is appropriately analysed for implementing the activity based budgeting. All the step which is required in the activity are taken into account. The activities which are beneficial for an organisation is performed and others are eliminated (Common Wealth bank, 2019). 
2. Competitive edges- As discussed, in activity based budgeting the unnecessary cost is reduced by eliminating unnecessary activities which ultimately beneficial for an organisation. The cost which is saved by this elimination is then utilise in making the product better. And the product and service is provided at the lower price as compared to the competitor then which leads to earn profit (Woods, Revill, Sculpher, & Claxton, 2016).
3. Business as a unit- In this technique, the budget is made by seeing the company as whole, not keeping in mind about any single department by the mangers who are responsible for making budget. That means by implementing activity based budgeting is helpful in seeing the business as a unit.
4. Elimination of bottleneck- In this activity based budgeting, budgets are prepared after critical analysed and researched so chance of risk is less by removing all the unnecessary activities of the business. By implementing this in business eliminates all bottleneck related to the activity. Business are carried out flawlessly (Common Wealth bank, 2019).
5. Enhance relationship- The relationship between an organization and its customer is enhanced by implementing activity based budgeting by serving the best quality of product to the customer and eliminating undesirable activities. The organization main purpose is to serve best service to the customer which leads to improve the relationship between the organization and its customer (Zambon, & Dumay, 2016).

Prejudice of activity based budgeting 

1. Requires understanding- In activity based budgeting deep analyse and research play a crucial role and for this requires understanding of various areas of the business. If the manager don’t have proper knowledge of various areas of business then it will leads to build an inappropriate budget.
2. Complicated- The nature of activity based budgeting system is complicated as it needs to analysed and researched of various aspects. 
3. Resources consumption- as this method is for allocating the resources for the activities to an organisation that is this process consume much resources. It require a top manager for analysing the activities and it is time consuming task also (Shea, Waldrup, Xu., & Williamson, 2018).
4. Cost involved- Cost is required for train the employee. The employee who is not well trained is not capable to analyse these activities and leads to inaccurate result. And as discussed in this technique, top manager is needed which is also costly for an organization.
5. Not focuses on long term goals- In this technique the main focus is on the short term goal. It didn’t focuses on the long term goal of the organization. This can be fatal for an organisation to set up in the market (Akhavan, Ward, & Bozic, 2016).

In what ways Activity based budgeting differ from the traditional based costing 

Both costing method are aligned and useful for the bifurcation of the cost in the different process department of the organization (Keel, Savage, Rafiq, & Mazzocato, 2017). However, whether the activity based costing and its suitability in terms of the implication of the ABC costing method for the Common Wealth Bank have been assessed by the bifurcation of the costing in the different process department. 

 Activity based budgeting V/S traditional budgeting process 

Firstly, the activity based budgeting process is the alternative and innovative way of preparing budget where as traditional budgeting process are much simplest (Laviana, et al. 2016).

Secondly, the traditional budgeting process are adjusting prior period budget to calculate for revenue growth where as activity based budgeting not consider the past budget to calculate budget is required in the current year but it rely on deep analyse  (Common Wealth bank, 2019).

Thirdly, traditional budgeting process is not implementing in the new firm or organisation where as activity based budgeting is also applicable in new firm which wants to come in market and is also implemented in firm which undergoing material changes (Najjar, Strickland, & Kaplan, 2017).

Fourthly, understanding with the help of an example, a company xyz is anticipates receiving order of 60000 sales order in the upcoming year in which each order costing $2 to process then by implementing activity based budget for the expenses relating to the processing sales order for the upcoming year is $120,000 (60000*2). Where as in the case of traditional budgeting process, if the last year budget was $60,000 of sales order processing expenses and sales were expected to grow with 10% then the budget is $66,000 [60000+(60000*10%)].

Fifthly, activity based budgeting is time consuming process as in this process proper and deep analyse and research is required for preparing accurate budget where as in the case of traditional budgeting process there is no need to analyse the activities but just by considering the past year’s budget one can set the new budget (Defourny, et al. 2019).

Sixthly, by implementing the activity based budgeting an organisation can serve better service to its customer by saving the cost which is utilising in the unnecessary activities where as in traditional budgeting process there is no way to save such type of cost which is unnecessarily used (Almeida, & Cunha, 2017).

Seventh, with the help of activity based budgeting the relationship between organisation and its customer is enhanced because the cost which is saved by the organisation by eliminating unnecessary activities then the saved cost is utilise to provide better customer satisfaction where as in traditional budgeting process there is no way to save cost in effective manner. 

Activity based budgeting can facilitate planning and control activities in commonwealth bank

Budgeting play a crucial role in the process of planning and control. Planning is the process which gives a framework to help the management to build a plan of action, to determine the future revenues and costs, to perform future events, to decreases the uncertainty about future and to enhance the chances of achieving the goals and aims of the objective through the coordination of plans (Almeida, & Cunha, 2017).

Now have a look on the process of control, control is a term which uses feedbacks on the performance and results, by taking the results with the plan and comparing them, measuring its deviation from plans and policies and finally taking the corrective action which is beneficial for making all future activities in the line with plan (Thaker, et al. 2016).

It is revealed that budgets are represent in quantitative expression of these plans, expressed in both the terms that is physical and financial. Now it is clear that planning is the process which involve in identification of desired output and activity based budgeting is the way to achieve that output by identifies the input which is needed. Thus for overall organisation there is need to establish program, make basic policies, set goals and objective by uses the process of planning  (Common Wealth bank, 2019). To satisfy the company’s objective and goal there is need of planning process in which budgeting is one of the main components that coordinates the detail of many activities needed to implement the programmes (Domingo, Eggrickx, Naro. & Bourret, 2018).

Budget is used to control by comparing actual operation and performance as they ahppens with budgeted operation.

Activity based budgeting is beneficial for our company.

Hence, it is revealed that activiting based budgeting can facilitate planning and control in Commonwealth bank, as this organization is always belief in progress and innovation and for doing so budget is required. By using the activity based budgeting Commonwealth bank can prepare the accurate budget and eliminating the unnecessary activities and saved cost which is used to compete in market by selling the product in low cost compare to their competitor. As this company is standing in market from 180 years of experience and to withstand in market every company has to satisfy its consumer so by selling the product in low price with better quality one can achieve this (McBain, et al. 2018). By implementing activity based budgeting, Common Wealth bank can eliminate the unnecessary acitvites, reduce cost of product, improve relationship with consumer, elimination of bottleneck, proper analyse and research is mandatory, seeing the business as a whole unit (Khan, et al. 2019).

whether the Activity-Based Budgeting is suitable to your company

Activity based costing is the cost accounting method under which the overheads and indirect costs are assigned to the respective related activity. activity based costing defines the relationship between the overheads and related activity or products, indirect expenses and related activity and product more accurately than the conventional cost accounting methods. However segregation of some administration expenses between the products and activities is hard as they are related to whole operations (Common Wealth bank, 2019). Commonwealth bank moved itself from the conventional cost accounting methods to activity based cost accounting as it would help any organisation in data analysis which would help in cost reduction and meet long term targets. Under this cost accounting method, cost drivers are identified and then the rate of such cost drivers are calculated and total indirect costs and overheads are analysed on the basis of these rates and resulting total costs  (Common Wealth bank, 2019). According to bank's CIO which commented at the time of shifting the office of bank to new building which will suit the activity based costing culture, said it would further empower the employees. This method helps to assign the cost to each activity of business as per their actual consumption. Therfore, it could be inferred that the activity based costing is the process of bifurcating the costing in the particualar process of the Common Wealth Bank and alos helps in bifurcation of these costing in the different process (Berthelot, et al.  2017).  The method first identify the activities involved under the business and then allocate the cost to products and services as per according to the real consumption by each. With the help of this method, while making the decisions regarding costing the company can assess the cost of each of its products, services and activities. Also the company can eliminate the cost incurred on products and services which are not profitable for the business or can remove the services and activities which are ineffective for the business of the company. if these unnecessary activities and services consumes the cost of company and still have no benefit and effect on the business of company then it is better to eliminate the cost for the reducing the overall cost of the company. This method assigns costs to the resources of company through the activities of services and products given to the customers. It supports various strategic decisions such as outsourcing, pricing, identification and measurement of process improvement actions (Common Wealth bank, 2019). 

Conclusion

The activity based costing is more suitable for eth organiziaton which are facing high commplexites int eh rpocess. The segments of the Common Wealth Bank are retail banking, business and private banking, institutional banking and market related to core banking; and fund management, New Zealand and international financial services. Therefore, it could be inferred that the Activity base costing is more suitable for this company and it would help Bank to make the proper bifurcation of the costing in the different process of the Common Wealth bank. ABC method majorly focuses on cost allocation in operational management where it segregate the fixed, variable and overhead cost.