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Time-driven activity-based costing uses for internal users in the organization

Abstract

Table of Contents

Features of Standard Costing System 3

Potential benefits of Standard Costing System 3

Features of Time-Driven Activity-based costing 6

Time-Driven Activity-based costing uses for Internal Users in the Organization 7

Introduction

This report will be cover two parts are A&B. The part-A of the report will include the features of the standard costing system, the potential benefits of the Standard costing system, the important information that MAS can provide to the Managers so that they could assist them in terms of control and management and lastly it includes an example of the organization where this MAS can be used which proper justification. The second part of the report covers the Time-Driven Activity-based Standard Costing System whom it was designed and implemented in the real organization. The features and their usage for the internal users when it comes to TDABC were also highlighted in the report. Lastly, the report also provides the practical use of TDABC in contemporary organizations.

Part- A

Features of Standard Costing System

A standard cost could be defined as “the amount a unit produce should cost". It is the generic term that is used for the combination of standard price as well as the quantity of a product that includes factory overhead, cost of material, and labor. a standard cost system benefits the company by saving their cost through record-keeping (Badem et al. 2013), especially in the long run. the standardized cost could be effectively applied to all the products with the same measurable units through the inventory valuation. Standard cost is an estimated total cost that is used by the management to evaluate the cost-effectiveness of a particular product. Some of the features of the Standard Costing system are:

Potential benefits of Standard Costing System

Some of the major advantages of a standard costing system are highlighted below:

  • Proper planning: one of the major advantages of standard costing is that it helps in applying the principle of management by exception that is the management does not need to worry about the activities which are preceded in tandem plans and therefore should only focus on the issues related to exceptions(Badem et al. 2013).

  • Helps in formulating policies: another very important advantage of the system is that this technique is a valuable aid to the management especially when it comes to determining price and formulating their production policies. Furthermore, the standard costing equips cost estimates while planning the production of new products

  • Eliminates wastage: through the standard costing system, certain waste such as idle time, material wastage as well as last machine hours are significantly reduced, which helps the firm in eliminating the wastage(Standard Costing 2021).

Type of information MAS can provide to Assist the Managers

  • It provides objective and target: another very important information which could significantly assist the manager is that standard costing helps in setting up the objectives as well as the target for each level of management and also helps in determining the responsibility of departmental managers. Standard costs are considered to be predetermined based on reason as well as the achievable level of output. The Department heads to understand what is expected from them and what should be the level of performance in comparison to the target can also be analyzed from the variance report does the system serve as an incentive to the Department heads to achieve the target set by the organization.

The standard cost could be considered as a benchmark, where it presents the expected future cost of a particular service, process, product, or subcomponent. Once these standards are fixed managers can gauge their performance by comparing their actual results from the set standard. the difference between the actual cost and the standard cost is termed as a variance. these variances provide useful information to the managers when it comes to determining whether the production system is efficient or not. Furthermore, these variances are quite important when it comes to the control process, as they alert the senior managers when something is not going according to the predetermined plan. apart from that these variances also provide information for performance value. According to McWatters et al (2001), and Zimmerman (1997), Who believed that the main reason behind using the standard cost is that they are useful when it comes to decision management and decision control (Almeida & Cunha 2017).

An organization that can opt for this MAS

Part-B

Design and Implementation of the Time-Driven Activity-based Standard Costing System

  1. Determining the unit times is the exact time that is needed for the performance of each activity that is listed in step 1. the use of time equations is done to calculate the total time needed for each activity that is listed in the pool of table of activities.

  2. Practical Capacity resource use is calculated that is how much the total time is available for productive work of each supporting unit (each employee) in performing the task. In this, all the unproductive work is eliminated that includes the off days of the employees, national holidays, break time, rest time, and training time of all the employees.

The study of the Hotel Graha Cakra has shown the accurate features of the Standard costing method along with the time is driven activity-based costing. The points that are discussed in Part A are covered in the case study of the Hotel Graha Cakra and found to be appropriate. It helps in determining the actual cost of the room. With the traditional method, the room cost is determined as 443, 836 for superior room but while calculating through TDABC method, it comes out to be 405, 764 that determines the actual cost of the room as it is calculated by eliminating the unproductive hours of the labor. It helps in managerial planning by determining the number of productive hours that is required for performing the various activities and unit cost per labor and helps in ascertainment of the budget cost for the labor. It helps in noting down all the activities that are required for performing the task and helps in the coordination of the targets that are assigned for various tasks to the employees or labor. It helps in maintaining the proper record keeping that could be used for the next year comparison. It helps in determining the cost of each component separately that is direct material cost is calculated as 91,167,861.00, Direct Labour as 19,847,685.00 and Overhead: Indirect Labour as 5,604,682.47 that helps in studying these variables separately to improve the performance of the business. The calculation in TDABC is based on per unit whether it is per unit cost or per unit time that helps in maintaining the standard throughout calculations. The TDABC method is flexible and changes can be done as per the convenience and requirement like the costs are calculated for different types of rooms Junior Suite, Superior suite Deluxe Suite and Royal suite due to flexibility in the method of calculation.

Time-Driven Activity-based costing uses for Internal Users in the Organization

The accounting information to the internal users and the management of the organization is really helpful as it helps in the generation of the pool of activities that would help the internal users to have a detailed list of sub-activities that needs to be performed. It can serve as a Standard operating tool for internal users and the management. During check-in, comprehensive detailed activities are mentioned along with the duration of time taken for each activity. As per the attached table of Appendix 1, the check in process for the go show would be 9 mins and for reservation guests would be 6 mins. In case the employee is taking much more time in this activity as per the stated time, training is required for such employees so that they will finish their activity as per the scheduled time. It helps the management in evaluating the performance of the activities that is been done by the employees. It helps in determining the performance level of each employee and helps in rewarding them for exceptional services and motivating them to work as per the standards that are mentioned. It also helps in calculating the total time that is spent in performing certain activities. It helps in the calculation of work time and unproductive time and total effective minutes of each employee. Like in appendix 2, the work time of the general manager is calculated as 149,760 mins and the unproductive time is calculated as18,720 mins and therefore the total effective time of the General manager is calculated as 131, 040 minutes. Employee working time is calculated and we would be able to see whether the employee indulged in more of the unproductive time or more productive time been assigned for the work. As we can know the pool of activities and the minute spent on each activity, we would be able to calculate the cost driver rates by multiplying unit time with rate labor that would help in estimating the budget that is required on yearly basis and in case there are any changes required to be made in between, like for addition of labor, it would be easy to calculate as the no. of units will be changed and that would change all the necessary elements associated with it. So, making amendments is another important use of the TDABC. With the study of the information from the data that is obtained through TDABC, management would be able to make strategies or change strategies as per the requirement that would benefit the business. In the case study, the initial cost is calculated on the management judgment that results in the excessively high-profit margin per room. Though it appears as a profit earned by the business, there are times when the rooms are unoccupied due to the competitors selling the rooms at lower prices and couldn't generate the desired profits. In such cases, the management can change their strategy and can give discounts so that the rooms can be sold and they can do the marketing efforts to improve the selling of the rooms.

Practical use of Time-Driven Activity-based costing in contemporary organizations

Conclusion

References

Badem, A, Ergin, E & Drury, C 2013, "Is Standard Costing Still Used? Evidence from Turkish Automotive Industry", International Business Research, vol. 6, no. 7.

Barros, R & Ferreira, A 2017, "Time-driven activity-based costing", Qualitative Research in Accounting & Management, vol. 14, no. 1, pp. 2-20.

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