Implementation of an ABC System
Research at least two (2) articles that include a description of a company’s design and implementation of an ABC system. Good sources include Strategic Finance, Management Accounting Quarterly, and the Journal of Cost Management.
Then prepare a report on your findings. Your response should include the following.
- Company Name
- Company Industry
- Description of the ABC Application
- Assessment of the Benefits of the ABC System for the Company
- Discussion of the Implementation of an ABC Project
Company’s Name and Industry
Established in 1886, Coca-Cola is an American multinational beverage organization that majors in producing, marketing, and distributing carbonated soft drinks. The company owns, markets, and distributes more than 500 brands, whereby approximately 21 of these brands generate about one billion revenues annually. The company sells its products to more than 200b nations globally, with clients that drink above 1.9 billion Coca-Cola served beverages daily. Further, because of its size, Coca-Cola can effectively exercise its market power over its suppliers by commanding competitive prices. The organization can also utilize its enormous size to impact the competition by underpricing certain items, acquiring smaller rivals, or saturating the market with most of its products (Coca-Cola Activity-Based Costing (ABC), n.d.). The company mainly markets two forms of its products in the non-alcoholic industry, including standard and custom products. It manufactures the standard product in large batches while the custom products are produced in smaller batches.
Description of the Activity-Based Costing (ABC) Application
Organizations of the same magnitude as Coca-Cola apply the ABC to ensure that the executives can completely comprehend the firm’s overall expenditures, allowing them to effectively establish a more suitable pricing approach. ABC can promptly track the firm’s expenses, directly and indirectly, to the products, channels, services, and clients that cause such expenses to be incurred. ABC also would track the overhead to services, products, and clients by identifying the resources and their projected costs (Javid et al., 2016). Such resource expenditures include salaries, equipment depreciation, operating suppliers, and electrical power that represent the capacity to execute various responsibilities. Under the ABC system, the activities are perceived as either event or transaction that is a cost driver. Also, the cost or activity driver refers to an allocation base, for instance, machine setups, consumed power, maintenance necessities, purchase orders, production orders, or quality inspections. The two primary classifications of activity parameters: the transaction drivers that entail tally the number of times the activity happens, while the duration drivers that assesses the period required for the activity to be completed (Hansen, Mowen & Heitger, 2021). Unlike the traditional cost measurement systems that mainly is based on the volume count, including the direct labor and machine hours, to assign overhead or indirect expenses to firm’s products and processes, the activity-based costing system categorizes different levels of activities, which are unrelated to the total units manufactured. Such levels include batch-level, customer-level, product-level, organization-level, and unit-level activity.
The activity-based costing is applied in product and target costing, product line and client profitability assessment, and service estimation. Coca-Cola Company has applied the strategy of ABC costing to assess the differences between its bigger standard global products and its custom regional productions that cannot be provided on the international market (Sawyers, 2016). Besides, since the company provides various products and services and utilizes numerous distribution and sales channels compared to its rivals, ABC is not an effective accounting technique that can be applied in tracking its expenses.
Assessment of the Benefits of the ABC System for the Company
The benefit of applying the ABC strategies versus the traditional costing systems is that it has enabled Coca-Cola to allocate overhead activity expenses of the organization to the products and services it manufactures and distributes. The indirect and overhead costs would focus more on the actual correlation between the overhead processes, costs, and the delivered produced services. The challenge with the traditional costing system is that the increasingly massive number of indirect expenditures continue to be owed through applying the parameters that are typically unrelated to what caused the costs to be incurred in the firm. Since Coca-Cola manufactures various products, monitoring the overhead and general cost structure is essential. Additional to the various form of products it manufactures, Coca-Cola also serves different forms of clients. The variation and diversity of the manufacturing process created by the company establish complexity leading to a greater overhead expense. An organization that provides various products to different clients requires the resources tracked and assigned as costs aligned to the cause-and-effect relationship, which is the main essence of activity-based costing (Kosasih et al., 2019). ABC changes the nature of numerous indirect costs, making the initially perceived indirect costs, like utilities, depreciation, and salaries, traceable to a given activity. Instead, ABC transfers the overhead expenses from the high to low-volume products, rising the costs of units presented in the low-volume products.
Discussion of the Implementation of an ABC Project
The Generally Accepted Accounting Principles, GAAP, necessitates organizations to follow a set of guidelines, standards, and regulations for financial accounting. Such guidelines guarantee that the regulations of financial accounting are always met. The firm’s objective is to either reduce the overall taxes or increase reported earnings, relying on the clients’ demands, though it does not essentially consist of other cost allocation uses. Coca-Cola company utilizes activity-based costing for assigning the overhead costs of different activities, normally the support sectors, to products or services manufactured or marketed, allowing the upper management to evaluate and analyze their profitability. Further, this would provide the upper management with the ability to precisely evaluate the true cause and effect correlation that would be used in determining the actual cost of a product and service and if it contributes to overall profitability as aligned to the demand and the marketed prices.
Coca-Cola Company has structured various strategies to ensure effective implementation of the ABC approaches. Such strategies include creating a cost pool for every activity based on the beverages. The cost is aligned to the three main processes that the company applies in its production, which consist of concentrate and syrup manufacture, blending, and packaging. Also, Coca-Cola allocates the total cost linked to each activity to the relevant pool, including the raw material, transportation, and direct labor. It allocates the cost drivers to each pool (Kosasih et al., 2019). The company calculates the per-unit cost aligned to the applicable cost driver and divides the quantity of every pool by the projected total utilization of the cost driver. Lastly, the cost of unit is multiplied by the quantity of the units of cost drivers of a given production.
