Question

Assume that you were hired as a cost accountant to develop a plan to implement the Activity Based Costing system for one of these service organizations. Use a service company or government agency with a name that begins with the letter "T". Present an ABC system development plan, including detailed steps needed to effectively implement the system. Include a brief background on the organization’s main activities and services provided and your opinion on whether there will be any limitation on implementing the ABC system in the organization selected.

Answer 1

We will discuss activity based costing system for service company which provides services in Information Technology i.e. Tata Consultancy Services (TCS).

Services provided by TCS in brief are as follows- Consulting, Cloud Infrastructure, Enterprise Application, Cognitive Business Operations, Conversational Experiences, Automation & AI, Cloud Apps, Cyber Security, Block-chain, Analytics & insights, Internet of Things, Engineering & Industrial Services.

Steps involved in the development & effective implementation of ABC system are as follows-

1) Understanding & analyzing services - Study of services & ascertain and identify various stages involved in those services.

2) Study of activity involved- In this activities involved are identified for example- For enterprise software development service steps can be broadly categorized as pre-development activities, development activities & post-development activities. Once activities are identified, divide them into value added and non value added activities. Objective behind this step is to focus on value added activities while non value added activities can be eliminated in future.

3) Establish activity cost pool- In simple words, cost pool is the total cost assigned to an activity. For example- cost involved in the developing software can be pooled under the head "development cost".

4) Identify cost driver - Cost driver is any factor which causes a change in cost of an activity. For example- complexity of application or value added requirements of the application . Cost driver is an activity which generate cost. ABC system is based on the belief that activities cause costs and therefore establish link between activities and services. So, identify those cost drivers.

5) Identification of cost with the services - As direct costs are identified easily with the services, link indirect cost with services by identifying activities and cost drivers. Therefore, use ABC system to track costs from activities to specific services.

Limitations - Large firms can adopt ABC system. However, adoption depends on the effective implementation, it requires involvement of staff and their training on continuation basis, review of system working on periodic intervals and follow up on feedback received. It also requires support from top management and substantial investment of time and money.