ACTIVITY-BASED COSTING AND EFFECTIVE PRODUCT OFFERING STRATEGIES: EVIDENCE FROM MANUFACTURING ORGANISATION
Authors:
Suaad Jassem
Abstract:
Research Aim: This research utilizes a case study approach to demonstrate the difference between traditional volume-based approach and activity-based costing in determining the profitability of manufacturing companies that offer multiple products. The primary objective of this comparison is to show how the latter method enables effective real-time decisions that are aimed at maximizing the contribution of individual products to the bottom line. Design/ Methodology/ Approach: The method deployed in this research is a qualitative approach through content analysis of financial documents provided by the organisation where the case study was conducted. The documents included details about how traditional cost accounting was being applied in the company along with the method of distribution of overhead costs, plus how the accounting information processing changed after application of activity-based costing. Research Finding: The case example provides evidence of how managers can effectively determine accurate information regarding cost generated from each product that in turn enables the management to evaluate and re-design their product offerings based on profitability from each product. Theoretical contribution/ Originality: These studies strengthen the arguments made by proponents of activity-based cost accounting that modern-day accounting should avoid arbitrary allocation methods based on volume and identify units of activities to which costs can be assigned. The basic contention is that mere financial information is of no consequence unless the accounting information is presented in a useful way for managers to make market-based decisions. Practitioner/ Policy implication: Most application of ABC research has been emphasized in the field of health care services to determine the exact cost of medical care. In contrast, relatively fewer studies have been published to support application in manufacturing industries. This study attempts to makes a compelling case for the inclusion of product-level cost information generated by ABC into external reporting for the consideration of regulators and policymakers. Such information will enable stakeholders to gauge the health of the company and the performance of the management. Furthermore, the outcome of this research lays another set of bricks on the pavement towards a better appreciation of activity-based costing for industry practitioners involved in companies that offer multiple products in their portfolio. Research limitation/ Implication: The fact that the study is based on a single manufacturing company, limits the ability to generalize the findings. Therefore, future researchers should attempt to obtain data from a large enough sample size to be able to draw broader inferences. Furthermore, the study did not cover the service industry, which represents the vast majority of business organisations nowadays.