Challenges Involved In The Implementation Of An Activity Based Costing System Accounting Essay Example For Students

Challenges Involved In The Implementation Of An Activity Based Costing System Accounting Essay Outline1 1.0 Executive Summary2 2.0 Introduction3 2.1 SNBTS Background4 2.1 SNBTS Situation Background5 3.0 Cardinal Analysis6 3.1 SWOT Analysis7 3.1.1 Strengths8 3.1.1 Failings9 3.1.1 Opportunities10 3.1.1 Menaces11 4.0 Operational challenges faced by SNBTS12 5.0 A new costing attack at SNBTS13 6.0 Benefits of Activity Based Costing at SNBTS14 Figure 1SNBTS Efficiency Savingss15 7.0 Joint costs and their deductions for ABC16 Figure 2 SNBTS Joint Costss17 Professionals and Cons of Proposed Options18 Recommendations19 8.0 Activity Based Costing Implementation Challenges at SNBTS20 9.0 Operationalzing Activity Based Costing at SNBTS21 10.0 How the hereafter looks for SNBTS22 10.1 Short Term23 10.2 Long Term Growth24 11.0 Decision 1.0 Executive Summary This survey looks at the assorted challenges involved in the execution of an Activity Based Costing system at The Scots National Blood Transfusion Service ( SNBTS ) . SNBTS is a public sector organic structure which supplies blood and related merchandises to the Scots population. The company is presently confronting increasing challenges from many foreparts such as the progressively complex regulations and ordinances refering the aggregation and testing of blood due to safety concerns about the transmittal of diseases such as HIV and Hepatitis, the increasing force per unit area to cut down costs by the Scots authorities which financess the operations and the concern by the direction of SNBTS that any farther cost decreases would hold an impact on care services. This led to the effort to implement an ABC costing system, followed by Activity Based Management Practices to better the apprehension of how resources are utilized within the company in order to better procedure efficiencies and cost control. SNBTS is forced to get the better of many challenges during the execution of the ABC bing system such as troubles involved in informations garnering with respect to relevancy of information, clip and costs. The company had to besides get the better of certain sum of opposition due to staff insecurities and an issue sing cost allotment for joint merchandises. A proper alteration direction plan, preparation of a squad consisting of the right persons with the right accomplishments, an nidation attack based on ROI and the streamlining of procedures are some of the steps proposed to get the better of the challenges, while a physical property attack is advocated to turn to the joint cost issue. Improved cost behaviour designation and control, improved quality criterions, better pricing methods and improved stock rating are some of the identified advantages for SNBTS via ABC costing. 2.0 Introduction 2.1 SNBTS Background Scots National Blood Transfusion Service ( SNBTS ) is a none-charitable organisation which was established to carry through the blood supply demands of patients in Scotland which has an approximative population of 5.5 million. SNBTS safely collects and provide blood and related merchandises. All blood collected is through contributions. SNBTS is the first nationally organized transfusion organisation in Scotland. The employee base is about around 1100 runing from applied scientists to administrative staff. SNBTS is comprised of a cardinal central office and five regional transfusion centres. These transfusion centres are responsible of roll uping, processing, hive awaying and supply blood throughout Scotland. Inanition to these transfusion centres, SNBTS besides has a set of research and development centres. Core intent Meeting the transfusion demand of patients in Scotland by roll uping and providing sufficient blood and related merchandises. SNBTS mission statement SNBTS is the specialist supplier of transfusion medical specialty in Scotland providing high quality blood, tissues, merchandises and services. SNBTs works with communities, infirmaries and professionals to guarantee that the giver s gift is used sagely and efficaciously for the benefits of the patients. 2.1 SNBTS Situation Background Presently SNBTS has some operational issues. To get the better of issues and to make a dependable merchandise cost information system, SNBTS decided to implement a new ABC system ( Activity based costing system ) . Activity-Based Costing ( ABC ) is a bing theoretical account that identifies activities in an organisation and delegate the cost of each activity resource to merchandises and services harmonizing to the existent ingestion by each in order to bring forth the existent cost of merchandises and services for the intent of riddance of unprofitable and take downing monetary values of overpriced 1s. To make a dependable merchandise cost information system, SNBTS decided to implement a new ABC system. The purpose of the execution of this system is to clear up how resources are allocated. To ease the execution of this new ABC system, a new direction comptroller was recruited. A commercial off the shelves package is to be purchased. The duty of the undertaking system is to choose the cardinal variables with a general ABC model of activity cost pools and cost driver rates. The purpose of this assignment is to analyse the execution of this new ABC system placing the features, benefits joint bing and execution issues faced. 3.0 Cardinal Analysis 3.1 SWOT Analysis 3.1.1 Strengths SNBTS is a good established company in the domain of blood contributions and transfusion with over 50 old ages experience in its field. The being of five major runing board of directorss to complement its nucleus offering ; i.e. contribution and transfusion of blood, such as Supply concatenation, Clinical, Tissue services, Protein Fractionization Centre ( PFC ) and Alba Bio Science, make SNBTS the taking organisation of its sort in Scotland with high rational capital and a wealth of experience. 3.1.1 Failings The chief failings of SNBTS lies chiefly with its stock list direction, deficiency of cost visibleness and changing merchandise fabrication rhythm times. The differing rhythm times for differing merchandises makes it highly disputing to run into sudden alterations in demand. Some of SNBTS s merchandises can take up to 3 months to fabricate. This consequences in the company holding to keep high degrees of stock list which would in bend tie up hard currency which could be used for bettering its quality criterions. Furthermore the company s out-of-date volume based bing methods are doing the company less efficient due to the inability to supervise resource use. 3.1.1 Opportunities There are chances for SNBTS to secure the services of external advisers to analyse its fabrication methods and cost construction in order for it to be able to follow universe category patterns. Other chances include increasing gross revenues volumes by selling blood related merchandises to the private sector, come ining into joint ventures with other companies to develop new blood merchandises, provide consultancy services to abroad blood transfusion companies, the sale of trim runing capacity and by the support of autochthonal bio engineering companies. This would supply SNBTS the chance to gain gross, which in bend could be used to further better its merchandise portfolio, research and development and procedure efficiencies. 3.1.1 Menaces Primary menaces to SNBTS s being are the continuously altering blood transfusion related ordinances and the of all time present menace of decreased support by the authorities ( Christie, 1998 ) Cultural Diversity EssayRecommendations Physical property attack It is of import that the ABC bing methodological analysis is used suitably up to the split off point ; i.e. the point where the joint merchandises are formed. Thereafter, nevertheless either a market based or a physical property based attack would hold to be used based on the above mentioned pros and cons. In the instance of SNBTS, the market based attack, ( where in which market monetary values are used as a footing for allotment ) is less suited particularly since it is chiefly a non net income organisation and due to the fact that there would be a demand to constantly reappraisal and amend the values based on the fluctuation in market monetary values. Therefore a physical property attack would be more suited due to its simpleness in application and due to the comparative stableness of values in comparing to the market attack. Optimization of throughput A ; capacity use Since the direction at SNBTS has programs for implementing Activity Based Management patterns, this would impart itself to proper capacity planning and throughput optimisation. Since bing would be based on ABC methodological analysis up to the split off point, this would ease lower transportation monetary values to other divisions. 8.0 Activity Based Costing Implementation Challenges at SNBTS The move to implement the ABC costing system was spearheaded by the manager of Finance with the aid of a freshly recruited direction comptroller and six other stakeholders from transverse functional subjects. The chief aims for the execution of ABC bing at SNBTS were to better the transparence of cost behaviour and thereby addition cost control and to hold a clear image on how resources were being employed in order to implement Activity Based Cost Management ( ABCM ) . The undertaking squad had to get the better of a just portion of hurdles during the undertaking lifecycle. Change as ever does non come easy and it is exceptionally disputing when a set of alterations affects the whole company. Even though there was nt a great trade of opposition to alter, there were specific challenges that had to be overcome by the undertaking execution squad. Lack of Sufficient Knowledge One of the initial challenges faced by the squad was the general deficiency of cognition sing the niceties of ABC costing by the squad members and bulk of the employees. This caused assorted operational issues and holds, particularly with the bite of informations. ABC bing methodological analysis entails a important sum of clip spent on garnering information with respect to the assorted undertakings undertaken by employees and analyzing the assorted procedures that guide such activities. Initial troubles were sing the definition of an activity and guaranting everyone was on the same page with respect to what was expected from them. Time and Costss This is frequently referred to as one of the drawbacks in implementing an ABC costing system. A thorough function of all procedures, the drill down and filtering of all relevant activities, the designation of cost drivers, make up ones minding on how many activities would be tracked per cost pool etc are tremendous challenges and take up much clip and resources ( Irvine, 2005 ) . Apart from the sum of information gathered and reviewed, the other challenge was to make with the method of roll uping the needed information ( from over 1100 staff ) Gathering the Right Data One of the cardinal concerns when roll uping information is guaranting that the right activities and right figure are chosen to stand for the costs allocated to the end product. Incorrect data aggregation and subsequent allotment can ensue in major reverses during the execution phases and can endanger the whole undertaking. Staff Insecurities Initial opposition was caused due to the issue of staff insecurity. The total transparence construct of ABC can hold a negative impact on staff who might comprehend it as a means to prise into one s work life ; i.e. a kind of glorified work survey on staff productiveness. This caused some apprehensiveness and reserves amongst certain staff about the existent motivations of the enterprise and the hereafter of their occupations. Addressing Indirect Support Activities Indirect support activities that could non be traced straight to the concluding end products of SNBTS had to be accounted for and allocated within the merchandise costs. Costss incurred by services such as computer science, finance, forces and preparation had to be allocated in a suited mode. Though it was decided upon that a cost cascade attack would be used, the challenge was to acquire the credence of the stakeholders would be lower down the cascade, since they would hold to bear a part of the operating expenses from the predating degree on the cascade. Joint Costss Another challenge was make up ones minding on the most suited method of apportioning costs for joint merchandises, since a high part of the end product was from a common beginning ( This is addressed in item in subdivision 4.0 ) Allocating Costss from Legacy Activities In ABC costing, non all fixed costs would be would be computed as variable in nature. However, certain fixed costs such as research and development costs, specific undertaking costs etc can non be attributable to the cost of current merchandises. This created a quandary with respect to the correct allotment method for research such costs. 9.0 Operationalzing Activity Based Costing at SNBTS Forming the Right Team One the factors that contributed to the challenges faced by the undertaking squad was the deficiency of equal consciousness and experience with the elaboratenesss of ABC costing and undertaking execution. Taking into history the fact that the new costing attack would hold an impact on the whole organisation, it is of critical importance that the squad consists of members experienced in the execution of undertakings of such magnitude. SNBTS direction should look at the feasibleness of deriving the services of an ageless party to drive the undertaking, particularly since it besides deals with employee sensitivenesss and cost issues. This would assist extenuate opposition to alter and better the objectiveness of the undertaking direction squad. Change Management Changes within an organisation of this magnitude can non be implemented without taking the right stairss to guarantee it occurs in a smooth and timely mode. The direction at SNBTS should implement the new costing method merely one time all employees are exposed to the three phases of alteration direction such as unfreezing , alteration and re stop deading . This can be achieved through proper creative activity of consciousness sing the niceties of ABC costing, the chief aims of its proposed execution and the attendant benefits for all staff. A proper alteration direction plan would greatly help the undertaking squad with the execution of the undertaking. A proper alteration direction plan will besides travel a long manner in relieving the frights and insecurities of the staff with respect to their occupation security. Guaranting Sufficient ROI When make up ones minding on the degree of item required with respect to the activities that contribute to resource use, it is of import that the direction continuously weighs the returns with cost incurred in extra informations aggregation. This is of import since one of the chief drawbacks of implementing ABC costing is the sum of clip and resources spent on information assemblage. Procedure Optimization ABC bing can non be successfully implemented in any organisation unless the organisation already has a good documented set of procedures which are invariably reviewed and revised. It is of import for the direction at SNBTS to guarantee that all procedures are documented and categorized into critical and non critical procedures to ease the execution of ABC costing. 10.0 How the hereafter looks for SNBTS A reappraisal of the internal and external challenges faced by SNBTS provides an penetration into the possible stairss that could be undertaken during the short term and long term for future growing. 10.1 Short Term Improved efficiencies Successful execution of ABC costing and the subsequent execution of Activity Based Management would supply SNBTS a great chance to better its cost construction, take non value adding procedures and continuously better itself with much more success compared to the old ages prior. This would do SNBTS on par with the best in the universe. Improved Quality Standards ABC bing would ease improved quality criterions at SNBTS and could be used as a stepping rock for added quality betterment enterprises. However, the direction should guarantee that SNBTS is ever one measure in front of the authorities s of all time increasing regulations and ordinances and cease being reactive and become pro active alternatively. This is of import for the sustainability of SNBTS in this industry. Improved client focal point SNBTS should use the benefits of improved cost control and efficiencies to pull new clients. A company that has crystalline fundss will supply clients added assurance in making concern with it. Intellectual capital and People Development The company should use its staff s experience and potency and supply equal preparation and development to foster their accomplishments. This would be a long term investing for the company, which would keep it in good position for the hereafter. 10.2 Long Term Growth SNBTS should look for chances for growing in the long term, instead than to simply guarantee position quo. Apart from the obvious fiscal impact, a company that grows will besides ensue in a high degree of staff motive and battle. Transform the concern theoretical account SNBTS should see altering from being entirely a non-profit-making organisation into an organisation that is besides focused on net incomes. This could be achieved by exporting its merchandises to foreign markets, leasing out trim capacity to other companies and supplying consultancy services. Diversification SNBTS with its experience of over 50 old ages can look at chances for chances for joint ventures in countries such as planing new types of blood bags. 11.0 Decision A comprehensive analysis on SNBTS and its operations all indicate the virtues of implementing an activity based bing attack. This would supply SNBTS the right chances at the right clip to change over its image from being a cost Centre to an organisation that provides echt value to the state with respect to the service it provides it s the citizens of Scotland and the gross it earns through its exports and other services.