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July 19, 2013

Essay Paper Sample on Activity Based Adoption

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With business competition across the globe growing stiff and increased means of communication, the modern economic context of the today’s globalized world has evolved drastically. Be it multinationals, SMEs, public or private organizations, all of them are confronted with strong economic pressures. As a result, they are forced to reduce their budget and increasing direct and indirect costs. All this is forcing companies to rethink their modeling system, their accounting and financial system. In general, the control systems involved lately in place at public and private sector organizations are mainly interested in production costs. In addition, it is customary to look more specifically the nature of costs and not their origin. The understanding of the origin of costs is important to identify potential reductions for businesses. The ABC, Activity Based Costing is a costing technique that proposes to take account of the origin of costs and rethinking the representation of companies from this principle. In this paper, we will analyze the principles of this method and its implementation and illustrate its effects through real organizational examples.
The conventional methods for calculating the costs of services have limitations. The ABC approach allows room for the management based on processes and activities. It allows process analysis to understand and control training costs and value creation at the root of the performance of the company. To understand the rationale adopted for the implementation of the ABC method, one must know the meaning of concepts used.
Resources: These are the human and material resources (space, energy, consumables, computing power, networks, etc.), necessary to carry out activities.
Activities: Key factor to ABC, it involves the practical tasks carried out to provide services to its customers both internal and external.
Services to clients: it is the services offered to end users to do their jobs.
Key cost drivers or allocation: it is the operational indicators (FTE m², workstations, etc.) This is used to allocate costs between resources and activities on the one hand, and the activities and services or customers on the other.
Literature Review
Over the past decade, several companies in both North America and Europe, have sought to develop systems that generate more precise information on the cost of their products and services. Many researchers in Europe and the United States suggested that the use of Activity based management can help companies address this need (Cooper & Kaplan, 1988). However, surveys conducted in different countries have clearly demonstrated that the rate of adoption and implementation of activity-based costing and activity based management were lower than what one might have thought initially (Cobb, Innes & Mitchel, 1992).  Several contextual factors related to external and internal environment of companies seem to influence the process of diffusion of accounting activities and the perception of managers. Researchers were interested in the past two decades in the relationship between the context in which businesses operate and the nature of management accounting systems that they develop (Govindarajan, 1988). However, very few studies have been conducted so far to help better understand the contextual factors that influence the choice of companies in terms of cost systems and cost management.
In 1923, J. Maurice Clark came up with a phrase ‘different costs for different purposes’, however it has often been noted that companies usually put into practice only one costing system. This single system, nevertheless, is used for all the purposes including stock valuation, planning, control and decision-making. (Brignall, 2000) Before the advent of AA costing and management system, majority of the private companies tended to rely on volume-based cost driver namely direct-labour hours, direct labour cost, or machine hours. (Cagwin, 2002)
The ABC approach allows analysis of how fine is the indirect costs that make up the products and / or services. Now we realize within an organization that is not useful to calculate a cost but to drive. The strategies used by companies to achieve their goals should be based on production processes and organizational. These processes include the activities. It can have a precise view of these activities based on a traditional hierarchical organization but also to have a cross section, facilitating the analysis of how the activities work with one another in the internal processes. The method of defining and identifying performance indicators for each activity, useful for gauging the overall functioning of the enterprise, and achieving goals. It also helps to identify dysfunctions and hidden costs to improve profitability and better perceive the costs consumed by each activity.
This method not only provides a solution for accounting analysis. It makes it easier to redefine its activities, to analyze its core competencies, to assess risks by activity and refine the structure of the company. The information about the company is particularly highlighted during the installation method in the company.
An overhead allocation based on activity centers fends off the usual outcome of traditional output-based costing system particularly under cost low volume products. One such research found that overheads based on activity serves as a helpful tool in reducing the possibility of unnecessary, wasteful, resource usage and the costly consequences of complex ways of business operations. In other words, it streamlines the entire business process.
ABC has proved to be instrumental and phenomenal precisely in the area of planning, control and decision making of the service industries. Cooper and Kaplan (1991) concludes activity based adoption towards AA can prove beneficial to the service and consumer industry such as hospital and bakery, for instance. This is largely due to the fact that this method entails the same set of issues as manufacturers e.g. analyzing operating expenses and performing service activities that demand resources.
The case in point is that it is a cost-effective way for service and consumer firms as it allows them to trace cost to services and ensure implementation of total quality system. It also makes easier for the concerned management to analyze activities and determine their value to the customers. For example, the application of ABC system in hospital helps managers to better assess operational efficiency, establishes more meaningful comparisons of financial performance with other hospitals, and optimizes the mix of service offered to patients.(Ibrahim, 2001)
Given this, it can also be safely said that AA is also extremely helpful in the operations of governmental and public organizations.  A 1989 report prepared by the General Accounting Office (GAO) states that the public perceives that the federal government is poorly managed and is unable to exercise little or no control over its activities. The GAO suggested that the federal government change the way government is managed to improve efficiency and effectiveness in an attempt to restore public confidence. Officials at the GAO specifically recommended that deficiencies in management information systems, accounting systems, and weaknesses in internal control be corrected to deter fraud and abuse (Cotton, 2000)
Activity analysis in the first place determines what activities are executed, how many people perform the activities, how much time they spend on them, how much and which resources are consumed, what operational data best reflects the performance of activities, and  of what value the activities are to the organization. Activity based management is a process that refers to the identification and evaluation of activities which are performed through the use of activity-based costing. It conducts a value chain analysis or re-engineering initiative to enhance strategic and operational decision making in organizations.
Gosselin identifies three levels of activity management namely AA, ACA, and ABC. AA “consists of identifying the activities and procedures carried out to convert material, labor and other resources into outputs”; ACA improvises AA “to identify the costs of each activity and the factors that cause them to vary.” ABC goes through a further stage to determine and assign costs to products and services by the identification of overhead costs with homogenous activity.
In activity-based costing, initially the cost assigning is ensured in three different phases. Cost factors are assigned to the resources, the resources are assigned to the activities by the resource drivers and the activities are assigned to the cost-objects by the activity drivers.
Risk is always associated with the implementation and extent of activity based management. This is to say, some activities carry an implicit value, not essentially mirroring a financial value added to any product. For example a particularly agreeable workplace can help attract and retain the best staff, but may not be identified as adding value in operational activity based management.
Differences between Private and Public organizations
The scope and extent of ABC analysis and its implementation varies from organization to organization. The other three levels mainly include activity analysis, activity cost analysis, and activity-based costing. The differences between the effectiveness certainly lie in the private and public organizations in terms of results. At governmental level, the success chances of activity based management are slim while on the other hand private and relatively small organizations are more likely to do well with it. This is largely due to certain factors inherent in the nature of both kinds of organizations. The governmental organizations are large and more prone to facing problems such as delayed budget, lack of management, stalled projects and redtapism.   More so, it has also been noted that governmental organizations are least concerned about the activity based practices.
On the other hand, private organizations are quicker to understand the importance of activity based management. It is much easier for them to implement it within the framework of their organizations. As a result, the success chances of activity based management and ABC are higher than in governmental and public organizations.  In the following pages, we have discussed two separate case studies to validate this research variable that ABC and activity-based accounting is more successful in private organizations.

Loose versus Tight Control and lack of control
Researchers have pinpointed the correlation between the process of activity based adoption and size of organizational, lack of control, and loose versus tight control. The factor tight versus loose control is associated with activity-based accounting. Coupled with the cultural dimensions, this very factor is an important factor in the process of activity based adoption. This factor can be defined under the banner of business unit culture. In a way, it is one of those important factors that constitute the activity-based adoption.
This important third dimension refers to an extra emphasis on control of activities and costs. Lack of control, in this regard, is detrimental to the company as it leads to the failure of the company cost and finance management resulting in the collapse of company. Lack of control mainly budgetary has often been noted in governmental organizations, a plausible reason for their failing ventures.  As we have discussed in this paper, Super Bakery Inc, a private company, made the most of tight control dimension and yielded desirable results. On the other, the governmental venture of a hospital failed mainly due to the loose and at times lack of control.
The business units that have put into practice tight control culture tend to be very cost conscious. Tight control involves extensive and flows of information, in-depth planning, budgeting and reporting system.  These characteristics propose that business units having tight control culture will tend to adopt activity management practices as opposed to those with loose control cultures.

Findings (A case of private and public organizations)
As discussed above, Activity based adoption serves to streamline and facilitate the overall business activity in both private and public sphere. Our findings for a private organization relate to the Super Bakery Inc located in United States. It is a small-scale organization with only a few branches in the country.  It was a virtual corporation that preferred to outsource its major business applications. Primarily this measure was taken in order to minimize its cost of operation directly related to its income levels. Outsourcing enabled Super Bakery to manage easily and control the flow of the activities that were bound to reap profits and revenue.  
Quite prudently, Super Bakery did not prefer to shoulder the huge responsibility of facing the risks inherently involved in each stage of production and transaction. This helped the company realize its potential of achieving the set goals and targets also allowing it to cut to size its expenses. Had Super Bakery not taken these initiatives, it would have to incur and bear the expenses that came with the acquisition of relevant assets for various processes. 
These processes may be defined as involving machinery for production of various products, the smooth running and maintenance and replacement of machines whenever necessary. Surely, this was not without increasing the costs of production.
The simple example of costs of production involves the cost of raw materials, relevant inputs, and overhead costs such as the cost of electricity, water, salaries and wages for the greater number of employees who would have to be directly and indirectly involved in the process (Garrison, 2009). Costs of transportation of inputs as well as finished products to the various distribution points is also eliminated, as is the costs of storage of raw materials and finished products before transportation to the target market.
Evaluation of Findings
Super Bakery put into practice traditional costing methods that hinged on listing the costs for the different businesses it had chosen to represent and carry out its responsibilities on its behalf. This process typically encompassed jotting down all the schedule of individuals in such a way that the individual costs and revenues no longer remained independent of Super Bakery’s costs schedule. Such an affinity was ensured leaving little room for discrepancy for that matter.
This implied that the final cost per product was distributed evenly in its units of merchandise. Hence it became almost impossible for the company to capitalize on the high yielding profitable units caused to their relatively low costs. Super Bakery provides a vivid example of a virtual corporation that enabled it to conduct activity-based costing (ABC) despite its unique organizational structure.  
The company is dubbed as virtual since it opted to outsource its selling to a gamut of independent brokers and has contracted out manufacturing, warehousing and shipping without having to develop and put in place a gigantic multifunctional organization responsible to carry out its business. Moreover, coupled with a performance reporting system, the ABC system has been quite beneficial to the Super Bakery.
The ABC system allows for the management to supervise and monitor the profitability of the account of each customer and the performance of outside contractors. As opposed to other ABC systems, that of Super Bakery focuses on measuring costs by customer order instead of by product.
Adoption of Activity based practices in public sector organizations
Activity based practices are the innovation that involves the production, adoption and diffusion of new ideas into the management practices. Although a broad range of indicators has been constructed to measure the innovative activities of firms but not much has been known much about the dynamics of innovation and activity based management practices in public sector organizations (Albury, 2005). The drivers of innovation in the public sector organizations include rising costs in the current budgetary constraints, the demand for services caused by demographic changes, the constant pressure to achieve cost containment and improving efficiency, increasing demand for transparency and the need to improve the quality and availability of public services (including education and health). Adoption of Activity based practices should not be limited to monitoring the efficiency and cost, but also to focus on construction of a large set of indicators to inform the process of innovation in public sector organizations.
In recent years, techniques have been developed to determine public spending that are not productive, or at least those that are not justified by the resulting benefits. It is now widely recognized that effective and efficient use of public funds contributes substantially to increase the socioeconomic well-being of the population. Management of public finances is part of the context of planning, programming and budgeting, the implementation of budget and accounting, and the auditing and evaluation of public resources. These state functions are intended to ensure that, wherever possible, public resources - generated in the country or abroad - are used in compliance with the law and yield optimal results. 11. In this context, all countries have the primary concern to find ways to harmonize methods for three processes, both distinct and interdependent, namely: a) management macroeconomic policy and control overall financial variables, b) the reorganization of spending priorities, and c) management of efficient and modern institutions to provide services.
The effective and efficient management of public finances is not the hocus-pocus technique. The decisions to strengthen the concerted participation and accountability must precede the fiscal decentralization. Decision concerted to fight against corruption must come before the necessary improving public expenditure management. The decision to counter the "bureaucratic capture" has come forward measures to strengthen controls of spending, strategic allocation of resources, good operational management and compliance of legality (Foster and Swenson, 1997). Similarly, the introduction of new relationship between people and government and adherence to the principle of collective responsibility must come before the measures are on the budget horizon beyond the immediate future through multiannual schemes if possible or at least to regular public debates. It should also include the capacity of governments in financial matters the willingness and ability to forge coalitions policy and encourage a new culture of transparency, accountability and participation.
Challenges in adopting Activity based practices in public sector organizations
In public sector organizations Activity based practices is linked with myriad of factors which include national accounts, delayed budget reviews by the lack of data, methods of data management, outdated rules and procedures that stress control and inadequate training.
Although there is a framework for measuring business innovation and it has accumulated years of experience in collection of such data but difficulties in measuring innovation in the public sector organizations are many and far from negligible. The first problem is the scope of what is being measured and who should be the target population (the public administration organizations, public sector organizations or the public companies). What types of activities / areas should be included in these measures and what are the appropriate statistical units? The second difficulty is how to measure innovation in the public sector organizations and, in particular, how it can be used or adapted the framework of Activity based practices (Brown, Booth and Giacobbe, 2004). What are the concepts and basic tools which are applicable in the public sector, particularly the multiplicity of its objectives, its complexity, heterogeneity, and its organizational structures and incentives?
In order to achieve Activity based practices in a public sector organization, following steps can be followed:
·         Introduce a more competitive environment in the public sector and moving towards terms of contracts and the procedures to call offers. Competition being the key word to reduce costs and to improve quality (Baird, Harrison, and Reeve, 2004)
·         Link resource allocations and payments at measured performance;
·         Set standards and criteria for specific performance (definition of goals and objectives, indicators of success - especially for management category), preferably in quantitative terms;
·         Greater flexibility in recruitment and remuneration, better use of public relations techniques;
·         Decrease in direct costs, rigorous work discipline, resistance to union demands, cost containment of "compliance" etc.;
·         Put an end to the bureaucratic management centralized staffing;
·         Arrange smaller services units;
·         Print a pragmatic leadership style of the public sector
A project to support the health reform was launched in Yemen in 2002 to, initially, increase access of women and children to a set of integrated maternal health and the child provided in hospitals and health centers in some districts and, second, to improve the effectiveness of national public health and resource allocation in the public health sector in Yemen. Although the development goals of the project are clear, however, indicators, inputs, and mechanisms for implementation are unclear. First of all, these gaps, plus the weak capacity of Department of Health and Population, are major barriers to implementation.
The project was not succeeded due to lack of execution, so that one wonders about the value of continuing the project. This problem of implementation, not only for the Project to support health reform but also another important project of the World Bank, eventually rebound on the Government of Yemen, which the World Bank announced in December 2005 that it will cut its funding by 34% in consideration of the trampling of domestic reforms, poor governance and lack of progress in a number of "troubled projects".

It is observed through this analysis that Activity based practices is neither a science nor a theory; it is a management strategy that the performance data guide the implementation and, ultimately, determine the allocation of resources. It focuses on results throughout the process and requires clear goals, make decisions in light of the facts which are transparent and seek continually to improve. There is no universal formula and no absolute truth in implementing Activity based practices in organizations.
This report compares the implementation of Activity based practices in private and public sector organizations. Our discussion shows that implementing Activity based practices in private organizations is much easier than implementing it in public sector organizations. Many countries, organizations and individuals are working hard to reform their development practices to produce results.
Implementing Activity based practices in public sector organizations requires that it must be constructed as a priority by the State and complement the initiatives, strategies and national development plans. To consolidate the foundation and implement Activity based practices in public sector organizations, it is vital to provide practitioners with training and build capacity and allow the leaders to explore new approaches to improve the development in their communities. The value of incentives is another leitmotif of Activity based practices. Incentives while as deterrents can be effective, and even the simple act of recognizing and acknowledge the commendable efforts have been made is often a powerful motivator.
Thus, the report clearly describes that implementing Activity based practices in public sector organization is a complex and much more difficult process than implementing these practices in private organizations.
Moreover, this should also be kept in mind that all the dimensions including innovation, loose versus tight control, play a pivotal role in the process of activity based adoption and management. Private organizations, in researches, have shown to be more welcoming and supportive of activity based management. 


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