Suitability Of Time-Driven Activity-Based Costing For Wesfarmers Ltd

Description of Wesfarmers Ltd

Time-Driven Activity-based costing may be defined as a costing method that determines the business activities and allocate the cost of each activity with resources to all items and services according to the actual utilization by each organization (Hoozee & Bruggeman, 2010). This approach also assigns the indirect cost into direct cost as compared traditional costing. This report shows the suitability of time driven activity based costing approach for Wesfarmers Company. Wesfarmers is a leading Australian listed company and it is involved in numerous business activities, like supermarkets, hotels, liquor and services departments, home appliances, energy and fertilizers, industry and safety products and coal. The report explains the concept of Time driven activity based costing and its characteristics. The report discusses the basic factors which show the difference between the traditional costing and time driven activity based costing. The main purpose of this report is to check whether Time Driven Activity Based Costing is suitable for Wesfarmers Limited or not.

According to Azizul Islam & Jain (2013), Wesfarmers is an Australian listed company and the biggest private sector player which consist 220000 employees and has shareholder base of approximately 530000. The organization generated a big portion of its income from the Supermarkets and Grocery departments in Australia. Company diverse its business operations by covering various activities like supermarkets, hotel, services departments and industrial safety products. The main focus of the Wesfarmers Group is to ensuring that each of their departments has strong management capacity which is responsible for strategy improvement and performance, as well as day-to-day operational activities. Each department is overlooked by a senior division board of directors or control panel that includes the Company Managing Director and Finance Director and is guided by a large working cycle and governance framework. Company perceives that an enabling society is basic to inducing responsibility for delivering the results completed through the company’s corporate planning framework. Organization uses the extend forces in target setting and encouraging team members to be proactive in driving the formation of values in its businesses (Campbell, 2017). The organization looks to build up a culture that promotes advancements and rewards intensity and innovation. The company has respect for representatives, customers and providers and a constant concentrate on giving safe work environment is major to the way that company operates. Wesfarmers’ social obligation stretches out to maintaining of moral direction, environmental obligation, and group commitment. The important core values of the company consists the following factors (Kenny, 2011):

Explanation of Time-Driven Activity-Based Costing and its features

Honesty:   

Organization acting morally in all dealings.

Transparency

Transparency and trustworthiness in detailing, response and ideas.

Accepting that errors will occur from time to time and look to gain from them (Lowitt, 2011).

Responsibility:

Remarkable allocation of authority and basic leadership to divisions 

Responsibility for execution

Securing and increasing company image

Strength:

• Solid and prepared in order to make critical decisions and challenges the state of affairs in quest for development and manageability
• Supporting and empowering an environment free of threat and fault

On the same side, the important goal of the organization is to give a satisfactory return to its shareholders. According to Rowe et al. (2014), the organization aims to accomplish this goal by focusing on the following factors:

Fulfilling the requirements of customer

• Satisfying the needs of customers through the planning of products and services on the basis of competitive and professional
• Providing a secure and fulfilling work environments for employees, rewarding them for the good performance and offers opportunities to progression
• Contributing to the development and prosperity of the countries in which it operates its business activities by directing the existing business operations in an efficient way and by finding out the opportunities for expansion
• Placing a solid focus on prevention of the environment
• The sustainability report of the organization continue making and value over the long term, Wesfarmers is committed to proactively handling its community and environmental influence.

Concept of Time-Driven Activity Based Costing and its Features

Concept: According to Ng & Popkin (2012), Time Driven Activity Based Costing refers to managerial bookkeeping approach that measures the actual cost of conveying products and services to the consumers. This model permits all assets, for example, personnel, devices, facility and indirect and support cost to be directly attributed not allocated to the company’s output of customer service. Time-Driven activity based costing provides new applications basic to any organization seeking to control cost, create smart investment decisions, and better manage service labels inside and outside the organization. Particularly, supervisors can now link strategic planning to operational budgeting, enhance due to the diligence procedure during mergers and acquisitions, and support consistent change activities, such as, lean management. Time-Driven Activity based costing enable company to reduce unessential complexity in their organization supply chain and upgrading staffing in vital parts of their workforce. A typical Time driven activity based costing model need fewer equations than the number of activities used in a conventional activity based costing model, consequently managing simplicity. This model also allows more assortment and complexity in orders, products, and consumers, hence including accuracy at minimal cost and effort. This model decreases the amount required and only needed estimation of two things:

• The practical ability of committed assets and their price
• Unit times for performing value-based activities

According to Zott & Amit (2010), the key concepts of Time-Driven Activity Based Costing include:

• Building a precise time-based calculation in one facility will ordinarily fill in as a format that can be easily applied and customized to different plants, or even in an industry.
• Time Driven Activity Based Costing requires less time and assets to execute
• It computes, approve, and report findings and keep up the past conventional Activity Based Costing model.

Features of Time Driven Activity Based Costing

 In the Time Driven Activity Based Costing, the total cost is divided into fixed cost and variable cost which is necessary to provide quality information in order to design an appropriate cost structure in an organization. The main characteristics of time-Driven activity based costing include (Stefano & Casarotto Filho, 2013):

• The appropriate differentiation is created between cost behavior patterns: The process of time driven activity based costing measures the actual cost of products and services in accurate manner.
• The cost behavior patterns are diversity related, volume and time related.
• Suitable cost drivers required to distinguish the overhead to a product.
• The cost drivers direct the cost behavior pattern.
• This model makes accessible appropriate cost data which enhance the quality of managerial decisions.
• Adequate data acquired in order to make a sound decision related to the profitability of different product offerings.  Reasonable distribution of overheads possesses a significant segment in the aggregate cost segments.

Explanation of time equation and how time equation is used to allocate activity costs. 

It gives accurate cost of the products and also it is one of the simple processes. Time Equation gives emphasis on estimating the process and also to produce accurate cost model. The actual time is identified and linked to different products and services in a proper way. For instance, In Wes farmers the packaging manager is giving focus on the process of packaging products for shipment.  In the scenario, proper packaging is essential, so that products can be delivered properly.  If the product is packed so that the requirements can be met and it will take 0.5 minutes to prepare it for shipment. If the products need new packaging then the manager will take into consideration various observations and then 6.5 minutes will be needed to supply new packaging. If the products are shipped through air then 2 minutes will be required to put the package in the container of air worthy. So the information that will allow the manager to evaluate the time required for the process of packaging will be:-Packaging time = 0.5 + 6.5 (If packaging is needed) + 2.0 (if shipping is done through air)

Justification of TDABC

 Time equation is used to allocate activity costs. 

This below given example has reflected how time equation is used to allocate activity costs. Total cost of the particular process has been assigned to the particular process based on the quantity used, time involved and cost driver rate involved in the particular process system. 

TDABC has been used in the above given table which reflects how we could bifurcate the expenses and cost incurred in the particular process system of the organization. However, assigned cost of the particular process could be compared with the total used cost, supplied material cost and unused capacity of the business. This will help in assessing the total cost of the whole process system.

Traditional costing: According to Weygandt et al. (2015), traditional costing frameworks apply an indirect cost to items which is depends on the predetermined overhead cost. Traditional costing structure treats overhead costs as a specific overhead cost costing framework treats overhead costs as a single pool of indirect costs. There are various stages included in the traditional costing procedure:

• Determine indirect cost
• Evaluate indirect costs for the appropriate period, such as month, quarter, year
• Select a cost driver with an ordinary link to the cost which includes machine hours, labor hours
• Compute the predetermined overhead cost
• Apply overhead to products by using the predetermined overhead rate.

Time-Driven Activity based costing approach: According to Rasiah (2011), it determines the limit of each department or process of the organization and allocate the cost of this limit of gatherings over the cost object based on the time required to execute an activity. For instance, if the demands for representatives in these departments or process decays, this approach can estimate the number of resources release. Time-driven activity based costing captures the diverse characteristics of an activity by using time equations in which the time consumed by an activity is an element of various features. This time assigns the cost and time of the activity to the cost object which is based on the characteristic of each object. The unit cost of resources and time required to perform an activity are the two basic parameters use for this approach. Time-Driven activity based costing approach comprises the following six stages which are as follows (Ruiz-de-Arbulo-Lopez et al., 2013):

• Recognizing assets groups and the activities by the company for which purpose they are using
• Characterizing the cost of each activity
• Evaluating the reasonable limit of each activity
• Computing the cost per unit time
• Identifying the required time for each activity
• Ascertaining the cost per transaction

TDABC APPROACH CONCEPT:  It is related to the time analysis and learns about importance shift in the costs of resources and also to the practical capacity. The focus is given on updating the resources as per time unit and also resource cost rate.  It is one of the popular processes in the organization and also it is related to the management circles.  The baselines are calculated for the operations and also to create a model (Monroy, Nasiri & Peláez, 2014).   It gives focus on building a correct time based algorithm and also help to easily implement in various companies.  It requires less time and resources so that proper implementation can take place. TDABC is based on the cost pools in which the cost rate of supplying resources is taken into consideration. It is suitable for each and every organization. The advantages are it gives accurate cost and also inexpensive and easy model. The emphasis is given on attaining the costs to activities that are suitable. The cost is applied on the operating cost.  It is seen that TDABC takes into consideration various characteristics of an activity that are based on time equation (Öker & Ad?güzel, 2016).

Difference between Traditional costing, Activity-based costing, and TDABC

According to Lee et al. (2010), Time-Driven activity based costing simplifies the costing procedure by reducing the need for meeting and study representatives for distributing the resources costs to each activity before driving them down to cost objects which includes orders, products and customers. The conventional activity based costing framework using transaction, while the Time driven activity based costing system uses time driver costs. Time driven activity based costing consists the following steps:

• Cost estimation of included assets
• Unit times for activities which are to be allocated to customers or items

Moreover, this method is suitable for Wesfarmers Company because it gives an exact strategic cost and profitability model which is quick, reasonable, and simple to establish. Integration with the detailed transactional information can be accessible for business from Enterprise Resource Planning (ERP) and customer relationship administration frameworks. Time-driven activity based costing is depend on transactional costs which are particular involves individual orders, customers, forms, and provider. By adopting this model, Wesfarmers can simply stretch adaptable different and difficult enterprises with versatile applications programming and database innovation.

Wesfarmers should use time-driven activity based costing model to get certain benefits such as:

Standardized procedure: According to Trkman (2010), this model gives the company a coordinating costing framework which concentrated on enhancing margin, reducing waste, and improving volume run through the operation every month with information reflecting direct production margin in order to cover big volume driven procedures such as operation, inbound logistics, distribution center operations and buying and sourcing.

A wide diversity of products and customers: According to Porter & Heppelmann (2014), this model is portrayed with automation, product diversity and total overhead can be enhanced in Wesfarmers. Time driven activity based costing enables the company to make a clear aspect for those assets of an organization which comprises supervision, set up, order cost and material dealing with costs for activities and transactions are unrelated to the physical volume of units created. This model is considered as an inexpensive and detailed method of distributing overhead to unit cost proceeded until the point the emergence of activity based costing.

Adaptable and inexpensive: By encased this approach in an enterprise resource planning frameworks, the exact cost can easily follow each order transaction (Muller, 2010). Wesfarmers can overlook a persistently precise image of how cost is allocated to specific customers, enabling relationship profitability analysis. Organizations can change in work techniques and make accounting method becomes simplified by substituting huge quantities of activities with far fewer processes

Conclusion

From this report, it has been concluded that Time driven activity based costing is an effective tool to create and diminish the difficulty of cost dimension and distribution of resources. This report describes the suitability of Time driven activity based costing for Wesfarmers Company. The report describes the concept of time driven activity approach and its various features which make this model effective for business. The study shows the difference between the traditional costing and time-driven activity based costing. The report also concludes that Wesfarmers can get various advantages related to cost measurement and allocation of resources by adopting time-driven activity based costing.

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