Proposing an activity-driven operational accounting framework at an agricultural chemical company

Abstract

An activity-based approach to operational management aims to address the shortcomings of traditional resource management methodologies and to provide enhanced management information. Since effective cost management is of critical importance, operational processes not adding value to the business must be identified. As such, activity-based operational management techniques provide an opportunity to strive towards cost-competitive excellence. By properly analyzing the business operations’ results, the non-value adding processes can be eliminated, allowing management to properly focus on those activities that will effectively contribute towards better decision-making and competitiveness. The main objective of this case study is to evaluate the feasibility of an activity-driven operational accounting framework within a South African agricultural chemical manufacturer and provides a comparison between its traditional cost accounting methodology and a proposed activity-based operational accounting framework. The results indicate that with the traditional costing method, not all operational costs are visible, and that the product costs are probably incorrectly allocated, and as such much of the operational costs are not properly recovered, which, in turn, will have an adverse effect on the company’s sustainability. The recommendation is therefore that the company should consider phasing in certain aspects of an activity-driven operational accounting framework.