Developing an activity-driven costing framework for a South African cash services company

Abstract

Globalisation has increased market accessibility for foreign entrants to local markets, and technological advances have rapidly transformed business environments. This has intensified the need for accurate and relevant financial and non-financial information, to provide managers with information to identify and eliminate non-value adding activities and loss-making products. To be competitive, companies must reduce product and services costs without adversely impacting quality. Accurate product costing has become key for companies’ survival. Company A, the selected case study, is a leader in the South African cash services and solutions industry. Its objective is to defend its position of being a prominent player in the industry and, as a result, it is under pressure to optimise its processes and to reduce costs. To achieve the above, Company A needs to understand its resource consumption so as to allocate overheads accurately. An activity-driven costing framework is developed to provide accurate and reliable information on product costs by accurately identifying and assigning overhead costs to products and services. The traditional costing system (TCS) and the activity-based costing system (ABC) were compared and contrasted. The study found that the popularity of TCS rested on its ease and cheapness to manage, as it uses a single cost driver such as direct labour to allocate overhead costs. The use of a single cost pool, however, led to products and services costing and pricing distortions. It also did not offer management much in terms of optimising cost usage, reducing process inefficiencies and ensuring quality management. ABC prevents product and services costing errors by adopting multiple cost pools and cost drivers to reallocate business support services. It allows companies to get a good approximation of the total real costs of products, services and unused capacity. ABC, however, monthly requires considerable resources to collect and process the data, which includes interviews and the preparation of management reports. To correct this shortcoming, time-driven activity-based costing (TDABC) was developed. It is quicker, cheaper and simplifies the costing process by eliminating the need to interview and survey employees for allocating resource costs to activities. TDABC only requires the calculation of the cost of providing resource capacity and the capacity cost rate to drive departmental resource costs to cost objects, by forecasting the demand for resource capacity (typically time) that each cost object requires. It was due to these benefits that the costing framework developed for Company A was an activity-driven one. To answer the problem question, namely whether the development of an activity-driven costing framework would lead to improved product pricing and costing decisions in Company A, TDABC was compared to the current TCS in use. Comparison of the two methodologies revealed that, under the current TCS, there is cross subsidisation between the two departments. This has resulted in products being inaccurately priced and thus uncompetitive in the market. By implementing TDABC, the management of Company A can obtain a better understanding of the rate of consumption of business support services resources. Company A can have more precise information to accurately cost products and services. This information leads to better resource planning, elimination of waste and enlightened management decision making