An evaluation of an activity-driven operational cost accounting framework in an electricity distribution company

Abstract

The business environment has become dynamic and is furthermore evolving rapidly through new technological advances, economic situational changes and global warming. Under these circumstances businesses require costing models and systems that ensure that the best value is achieved and maintained to ensure sustainability and ongoing concern. Company A, the selected case study, is the market leader in South Africa in generating, transmitting and distributing electricity. Its objective is to increase sales and expand its customer base to neighbouring countries. To achieve the above, Company A needs information that is factual, relevant and that creates value through the cost savings initiatives that will result in it being a low cost electricity producer. Company A plays a significant role in the economy of South Africa. The main objective of this study was to evaluate an activity-driven operational cost accounting framework within Company A. The results proved that the time-driven activity-based costing (TDABC) was superior to the existing costing method used. TDABC was compared to the current costing system of Company A, and the results between the two costing methods revealed that there were an under-absorption of overheads in departments with a low 3-factor formula (the current costing method), while an over-absorption was recorded where the 3-factor formula was high. This has resulted in the distortion of financial reporting and possible misrepresentation of costs and in turn making cost management decisions that could be detrimental to the company. TDBAC, as a cost management technique, will result in Company A's cost management processes being improved, resulting in improved decision-making.