Activity Based Accounting and Financial Reporting

https://www.youtube.com/watch?v=MfzVrYbsEOU

Preamble;

Activity based Cost Reporting (ABC) is so far the most effective reporting format that avails information about the costs incurred in running a business or organization to decision makers who are not accountants.

ABC enhances decision-makers’ awareness of how and where money is being spent by the different activities in the company and therefore put them at better position of making effective cost related decisions.

Most entities cannot properly understand their costs of operation because they use the traditional/usual financial reports which have been proven to be inadequate at generating clear and useful cost information.

The ABC can help an entity successfully implement a strategy of profiting by providing the lowest possible price to its customers while maintaining quality of goods at the standard demanded by the customer. It enables the organization to constantly track and monitor its cost.

ABC reporting is an accounting process that generates reports (see figure 2) understandable by NON-accountants; informing them about the actual cost breakdown of running the business.

With the customer very hesitant to pay more for your goods than what your top competitors are pricing it at, profitability can only therefore be achieved by investing in management efficiencies that will ensure production of high quality products and services at the lowest possible cost to have good margin.

How is Activity based reporting different?

Most entities merely list their expenses as in figure.1(see next page). Those who have attempted to report as in figure.2, have ended up generating misleading reports as observations indicate that they arbitrarily allocate cost/expense without following an empirical formula and business theory leading to false reporting through under/over accounting. To transform an entity’s reporting format from… figure.1 to figure 2. Requires specialized knowledge and skill.

A consultant can offer services to help an entity in the following ways:-

·    Design and implement an activity based costing process and reporting format that will update decision –makers with accurate cost reports.

·      A consultant can also offer a review audit services on the process and reporting formats to eliminate any over/under accounting issues and also establish if what is still being reported is relevant and of importance to the organization and further advise on how it can be improved upon.

·   A consultant can also offer training services to help members of an entity refresh their knowledge of cost management and reporting for decision making.

Well researched companies like the McDonalds franchise were able to rise above the competition by offering customers high quality product and service at an affordable price by committing to cost and management efficiency activities to ensure the final product is sold at an affordable price while generating a decent profit for the company.     

Examples in Figure 1& 2 below are of a Lodging, Bar and Restaurant

Figure 1.                                                                          Figure 2.

BASIC BUSINESS SET-UP

Plain Financial Reporting			Activity Based Financial Reporting
REVENUE	F/Y 2019 UsHs		REVENUE	F/Y 2019 UsHs
Sales	102,000,000		Category 1.	51,000,000
			Category 2.	48,000,000
			Category 3.	4,000,000
			Total	102,000,000
			EXPENSE
EXPENSE	UsHs		1.        Administration	12,000,000
Transport	30,000,000		Transport	2,400,000
Medical	15,000,000		Training	500,000
Salaries	4,500,000		Telephone	-
Vehicle Repairs	16,200,000		2.        Kitchen/Production
Replacements	0		Recruitment	230,000
Repairs	0		Financial cost	0
Hires	230,000		Training	31,200,000
Recruitment			Transport
Sales and marketing	12,000,000		Waste/Purchase/storage	0
Training	7,000,000		3.        Restaurant
Financing cost	0		Consultancy	750,000
Consultancies	19,000,000		Transport	320,000
Supervision	0		Supervision	0
Interest	3,500,000		Telephone	3,450,000
Publications	25,000		Commissions/refreshments	10,900,000
Newspapers and Magazines	18,000		4.        Marketing and sales
Commissions	11,000,000		Transport/adverts	24,500,000
Telephone	2,700,000		5.        Sauna
Utilities	1,900,000		Telephone	-
Security	4,000,000		Transport	-
Depreciation	4,200,000		consultancy	-
Rent	0		6.        Customer care and Complaint
Commissions	0		Telephone	0
Tender	0		Transport
Profit	(29,273,000)		Damages	15,650,000
			7.        Bar
			Consultancy/design	40,273,000
NOTE; This is just an examples of how an Activity Report could look like don’t be bothered by the cost items.			Transport	-
			8.        Human Resource
			Consultancy	-
			Transport	-
			9.        Financing Activity	-
			Product/service Development	40,273,000
			Total Costs	131,273,000
			PROFIT/LOSS	(29,273,000)