The assignment is based on the Role of ABC in Capital Investment Analysis in the EDUC Electric Distribution Utility Company. It looks into the way ABC can deliver decisionalistic information for the improvement of the corporate value. The study introduces a framework for Activity-Based Investment Decision Analysis, consisting of two phases: The two methods include; Project Analysis Method and Project Prioritisation Method. The Project Analysis Method applies the ABC data to the sorted variables common in Cash Flow, that is, the Net Present Value (NPV) and Internal Rate of Return (IRR). Cost and performance impacts, quadrant analysis, and Analytic Hierarchy Process (AHP) are used for explicit selection of projects in the Project Prioritisation Method. The assignment intends to show how ABC can enhance investment decisions in a utility company by yielding a better cost distribution, ensuring that activities are aligned to organizational strategic objectives, and by incorporating both financial and non-financial measures when appraising projects.
Synopsis
Thus it was aimed to pilot apply the ABC-based investment analysis framework in EDUC through the study. Concerning the Project Analysis Method, work teams assessed two projects of each category (substation, sub-transmission, and distribution line), based on the ABC that establishes the initial investment and O&M costs. When the PPM was used, it came into comparison with other methods to 23 projects and identified the priority ones. It turned out that the proposed structure can be easily used when there are limited options for obtaining information. Some of the findings were that many of the activity drivers omitted particular consumptions of resources, stressing the need to develop better work orders. The elaboration of the Project Prioritisation Method indicated its applicability for other decision analyses besides the investment planning. Though, due to errors in input data, the full implementation was stopped until enhancement in the data quality. The paper also found that the ABC-based approach could offer more comprehensive and strategic investment decision-making in the context of the utility sector by combining cost, performance and strategic alignment components.
Activity-Based Costing (ABC) is a costing methodology that assigns costs to activities based on their consumption of resources. Unlike traditional costing methods that allocate costs based on volume or machine hours, ABC seeks to provide a more accurate representation of the true costs associated with producing goods and services. In ABC, activities are the fundamental tasks or processes that consume resources in an organization. These can be related to production, distribution, customer service, and other business functions. (Drury, 2013)
Let’s understand this approach with an illustration:
Telehealth sector |
||||||||
Activity Number |
Activity |
Possible Cost Driver 1 |
Percentage Time |
Total Value Added Cost |
||||
Employee No. 1 |
Employee No. 2 |
Employee No. 3 |
Employee No. 4 |
|||||
1 |
Maintenance of telehealth platforms |
Technology infrastructure |
33% |
34% |
41% |
44% |
54820 |
|
2 |
Renewal costs |
Number of licenses |
15% |
18% |
19% |
21% |
26440 |
|
3 |
Developing training programs |
Training healthcare professionals |
23% |
25% |
16% |
11% |
26980 |
|
4 |
Platform for video or audio consultations |
Conducting remote consultations |
14% |
11% |
14% |
15% |
19340 |
|
5 |
Operating help desks, providing 24/7 support |
Providing customer support |
15% |
12% |
10% |
9% |
16420 |
|
Total Percentages |
100% |
100% |
100% |
100% |
||||
Total Wages |
32,000 |
40,000 |
34,000 |
38,000 |
1,44,000 |
Telehealth sector |
||||||||
Cost Driver |
Number of Cost Drivers |
Employee No 1 |
Employee No 2 |
Employee No 3 |
Employee No 4 |
Total Costs |
Cost per Cost Driver |
|
Technology infrastructure |
76 |
10,560 |
13,600 |
13,940 |
16,720 |
54,820 |
721.32 |
|
Number of licenses |
230 |
4,800 |
7,200 |
6,460 |
7,980 |
26,440 |
114.96 |
|
Training healthcare professionals |
360 |
7,360 |
10,000 |
5,440 |
4,180 |
26,980 |
74.94 |
|
Conducting remote consultations |
1080 |
4,480 |
4,400 |
4,760 |
5,700 |
19,340 |
17.91 |
|
Providing customer support |
3500 |
4,800 |
4,800 |
3,400 |
3,420 |
16,420 |
4.69 |
|
32000 |
40000 |
34000 |
38000 |
Telehealth sector |
||||||
Cost Driver |
Cost per Cost Driver |
Product A |
Product B |
|||
No of Drivers |
Value added Costs |
No of Drivers |
Value added Cost |
|||
Technology infrastructure |
721.32 |
24 |
17,311.58 |
52 |
37,508.42 |
|
Number of licenses |
114.96 |
101 |
11,610.61 |
129 |
14,829.39 |
|
Training healthcare professionals |
74.94 |
137 |
10,267.39 |
223 |
16,712.61 |
|
Conducting remote consultations |
17.91 |
378 |
6,769.00 |
702 |
12,571.00 |
|
Providing customer support |
4.69 |
1435 |
6,732.20 |
2065 |
9,687.80 |
|
Total Overhead |
52,690.78 |
91,309.22 |
||||
No. of units |
200.00 |
300.00 |
||||
OH per pack ABC |
263.45 |
304.36 |
||||
OH per pack Traditional |
288.00 |
288.00 |
Activity-Based Decision Analysis (ABDA) is a framework that focuses on analysing and making decisions based on activities within an organization. This approach is particularly relevant in the context of process management and improvement. Here's a breakdown of the key components of an Activity-Based Decision Analysis framework:
Activity Based Costing is applicable to the telehealth services in New Zealand in the following ways:
Time-Driven Activity-Based Costing (TDABC) is an extension of the traditional Activity-Based Costing (ABC) method. TDABC addresses some of the challenges and complexities associated with the detailed and resource-intensive nature of traditional ABC. (Dejnega, 2011) It simplifies the allocation of costs by incorporating time equations and uses time estimates for activity duration rather than conducting extensive and detailed activity analysis. Here's an overview of Time-Driven Activity-Based Costing:
Let’s understand this approach with an illustration
Included Margin |
|||||
Contract price |
$1,999.00 |
||||
Practice price |
$199.00 |
||||
IVR call price |
$0.20 |
||||
admin call price |
$15.00 |
||||
triage call price |
$45.00 |
||||
Price per call with followup (clinic, callout) |
$60.00 |
Name: |
ABC |
Practices: |
5 |
||
Date: |
Feb-23 |
||||
Triage Calls: |
900 |
||||
Call Data (pro-rata 3 months): |
Clinic Calls: |
300 |
|||
IVR calls: |
15,000 |
||||
Admin Calls: |
900 |
||||
Pricing (inc. 8% Margin) |
|||||
IVR Only Calls |
Admin Calls |
Triage Calls no handover |
Triage Calls with handover |
Cost of practices |
Annual Price (revenue) |
$3,000.00 |
$13,500.00 |
$40,500.00 |
$18,000.00 |
$995.00 |
$75,995.00 |
The time driven Activity Based Costing is applicable to the telehealth services in New Zealand in the following ways:
Areena, S. (2019). A review on time-driven activity-based costing system in various sectors. . Journal of Modern Manufacturing Systems and Technology.
Dejnega, O. (2011). Method time driven activity based costing–literature review. Journal of Applied Economic Sciences.
Drury, C. (2013). Management and cost accounting. . Springer.
Jalalabadi, F. M. (2018). Activity-based costing. In Seminars in plastic surgery (Vol. 32, No. 04, pp. 182-186). . Thieme Medical Publishers.
Namazi, M. (2016). Time driven activity based costing: Theory, applications and limitations. Iranian Journal of Management Studies.
Riediansyaf, M. (2014). The application of time driven activity based costing in the hospitality industry: an exploratory case study. . The Journal of Applied Management Accounting Research.
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