Top management attitudes towards the Activity-based costing

Top management attitudes towards the Activity-based costing

Top management is in the position of approval of the costing system used in the apportioning of the company’s overhead costs in any Sri Lankan organization. There is a constant support of top management to implementing activity-based costing system changing from the traditional volume-based costing system. Now a days accurate costing information is crucial for businesses to achieve a competitive advantage over its competitors. Currently there are experiences of the use of ABC in many different kinds of businesses. It depends on the objectives of the company and its businesses. Small businesses usually do not use ABC because of the high cost. With respect to the objectives, the ABC company works as a set of activities, calculating their costs through cause-effect relationship.

It is also implemented in types of businesslike hospitals, libraries, in large banking and telecom firms. There are improvements around activity-based costing in logistics and supply chain.Activity-based costing was mostly attentive on production companies. Manufacturing companies use activity-based costing to improve cost estimation and effective customer service. Afurtherfacet is that the result of ABC can be used for internal benchmarking of the efficiency of activities. Activity based costing is being implemented by a growing number of companies around the world. Specific ABC applications vary from organization to organization. A few organizations use ABC as their basic, ongoing cost accounting system.

In my view, companies which have high degree of complexity in their processes, which include supplementary activities prior to production (complex production), expanded product mix, combined with different types of customers and sales teams. It has also been used by departments to sort supplies vendors and standardize prices for those types of companies ABC is more suitable to effective calculation of costing.

Obligations to implement ABC in Sri Lanka

Sri Lanka has corporate target of becoming a tourist hotspot. In order to do that there are few major facts. One of them is having good restaurants. Problem with most of the Sri Lankan restaurants are; most of them does not use the correct pricing techniques. Down side of this is most of the restaurant owners set their price based on their competition. Not just for the foreign customers; even for the locals most of the quality places value their food not based on the costs on each item but dividing the total over heads for each product. One of the common example of Sri Lankan context is selling Tea at 450 a cup in most of the Five star hotels. Yet the cup of producing the tea is approximately around Rs. 50 including all the supplementary facilities.

As to the tourism reports and articles of Sri Lanka; most of the tourist does not tend to dine from the top restaurants because of the prices are ridicules. Other thing is ABC derives standards for cooking. Like world class restaurant chains ABC allows manager to get an idea about average time of production and actual cost of the product. There for they will be able to take managerial decisions to drop non performing products. Because one of the most common factors in Sri Lankan restaurants are they have little bit of everything not specialize on few things.  First and foremost is the attitude problem. Most of the Sri Lankans have very poor attitude on changing their behaviors. Knowledge is the other main issue. Even though some of the restaurant owners are literate on English they have a very little knowledge in applying and understanding statistical stuff like ABC applications.

No proper standards of cooking. So very hard to define the cost factors and the measurements.Specially not on star level restaurants measuring these factors are very hard. For example; sometimes they use the same oil to cook few times and sometimes they use it once or twice. Even the supplies also change very rapidly.

Other issue is the instability of the government. The tax rates and other various types of factors influence prices of the products. So its hard to define the cost for a particular time.

And these things has to updated once the costing changes; this pop the second problem in sri lanka where updates on rates never gets updated and once its not generating expected out comes they drop the system and use their traditional ways.

An Effective Tool for Better Management

An Effective Tool for Better Management

The study clearly focuses on gaining much better understanding on activity based costing systems while giving the reader its concepts and how to apply the concept and success stories. Activity based costing is an emerging trend with many obstacles as many people are used to follow the traditional costing methods which has been the practice throughout. Simply many organizations have been practicing the traditional costing methods as it is easy to understand and is less costly. Unlike the activity based costing methods, traditional costing methods have simple rules and is easily understood. However this study advises the benefits of using activity based costing while mentioning that it may be a tedious task and requires importantly the coordination of the cross functional teams to work smoothly.

The findings can be used for local manufacturing company where activity based costing will be very useful to identify costs accurately. It is indeed important for manufacturing organizations to use activity based costing as there are range of cost activities and the costs can be broken into cost pools before identifying the cost drivers and allocations. Taking the nestle research mentioned in the article it required the coordination of the cross functional teams across the organization to share information. Teams need to share information while making the process less sophisticated to identify correct areas and make right decisions.

This stresses the importance of educating the users of accounting information and also the people who work in the accounting departments. However unlike traditional costing methods where only the accounting department is involved, in activity based costing it is a team work for which all departments need to get involved. Therefore it is important to educate all users that their contribution is important for this. Specifically it needs to be mentioned that accurate cost information can be obtained by this.

Therefore it is vital for all people working in an organization to identify the areas of improvement in accounting and finance while making recommendations for process improvements and enabling the organization to achieve their goals.

Customer profitability analysis

Customer profitability analysis

Main objective of this study is to determine the impact of activity based costing(ABC) on the  customer profitability analysis (CPA). Previous studies have examined the importance of customer profitability without checking the potential usefulness of ABC to develop CPA.

Customer profitability analysis can use for any income increases by using any strategic decision, such as change of delivery term of a contract up to terminate business dealings of unprofitable customer. 

Researchers state that if customer related cost can be reduced without any change for customer experience or while maintaining the quality of the product or service, there is a impact on customer profitability. It is necessary to distinguish the characteristics profitable from unprofitable customers.  

Researchers have identified four expense categories impacting on customer profitability

1.Purchasing Patterns  and customer profitability

2. Delivery Policy and customer profitability

3. Accounting Procedure and customer profitability

4. Inventory holding and customer profitability

According to the  activity based concepts are paramount important to focus on customer profitability. There are three types of customers who are potentially unprofitable however might be retained

(1)  New and growing customers, who promise profitable business in the future and may provide a stepping stone for penetrating lucrative new markets;

(2) Customers providing qualitative rather than financial benefits, including customers at the edge in the development of new markets who provide valuable insights into likely trend movements in consumer demand;

(3) Customers providing increased capability because of their status as recognized leaders in their markets or fields of expertise.

Researchers request to negotiate with customers to influence the behavior in a way it is profitable to organization without compromising customer satisfaction.  Improved negotiations might include

Non-cash incentives from sunk-cost investments –

Restructure of delivery runs to create a more timely but less frequent service for the customer;

Capacity maximization on delivery runs that are required for profitable customers by offering a more frequent service for the potentially unprofitable customer with unpredictable demands;

Purchase of equipment on behalf of customers which they can use rent-free, in lieu of discounts and/or agent’s commissions. The cash saved on reduced discounts/commissions potentially should exceed the cost of the asset. Additionally, ownership is retained and a stronger bond is forged with the customer, thereby generating greater negotiating power in future;

Free short-term financial advice which will create efficiencies for the customer, leading to reduced internal workload and consumption of resources;

New products at no cost in return for reduced discounts, to serve a dual purpose: improving customer profitability while providing a useful vehicle for the promotion of new products;

A trade-off between quantity discounts and settlement discounts that minimize the costs of cash overdraft and maximize long-run production scheduling.

The most important point of customer profitability analysis is that management should aware about the unprofitable customers and make more attention in developing strategies to minimize the losses or make the customer profitable without reducing the customer satisfaction.

Resources allocation to activities provide clearer picture of resources consumption by customers. Using activity drivers will assist to assign activity cost to customers. Turney and Stratton developed an activity-based model using micro and macro activities which easily assign the cost to final products.

Customer costing objective – depicting the profitability of a customer using the cost of macro activities;

Performance improvement objective – isolating detailed areas for potential improvement by focusing on micro activities.

How ABC important to Sri Lankan Companies

If you look at Asia’s top 100 companies, top 100 brands, etc there is hardly any Sri Lankan companies in the list. Countries who are less developed than Sri Lanka like Pakistan, Vietnam even have some presence. We have failed due to so many reasons. One main reason is Sri Lanka does not have sustainable product or services to offer to the world. We are unable to compete with the low price high quality products in the market.

Only a few Sri Lankan companies practice the activity based costing which directly supporting to total quality management (TQM), 5-S system etc.  Practicing ABC costing will provide manufactures or service provider some clear picture about high cost pools. So they can attack high cost areas by adding high technology, streamline the processers, bringing new concepts, product modification, outsourcing etc.  Sometimes they may have more involve in low cost pools which is not adding value. This also help to enhance the quality or practice  total quality management.

ABC costing helps to take product pricing decisions. Such as the final price to customer. Whether to continue or discontinue the production. whether to produc the product or make outsourcing. Keep the particular customer drop the customer. Etc. Management can use this  ABC costing to make above decisions.

Companies can use the ABC costing data for budgeting purposes. Since it gives more accurate cost information and accurate customer profitability analysis. Further it improves the budgets and same can be used to measures of department and division performance.

ABC costing helps in effective utilizing the scares resources and make the input cost low. It focus more on profitable customers and cost centers which lead to make product cost low. Hence it generates more sales and with less efforts with the improved quality. 

Any barriers to implement it in Sri Lanka

Most of the Sri Lankan companies, specially management is not aware about ABC costing principles and they do not understand the benefits which can obtain. Hence there is some resistance from Management to implement ABC costing in their organizations.

ABC costing is more time consuming for implementing and to collect data. It’s a systematic and lengthy process. Also there is less people available with required knowledge to implement and practice ABC costing.

If a company is trying to purchase, implement and maintain an activity based system, the initial cost is huge. Hence it is much difficult to implement for smaller organizations.

Some companies have complicated process.  Establishing the causes and effects and the relationship between cost driver and final product costs is difficult and unclear.

ABC does not conform to generally accepted accounting principles in some areas.

Application of Balanced Scorecard in the University System of Sri Lanka

Application of Balanced Scorecard in the University System  of Sri Lanka

In today's  global completion  every organization is trying to provide quality service to win the competition. like other organization universities also focusing on ensuring academic excellence. Therefore universities are always trying to recognize the performance improvement measurements to achieve their predetermined goals and objectives. For this purpose universities can use Balanced Scorecard model. Therefore, the BSC focus on the fact that university required a balance between both financial and non financial measures.

The Customer Perspective

When University consider customer perspective it should identify its potential stakeholder and their expectations clearly. In University there are few customer groups such as students, staff, public, government and donors so under the customer perspective each and every stakeholders interest to be addressed. The customer perspective can accomplish using performance indicators such as  quality of graduate, quality of service provided community, etc. In Universities students are the main stakeholders. So the university has to produce quality graduate who possess good knowledge, skills and attitudes which match with job market requirements. Also  Universities can develop community based extra activities to achieve interest of community.

ex. Universities can conduct seminars for grade five scholarship examination, G.C.E.O/L and A/L examination, organize blood donation camp and medical camps.

The Internal Process Perspective

Internal process perspective measures the performance of the internal work and procedures of the university. This highly focus on the quality of academic learning process, increase infrastructure facilities and maintain good relationship with students and university administration to minimize conflicts. The considering this perspective may leads to achieve productivity.

The Financial Perspective (FP)

In traditional perspective university measures net operating ratio, research funding effectiveness by focusing cost and revenue. Under the BSC methodology university can initiate programme’s such as external degree programmes and post graduates progarmmes rather than depending on treasury. And the funds received from those programmes can be allocated to extra activities and staff development activities. Also those self generated funds can be used to allow staff members to participate for foreign conference and training with the purpose of getting utmost benefit from them to the university. Also university have to attract research grants.

The Learning and Growth Perspective (LGP)

Learning and growth perspective of the BSC attend to the universities competence to uphold high performance levels over time. This has focus on enhancing working environment,  self-confidence of staff , professional and personal development of staff

, quality assurance and effective use of technology. In university system this can be accomplish through encouraging staff  to start higher studies by funding course fee by university , can arrange varies staff development programmes with the assist of  Staff Development Centre, encourage academic staff to conduct research.

Conclusion and Recommendation

In early days most public universities mainly focus on the improving the graduate employability rate by ensuring academic excellence but with the environment changing rapidly and expectation of stakeholders are ever increasing universities also focus more on not only academic excellence but also service excellence, managerial enrolment growth, staff development, and cost effectiveness and increase revenue. Because when we concerning higher education sector quality of educational service and stakeholder satisfaction are most vital factors to be considered. Accordingly to achieve those expectations university should develop best performance indicators. For this purpose balance scorecard can be used as a conceptual framework which can be use in translating universities strategic objectives into a set of performance indicators. Rather than only  focusing on operational performance of the university and use of quantitative financial measures, the BSC approach associate the university's strategy to measurable goals and objectives in four perspectives namely financial, customer, internal process and learning and growth. Also once the BSC is developed for the university it is essential to have continuous improvements and enhancements.

GREEN ENERGY SOLUTIONS TO THE APPAREL INDUSTRY

This research will identify the energy usage and consumption of Apparel industry in Sri Lanka and provide ‘Green Energy’ solutions for the industry. As a main export business and a large industrial component in Sri Lanka, apparel industry consumes large amount of electricity. So, the study was a step towards achieving the goal of introducing green energy solutions to the apparel industry. The adoption of green energy solutions to the industry is seen as an important strategy in finding a solution to the energy problem. Green energy is the sustainable provision of energy that meets the needs of the present without compromising the ability of future generations to meet their needs. Technologies that promote sustainable energy include renewable energy sources, such as hydroelectricity, solar energy, wind energy, wave power, geothermal energy, and tidal power, and also technologies designed to improve energy efficiency.

In order to increase the accuracy of the research, the researcher will discuss more methodological arguments in literature review. Therefore it will be very supportive to develop independent variables for a selected dependent variable. The researcher has identified “the green energy solutions to the apparel industry in Sri Lanka” as the dependant variable, and the factors that determine the adoption of green energy to the industry as the independent variables, which are namely, the current energy sources using in the apparel industry in Sri Lanka, availability of green resources in the country, the energy consumption and the usage of apparel factories, senior managers attitudes towards adopting green energy to the industry and the government regulations and motivation towards the green energy concept. The population of the research is based on the main apparel factories in Katunayeka trade zone in Sri Lanka, which can be taken as a sample to represent the whole Sri Lankan apparel industry and the researcher is using the simple random sample technique as the sampling technique.

Apparel industry is an energy intensive industry and the energy cost in this sector is a significant component of its operational cost. Operating costs can certainly be reduced by performing energy analysis and diagnostics, leading to efficient energy conservation and management policies. Apparel sector uses energy from several sources. Among those, electricity is the most extensively used energy. This study has assessed the energy used in apparel sector of Sri Lanka and suggested Green Energy solutions to the apparel industry.

As a main export business and a large industrial component in Sri Lanka, apparel industry consumes large amount of electricity. So, the study was a step towards achieving the goal of introducing green energy solutions to the apparel industry. The adoption of green energy solutions to the industry is seen as an important strategy in finding a solution to the energy problem. The key factors to reducing and controlling CO2, which is the major contributor to global warming, are the use of alternative approaches to green energy generation and the exploration of how these green energies are used today and may be used in the future as green energy sources in Sri Lanka.

Further, the secondary data collected by the existing green factories in Sri Lanka is provided to support the core idea of the research. The difference between the energy consumption of a green factory and a standard factory is shown by tables and figures followed by the electrical usage in 2009 to 2012 mid and moreover, the trend of the electrical cost and the unit usage is analysed monthly to give a clear image on the electrical usage in a Green factory.

It can be stated that the investment made on the green energy efficiency measures can be recovered within recent future. In addition, reduction of energy cost will result in decline of production cost of the apparel factories and to achieve competitive advantage.

ENVIRONMENTAL MANAGEMENT SYSYTEM OF KANDALAMA HOTEL SRI LANKA

ENVIRONMENTAL MANAGEMENT SYSTEM OF KANDALAMA HOTEL SRI LANKA

The study aims to understand the importance of an Environmental Management System for the Hotel industry by focussing its attention on Aitken Spence Hotel, Heritance Kandalama which is a fore runner in implementing Environmental Management Systems locally as well as globally.

The hotel being located in the midst of the lush greenery of the Dambulla District of Sri Lanka came under rapid pressures of various groups with special reference to environment conservation organizations challenging the construction of the Hotel in the mid 1990 decade while the initiation stages of the project were under way. The study reveals how the Hotel re-surfaced and diminished the adverse brand image created by various pressure groups and finally to become an icon of the green concept and environment conservation.

After the Hotel was built using environmentally friendly practices, the major mechanism which continued the environmentally friendly approach of the Hotel was its Environmental Management System. The study mainly focuses on the operationalization of the waste management aspects of the Environmental Management System and discloses the unique practices adopted by the company in achieving the preset environmentally friendly and cost saving objectives.

 Subsequent to a thorough analysis of the prevailing Environmental Management System practices, the study recommends a viable direction of improvements for the system bringing in to light the possibility of generating bio energy to facilitate the current environmentally friendly practices and to cut down on costs. The study also primarily acts as an appropriate source material for obtaining information on the environmentally friendly practices adopted by Sri Lankan Companies in the Hotel industry.

Increase in Foreign and Local Tourists

With the ending of the ethnic conflict of the Northern and the Eastern provinces of Sri Lanka which impacted the security of the entire country adversely, a wide spread positive attitude has emerged towards the tourism sector of Sri Lanka across the world.

Encouraging Adventure sports in Sri Lanka, new hotels permitted to be built in east cost of the country and promotional campaigns are some of the new tourism promotions sponsored by the government.

“With the implementation of the new Tourism Act No. 38 of 2005 in August 2007, we have witnessed an enhanced effort at destination marketing through the newly established Sri Lanka Tourism Promotion Bureau”.( Aitken Spence Hotel Holdings PLC, Annual Report 2008/09, )

This increased readiness level and the diminution fear of travelling to Sri Lanka of worldwide communities will have a positive impact on Kandalama Hotel since the natural beauty and serenity of the surrounding combined with the placid peacefulness of the hotel is willing to be embarked by thousands of travellers. Being one of the top five star hotels in Sri Lanka, the tourist attractions to the hotel will be inevitable.

On top of the foreign tourist attractions, the affluent local customer base will also be adding value to the revenue generation capability of Kandalama Hotel as a result of increased tendency towards leisure with the prevailing peaceful condition of the country.

 Increased Concern for eco Tourism and Environment Conservation

With rising global issues such as global warming and environmental imbalance radically impacting the daily livelihoods of communities, the eco tourism sector which was once seen as an innovative move has now become the ultimate saviour of the industry. This is as a result of the decreasing demand for the conventional tourism sector as a result of adverse impacts generated by it to the environment.