This assessment will cover following questions:
- Origin Energy Limited is a supplier of electricity and gas. Identify the Activity Based Budgeting its unique features used by the Origin Energy Limited company.
- How Activity Based Budgeting is suitable for the Origin Energy Limited company.
- Differentiate between the Activity Based Budgeting and traditional budgeting system.
Management accounting is the branch of accounting that refers to planning, analysing and interpreting the financial information for decision making. It is also known as cost accounting that is essential for the business enterprises and its managers to make decisions. Management accounting helps the managers to achieve their business objectives and goals. Management accounting has become a very broad area that is helping the organisation through its various techniques. There are various types of management accounting that are used by the organisations according to their operational activities (Bataineh, 2018). The report is about the budgetary method Activity based budgeting system. Study will reveal about the features of activity based budgeting how it aids in planning and controlling the activities of company. The report is based on the Origin Company Electricity providers and gas suppliers.
Report is to the management of Origin Energy.
A. Description of the company
Origin is a public energy company that is listed over stock exchange in Australia and have headquarters in Sydney. Company was formed inn February 18, 2000 as an outcome of demerger conglomerates of Australia, Boral limited that saw energy business forming as new company, distinct from construction and buildings material business. Between 2001 & 2002 acquired licence of electricity retailer from distributors Citi Power and Powercor. In year 2004 SEAGas pipelines were completed as well as commissioned that served as link between Victorian & South Australian markets of gas (Origin Energy, 2019). Origin acquired 50% of interest in Kupe Gas Fields. It further managed in obtaining the interest in Edison Mission Energy of 51.4% in contact energy of New Zealand. Share of 53% in Contact Energy was was sold in market in 2015. In year 2013, Origin withdrew its investments in Geodynamics from EGS. Origin Energy in 2018 was among the 17 energy businesses which supported launch of Energy Charter. It was global initiative which was aimed at collaborating all the parts of supply chains of power for giving the customers much more affordable & reliable energy.
Core business of company is exploration of natural gas and production. It is having a diversified exploration portfolio that includes Surat, Bowen and Eromanga/ Cooper in the Central Australia and many more in other regions of Australia. Origin is also holding interest in the Canterbury Basin of New Zealand and interest in permit in Vietnam and Botswana.
It is also shareholder in Pacific LNG joint venture with China's Sinopec and US giant Conoco Phillips. It delivers largest coal seam gas in Australia to the LNG (liquefied natural gas) export project of Queensland (Origin Energy, 2019). It is the largest retailer of energy in Australia with 4.217 million of customers and serves both small business and residential markets and big energy customers. Origi also operates biggest portfolio of power generation with capacity of 6010 MW which represents around 13% capacity of power generation in National Electricity Market .
Company is also engaged in arena of renewable energy. Company has spend years to acquire wind farms, business of Solar energy that manufactured silver cell technology, and the Geothermal power. It was aimed at converting heat that is sourced in hot rocks into power or electricity.
Company in financial terms is performing well and is having adequate financial health and position. The accounting practice followed by the company are adequate. Company has made profit of $ 218 million from a loss of $2.4 billion last year. Company has made progress in reducing debts and improving the business. The performance of the company of the company could be improved further by adopting effective internal management techniques that will help in reducing its cost by proper planning.
B. Description of Activity Based Budgeting and its features.
As the Origin Energy is involved in multiple businesses. It is required to control the cost of each activity that is undertaken by the company. Profits could be increased by reducing the cost and to ensure that expenditures of the company are being made over productive areas.
Activity Based Budgeting
ABB is defined as budgeting method designed for providing greater transparency in the budgeting process. In simplified form it is a technique of budgeting where the revenues that are generated from research and instructional activities should be allocated directly to the units which are responsible for activity (Ellegård and Glenngård, 2019). Activity Based budgeting has empowered greater accountability and planning. It creates incentive for the units for more efficiently managing its resources & expenditures. Having direct control over the resources which are emerged from eh activities creating incentives for setting priorities and developing new activities which are consistent with overall strategic goals and mission of organisation.
Since activities of company consume resources, model of ABB uses ,monetary and physical indicators. The model have been made established through evolution & advancement in computing to carry out services of company. Permitting non monetary and monetary measures for carrying out, system provide whole view of costs for company and also ensures efficient utilisation of the resources. Method uses split variations in the total costs model which is based over concept that all costs incurred in company has to allocated to its products. This method reliable method used by organisations based over allocating cost the activities. The system uses cost drivers which help in deriving budgets. It focuses more on activities rather than its functions (Emerling and Wojcik-Jurkiewicz, 2018).
Activities involved in Activity Based Budgeting
Task of ABB system is of identifying all the activities that are carried out in organisation that are consuming resources. The activities are mainly classified into two main and secondary activities.
Main Activities – It refers to activities which are linked linked directly to the purpose of company. These activities cannot be eliminated.
Secondary activities. - It refers to activities that generate added value from viewpoint of customer. They involve generally various costs that are subcontracted sometimes.
After the activities are defined next step is of identification of methods for allocating resources between the departments and their activities. This is done with help of the inducers that are factors which define the consumption level in various activities.
There are three main inducers to influence the decision are amounts of resources which are required by activities, time representing the duration taken by the process and the repetition of activity in numbers after getting the facts, appropriate costs could be calculated (Jakobsen and Pallesen, 2017).
It helps company in identifying the activities that are consuming resources and analyses the costs involved in each activity.
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The Activity Based Budgeting also offers
- Extension over conception of the management, controlling and analysing the costs by attention over planning and designing of product.
- Quality measures and the delivery time, innovation, flexibility and services after sales, discerning traditional costs systems that are underdeveloped in comparison to it.
- To obtain in depth analysis of resources which are used in case of costs by the activities.
Feature of Activity Based Budgeting
Main features of ABB system includes
- It divides cost in two type and that are variable cost and fixed cost that are necessary for providing quality information that enable the managers in designing the effective cost system for manufacturing concerns.
- It is capable of making appropriate distinction between patterns of cost behaviours.
- Patterns of cost behaviour include related to diversity, volume, event and time (Kenno and Sainty, 2017).
- Appropriate cost drivers are to be identified by the organisations to trace e overhead of product.
- Pattern of cost behaviour is dictated by the cost drivers.
Benefits of Activity Based Budgeting
- ABB has a forward looking view instead of looking to the previous activities that have common features under the traditional budgeting. It questions about the things which are required to be performed and the areas where improvements could be made rather what was earlier approach and allocation of costs accordingly.
- ABB source the budget on resources and activities allowing to identify insights over the inefficiencies in process and source of imbalances that will be helping the managers to find improvement areas that will make them more effective in the jobs.
- It follows higher practical approach as environment is dynamic and it makes easier for managers and employees in communicating and executing activities in time bound way. It also evaluates performance of same through fixing the accountability for the specific activities (Klimenko, 2019).
- The systems leave scope to make changes according to change in current situations and environment in contrast to that which was planned initially. It allows the tools for tracing resource consumption allowing identification of issues of capacity so that adjustments can be made on time.
- This budgeting process have much increased control over the activities and processes that are carried within the organisation rather than the traditional budgeting method.
- It helps in accurate planning of the revenues and expenses of company providing meaningful detail regarding future and estimated financial projections.
- This system helps corporation in having better control over its operations and aligning its annual budgets with overall goal of firm through implementation of Activity Based Budgeting (Kurakova, 2017).
- It helps company in improving the business processes through identification of unnecessary activities leading to increase in costs.
Disadvantages of Activity Based Budgeting
- Major disadvantage of the ABB system is that it is very expensive for implementing and have more cost involved in comparison to traditional method of budgeting.
- At increased level more of the technical details is required for maintaining and capturing the costs at particular levels.
- The process involves various assumptions that consumes significant time of the management & could lead to inaccurate costs over certain times that will be depicting incorrect costs of product (Ohemeng, 2016).
- The method requires in depth understanding about the processes.
C. Difference between Activity Based Budgeting and Traditional Budgeting System.
It refers to the process involving projections of the business revenues and the expenses for next year taking the bases of previous budgets prepared by the company. Budgeting means a tool, used in accounting which helps to make predictions and analysing the earnings of business and its expenses. Traditional budgeting by looking at the previous budgets gives clear template for justifying the predictions.
Businesses sticks to the budgets prepared to the closest level possible and avoiding the overspending. Company has positive returns when expenses are lower than the budgeted level and sales are higher than the predictions made. It only revolves around sales projections and revenues that are estimating the expenses and predicting profit (Popesko and Šocová, 2016).
The budgeting is much easier and helps the management in decision making. Issues can be identified in the business and changes can be made accordingly. Traditional budgeting is used by businesses specially when they have to obtain finances. Lenders and investors analyse the financial plans before the investments are made in company.
Difference between the two budgeting approaches.
Activity based budgeting is an alternate budgeting practice. The traditional budgeting methods are comparatively much simple and adjustment can be made in budgets of prior period for accounting of revenue growth and inflation. Instead of using budgets of previous years but decide for the spending and expenses of company in current year ABB system uses deeper analysis. ABB system is not essential for every company. As established firms experiencing minimal changes hardly affects and application of flat rate over data from last year for reflecting the inflations and business growth is sufficient(Rodrigues, 2016).
Newer companies not having the access over information about historical budgeting cannot be considered as an adoption. ABB is also adopted and implemented by the firms undergoing significant changes like with subsidiaries, customers, products or business location. In such situation traditional budgeting do not proves to be useful for the purpose of future budgeting.
The traditional budgeting involves very lower cost as one budget is prepared for the organisations. Managers are only required to add inflation rate to their previous budgets. Where the ABB is much expensive as it involves identification of cost drivers and activities and functions that are carried out within the organisation (Rosaria and et.al., 2016). Budget is prepared for every activity and process undergoing.
Traditional budgeting do not involves consideration of factors that are affecting the cost structures in company. It continue to follow the old budgeting approach, error in previous budget will be followed continuously in the new budgets. ABB do not consider the previous budgets only but identifies the factors that have affected the budgeting so that errors are not continues in the new budgets. Traditional budgets do not provide areas of improvement as it is very difficult to find the loopholes as it involves making budgets on comparatively larger scale. It does not allocation and separation between functions and processes. ABB involves budgeting for separate activities and processes and provides with the areas where improvements are to be made by the organisations.
Managers are provided with much detailed information about the process activities and functions. Managers can make more accurate and relevant decisions though ABB for improving the performance of company. On the other hand traditional budget do not provide accurate information as the other factors are ignored that can affect the projections made. This do not allow managers to make appropriate decisions.
Traditional budgeting is beneficial for the business that are established and do not face much fluctuations in their projections. ABB is beneficial for entities with number of process activities and departments. It helps the managers to consider all the factors that could affect the projections.
D. Activity Based Budgeting facilitating planning and control activities in Origin Energy.
Origin company is involved in core businesses of exploration and production of natural gas, generation of electricity, retail and wholesale of gas and electricity and the sale of liquefied natural gas with principal business of operation of energy. Since these activities requires number of processes activity based budgeting is essential for the company.
Budgeting when done appropriately will be serving as planning & controlling systems. The goals and objectives of company is documented in the financial terms.
Planning is always future oriented and explains what management desires of doing. ABB after analysing the factors that have influenced the budgets previously would make new budgets. ABB will helps company in making accurate and relevant forecasts. Since it involves making assumptions about the future activities and expenses. ABB provides with relevant information after making detailed analysis so that the assumptions made are not wrong. Planning actually begins with the goals and objectives. Objective of every company is to minimise the costs. There are various areas where costs can be cut and reduced. ABB identifies the areas that are acquiring unnecessary cost in Origin, these are usually the unproductive activities that are consuming cost and resources (Sangiumvibool and Chonglerttham, 2017). When these areas are identified the budgets prepared by the company for the next year would be much more accurate with least variances. Budgets are prepared for moving the company in a defined direction controlling its cost and expenses. ABB provides the company to plan the budget for all the activities separately so that resources can be allocated more accurately. Hence, Activity Based Budgeting will help in effectively planning the future budgeting activities of Origin Energy.
Controlling refers to monitoring the activities implemented in plan and to take corrective measures and activities as required. Controlling is a continuous process as making accurate predictions is not possible. There are number of factors that may influence the projections and are not within control of the enterprises. ABB is a flexible budgeting method that provides space for the possible improvements in the budgets when required. It helps in effectively controlling the expenditures in the processes of Origin. ABB makes projections after considering external factors so that when variations occur it does not significantly affects the budget and the activities (Shepherd, 2017). In this way Activity Based Budgeting helps in effectively controlling the activities of business and the plans made.
E. Discussion over suitability of Activity Based Budgeting for the Origin Energy
ABB system for analysis is a very effective element to obtain information required for making the decisions and assessing actions and activities relating to product. System do not involve complex procedures that involves its implementation difficult. This system focuses more on cost of the activities unlike the other traditional system for cost quantification. The system emphasizes more over activities which bring added value to product. Since company is an established business it should not face increased variations. But company has suffered significant loss last year and during the year 2018 had managed to made profits. So the business face variations. ABB is suitable for the enterprises that along with the inflations and revenues growth are also required to consider other external factors also. The budgeting will be suitable as it will be providing increased transparency and traceability which allows in balancing the capacity. Company has sophisticated operational model and ABB has various tools for balancing the capacity. The budgets could be integrated with the initiatives of management and have horizontal orientation. It lays emphasis over achieving the completely the operational & financial budgets. Company is suffering through critical stage and it important to have control over the allocation of cost and resources. It involves better costing the activities of products, processing so that decision can be made accurately (Vereen and et.al., 2016). It involves eliminating the activities and processes that are consuming resources and are unproductive. ABB will be suitable for its diversified and complex operational as well as financial business budgets.
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The above study shows that management accounting methods have critical role to play in a organisation. Origin is electricity generating company that has emerged its business in various power generation and sales of electricity and gas. Activity Based budgeting is used by organisations to have proper allocation of resources over different processes. This helps in reducing the variances between actual and planned budgets. ABB helps in appropriately identifying the costs involved in functions and processes. Therefore corporation such as Origin Energy involving various processes should adopt activity budgeting system to identify the areas of improvements and to take corrective measures.
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Books and Journals
Bataineh, A., 2018. Applicability of activity-based costing in the Jordanian hospitality industry. International Journal of Economics and Business Research.15(4).pp.475-489.
Ellegård, L.M. and Glenngård, A.H., 2019. Limited Consequences of a Transition From Activity-Based Financing to Budgeting: Four Reasons Why According to Swedish Hospital Managers. INQUIRY: The Journal of Health Care Organization, Provision, and Financing, 56, p.0046958019838367.