Walmart Can Benefit From Activity-Based Costing (ABC) - Essay Sample

Introduction

The retail business is one of the leading industries and involves selling finished goods and services to the consumers. Walmart is one of the leading retailers and can significantly benefit by introducing the activity-based costing (ABC). ABC is an accounting model that identifies practices and activities in a company and assigns the cost of every activity to the services and product according to the company's structure. With the use of the ABC, the overall resources can be allocated to better yielding products. However, this report will consider Walmart Inc., a retail company. Walmart has approximately 11,368 stores located in 27 countries as of April 2019, operating in different locations worldwide (Walmart Inc. 2019). The activity-based systems apply to Walmart since the company's success is attributed to its ability to offer low price while maintaining high volume. The ABC approach also aids in the assigning of overhead costs to particular services and products.

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Description of the ABC Application in Walmart

Activity-based costing model application defines various cost accounting practices (Horngren, Sundem, Stratton, Burgstahler, & Schatzberg, 2005). In its application in Walmart, it delivers a significant role, particularly, in the pricing efficiency. Efficiency is essential for Walmart in maintaining low-price among other competitor retailers. Through an efficient supply chain, it maintains lower margins as they seek to manage costs and create value. Through the ABC model, Walmart has employed two significant strategies. First, Walmart leverages its scale with the intent to create operational efficiencies responsible for a significant competitive advantage. Second, Walmart utilizes its scale by indulging into supply-chain investments and other executions. It means that scale results in larger stores compositing of more products creating a conducive business atmosphere. It brings about the idea of a store offering a small and focused selection of products.

The activity-based costing (ABC) method assigns indirect costs into direct costs in comparison to conventional costing (Horngren et al., 2005). In the case of Walmart, its overhead costs are distributed across a vast footprint that allows it to have aggressive prices while ensuring a proper and flexible net margin. Scales are critical in a company since they ensure the availability of a negotiating advantage with supplier, an occurrence that supports aggressive pricing of products and services. Since this creates leverage, Walmart structures a snowball effect in which an increase in the purchase volume results to a broader selection which on the other hand lowers the purchasing prices or customer prices whereas growing the purchase volume.

Benefits of the ABC System to Walmart

As a chain retailer, Walmart focuses on two categories of products (service standard products and services custom product). Since the standard product is more straightforward than the custom product, Walmart settles with the production of a standard product in large batches in comparison to custom products. In as much as the ABC model can be complicated, it delivers significant benefits to Walmart by improving the costing process in three distinctive strategies.

Increase the Number of Cost Pools

The ABC model is designed to deliver a proper tracking of the costs of activities in line with the standards of the industry. Within the cost pools, ABC creates costs pools for the costs incurred to provide a proper balance between allocated costs and the actual costs. Since product lines are essential in each cost pool, increasing the number of costs pools in Walmart has been one of the benefits delivered by ABC as it identifies the activities performed with the company's resources. Primarily, a small allocation of cost pools could result in an unclear definition and understanding of activities and resources spent (Fito Bertran, Llobet, & Cuguero, 2018).

Customer Profitability

In the utilization of ABC in Walmart, it has maintained significant customer profitability. Even though the majority of the costs incurred for individual customers are product costs, there is an overhead cost such as product return handling. Thus, the ABC systems have sorted these additional overhead costs and aided in determining customer profitability.

Distribution Costs

Since Walmart is a retailer company, the distribution costs could be mishandled due to overhead costs. Through ABC, Walmart can make reasonable determinations concerning which distribution channels might be using high overhead. By this, it assists in the decision to alter the distribution channel or drop an unprofitable customer (Lere, 2000).

Activity Costs and Margins

Since ABC is formulated to tract the cost of activities, it allows assigning costs to various segments of the overall processes in a company (Lere, 2000). In Walmart, ABC is a productive tool since it measures the ongoing cost of services. Also, with appropriate overhead allocations, the ABC systems determine the margins of various product lines, products, and the subsidiaries as well as position to Walmart at a profitable position.

Implementation of ABC Project

The ABC system applies to various industries. In the implementation of the ABC project in a company, it can be a powerful tool in assessing a company's operation as well as informing the future strategic direction of the company. The implementation of the activity-based costing model should be initiated by top-level management. It is because the model incorporates techniques tracing indirect costs to cost object (Horngren et al., 2005). By this, the ABC identifies how resources are utilized by the activities to support production. Also, it focuses on the distribution of the costs to the assigned resources in a similar ratio that they are consumed to ensure a determination of the cost of activities. In this case concerning Walmart, the product selected for the application of the ABC project is the 'Wrangler Men regular Fit jeans' selling for $17.87 as of August 2019 in Walmart. The product is among one of the top-selling commodities of Walmart (Walmart Inc., 2019). However, the activities surrounding the product include material handling, quality control, and procurement, which means that there are overheads in the pricing. ABC allocates manufacturing costs of the business to products in a more coherent manner than the traditional system by allocating costs to activities that act the primary cause of the total manufacturing cost of the firm and re-directing them to the products that require the activities (Nair & Tan, 2018). Proper application of the ABC system in a company substantially improves its cost management by eliminating unnecessary costs (Nair & Tan, 2018). For the success of ABC, however, there must be proper adopting and implementation of the system in the company. Many considerations should, therefore, be put in place before adopting the system. These factors include;

External Environment

These are the outside effects of the organization, such as competition and the external market unpredictability that affect the organization's operations (Nair & Tan, 2018). Large companies such as Walmart face stiff market competition from rivals like the Home Depot Company, there is thus need for ABC adoption to slim down wastes attributed to costs.

Organizational Support

Whether or not the organization affirms with the adoption of ABC system in the company is a factor affecting its implementation (Nair & Tan, 2018). Lack of organization's support in large businesses such as Walmart in the application will lead to a definite failure of the system (Nair & Tan, 2018). Lack of organization's support, however, due to lack of enough knowledge about ABC and further research is vital in convincing the management otherwise (Maelah & Ibrahim, 2007).

ABC Training Cost

Big companies have numerous employees, Walmart, for example, the company's analysis shows that about 2.2 million global associates are employed annually. With such a vast number of employees, there is a need for the management to consider the cost of training the human resource about ABC system. Where substantial costs are incurred, the company may choose to forego the system or slim down the employees to undergo the training.

Potential Cost Distortion

This refers to the prospective cost cut efficient adoption of ABC system would offer to the business, thus a vital consideration (Nair & Tan, 2018). Companies with inadequate cost management systems have more significant cost cuts therefore advisable to adopt ABC than when the company has minimum wastage on costs.

Conclusion

In conclusion, the implementation of the ABC model determines the overheads. Through the model, it defines the overhead and considers the units and cost of the product, the number of cost drivers, and the involved activities. Thus, Walmart considers the application of ABC to ensure maximum profitability while at the same time, maintaining favorable prices.

References

Fito Bertran, M. A., Llobet, J., & Cuguero, N. (2018). The activity-based costing model trajectory: A path of lights and shadows. Intangible capital, 14(1), 146-161. Retrieved from https://upcommons.upc.edu/handle/2117/116402

Horngren, C. T., Sundem, G. L., Stratton, W. O., Burgstahler, D., & Schatzberg, J. (2005). Introduction to management accounting (16th ed.). Upper Saddle River, NJ: Pearson Prentice Hall. Retrieved from http://dr.ur.ac.rw/handle/123456789/251

Lere, J. C. (2000). Activity-based costing: a powerful tool for pricing. Journal of Business & Industrial Marketing, 15(1), 23-33. Retrieved from https://www.emeraldinsight.com/doi/abs/10.1108/08858620010311539

Maelah, R., & Ibrahim, D. N. (2007). Factors influencing activity based costing (ABC) adoption in manufacturing industry. Investment Management and Financial Innovations, 4(2), 113-124. Retrieved from: https://www.researchgate.net/profile/Ruhanita_Maelah/publication/291287016_Factors_Influencing_Activity_Based_Costing_ABC_Adoption_in_Manufacturing_Industry/links/580738dc08aeb85ac85f68a3/Factors-Influencing-Activity-Based-Costing-ABC-Adoption-in-Manufacturing-Industry.pdf

Nair, S., & Tan, X. (2018). Factors Influencing the Implementation of Activity-Based Costing: A Study on Malaysian SMEs. International Business Research, 11(8), 133-141. Retrieved from: https://pdfs.semanticscholar.org/5db8/a7d23e83e84dc117886ec2328974164de019.pdf

Walmart Inc. (2019). Walmart.com. Save Money. Live Better. Retrieved from https://www.walmart.com/