QUESTION

 

 

ANSWER

 

COSTING SYSTEM AND CAPITAL INVESTMENTS

Introduction

This is most important to evaluate the budget of a project, it is most important to analysis the risk factor and the cost requirement of a project. The cost analysis is important because it can affect the decision-making process in an Organization.

Different type of costing system used in an organization

Activity-based Costing

The activity-based costing data includes the overhead trend of economic cost, social cost and environmental cost; it added the total costing pool which also includes non-environmental cost. As suggested by Angelopoulos & Pollalis (2017), this obstacle affects to manage the ability of economic costs, social costs and environmental costs decision.

Life-Cycle Costing (LCA)

Life -cycle costing is also known as LCA, the life-cycle costing help to decrease the influence environment of technology, product, process, industrial system and materials. The life-cycle costing is a help to analysis the total annual costing for the product which added the disposal costs as well as the capital costs of the product. LCA also help to evaluate the current cost benefits as well as future cost benefits for the organization.

Full Cost Accounting

FCA stands for full cost accounting it added the external cost also including the future budget during the process of decision making. Full Cost Accounting shows total indirect cost and direct cost for product pricing decisions, inventory valuation as well as the product profitability analysis (Auer, Bey & Schäfer, 2017). The FCA help the managers to add the impact of sustainability during the decision making process.

Figure 1: Different type of costing system used by SABIC

(Source: Kambanou & Lindahl 2016, p.188)

Comparison of different costing system

Activity-based Costing	Life-cycle Costing	Full Cost Accounting
Activity-based Costing has a trend of adding the overhead costing of environmental, economic and social cost It also helps to include the total pool cost of the product which also adds the non-environmental costing. The active-based cost is suitable for analysis as well as reduces the environmental impact as well as the cost benefits of the product.	LCA is designed to analyses the environmental effect of the industrial process, technological effect, product effect and the process effect of the product The life-cycle costing help to analysis the future cost benefits and current cost benefits (Epsttein & Buhovac, 2014) LCA design is best to evaluate the current and future benefits scope for a product of an Organization.	Full cost accounting help to added the comprehensive set external cost as well as the costs in the future management decision making FCA helps to analysis the total direct costing and total indirect costing for during the product pricing decision. FCA is good to evaluate the direct and indirect costing of a product such as taxation.

Table 1: Comparison of different type of costing system

(Source: Azevedo, 2015, p.105)

Advantage and disadvantage of each costing system

Activity-based Costing:

The advantage of activity-based costing is to analysis the total pool costing related to the environmental social and economic challenges of the industry, product and the process methodology of that company (Azevedo, 2015). The disadvantage of activity-based costing is the result is not 100% accurate it may be different during the particle implementation.

Life-cycle Costing:

The advantage of LCA is that it can help to evaluate future benefits and current benefits of the product and its scope. But the disadvantage of life-cycle costing is it cannot help to evaluate the environmental effect of a product as well as it cannot help to analysis the direct-indirect product costing.

Full Cost Accounting

The FCA stands for full cost accounting the advantage of FCA is it helps to calculate the total direct costing to the product as well as the total indirect costing of the product. As suggested by Kambanou & Lindahl (2016), the FCA has few disadvantages such as it cannot able to evaluate the future cost profits as well as present cost profit of the product is also not able to calculate the cost of the environmental effect of organization work process and the product.

Costing system align with the principal of sustainability used in SABIC

The organization Saudi Basic Industries Corporation is also known as SABIC. It is a Saudi Arabic based company which follows the costing system of Activity-based Costing. Since the Saudi Basic Industries Corporation is a petrochemical company they need to analyses the environmental impact continues to decrease their carbon emission of the organization. The company is dealing with the petrol product as well as chemical product, the company need to make sure to follow the standard population rule and regulation of Saudi Arabia.

It helps the organization to build a world-class product without damaging the environment. The Saudi Basic Industries Corporation has made clear policies to protect the environment and help to reduce the carbon emission of the organization (Mahal & Hossain, 2015). The Saudi Basic Industries Corporation use advanced technology in their organization these world-class mechanics not only help to increase the work efficiency but also help to reduce the carbon emission into environmental

Costing system align with the principal of sustainability in SABIC

SABIC is popular to use world-class equipment which helps to reduce the carbon emission of the organization. According to Omiunu (2015), the company follows activity-based costing to reduce the pollution emission of their organization. This activity-based costing system help to reducing the percentage of pollution emission of the Saudi Basic Industries Corporation, with the help of activity-based costing the Saudi Basic Industries Corporation identify the element which is responsible to increase the carbon emission of the organization (Sabic.com, 2019).

The strict policies of Saudi Basic Industries Corporation for the environmental pollution control, the use of zero-tolerance policies to reduce the carbon emission of the company (Schoute & Budding, 2017). They are very concerned about the environmental impact of their industry. The Saudi Basic Industries Corporation also concern about the total overhead costing of social, environmental, economic as well as a political issue which can give impact on their product price and quality. The activity-based costing is suitable for Saudi Basic Industries Corporation because they have to deal with various type issues for their organization such as environmental issue, social issue, political issues and social issues

Conclusion

The cost analysis of a project is very important any organization because it gives a huge impact on the decision-making system of the industries. The costing system of industries may be different-different it depends on the industry type and requirement of that organization, but the cost analysis gives a huge effect on the decision making the process of the organization. The costing process help to evaluate many factors such as environmental effect, current and future cost benefits of the product and its scope as well as the total direct and indirect cost many more

Reference List

Angelopoulos, M., & Pollalis, Y. (2017). Using ABC costing method with in a KPI-based framework to a Lean transformation of a Greek Public Company. Retrieved on 3^rd February 2019 retrieve from: https://mpra.ub.uni-muenchen.de/79483/1/MPRA_paper_79483.pdf

Auer, J., Bey, N., & Schäfer, J. M. (2017). Combined Life Cycle Assessment and Life Cycle Costing in the Eco-Care-Matrix: A case study on the performance of a modernized manufacturing system for glass containers. Journal of Cleaner production, 141, 99-109. Retrieved on 3^rd February 2019 retrieve from: http://orbit.dtu.dk/files/129908454/Auer_et_al._2016_Word_with_DOI.pdf

Azevedo, A. (2015). Innovative costing system framework in industrial product-service system environment. Procedia Manufacturing, 4, 224-230. Retrieved on 3^rd February 2019 retrieve from: https://www.researchgate.net/profile/Udisubakti_Ciptomulyono/publication/289989195_Innovative_Costing_System_Framework_in_Industrial_Product-service_System_Environment/links/56a6077808ae2c689d39a3c1.pdf

Epsttein, J., & Buhovac., A. (2014), Making Sustainability Work. Best Practices in Managing and Measuring Corporate Social Impacts,15(2), 16-28

Kambanou, M. L., & Lindahl, M. (2016). A literature review of life cycle costing in the product-service system context. Procedia CIRP, 47, 186-191. Retrieved on 3^rd February 2019 retrieve from: https://www.sciencedirect.com/science/article/pii/S2212827116300245/pdf?md5=1f513e6a200529a56fb3cbce47a27a22&isDTMRedir=Y&pid=1-s2.0-S2212827116300245-main.pdf&_valck=1

Mahal, I., & Hossain, A. (2015). Activity-Based Costing (ABC)–An Effective Tool for Better Management. Research Journal of Finance and Accounting, 6(4), 66-74. Retrieved on 3^rd February 2019 retrieve from: https://www.researchgate.net/profile/Md_Akram_Hossain/publication/309398925_Activity-Based_Costing_ABC_-_An_Effective_Tool_for_Better_Management/links/580e70bb08aef766ef10e546.pdf

Omiunu, O. G. (2015). Management Information and Accounting System and organizational Performance in Nigeria. Am. J. Soc. Mgmt. Sci, 6(1), 1-17. . Retrieved on 3^rd February 2019 retrieve from: https://www.researchgate.net/profile/Ojinga_Omiunu2/publication/295932640_Management_Information_and_Accounting_System_and_organizational_Performance_in_Nigeria/links/56d10dd008aeb52500cd87dd/Management-Information-and-Accounting-System-and-organizational-Performance-in-Nigeria.pdf

Sabic.com (2019) Ingenuity and Excellence, Retrieved on 3^rd February 2019 retrieve from: https://www.sabic.com/en

Schoute, M., & Budding, T. (2017). Stakeholders’ information needs, cost system design, and cost system effectiveness in Dutch Local Government. Financial Accountability & Management, 33(1), 77-101. Retrieved on 3^rd February 2019 retrieve from: https://sbe.vu.nl/nl/Images/Schoute_Budding-2017-Financial_Accountability__Management_tcm257-863318.pdf

Wilson, W. W., & Wolak, F. A. (2016). Freight rail costing and regulation: The uniform rail costing system. Review of Industrial Organization, 49(2), 229-261. Retrieved on 3^rd February 2019 retrieve from: https://web.stanford.edu/group/fwolak/cgi-bin/sites/default/files/wilson_wolak_urcs.pdf

 

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