Developing an acitivity based costing system to benchmark two operational units in an agricultural setting

Abstract

FairFruit, an exporter of fresh vegetables to the European, American and Asian market, operates two operational units which are in Guatemala and Peru. While they supply similar products to the same market, processes vary and differences in the cost structures are identified. Especially the overhead costs are significantly higher in Guatemala than in Peru. The explanation behind this phenomenon is yet unknown to the management of the company. Therefore, the problem statement of this project is: “What is explaining the differences in cost structure of the two operational units?” An answer to this question offers the opportunity for both units to execute structural improvements, reducing costs and inefficiencies. To answer this research question, the Activity-Based Costing method was used. The ABC method is a frequently used accounting tool which assigns overhead costs to activities performed by the company. By performing this method, management can have a clear overview on the costs related to the activities. It gives them the opportunity to focus on improving the costly activities and strengthening those that are having a strong impact on the bottom line of the business. As a next step, Activity-Based Management can classify all identified activities into value-adding and nonvalue-adding activities to make strategical and structural improvements. To execute the ABC method, many different steps were taken. First, a comprehensive view on the plant mapping and the process flows for all products was acquired to obtain a valuable understanding of the operations at FairFruit. Secondly, primary data was collected by doing interviews with key people from different departments of the company. Finally, an activity dictionary was constructed, forming the basis for next steps in the project.In the following phase, an understanding of the financial data for both operational units were gained, the financial statements were streamlined, and the detailed cost accounts were identified. Eventually, the detailed cost accounts were allocated to the corresponding activities with the use of several resources such as the company databases, interviews, process flows, etc. By conducting this analysis, interesting views on the operations of both operational units were handed to the managers. The final ABC model turns the scattered cost accounts in the company’s financial data into a list of costed activities, giving them the opportunity make strategic and structural improvements. As the project was faced with several challenges and limitations, the concluding section of this reports gives interesting suggestions for future research.