We learned about a number of options for costing systems. Either explain the option your organization uses, or if not available, a company in the Middle East and its costing systems.
Compare and contrast these costing systems and identify the advantages and disadvantages of these systems.
Costing Systems
Costing systems are used in business accounting strategies in various ways as per the need and nature of the business. It is a way to determine the cost of manufacturing or providing of service as compared to the revenue generated through its. The costing systems are used to recognize the overhead of the services rendered and then use it to trace it to business products and services. These indirect costs are difficult to allocate on products. The allocation of these indirect costs is done in different ways.
The Emirates Group
The company that is going to be analyzed is Emirates and DNATA. The Emirates is comprised of the Emirates and its subsidiaries. Investment Corporation of Dubai which is owned by the government of the Dubai owns this company. The Emirates is involved in operations as a Commercial International Airline. Its main operations include air transportation of cargo and passengers, retailing as well as wholesaling of the consumer goods, in-flight catering, hoteling, and food plus beverage sales operations. DNATA is also owned by the same company of Dubai. Its operations comprise of aircraft handling as well as cargo handling, in-flight catering, and also travel agent services (The Emirates, 2017).
Costing Systems used by Emirates | Compare & Contrast
The company Emirates Group uses different types of costing methods for its different activities of operations. For example, Emirates and DNATA share many corporate functions between them. These include human resource, finance, legal, cash management and information technology functions. The costing of these functions is done by allocating the costs between both companies on activity level. Another example is that Emirates use various governmental controlled utilities for its Dubai operations. These include the use of Electric Supply, water supply, and airport services. These transactions are being allocated based on an arm’s length basis.
Other than this, the company computes its operating costs as direct and indirect operating costs. The direct operating costs include the costs of handling, in-flight catering, overflying, landing, parking maintenance of aircrafts and crew layover. Other than this, the employee costs, Jet fuels, aircraft operating leases, corporate overheads, and depreciation and amortization costs are also included in the operating costs. The traditional costing system which pools all indirect costs associated with the production or service providing and applies it to all products broadly using one cost driver is used majorly by Emirates for its costing. The cost driver used by Emirates is the Available Tonnes Kilometers. It is the capacity in tonnes multiplied by the kilometers flown. It gives a measure of the total capacity of an airline. The unit cost of the Emirates is computed as 132 files per ATKM. It is not that the company is using only this method for its costing. It is also using activity-based costing where the cost can be traced back to the activity levels.
It is true that activity-based costing is a more accurate method as it takes into account many important factors before assigning of the cost. The activity-based costing gives true costs of the product parts. (Kumar & Mahto, 2013) However, for this same reason, it is difficult to implement as well. Traditional costing is much easier as it relies solely on allocating average overhead rates. However, this also shows that this will not be more accurate as it will not take into account which overhead costs affect the products in what manner (Weygandt, Kimmel, & Kieso, 2009).
Conclusion
For Emirates, the traditional costing method is accurate enough as the indirect operating costs associated with the service provider cannot be traced to a single service. Thus, with both costing systems offering their pros and cons, the more accurate and relevant one, i.e. the traditional costing is used by Emirates.
References
Kumar, N., & Mahto, D. (2013). A Comparative Analysis and Implementation of Activity Based Costing (ABC) and Traditional Cost Accounting (TCA) Methods in an Automobile Parts Manufacturing Company: A Case Study. Global Journal of Management and Business Research, 13(14).
The Emirates. (2017). The Emirates Group Annual Report ǀ 2016-17. Retrieved February 12, 2018, from Emirates: https://cdn.ek.aero/downloads/ek/pdfs/report/annual_report_2017.pdf
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2009). Managerial Accounting: Tools for Business Decision Making. John Wiley & Sons.
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