Academic journal article Journal of Applied Management Accounting Research

Implementation of the Activity-Based Costing Model for a Farm: An Australian Case

Academic journal article Journal of Applied Management Accounting Research

Implementation of the Activity-Based Costing Model for a Farm: An Australian Case

Article excerpt


Accounting and agriculture are two influential economic sectors that respectively make significant contributions to global economy. However, researchers of the two sectors seldom collaborate with each other. Accounting researchers have traditionally shown little interest in exploring how accounting systems and management controls affect agricultural management. Meanwhile agricultural researchers have been focusing on the enhancement of productivity via scientific management, philosophies and economic models with limited appreciation of the roles of accounting in agricultural industry (Johnston and Mellor, 1961; Polopolus, 1965; Schnitkey and Sonka, 1986; Stollsteimer, 1963; King, Boehlje, Cook and Sonka, 2010).

A major driver of recent research in accounting for agricultural industry is the introduction of International Accounting Standard (IAS) 41. IAS 41 requires all biological assets including agricultural products to be measured by fair value. This represent a radical departure from the traditional historical cost-based accounting practices in the agriculture industry and has sparked controversy over the relevance of the new valuation method. Due to the significance of IAS 41, recent research in accounting for agricultural industry focuses on the appropriateness of IAS 41 and its application (Argilés, Aliberch and Blandon, 2012). As such, limited attention is paid to implications of other branches of accounting to agricultural industry.

For farms, a major accounting challenge is costing of agricultural products. Similar to manufacturing organisations, farms typically have diverse ranges of products (Rosset, 1999). Due to advances in technologies for agricultural production, many farms in developed countries have simultaneously increased the use of machinery and reduced the use of labour in late 20th century. With diverse range of products and increasing weighting of overhead costs, overhead cost allocation becomes an important issue for costing of agricultural products. However, the unique nature of agricultural production increases the difficulty in allocation of overhead costs to agricultural products. The production of agricultural products often spins across multiple financial periods. In addition, some agricultural products may remain unharvested after they mature. Attributing costs incurred in a particular financial period to agricultural products is therefore difficult.

This study presents a case study on the development of a costing Activity-Based Costing (ABC)-based costing model in a family-operated Australian farm. The objectives of the study are to develop an understanding on how the ABC model can be implemented in farms and to examine issues associated with the implementation of the ABC model in farms. The remainder of this paper is organised as follow. Section two presents a discussion on the theoretical underpinnings of the study. Section three outlines the research methodology for the study. The case is presented in section four and a concluding remark is made in section five.

Theoretical Development

In developed countries, a large proportion of farms are operated by individuals or families (ABS, 2014; USDA, 2014). Given their relatively small sizes, farms often do not have no legal obligation to prepare general purpose financial reports (Argilés and Slof, 2001 ; 2003; Burton, Schurle, Williams and Brester, 1996; Neilson, 1986). As such, many farm operators elect to prepare simplified accounting reports which only include information for satisfying the basic requirements of tax legislations (Baxendale, 2001; Neilson, 1986; Hicks, 1999). While these reports provide farm operators feedback on aggregate financial performance of their operations, they are of limited relevance for resource management (Burton et al., 1996). A particular issue of these reports is the absence of information on product costs except for aggregate cost of goods sold. As such, farm operators often have limited knowledge on the profitability of each product line. …

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