Finance JAMARVol 14 No 2

JAMAR Vol. 14 · No. 2 2016

29

Implementation of the

Activity-Based Costing

Model for a Farm: An

Australian Case

Cedric Lu*

V.G. Sridharan*

Michael S. C. Tse**

Abstract

Due to the unique nature of agricultural

production, costing of agricultural products

presents a major challenge to the

management of farms and other

organisations that involved in agricultural

production. Activity-Based Costing (ABC),

with its ability to apply non-volume driven

cost drivers and disentangle resource

costs and cost objects through two-stage

allocation process, has the potential to

address issues in costing of agricultural

products. This paper presents a case

study of ABC implementation in a family-

owned 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. Findings from the case show that

implementing the ABC model in farms is

possible with the use of heuristics.

Technical factors are found to be

dominant over behavioural factors in the

development of the ABC-based costing

model for the farm.

Keywords

Activity-Based Costing

Agriculture

Costing

Farm

*Deakin University, Australia

** Holmes Institute, Australia

Introduction

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

JAMAR Vol. 14 · No. 2 2016

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

incurred to “produce” the material. They may

not be available for sales in open market as

farm operators may elect to keep them for

future use. In addition, future benefits of these

inputs are uncertain due to the inherit risks of

agricultural production. As such, determining

the fair value of these inputs would be

extremely difficult, if not impossible.

The uncertainties associated with agricultural

production further increase the difficulty in

calculating agricultural product costs.

Agricultural production has multiple stages

including soiling, sowing, watering, planting,

cultivating, and harvesting (Allen and Lueck,

1998). Each production stage is associated

with a number of internal and external

uncertainties. Internal uncertainty is associated

with agricultural products’ natural growths and

their physical quantities (e.g. quantity of soil,

quantity of breed/seed, maturity pattern)

(Argilés and Slof, 2001). For agricultural

production, consumption of resources varies

seasonally subject to individual product’s

physical state. Many plants have life that

extend across multiple financial periods and

the harvest of fruits and flowers can be

deferred for one or more financial periods.

Variations in resource consumption and time

gap between production and harvest make

identification of actual costs incurred for

producing agricultural products harvested in a

particular financial period very difficult.