Activity-Based Expenses ABC ) is a cost methodology that identifies activities within an organization and sets the cost of each activity with resources for all products and services according to actual consumption by each. This model provides more indirect costs (overhead) into direct costs compared to conventional costing.
CIMA (Chartered Institute of Management Accountants) defines ABC as an approach to costing and monitoring activities that involves tracking resource consumption and final output costs. Resources are assigned to activities, and activities for cost objects based on consumption estimates. The latter uses a cost driver to attach an activity charge to the output.
Video Activity-based costing
Destination
With ABC, companies can estimate costs well
elements of all products, activities, and services. It can help inform the company's decision to:
- Identify and eliminate unprofitable products and services and reduce the price of those who are too expensive (the purpose of product and service portfolios)
- Or identify and eliminate ineffective production or service processes and allocate processing concepts that lead to the same product on better results (process of reengineering objectives)
In a business organization, the ABC methodology defines the organization's resource costs through activities against products and services delivered to its customers. ABC is commonly used as a tool to understand product and customer cost and profitability based on production or process. Thus, ABC has been widely used to support strategic decisions such as pricing, outsourcing, identification and measurement of process improvement initiatives.
Maps Activity-based costing
Prevalence
After the start, ABC lost ground in the 1990s, becoming an alternative metric, such as a balanced Kaplan scorecard and economic value added. An independent report in 2008 concluded that manually controlled ABCs are inefficient resource use: expensive and difficult to apply for small profits, and poor grades, and that alternative methods should be used. Other reports indicate broad bands covered by the ABC methodology.
However, an activity-based recording application may be applied in addition to accounting-based activity , not as a substitute for any model cost, but to convert concurrent accounting processes into more authentic approaches.
Historical development
Traditionally, cost accountants have arbitrarily added a large percentage of the analysis into indirect costs. In addition, activities include actions performed by people and machines.
However, as the percentage of indirect costs or overhead costs increases, this technique becomes increasingly inaccurate, since indirect costs are not caused by all products equally. For example, one product may require more time in one machine that is expensive than other products - but because the amount of direct labor and materials may be the same, the additional cost for machine use is not recognized when an on-percentage charge is added to all products. As a result, when some products share a common cost, there is the danger of one subsidizing product to another.
ABC is based on the Activity Cost and Accounting Input-Output Calculation from George Staubus. The ABC concept was developed in the US manufacturing sector during the 1970s and 1980s. During this time, the Consortium for Advanced-International Management , now known simply as CAM-I , provides a formative role to learn and formalize principles that have become more formally recognized. as Activity Based Costing.
Robin Cooper and Robert S. Kaplan, a supporter of the Balanced Scorecard, brought notice to these concepts in a number of articles published in the Harvard Business Review beginning in 1988. Cooper and Kaplan describe ABC as an approach to solving problem of traditional cost management system. Traditional costing systems are often unable to accurately determine actual production costs and associated service costs. As a result, managers make decisions based on inaccurate data especially where there are multiple products.
Instead of using a large arbitrary percentage to allocate costs, ABC seeks to identify the cause and effect of relationships to objectively set costs. Once activity costs have been identified, the cost of each activity is associated with each product as far as the product uses its activity. In this way, ABC often identifies areas with high overhead costs per unit and directs attention to finding ways to reduce costs or to charge more for expensive products.
Activity-based costing was first clearly defined in 1987 by Robert S. Kaplan and W. Bruns as chapters in their book. Accounting and Management: A Field Study Perspective. They initially focused on manufacturing industries where technological improvements and productivity improvements have reduced the relative proportion of direct costs of labor and materials, but have increased the relative proportion of indirect costs. For example, increased automation has reduced labor, which is a direct cost, but has increased depreciation, which is an indirect cost.
Like the manufacturing industry, financial institutions have a diverse range of products and customers, which can lead to cross products, subscriber subsidies. Since personnel expenditure is the single largest component of non-interest costs in financial institutions, this cost should also be more accurately linked to products and customers. Cost-based activity, although originally developed for manufacturing, may even be a more useful tool for doing this.
Based on cost activities then described in 1999 by Peter F. Drucker in the book 21st Century Challenge Management . He stated that traditional cost accounting focuses on how much it costs to do something, for example, to cut the screw thread; activity-based costs also record the cost of not doing , such as the cost of waiting for the required part. Activity-based costing records costs not accounted for by traditional cost accounting.
The overhead cost assigned to each activity consists of a pool of activity costs.
Alternative
The lean accounting method has been developed in recent years to provide a comprehensive, accounting, control, and measurement system without the complicated and costly methods of manually controlled ABCs. However lean accounting is a snapshot concept for capturing the only partial or differential partial cost function selected. Lean accounting takes the opposite direction of ABC by working to eliminate strange cost allocations rather than applying complex resource allocation methods.
Lean accounting is mainly used in lean manufacturing. This approach proves to be useful in many areas of the service industry including health care, construction, financial services, government, and other industries.
Application of Constraint Theory (TOC) was analyzed in a study showing interesting aspects of the coefficient of productive TOC and ABC applications. Identifying cost drivers in ABC is described as something equivalent to identify bottlenecks in TOC. But a deeper insight into the cost composition of the inspected process confirms the results of the study: ABC can provide better structured analysis with respect to complex processes, and this is not surprising about the effort spent on detailed ABC reporting.
Methodology
The ABC methodology focuses on cost allocation in operational management. ABC helps to separate
- Fixed costs
- Variable cost
- Overhead
Cost segregation helps to identify cost drivers, if achieved. Manpower and immediate materials are relatively easy to trace directly to the product, but it is more difficult to directly allocate indirect costs to the product. Where products use common resources differently, some weights are required in the cost allocation process. The cost driver is the factor that creates or drives activity costs. For example, the cost of bank teller activity can be attributed to each product by measuring how long each product transaction ( driver cost ) takes on the counter and then by measuring the amount of each transaction type. For the activity of running the engine, the driver is likely to be the operating hours of the machine. That is, machine work hours encourage labor, maintenance, and power costs during machining activities.
Apps
Cost Based Activity Systems ABC has proven its application beyond academic discussion.
A B C
- applies to all corporate, cost and accounting costs:
- is the modeling process that applies to full coverage as well as for partial views.
- helps identify inefficient products, departments, and activities.
- help allocate more resources to profitable products, departments, and activities.
- helps control costs at the product level and department level.
- help find unnecessary costs that might be eliminated.
- help fix the price of the product or service with the desired analytical resolution.
A report summarizes the reasons for implementing ABC as non-specific and especially for case study purposes (in alphabetical order):
- Better Management
- Budgeting, performance measurement
- Calculate more accurate cost
- Ensure product/customer benefits
- Evaluate and justify investing in new technologies
- Improve product quality through better product design and process
- Increase competitiveness or overcome more competition
- Management
- Manage cost
- Provide behavioral incentives by creating cost awareness among employees
- Respond to the overhead increase
- Responding to increased pressure from the regulator
- Support other management innovations such as TQM and JIT systems
Beyond the selective application of such concepts, ABC can be extended to accounting, thereby breeding the full coverage of cost generation in the department or throughout product manufacturing. Such expansion, however, requires an automatic data retrieval rate that prevents cost increases in cost administration.
Implementation
According to Velmurugan, activity-based costs should be implemented in the following ways:
- Identify and examine ABC needs - Determine the viability of the ABC method within an organization.
- Training requirements - Basic training for all employees and workshop sessions for senior managers.
- Determine the scope of the project - Evaluate the project's mission and objectives.
- Identify activity and drivers - Decide what drives what activity.
- Create a cost and operational flowchart - How resources and activities relate to products and services.
- Collect data - Collect data where diagrams indicate operational relationships.
- Create software models, validate and reconcile.
- Interpret results and prepare management reports.
- Integrate data collection and reporting.
Integrate EVA and process based on cost
Recently, Mocciaro Li Destri, Picone & amp; MinÃÆ' (2012) proposes performance and cost measurement systems that integrate economic value added (EVA) criteria with process based costing (PBC).
The authors note that the activity-based costing system is introspective and focuses on too low levels of analysis. On the other hand, they underscore the importance of considering the cost of capital to bring the strategy back to a performance measure.
Limitations
The enforceability of ABC is tied to the cost of data retrieval required. It encourages the prevalence to slow down the process in service and administration, where the time staff consumed per assignment determines the dominant cost portion. Therefore apps reported for production tasks do not appear as preferred scenarios.
Treating fixed costs as a variable
The main problem with ABC, like other cost allocation approaches, is that it basically treats fixed costs as if they were variable, thus presenting an inaccurate picture that would lead to a wrong decision. Allocating PPE to individual products, for example, can lead to seemingly unprofitable product stoppages after allocation, even if their discontinuation would negatively impact the bottom line.
Search Cost
Even at ABC, some overhead costs are difficult to set for products and customers, such as the salary of the chief executive. These costs are called 'retaining business' and are not assigned to products and customers because there is no meaningful method. These unallocated overheads should be met by the contribution of each product, but not as much as the overhead cost before ABC is used.
While some may argue that unracked costs for activities should be "arbitrarily allocated" to the product, it is important to realize that ABC's sole purpose is to provide information to management. Therefore, there is no reason to arbitrarily set any charges.
Transition to Automatic activity-based costing Financing
A prerequisite for lower costs in performing ABCs is automating data capture with accounting extensions leading to the desired ABC model. The approach known for event-based accounting only shows methods for automation. Any transition from the current process from one stage to the next can be detected as a relevant event. Pair events easily form their respective activities.
A sophisticated approach with authentication and authorization in the IETF RADIUS standard provides an easy solution for calculating all work-based activities. It simply defines the extension of the Authentication and Authorization concept (AA) to a more advanced concept AA and Accounting (AAA). Each approach to AAA is defined and managed in the context of cellular services, when using smartphones as e.a. smart agent or smart agent for automated accounting data retrieval.
Public sector usage
When ABC was reportedly used in the public administration sector, the reported study provided no evidence of methodological success beyond the justification of existing budgeting and management practices and service strategies.
US Marine Corps usage began in 1999. Its use by the British Police has been mandated since the 2003-04 UK tax year as part of the UK and Wales National Policing Plan, in particular the Police Performance Assessment Framework.
References
- Drucker, Peter F.. The Challenge of Management of the 21st Century. New York: Harper Business, 1999.
External links
- Who Wins in a Dynamic World: Theory Limitations Vs. Activity Based? articles about SSRN
- proposed an International Good Practices Guideline on Costing to Enhance Organizational Performance - International Federation of Accountants
Source of the article : Wikipedia
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