A third moment that locates the theoretical framework of the matter under analysis is its historical focus, so here we could raise the following concern: Is the ABC proposal a new phenomenon? What have been the principles of its evolution?
The issue of activity-based costing proposals has become a recurring aspect in the controversy of managerial accounting since the mid-1980s; being concern about it its origins, theories, practical aspects, advantages and limitations.
The use of a management and activity cost system becomes especially relevant in an environment as turbulent and dynamic as that of the late twentieth century, in conditions in which business managers need information that allows them to make decisions regarding combination and design. of products and technological processes, elements linked to the profitability of the organization on a global scale.
At this point, it is convenient to point out some of the most important changes that are affecting the cost calculation and management system. These changes include the following:
- Technological advances and increased competitiveness lead to the need to increase the product catalog, simultaneously with the fact that the life cycles of these products are increasingly shorter. To reduce investments in assets and thus be able to operate with lower financial costs, There is an increasing need to reduce inventories, which requires shorter production series. These technological advances also have an impact on the reduction of the weight of direct labor as indirect costs increase. This is due to the need for organizations to be more flexible and customer-oriented, which causes a greater weight of costs related to research and development, shorter series launches, production scheduling, logistics, administration and commercialization.This generates a greater weight of indirect costs. Need to avoid activities that do not generate value in cost centers.
Estos cambios provocan la necesidad de imputar los costos indirectos a los objetivos de costos (productos, clientes, servicios, etc.) de una forma más razonable, a como se hace en los sistemas de costos convencionales. Esto es consecuencia, tanto de la necesidad de obtener información más detallada de los costos, como de la pérdida de confiabilidad de los criterios convencionales de reparto de costos.
In conventional methodology, costs are assigned to products at the unit level; This assumes that all costs depend on the volume of production, while in the ABC, although costs are also assigned at the unit level, in many cases the allocation is made at the batch, product or infrastructure level. This means establishing a differentiation between the different types of activities that have been developed throughout the manufacturing process and identifying the way in which each product has consumed activities.
On its origins it is possible to observe different versions. According to Johnson, “there are two paths that lead to the current ideals of activity analysis. Both paths are born in the business world and not in the academic world. Some management accountants in the academic world, notably Gordón Shillinglaw in Columbia and George Stabus in Berkeley, outlined the concepts of activity-based analysis in the early 1960s. However, the concepts of activity they enunciated seem to have had no influence. academic thinking (except today), nor do they seem to have influenced both ABC developments in the business world. The first development of the ABC, begins at the beginning of the 60 in the General Electric,where finance and management control people were looking for better information to control indirect costs; GE accountants 30 years ago may have been the first to use the word activity to describe a task that generates costs. The other path that leads to activity-based costing appears to have originated independently of GE's progress in activity costing. ABC stems from the efforts of companies and consultants in the 1970s to improve the quality of cost accounting information. ”it appears to have originated independently of the progress made by GE in costing activities. ABC stems from the efforts of companies and consultants in the 1970s to improve the quality of cost accounting information. ”it appears to have originated independently of the progress made by GE in costing activities. ABC stems from the efforts of companies and consultants in the 1970s to improve the quality of cost accounting information. ”
Another study on the subject identifies four basic moments. A first moment, is related to the works of Alexander Hamilton Church, in the first decades of the 20th century; This author emphasized the study of the causes of indirect costs, however his proposal was to collect and store an enormous amount of data that required a complex and intensive analysis of them, something that with the then-current technique was not possible, reason why the difficulty arises that the determination and analysis of costs had to be done manually, which implied higher costs; This being the reason why Church's model was not widely accepted in his time.
Church understood that accountants made mistakes in distributing indirect costs on a single activity basis related to direct costs, usually direct labor. This author argued that the real source of the costs were the underlying processes, and that these should serve as the basis for the imputation to individualized products, to allow their reduction and control, thus avoiding waste.
There are other studies on the subject, among which stand out in a second moment the so-called Platzkosten, created by Konrad Mellerowicz in the 1950s; thirdly, the costing method proposed by George J. Staubus in his book Actyvity costing and input-output accounting in 1971; and in a fourth moment he transaction-based costing, proposed by Jeffrey G. Miller and Thomas E. Vollmann in 1985, which was later disclosed by H. Thomas Johnson and Robert S. Kaplan. In the case of Mellerowicz's work, this had no major repercussion and was forgotten.
As for the work of Staubus (1971), it had a greater acceptance, so much so that a large number of scholars on the subject establish the origin of activity-based costing in the proposals that the author makes in that publication. In the preface to this book, he raises the need for Accounting Information Systems to provide managers with all the information necessary for making sound decisions. He reports that his book pays special attention to various aspects of Cost Accounting, including: the meaning of costs, identification of relevant costing objectives. The relevant costing objectives are activities on which decisions must be made. He asks some questions that hint at his approach to analyzing the cost of activities, including:What should be the cost of typing a letter sheet and sending it within the United States? What is the annual cost of maintaining a thousand square foot space for an executive's office?
Finally, the great disclosure that activity-based costing currently has is due to the Johnson & Kaplan book »Relevant losses: emergence and failures of accounting management» published in 1987. When analyzing the changes that were taking place in the process of Production and commercialization due to the new programming and control techniques that were being put into practice, facilitates the search for new techniques for determining and analyzing costs, in tune with the new environment in which businesses are developed.
There is one element in common that all these researchers present, and it is their concern to optimize the return on capital based on cost reduction and control. Instead they are distinguished by the level of acceptance they have in their time, without a doubt the most widely accepted were Johnson & Kaplan.
Advantages and limitations of the ABC model.
Before listing the advantages and limitations of ABC, we consider it appropriate to point out in which type of companies this system should be applied:
- Those in which indirect costs make up an important part of total costs. Companies in which growth is observed, year after year in their indirect costs. Other companies with high volume in their fixed costs. In which indirect costs are They have been allocating products on an arbitrary basis. Companies in which the allocation of indirect costs to individual products is not really proportional to the volume of production of the products. Companies immersed in an environment of strong competition. that there is a great variety of products and production processes, in which, in addition, production volumes vary significantly. Companies with a great diversity of support structures, given to products.Companies with a high level of coincidence of processes or activities between products. Companies in which there are a large number of distribution channels and buyers that cause the need to undertake widely differentiated sales activities. Companies that demonstrate that there is dissatisfaction with the existing cost system. Companies where "cost leadership" has been chosen as a way to compete.
Regarding the advantages and limitations of ABC, the arguments presented in the reviewed bibliography are varied, the most important are the following.
Advantage:
According to Malcolm Smith, the advantages for companies that implement an ABC system are:
- Organizations with multiple products may observe a completely different ordering of the costs of their products; This new arrangement reflects a correction of the advantages previously attributed to products with lower sales volume. A better understanding of the activities that generate structural costs can improve the control that is executed over costs incurred of that nature. It can create a basis information that facilitates the implementation of a total quality management process, to overcome the problems that limit current results. The use of non-financial indicators to assess cost drivers, facilitates management measures, as well as means to assess production costs. These measures are essential to eliminate waste and activities with no added value.Cost inducer analysis provides a new perspective for examining cost behavior and the subsequent analysis required for planning and budgeting purposes. ABC increases the credibility and usefulness of cost information in the cost-making process. decisions and makes it possible to compare operations between plants and divisions.
For Amat Oriol and Soldevila Pilar the advantages of the ABC model are as follows:
- It is applicable to all types of companies. It identifies customers, products, services or other unprofitable cost objectives. It allows more precise calculation of costs, mainly certain indirect costs of production, marketing and administration. It provides more information on the activities it carries out the company, allowing to know which ones add value and which don't, giving the possibility of reducing or eliminating the latter. It allows to relate costs to their causes, which is of great help to better manage costs. Cost management with the ABC philosophy, receives the name of ABM (Activity Based Management) also called SIGECA (Activity Based Cost Management System. SIGECA is oriented towards the reduction (improvement in the performance of certain activities,elimination and / or subcontracting of activities, benchmarking of activities, pricing, replacement of equipment, etc. The ABC philosophy can be used for budget control and is called ABB (Activity Based Budgeting.)
Aimar Franco Osvaldo in an article, after exposing the criteria of various authors, concludes that the main advantages of the ABC system are:
- A better allocation of indirect costs to cost objectives (products or services) is achieved, enabling better control and reduction of indirect costs, by eliminating activities that do not add value and, especially, by their linkage with The Total Cost Management Technique. ABC is very useful at the planning stage, providing a wealth of information that guides many strategic decisions such as: pricing, source searches, new product introduction, and adoption. of new designs or manufacturing processes, among others.
Disadvantages:
Malcolm Smith in the article cited above poses the following limitations:
- An ABC system is still essentially a system of historical costs. In certain circumstances, its usefulness is doubtful, especially if there are aspects of future costs that become more important. With an ABC system there is a risk of increasing arbitrary charges, if decision criteria are not required regarding the combination and distribution of structures Common to different activities, through various cost funds and common cost drivers. ABC systems often ignore the fact that input data must have the ability to measure nonfinancial activities as cost drivers. and to appreciate the importance of accuracy and reliability to ensure complete system accounting.Cost drivers related to commitments that affect product design and plant layout are often given little importance. Instead, more emphasis is placed on cost generation. Activities for which data is not available or is unreliable, such as marketing and distribution, are also often ignored.
According to Gutiérrez Ponce (1993) the most important limitations are:
- There is a great lack of knowledge about the economic and organizational consequences after its adoption. The selection of cost drivers can be a difficult and complex process.
According to Amat Oriol and Soldevila in their book "Accounting and Cost Management" (1997) the main drawbacks that arise when trying to implement the ABC model are the following:
- Certain indirect costs of administration, marketing and management are difficult to impute to the activities. It can cause the adequacy of traditional cost systems to be discarded. Selecting many activities can complicate and make the cost calculation system more expensive.
Sáez Torrecilla Angel (1994):
- Its implementation is usually very expensive, since the entire network of activities and cost drivers requires more information than other systems. The calculations required by the ABC model are complex to understand.
Capasso, Granda and Smolie (1994) expose the following limitations:
- It abandons the analysis of costs by areas of responsibility. It is based on historical information. It lacks the support provided by double entry. It does not segregate costs by type of variability.
As previously stated, the costing systems respond to the needs of the users with respect to the information of the concrete and real processes of the production units. In other words, there is necessarily a relationship
COASTING TECHNIQUE <> Organizational Reference Context
The judgments about the validity of any costing technique, to be objective, must be the result of an analysis that has respected this “technical-context” relationship.
In other words, a conceptually correct technique designed for "context A" will necessarily fail if used in "context B". However, the cause of its failure does not respond to the fact that it is a wrong technique, but rather that it is applied in the wrong context (for which it was not created).
The controversy between the defenders of Activity-Based Costing and the defenders of "traditional techniques" is prolonged, in our opinion unnecessarily, largely due to this failure to observe the "technical-context" relationship.
In summary, “activity based costing” (ABC), activity-based costing, is the costing method that first costs the activities to later cost the products and other cost objects.
Objective - Charge products and / or services only the costs and expenses that add value to the production, distribution and administration process from the customer's point of view. Management's emphasis is on the processes responsible for increasing manufacturing indirect costs, attention to new production technologies and cost reduction of activities that do not add value.
Management philosophy - Management of indirect costs (overhead), due to the increasing increase of their participation in the cost of the product. Part of the assumption that the activity is the one that consumes the resources and the products consume the activities, the appraisal or tracking is done by means of cost guides. Activity-based management (ABM) is an evolution of ABC costing, by costing more cost objects such as: distribution channels, customers, business processes, product lines, quality, etc.
Flow management - Cost accrual process - Material flow and direct labor are similar in all costing methods. Meanwhile, the main conceptual differences lie in indirect costs. The most indicated accumulation process is "By Production Order", because the average cost is calculated by the process (total cost of the period / quantities produced), and the ABC tries to avoid average costs, oriented by the cause-effect relationship.
Implementation - In addition to all the aforementioned requirements, the implementation of the ABC must be part of the restructuring of the company, mainly in the production processes, activities, operations, tasks, technologies, etc. The crucial part is the identification of activities, then the elimination of activities that do not add value and finally the systematization of activities by cost objects. Choosing the software must be guided by the systemic integration of the information, otherwise it will be doomed to failure.
Final Considerations
- The goodness of a cost system lies in its ability to measure the use of productive resources throughout the process; therefore, in principle, it does not make sense to reject or accept a system if a detailed analysis of its advantages and limitations is not carried out beforehand. The implementation of the ABC allows a better allocation of indirect costs to products and / or services, in addition to enabling better control and reduction of these, provides more information on the activities carried out by the company, allowing knowing which ones provide added value and which do not, giving the possibility of reducing or eliminating the latter, allows relating costs to their causes, which It is of great help to better manage costs giving rise to the techniques of ABM and ABB, the ABC is very useful in the planning stage,It provides abundant information that serves as a guide for various strategic decisions such as, pricing, product introduction, among others. Among the main limitations of ABC is the fact that it can cause the adequacy of traditional cost systems to be discarded. With an ABC system, there is a risk of increasing arbitrary charges, if decision criteria are not required regarding the combination and distribution of structures common to the different activities, through various cost funds and common cost inductors. Its implementation is usually very complicated and expensive because sometimes the selection of activities and cost drivers is very difficult, especially if many activities are selected.
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BACKGROUND, ADVANTAGES AND LIMITATIONS OF ACTIVITY COSTS
Contributed by: NORGE GARBEY CHACON [email protected]
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