Activity-based costing (ABC) arises from the needs of a strategic cost analysis and is considered the instrumental part of strategic cost management, according to which it is the activities of all functional manufacturing areas that consume resources and Products consume activities, with the aim of discriminating in activities that add value and those that do not add value to products.
The ABC is one of the responses to the great changes in the determination of costs and constitutes a procedure or model of business excellence. Under these precepts, the work entitled “Procedure for calculating the cost of production based on activities (ABC) was developed at the Metallic Productions Company“ Israel Santos ”, DURALMET, Las Tunas; with the objective of developing an activity-based procedure that allows the cost of manufacturing the products to be calculated: doors, windows and lights more accurately, providing relevant information for decision-making. The research carried out also showed that ABC is a highly useful business management technique as it is an effective instrument for decision-making.
Key words: Cost, System, ABC, Activities.
PROCEDURE FOR THE CALCULATION OF THE COST OF PRODUCTION BASED ON ACTIVITIES IN THE COMPANY OF METALLIC PRODUCTIONS "ISRAEL SANTOS", DURALMET, LAS TUNAS.
The procedure will be elaborated for three products that make up the varied assortment of the company (doors, windows and lights), which is made up of two stages that include 7 steps, distributed in 5 for the first stage and 2 for the second that make up the proposed procedure, presented below.
FIRST STAGE: Determination of the total indirect cost of the main activities.
Step 1.- Define the activities, classify them and prepare the activities map.
Step 2.- Identify the activity centers and relate them to the activities.
Step 3.- Calculate the cost of the resources consumed by the activities.
3.1 Identification of the elements of expenses and their classification in direct and indirect.
3.2 Definition of the criteria for distributing indirect expenses among the activity centers.
3.3 Distribution of indirect costs among activity centers.
3.4 Define the distribution criteria or resource driver.
3.5 Distribute the indirect costs of each activity center among its activities.
Step 4.- Assign the costs of the auxiliary activities to the main ones.
Step 5.- Calculate the total cost of the main activities.
SECOND STAGE: Calculation of the total and unit cost of the products.
Step 6.- Define the activity drivers (inductors) and calculate their unit cost
6.1 Define the cost drivers.
6.2 Calculate the unit cost of each of the cost inductors.
Step 7.- Calculate the total and unit cost of each product.
7.1 Attribute direct expenses to each product
7.2 Assign indirect costs to each product.
7. 3 Calculate the total production cost of each product.
7.4 Calculate the unit cost for each of the products.
Here are some generalities or aspects to consider in each step.
FIRST STAGE: Determination of the total indirect cost of the main activities.
Step 1.- Define the activities, classify them and prepare the activities map.
The reason for the ABC system is to identify, by studying the manufacturing process, all the activities carried out in the company to obtain a product, as well as the costs of those activities. In this sense, ABC focuses mainly on managing activities well because they are the cause of costs, while they are related through their consumption to the cost of products and services. Therefore, the construction of this stage is achieved by monitoring the product through the production process complemented by interviews with each of the people who make the company's production units, as well as reviewing the organization charts, distribution of the facilities and the value chain if the company had it,This marks the strategic path of the company that determines the form of analysis of business activity with which it is possible to decompose the company into its constituent parts, seeking to identify sources of competitive advantage in those activities that generate value. As many activities as possible and not just a few are convenient, as any activity within the company may be relevant when determining production costs.since any activity within the company may be relevant when determining production costs.since any activity within the company may be relevant when determining production costs.
Multiple activities scattered in different analysis centers, physical cost locations or company responsibility centers are related to the same cost driver. Consequently, activities with the same cost inducer may be grouped into a single regrouping center; In this way, the causality chains existing within the company are exposed, improving their representation in the model that serves as the basis for the calculation. The number of regrouping centers that are defined will depend on the complexity of the production process and the accuracy that is being sought with the calculations.
It is important to keep in mind that an activity is the set of actions or tasks that generate costs, aimed at obtaining a product to meet the needs of customers. In other words, an activity is not the same as a task as shown below.
Taking into account that the costing by activities rests on the process of generating value, the activities must be classified according to whether or not they incorporate value into the product. Hence, it is suggested to use a table that contains both information: the activities and their classification, as shown below:
In order to have a comprehensive knowledge of the activities carried out in the company, it will be necessary to prepare what is called a map or catalog of activities; This map integrates and shows in a coordinated way the relationships between functions, processes and activities. Designing the activity map requires, first of all, the identification of the different activities that make up the operations carried out within the business activity where the ABC cost system is to be implemented. For this, it is appropriate, for example, to start with a plan of the production plant, of the location of the offices, etc., and to establish broadly the role played by each function or areas of the same.
Designing the activity map requires, first of all, identifying the different activities that make up the operations carried out within the organization and establishing or defining the relationships between them.
Step 2.- Identify the activity centers and relate them to the activities.
Activity centers or cost centers are those areas of responsibility in which part of the production process or administrative management takes place, which consume a certain amount of resources. Hence the need to identify the cost or activity centers where the activities that consume the different resources are concentrated. In order to organize the information, a table with the following format can be used:
Step 3.- Calculate the cost of the resources consumed by the activities.
The cost items that will be taken into account at this time only include the elements that make up the indirect costs because the direct costs can be assigned to the products directly, without the need to do a cost flow analysis. To the extent possible, the activity-based accounting system should guide the calculation of the cost of activities based on the predetermined centers; that is, estimated or standard costs.
If the company does not have these types of costs, it can use the real cost; The problem with these costs is that they are quite sensitive to short-term fluctuations in the operating environment, but they have the advantage that they are always current and reflect changes in the business environment.
Activities can be assigned costs in different ways, but the most important are these states: The first is to assign the different cost concepts according to the classification according to their nature; doing it in this way will achieve an adequate allocation to each activity based on the consumption of each of the factors.
The second way is using the reports of the different departments or cost centers; with the advantage that a prior cost analysis is available before grouping them by activity. Using one or the other procedure will depend on the type of information you want to obtain, as well as the availability of data on cost items.
It is based on the fact that direct costs are directly attributed to the products or objects of costing and that indirect costs are distributed among the different activities following the corresponding cost flow, as shown in the following graph.
This step goes from the identification of the elements of expenses and their conceptualization to the distribution of these among the activities carried out in each activity center. Given the complexity that can have the achievement of its purposes, it has been preferred to break it down into a step by step in order to facilitate its development, which is explained below.
3.1 Identification of the elements of expenses and their classification in direct and indirect.
The cost of manufacturing a product is the sum of all the resources involved in the process; Hence, any intention to determine a production cost must go through identifying all the expenses (elements) that are or will be used during the manufacturing process. For a greater usefulness of the information, it is convenient and, given the way in which the costing by activities assigns costs to the products, these expenses are classified taking into account their ability to associate them with the manufacturing process; that is, direct and indirect.
Direct expenses are those that can be identified with the products and indirect costs are the costs common to various items and therefore are not identifiable with any product. This information will be grouped as follows:
3.2 Definition of the criteria for distributing indirect expenses among the activity centers.
One of the contributions of activity-based accounting is in the treatment of indirect expenses and the way it allocates these to products. As mentioned, this process is carried out using inductors, which can be resources or activities; In this case, the so-called resource inducers or distribution criteria will be used, which will make it possible to make a primary distribution of indirect expenses between the activity centers in which the organization has been structured and which come from step No. 2. This information can be presented in a table like the one below.
3.3 Distribution of indirect costs among activity centers.
With the distribution criteria defined above, the resources (indirect costs) used are then distributed among the cost or activity centers. The information generated by the use of activity costing is extensive, so the way it is organized is essential for the success of its application. The following table is appropriate for this time.
A column is included in which the total indirect cost per activity center will be obtained, as well as a control row to ensure the total distribution of each item of expenditure.
3.4 Define the distribution criteria or resource drivers.
Resource drivers are defined as those criteria or bases used to transfer costs from resources to activities. Resource inducers will almost always be used to distribute resources among activities. In this case, they will be used as those criteria that constitute the most appropriate cause to measure the amount of resources each activity consumes. The definition of these criteria will depend on the type of information that is available in the entity, as well as the experiences and knowledge of specialists and technicians working in each area of the organization.
In a table with the following format, the defined criteria will be collected from a qualitative point of view
3.5 Distribute the indirect costs of each activity center among its activities.
The definition of distribution criteria or resource drivers previously made was intended to guarantee the distribution of indirect costs assigned to each activity center among the activities that take place in each one of them. This implies that these criteria must first be expressed quantitatively. Once you have in what amount of resources an activity will be loaded, the information will be collected in the form of a table, such as the one shown below.
Step 4.- Assign the costs of the auxiliary activities to the main ones.
Based on the principle of activity-based accounting, which states that resources are consumed by activities and not by final products, the conceptual bases of the cost-by-activities system state that only costs related to the main activities should be attributed to products., since it works with the value creation process. Therefore, in order to continue with the procedure, it is necessary to proceed with another distribution; in this case, the indirect costs assigned to auxiliary activities to the main ones.
Continuing with the procedure used so far, three tables will be used; the first to list the criteria to be followed to make the distribution, the second to express these quantitatively and the last to show the results obtained.
In this last table it is also considered appropriate to include a column where the total indirect cost that will be assigned, from the auxiliary activities, to each main activity will be shown. Likewise, the existence of the last row is due to the need to check that each auxiliary activity has "downloaded" its costs.
Step 5.- Calculation of the total cost associated with the main activities.
The total cost associated with each of the main activities depends, firstly, on the costs assigned to them directly (page 9, step 3.4) and, secondly, on the costs that came from the auxiliary activities was charged to it in the procedure previous (step 4). This step somewhat summarizes the work done thus far as total indirect costs are reunited, only now fully charged to core activities.
So the total cost of each main activity
cipal will be made up of the cost assigned to it directly plus the cost imputed from the auxiliary activities. This information can be shown in a table like the one below.
In this case, the same purpose of the control is followed and a column and a row whose totals must be equal have been incorporated into the table.
Once the total cost of each main activity has been obtained, the total and unit cost of each of the products can be calculated, which is done in the second stage.
SECOND STAGE: Calculation of the total and unit cost of the products.
Step 6.- Define the activity drivers (inductors) and calculate their unit cost.
The process of allocating the indirect costs of the main activities to the final product is carried out through the cost inductors that are defined for each of the activities. This process constitutes a key moment in the application of costs by activities since, as it has already been defined, the inductors are the factors that significantly influence the execution of an activity, they represent the reasons for which the costs are produced. That is, it is a factor used to measure how a cost is incurred, allowing the incorporation of the costs of the activities into the products.
6.1 Definition of cost inductors.
Cost drivers or cost drivers represent a fair and equitable measure of the activity in question in order to implement a means to measure it and then apply its costs to the items. An activity can have multiple cost inducers associated with it, but the best is the one that does not present quantification problems since the cause-effect relationship between: resource-activity-cost object is fulfilled.
The veracity and adjustment to the true causes of the occurrence of an expense will depend largely on what type of information is available; that is, it is not enough to recognize which factor causes a greater or lesser consumption of resources, but in what quantity it can be expressed. If this is not possible, then it will be necessary to select as inductor the one that is possible to quantify and assume the cost of that decision.
In a table like the one shown below, not only the inductors selected for each activity can be identified, but the quantification of each one by product.
6.2 Calculate the unit cost of each of the cost inductors.
An inductor or generator of cost or resources is "a factor used to measure how a cost is incurred and / or how to better impute said cost to activities." Cost drivers or cost drivers are those that represent a fair and equitable measure of the activity in question in order to implement a means to measure it and then apply its costs to the items.
Once the inductor of each main activity has been defined and quantified, the unit cost of each one will be calculated, as follows:
CUI =
Where:
CUI: Unit cost of the inductor
CTA: Total cost of the activity
IT: Total of the activity inductor
To reflect this result, taking into account that there will be as many inductors as main activities have been defined, a table with a format similar to that used is used. It is presented below, which will consist of four columns, in the first the main activities will be related, in the second the total cost of each one (step 5, page 11), in the third the total inductor (comes from 6. 1, previous table) and in the fourth the unit cost of the inductor.
Step 7.- Calculation of the total and unit cost of each product.
The total cost of manufacturing a product is the sum of all the expenses involved in said process; expressed according to their economic nature, it will be the sum of the cost of direct materials, direct labor and indirect manufacturing costs. Activity-based costing, as has already been stated, is not only concentrated on the production process itself but can be extended to the entire organization.
Thus, it is preferred to use the classification of expenses according to their ability to associate them; that is, direct and indirect. Thus, the way of calculating the cost of a product changes. The chart on the next page illustrates how this process should be done when you use activity accounting.
In summary, the total cost will be obtained as a result of adding to the direct costs (direct materials and direct labor) the indirect costs, which are now being consumed by the activities.
That is: Total cost = direct costs + indirect costs
Or, specifically under ABC:
Total Cost = Direct Costs + Costs of Main Activities
Direct costs will be obtained as the sum of all cost items considered as such and the cost of the main activities (obtained in step 5) will be applied to each product using the cost drivers defined for each activity (step 6).
7.1 Attribute direct expenses to each product.
As already mentioned, direct costs, defined as such and quantified in step 3 of this procedure, are directly attributed to each of the products, since the nature of these allows the resource to be identified with the product in question. This direct imputation process will be reflected in a table that shows the total direct cost of each product; this is:
7.2 Assign the indirect costs to each product based on the resources consumed by each activity.
It has been mentioned on several occasions that the costing by activities philosophy is based on the fact that products do not consume resources but that the activities carried out to obtain these are those that consume them. The entire procedure proposed in this work has been based on this and it is ratified when the time comes to calculate the indirect costs that will be assigned to the products.
It is at this point in the procedure that, using the inductors associated with each main activity (step 6.2), the amount of indirect costs imputed to each product is calculated, multiplying the unit cost of the inductor (step 6.2) corresponding to each main activity by the total cost of it (step 5). From these calculations the indirect cost for each product is obtained based on the activities to obtain these; This is shown in a table that will summarize the total indirect cost of each product; this is:
7.3 Calculate the total cost of production and of each product.
All the calculations made up to now allow us to finally calculate the total cost of production of the company as a result of the sum of each of the products. In short, it is the sum of the direct and indirect expenses obtained. The table that is proposed to be used is the following:
7.4 Calculate the unit cost for each of the products.
The unit cost of each product will be easily obtained by dividing the total cost by the quantity of manufactured products of each type.
Unit cost = total cost / units produced
CONCLUSIONS
1. Traditional (process) cost systems do not provide adequate and timely information for strategic cost management.
2. Activity-based accounting (ABC Costing) is an advanced management technique that allows not only determining product costs based on the organization's value chain, but also provides information for efficient resource management.
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