Nowadays, it is a problem to be solved by professionals linked to the economic sciences, reaching minimum and competitive cost levels in the manufacture of products or in the provision of services with the corresponding required quality and an adequate level of consumption of human resources. material and financial in correspondence with the development and existing technologies.
In our experience, this topic has been addressed in different investigations, trying to reduce costs in the search for greater economic efficiency.
The current costing methods and cost systems existing in the territorial managements do not reach the levels of sufficiency necessary to control the growth of expenses (essentially indirect costs), which constitutes a problem that is attacked by ABC costing, within the fundamental aspects of Strategic Cost Management.
Strategic Cost Management. Its essence
The first is to define it, for which it is expressed that »Strategic Cost Management is a continuous, cyclical process of formulating strategies, communicating these strategies, developing and using tactics to implement them, and developing and establishing controls to supervise the success of the previous stages. For this reason, accounting information is useful for each stage of this cycle. »
Each one of the different processes of the definition previously explained is explained briefly.
In the first, accounting information is the basis for conducting the financial analysis, which is an element of the process of evaluating alternative strategies. In the second, reporting is one of the important ways in which these strategies are communicated to the organization as a whole.
In the third, in the development of specific tactics that support the strategy as a whole and its implementation, financial reports prepared on the basis of accounting information are one of the elements that supports the tactics, to achieve that the desired objectives are met.
In the fourth, the evaluation of the performance of managers or the different business units, usually depends on accounting information.
The GEC could be defined in another way as the area under its responsibility to search for sophisticated knowledge of the company's cost structure, in order to achieve sustainable and continuous competitive advantages over time.
In it, accounting is basically used to facilitate the development and implementation of the business strategy.
What are the basic components of the GEC? They are three:
- Analysis of the value chain. Analysis of strategic positioning. Analysis of the causes of costs.
The Value Chain
As discussed above, Michael Porter developed the concept in his work "Competitive Strategy" (1980), which is based on the fact that each business unit must develop a continuous competitive advantage, based on cost, differentiation or both.
The value chain analysis begins with the recognition that each company or business unit is »a series of activities that are carried out to design, produce, market, deliver and support their product».
By analyzing each value activity separately, managers can judge the value of each activity, in order to find a sustainable competitive advantage for the company.
By identifying and analyzing the company's value activities, managers operate with the essential elements of their competitive advantage, since the efficiency and effectiveness of each of the activities affects the company's success in its strategy, whether low costs, differentiation or focus.
Activities can be divided into two types, main and support. The first are internal logistics, operations, external logistics, marketing, and service.
These can be imagined as a stream of related activities, starting from the arrival and storage of raw materials or inputs for production processes, their transformation into final products that are shipped, the marketing and sales activities to identify, achieve and Motivate customers or groups of customers and service activities to provide customer and / or product support after purchase.
Then the support ones, as the name implies, provide general and specialized support for primary activities.
These are administration, purchasing, human resources, technological development, and infrastructure. These should be considered as business functions, since without them there would be no organization and, together with the degree of linkage with the main ones, they make up what is called value chain analysis, which as a tool in formulating strategies, it requires managers not only to analyze each value activity in detail in detail, but also to examine the critical links between internal activities.
When referring to costs, the approach is different from that developed by traditional accounting, which is based on the concept of value added, which involves maximizing the difference between purchases and sales.
In other words, value added focuses its attention on the internal functions of the Company, beginning with purchases from suppliers and ending with costs paid by customers (sales).
The GEC explains that by setting such a narrow focus, such as value added, the Company loses a series of advantages and opportunities that begin before the purchase and end beyond the sale to the customer.
As previously emphasized when analyzing strategies, a business unit must be able to develop a sustainable competitive advantage through a series of strategies, which can be low cost, differentiation and / or focus.
Before analyzing the methodology of the value chain, the differences that exist in the conception of added value (principle on which traditional accounting is based) and the value chain, (principle of GEC.), Are exposed through a comparative table.
This chart will help to understand why the value chain is much more comprehensive for the development of a sustainable competitive advantage and also how it can incorporate the Vision and Mission concepts previously exposed.
Value chain methodology:
The fundamental steps to build a value chain are:
- Identify the value chain of the industry and assign costs, income and assets to value activities. Diagnose what are the causes of costs that regulate each value activity. Develop a sustainable competitive advantage, either by developing the cost causes better than the competitors., or by reconfiguring the value chain.
Competitive advantage cannot be analyzed within a company as a whole, but the value chain must be broken down into its different strategic activities, since each one incurs costs, generates income and is linked to assets, separating itself from those that represent a significant percentage of operating costs, or if the cost behavior of the activities are different, or if the competitors execute them differently or if it has high potential to create differentiation.
From this development, the return on assets can be calculated for each value activity.
From the previous analysis, the causes of costs that explain the cost variations in each value activity must be identified.
In traditional managerial accounting, cost has only one cause, which is the volume of activity or production. In the value chain, the concept of production volume captures very little of the richness of cost behavior.
Multiple cost causes coexist, which also differ through value activities. These can be structural or executive.
The former are defined as those that, when chosen by the company, drive the cost of the product. These are:
a) Scale, that is, the amount of investment to be made in areas of manufacturing, research, marketing resources, etc.
b) Extension, that is, the degree of vertical integration.
c) Experience, refers to the number of times in the past the company has done what it is doing now again.
d) Technology, refers to the technological methods used at each stage of the value chain.
e) Complexity, refers to the breadth of the line of products or services that will be offered to customers. As for the second, executive, are those that are decisive in establishing the cost position of a company and that depend on its abilities to execute them successfully.
Within the list of these causes, the following can be mentioned:
- Commitment to the work group Total quality management Use of capacity Efficiency in the distribution of the plant Product configuration Use of existing ties with suppliers and / or customers through the company's value chain.
The third step, after identifying the value chain and diagnosing the cost causes of each activity, you can gain a sustainable competitive advantage in two ways:
I. Controlling the causes of costs better than the competitors, that is, the causes can be analyzed and the performance of the causes of costs can be improved, Benmarching can be used on the competitors, knowing that this option must always be reviewed and reconsidered in the short term, since the competitor will operate in the same way.
II. Reconfiguring the value chain: which implies that while the causes of costs are recomposed, the cost chain will have to be redefined in the activities where it is most needed.
There are a number of difficulties in being able to build the value chain. First, you need to calculate the price (revenue) for intermediate products, isolate key cost drivers, compute supplier and customer margins, and build cost structures for competitors, to name a few.
Strategic Positioning
The role of accounting information within the business is analyzed here, which in principle is to facilitate the development and implementation of strategies.
This is what sets the GEC apart from traditional managerial accounting.
The relationship between costs and strategies, explained above, is resolved by the influence they have on each type of strategy chosen, the generation of costs and therefore the control that must be carried out in the management process.
The strategies differ in the different types of organization and the controls should be adapted to the requirements of the chosen strategies.
The link between controls and strategies originates from the following ideas:
to. For effective execution, different strategies require different task priorities, key success factors, experiences, perspectives, and behaviors.
b. Control systems are units of measurement that influence the behavior of people whose activities are being measured.
c. For this reason, a design of control systems should be carried out according to the coherence between the strategy and the influence on people.
The strategic analysis is based on the aforementioned concepts, related to the Vision, Mission, Objectives, and Strategies that operate as a main vertex in the elaboration of controls and the possibility of obtaining sustainable competitive advantages and care in the value chain.
Joining concepts, it should be emphasized that management control depends on the strategy chosen to obtain the competitive advantage and on the options chosen with respect to the value chain. This is in light of the mission formulated and the strategy chosen.
In other words, a company whose mission is defined within the framework of a mature market, with undifferentiated products and a cost-leading strategy, the costs of product or service design must be a tool of fundamental importance.
Thus, each organization, and depending on the mission formulated and the chosen strategy, must assign a control system to it, taking into account other factors such as technology, culture, the external context of the environment, etc.
Causes of the cost.
The third constituent element of the GEC is the concept of the causes of cost.
These take a preponderant place in the GEC, due to the strategic approach that is given to these causes and especially because of the union, in which the value chain and positioning are related to this third element.
Thus, the GEC accepts the fact that costs are driven by multiple factors, this also explains the different cost variations in each activity.
As previously mentioned in management accounting, cost is a function of the production volume only.
Hence, a series of analyzes related to this factor emerge, among which the following are mentioned by way of example, the division between fixed and variable cost, the volume-cost-utility relationship, budgetary control, etc.
It is here where the GEC generates the novelty of not considering the volume of production as causal of the cost but also incorporates a series of more advanced models in the relation of the causality of the cost, as previously seen.
By way of mention, the grounds are divided into two:
- Structural causes of execution.
Without abounding in them, it is only established that the GEC advances on managerial accounting by approaching issues from another angle and fundamentally, positions cost within the spectrum of decision-making in the Company in an integral way and opens a different path towards management, which can be used in pursuit of an improvement in the administration of an Organization.
ABC and Strategic Cost Management
The world, society, organizations, individuals and the environment tend to change rapidly, that is why all the things that surround these systems have to adapt to the rhythm of substitution of the norms that govern the new social order and for that matter that it corresponds, the productive and managerial.
The cost calculation model for companies is of utmost importance, since these are the ones that determine the viability of the business, those that mostly determine the degree of productivity and efficiency in the use of resources, so a cost model it cannot be based solely on allocating costs on a certain factor, which for the business order may be insignificant or not very representative of what it actually symbolizes.
Below is a clear explanation of the rationale and components of the Activity Based Costing system.
Theoretical Context
A = Activity B = Based C = Costing
The activities are the whole set of elementary tasks and tasks whose performance determines the final products of production.
The ABC of costs
Companies can no longer carry out tasks that do not generate value, all those that hinder or do not help the effective performance of productive factors must be eliminated, because this value is what gives them the privileged or undervalued positioning that they have in the market, measured this by the quality of its products, the efficiency of the services, the low prices, remaining credit, etc.
The cost model should be applied to the formation of the company's value chain, distributing costs in the least arbitrary way possible.
The activity-based cost system aims to establish the set of actions that aim to create business value, through the consumption of alternative resources, that find in this connection their causal imputation relationship.
Activity-based cost accounting proposes not only a model for calculating costs for business activities, the calculation of products being a material by-product, but not the main one of this approach, but it constitutes a fundamental instrument for the analysis and strategic reflection of both the business organization as well as the launch and exploitation of new products, so its field of action extends from the conception and design of each product to its final exploitation.
Phases to implement the ABC
The ABC costing model is a model that is based on the grouping into cost centers that make up a value sequence of the products and services of the company's productive activity.
It focuses its efforts on the reasoning of adequately managing the activities that cause costs and that are related through their consumption to the cost of products or services.
The most important thing is to know the generation of costs to obtain the greatest possible benefit from them, minimizing all the factors that do not add value.
"The activities are related in sets that make up the total production processes, which are ordered sequentially and simultaneously, in order to obtain the different cost statements that accumulate in production and the value they add to each process." 4
"The processes are defined as" The entire rational organization of facilities, machinery, labor, raw materials, energy and procedures to achieve the final result. " In the studies carried out on ABC, activities and processes are separated or described, the most common are listed below.
Activities
- Homologating products Negotiating prices Classifying suppliers Receiving materials Planning production Issuing orders Billing Collecting Designing new products, etc.
Processes
- Purchases Sales Finance Personnel Planning Research and development, etc.
The activities and processes to be operational from the point of view of efficiency need to be homogeneous to measure them in operational functions of the products.
Identification of activities
In the identification process within the ABC model, activities must first be appropriately located in the productive processes that add value, so that when operations begin, the organization has the ability to respond efficiently and effectively to the demands that the market imposes on it.
After the activities in the company have been specified and grouped into the appropriate processes, it is necessary to establish the work units, the cost transmitters and the transformation ratio of the factors to thereby measure the productivity of the inputs and to transmit rationally the cost of inputs over the cost of outputs.
A study of the sequence of activities and processes, together with their associated costs, will be able to offer the organization's managers an overview of the critical points of the value chain, as well as the relative information to carry out continuous improvement that can be applied in the value-creating process.
By knowing the causal factors that drive the activities, it is easy to apply the efficiency inducers (Perfomance drivers) which are those factors that decisively influence the improvement of some efficiency attribute of the activity whose refinement will help to complete the harmony of the productive combination..
These inductors tend to focus on improving the quality or characteristics of the processes and products, reducing deadlines, improving the critical path of core activities, and reducing costs.
Finally, it is necessary to establish a system of control indicators that continuously show how the activities and processes are functioning and the progress of the efficiency inducers.
This control consists of comparing the real state of the action against the proposed objective, establishing the appropriate correctors to take them to the proposed value chain.
Partial Conclusions
- The activities method introduces new techniques in terms of the precision and flexibility with which the cost analysis can be carried out. Accuracy is given by the quality of the representation of the operation of the company and not by the level of detail and, therefore, the power of this representation to make decisions.
- The introduction of ABC, as part of the Strategic Cost Management or Management, allows for a better allocation of indirect costs to products and / or services, achieving better control and reduction thereof; providing more information on the activities carried out by the company, so that it is possible to know which activities add value and which do not, showing the possibility of reducing or eliminating the latter;
On the other hand, costs can be related to their causes, meaning a great help to better manage costs. Due to the abundant information it offers, the ABC is very useful in the planning stage, serving as a guide for strategic decisions such as pricing, introduction of products and / or services, etc.
Basic Bibliography
Amat, Oriol. Cost accounting. Ediciones Gestión 2000. Barcelona 1999.
Amat. Or, Soldevilla, P. Accounting and Cost Management. Editorial Gestión 2000. Barcelona 2000.
Car, Roberto. Basic Elements of Industrial Costs. Macchi editions. Buenos Aires 1999.
Chauvet, Alain. Reduce the Costs of your Products. Management 2000 Editions. Barcelona 2000
Horngren, Ch; Foster, G; Datar, S. Cost Accounting. A Management Approach. Ediciones Pearson Educación de México, SA. Prentice hall Hispanoamericana. Tenth edition. 2002.
Jiménez, Carlos. Costs for entrepreneurs. Macchi editions. Buenos Aires 1999.
Kaplan, R; Cooper, R. Cost and Effects. 2000 Management Edition. Second Edition. Barcelona 2000.
Mallo, C; Jiménez, M. Cost Accounting. Pyramid editions. Madrid 1997.
