Although for many ABC is considered as a system, it is a method of costing production based on the activities carried out in its elaboration. The method is designed for manufacturing companies, however, thanks to the good results in handling it, its application extends to service companies.
Can sympathize with traditional systems. The information it provides is used to correct deficiencies, by comparing the resources consumed with the final products, rather than to locate actions or decisions that lead to improved profits and operational performance.
ABC is a current philosophy but it has been used for several years in numerous companies without assigning a name to the activities carried out in production as it is done now, they were simply carried out.
2. Definition
"The" Activity-Based Costing "Method (ABC) measures the cost and performance of activities, based on the use of resources, as well as organizing the relationships of those responsible for the Cost Centers, of the different activities" (Del Río González Cristóbal, 2000).
"It is a management process that helps in the administration of business activities and processes, in and during strategic and operational decision-making."
(Cárdenas Nápoles Raúl, 1995).
"System that first accumulates the indirect costs of each of the activities of an organization and then assigns the costs of activities to products, services or other cost objects that caused that activity."
(Horngren Charles T., Sundem Gary, Stratton William, 2001)
3. Objective
It is the allocation of costs in a more rational way to improve the integrity of the cost of products or services. It foresees a closer confrontation or equalization of costs and its benefits, combining the absorbent cost theory with that of variable costing, offering something more innovative.
4. Methodology
Its methodology is based on the treatment given to Indirect Production Expenses (GIP) not easily identifiable as benefits. Many indirect costs are fixed in the short term, ABC takes the long-term perspective, recognizing that at some point these indirect costs can be modified, therefore relevant for decision-making.
Activities are also called "transactions", cost drivers are measures of the number of transactions involved or involved in a particular activity. Low-volume products usually cause more transactions per unit of production than high-volume products, just as highly complex manufacturing processes have more transactions than simpler processes.
So if costs are caused by the number of transactions, volume-based allocations will allocate too many costs to high-volume products and low costs to low-complexity products.
Previously in most cost centers the only measurement factor for allocating costs to products was using factors based on machine hours or man hours, which can better reflect the causes of costs in their specific environment.
ABC cost uses both unit-based cost drivers and those used by other bases, trying to produce greater precision in the cost of products.
5. Establishment of the ABC method:
- Define cost objects, key activities, resources, and related cost drivers. Define activities that support benefits (out puts) as the cause of those activities. Develop a process-based diagram that represents the flow of activities, resources, and the relationship between them. Define the link between activities and benefits (out puts) Collect pertinent data that refer to costs and physical flow of the units of the cost driver between resources and activities. Develop the costs of the activities. Calculate and interpret new activity-based information. Management now has more accurate cost information for planning and decision making.
In the analytical process of defining activities and their links, managers help each other evaluate and reduce the costs of strategies.
6. Applications of ABC
a) Get involved in the analysis of activities, identify and describe them, determining how they are carried out and how they are carried out, how long and what resources are required, as well as what operational data reflects their best performance and what value the activity has for the organization.
b) The process of assigning activities costs to each cost object using appropriate cost drivers that can be measured quantitatively.
The costs for an activity become a cost "pool" and the "cost driver" is used to assign costs to products or services.
7. Decision making at ABC
Production managers often find it necessary to request special cost investigations, especially when they want to know the causes of cost variations.
ABC is developed to allocate costs, correcting deficiencies when comparing the resources consumed with the final products, however it is required as a refinement to preserve the separation of fixed and variable costs, allowing management to make rational decisions between economic alternatives.
It is important that the cost allocation base, are valuable benefits (out puts) and for the benefit of the client, so a base is provided to assign unit costs to the users and if not, ABC, eliminate drivers. which are not valued out puts.
ABC assigns to each product the costs of all the activities that are used in its manufacturing and if the fixed and variable costs are appropriately separated, managers will be able to apply the appropriate techniques to reduce waste, managing aspects such as: production capacity, design of processes and production methods and practices that are within your field of decisions.
ABC aims to simplify the cost of the product, by accumulating the costs of carrying out each activity to generate the product.
8. ABC Benefits
- Different ranking of the cost of its products, reflecting a correction of the benefits previously attributed to low-volume products. The analysis of benefits provides a new perspective for examining the behavior of costs. Increases the credibility and usefulness of information on costing, in decision-making. It facilitates the implementation of total quality. It eliminates waste and activities that do not add value to the product. It facilitates the use of the value chain as a tool for competitiveness.
9. Drawbacks of ABC
- It is essentially a historical costing method with the disadvantages of these. Arbitrary cost allocations can be increased, because costs are incurred at the process level not at the product level. In market areas, clear distribution between the causal root of a activity and its cost driver, which is used to allocate product costs. There is often no clear distinction between the causal root of an activity and the activity's cost driver, which is used to assign costs to products. It is not easy to select the activity cost dirver that reflects the behavior of costs. Its implementation is expensive.
10. Conclusions
In production and engineering procedures where very high-level qualified personnel are required, the information that is produced by itself does not generate actions and decisions that lead to an improvement in operational performance gains, this results in the emergence of new techniques or methods in their improvement.
The ABC costing system is considered more than a costing method, a managerial process to administer the activities and processes of the business that benefits in the choice of strategic and operational decisions.
It is an expensive and complex system compared to traditional systems, so not many companies use it. But more and more organizations are adopting an activity-based system.
To better support managers' decisions, accounting goes beyond simply determining the cost of products or services. Developing new systems such as the use of an activity-based cost system to improve the organization's operations.
“In the competition for Globalization, no system produces the adequate information, what can change is how to carry out F. Taylor's work, times and movements. By reducing process times, costs are automatically reduced ”(Cárdenas Nápoles Raúl, 1995)
Currently, control and cost reduction is carried out by means of analysis of variations in budgets.
11. Terms used:
- ABC. Activity based consting system Activity based cost system. Cost drivers or Cost Activator. It is the multiplier by which the expense must be affected so that it becomes a cost for a defined activity. Cost drivers. Cost allocation basis. For example: process minutes. Out puts. Tangible and intangible benefits provided to customers. Pool. Cost of a particular activity. Activity. It is the part of a process for which we want to know its cost, it can be an operation, a thread or a specific movement of an operation.
For example: Shirt sleeve stitching
- Allocation Expense: Money spent on Direct Labor per minute. Process. Set of Interconnected Activities, which have defined the start and end borders, as well as the input and output elements. Cost Formula: It is generally the Cost x Expense Driver to Assign. Take note that the dimensions of each multiplier must be consistent. Cost elements. These are the cost subdivisions that you want to model. Normally they will be:
12. Bibliography:
Cárdenas Nápoles Raúl. "The logic of costs 1". IMCP. ANFECA. Mexico 1995
Del Río González Cristóbal. "Costs III". ECAFSA. Mexico 2000
Horngren Charles T., Sundem Gary, Stratton William, "Introduction to Administrative Accounting." Prentice Hall. Eleventh edition 2001
