In accordance with the changes and modernization that have been carried out in companies worldwide in recent years, it is necessary to improve accounting and costing systems, since traditional cost systems do not solve the problem of measuring the efficiency of activity, supported by several factors, standing out:
- Need for a cost system according to the changes that have occurred in the business world. Technological innovations which have revolutionized the use of information. Financial and non-financial information of the Company. On the other hand, the criticisms made in the current literature of traditional costing methods by not being able to adapt to changes in the business world at the end of the century.
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 Cuba, this issue has been addressed, trying to reduce costs in the search for greater economic efficiency.
Background to cost management systems
Since its origin, traditional cost management accounting systems have wanted to encompass three objectives:
- Assist financial accounting in calculating the results of the periods through the valuation of products or services. If, on the one hand, the accounting principles of financial accounting require valuing the products for the total "Full Costing" costs that they incorporate in the manufacturing processes, on the other hand, they may be interested in valuing them by other methods in order to obtain other information on the valuation of products or services. Control production processes to provide information that facilitates decision-making in the short term (definition of prices of products or services, levels of profitability by customers or markets, definition of supply of products to manufacture, decision on the manufacture or purchase of products, etc.) and in the long term (definition of the product or client portfolio strategy, production processes to be incorporated, etc.) Provide relevant data to evaluate the performance of the organization's agents and for planning future activities.
On the other hand, these traditional systems are based on the following principles:
- They argued that the mechanisms or operational knowledge were stable over time. Otherwise, it could be said that the changes that took place in the organizational structures or in the production processes did not have a relevant impact on the manufacturing processes. In this way the original systems and processes prevailed stable for a long period of time and therefore the modifications in the processes and products were minimal.The second of the characteristics of traditional management systems is that they were based on an availability of information perfect. Given the simplicity of the production processes, the location of the markets and the needs created for the clients, the entrepreneur or manager of the organization had all the information to face the decisions.This point wants to highlight the idea that traditional organizations were based on vertical hierarchical structures where the area manager barely had a power of influence in the rest of the areas that were not his responsibility, but instead had a domain and Absolute power over the control of the resources he managed. A third characteristic was defined because the objective was to minimize the costs of the resources consumed. The resources consumed were mainly direct costs of raw materials and direct labor. The indirect costs associated with the product had a smaller quantity and therefore, any action aimed at maximizing benefits had a direct impact on the direct costs of the products consumed.
Problems posed by traditional cost management systems.
- They provide erroneous information on the margins and profitability of the products. They distort the cost of the products individually, since they are oriented to establish accounting-financial valuations, either external - for tax obligations - or internal - to satisfy requirements issued by a higher level organization entity.They do not allow to make comparisons in a coherent and homogeneous way because the composition of the costs that are incorporated into the processes is unknown and therefore any decision based on the comparison of data, can lead to a erroneous decision-making. They do not provide "key" non-financial data, such as productivity levels, number of errors, number of invoices processed, etc.They generally allocate costs proportionally using volume-based apportionment rates such as the number of units produced and / or sold, hours of direct labor, machine hours, etc., to allocate indirect costs, causing distortion in the cost of processes and therefore misvaluations, given that not all factors involved in the process depend on volume. They do not provide managers with sufficient information on the causes and behavior of indirect costs. Therefore, they do not have objective criteria to define the correct actions to reduce unnecessary expenses because they do not know the causes that originate them.This causes distortion in the cost of the processes and therefore erroneous valuations, given that not all the factors involved in the process depend on volume. They do not provide managers with sufficient information on the causes and behavior of indirect costs. Therefore they do not have objective criteria to define the correct actions to reduce unnecessary expenses because they do not know the causes that originate them.This causes distortion in the cost of the processes and therefore erroneous valuations, given that not all the factors involved in the process depend on volume. They do not provide managers with sufficient information on the causes and behavior of indirect costs. Therefore, they do not have objective criteria to define the correct actions to reduce unnecessary expenses because they do not know the causes that originate them.Therefore, they do not have objective criteria to define the correct actions to reduce unnecessary expenses because they do not know the causes that originate them.Therefore, they do not have objective criteria to define the correct actions to reduce unnecessary expenses because they do not know the causes that originate them.
What have been the factors causing changes in the current management systems?
- A first factor has been technological evolution that has impacted different aspects such as reducing the life cycle of products, streamlining production processes and designing new products.
On the other hand, the incorporation of robotization in certain tasks that were manual, has increased the productivity of factories, making labor (which previously had a relevant importance) become a pure element of control or support for equipment.
At this point, reference is also made to other non-productive processes that are being affected by the technology of the new information systems, the most recent being the implementation of the Computer Systems that cover all the operational and administrative-financial processes that allow the organization a centralization of all support services to the value chain.
- A second factor has been the globalization of the markets. From the mid-nineteenth century to the present time, the percentage of exchange of goods and services between countries has increased considerably and taking into account the trend towards market globalization, where supranational economic organizations such as the EU, MERCOSUR or NAFTA - to name a few of them - support this type of trade, this percentage can be higher.
Thus, clients are unique and can be served in very diverse geographical areas and therefore the organization is required to be close to them.
- A third and final aspect that should be highlighted is the differentiation in the quality and price policies that clients have established in the market, it speaks of customer satisfaction. Today the customer is the one who demands products and the manufacturer has to "manage" to serve that product with guarantees of quality and service.
Activity-based costing method.
As an introduction to the subject, it is considered appropriate to explain how ABC terminology is reached, which comes from the English words Activity Based Consting which in Spanish means Activity-Based Costing.
The use of an activity cost management system is novel and relevant in the context of the development situation of business managers at the end of the 20th century, in which they needed information for decision-making regarding the dynamics of the industrial and technological processes related to the profitability of the organization on a global scale, that is why at the end of the 80s this system moved to a distinctive and controversial level for managerial accounting.
ABC systems involve a new way of thinking2.
Traditionally, cost systems (Phase II) were the answer to the question: How can the organization allocate costs to be able to carry out financial reports and to control costs in the departments?
ABC systems carry a completely different set of questions.
- What activities are carried out in the organization? How much does it cost to do the activities? Why does the organization need to carry out business activities and processes? What part or quantity of each activity do products, services and customers require?
A properly constructed ABC model provides the answers to these questions.
An ABC model is an economic map of the organization's costs and profitability based on activities.
It may be possible to refer to it as an activity-based economic map rather than as a cost system, which clarifies its purpose.
Can you drive from one place to another without a map? Can you build a house without a set of architectural plans? It is clear that yes. If a manager is working in familiar territory (be it a tour we've already taken or a house they've built hundreds of times before), the manager can rely on experience and good judgment to achieve a result.
But when the territory is new and the conditions have changed significantly compared to previous experience, then it is when an information system such as a good map becomes essential.
For companies that are producing new products, introducing new processes, reaching new customers, and meeting many more customer needs, the ABC system provides an economic map of their operations that highlights the existing and expected cost of activities and business processes, which in turn leads to knowledge of the cost and profitability of products, services, customers and production units.
Two important authors - Robin Cooper and Robert S. Kaplan, the latter, co-author with H. Thomas Johnson of the book Relevance lost. The rise and fall of management accounting, - pointed out that the technique of appropriating factory indirect costs through the classic known stages, seems to be in urgent need of revision.
To this end, it was proposed to improve the secondary and even the tertiary distribution, appropriating the costs, which they called transactions, which may well be called operations or tasks.
What is the approach provided by ABC / ABM? (Activity Based Costing / Activity Based Management). (Activity Based Cost / Activity Based Administration).
As can be seen, the changes revealed in the previous point have affected all processes of productive and non-productive organizations with great force. Faced with this new panorama, some questions should be asked:
- Have the logistical, commercial and administrative processes been affected as a result of these external changes in the organizations? Which have had or are under greater pressure to change and adapt to the new times? How have the organizations modified their structures to adapt to the change? How do new information and management systems reflect these changes for correct decision-making? Have organizations correctly assessed the effects of these changes? To what extent do organizations have control over their costs and how can they manage them?
These new management systems provide greater analytical power, since they can incorporate another series of measures of great qualitative value in decision-making.
With the new activity-based approach, any organizational aspect can be controlled, evaluating any action before a decision on the cost structure could be adopted.
ABC is a system that places a special emphasis on managing the value of processes and not costs.
This is easy to understand since ABC is a management tool that allows knowing the flow of activities (and therefore their costs) throughout the organization. That is, the ABC controls all the costs that are incorporated into the product but not all of them provide a value that the customer can perceive.
ABC / ABM a new management system
What is ABC / ABM and what are its objectives?
It could be affirmed that a «comprehensive» management system allows to know the flow of the activities carried out in the organization that consume the available resources and therefore incorporates or imputes costs to the processes. The characteristics that define it are analyzed:
- It is a «comprehensive» management system where information can be obtained from financial and non-financial measures that allow us to optimally manage the cost structure. It allows us to know the flow of activities so that each one can be evaluated separately and criticized the need to incorporate it or not into the process without losing the overall vision. It provides objective assessment tools for cost allocation. It evaluates the resources consumed by each activity.
Among the objectives pursued by the implementation of a cost management system, we can mention:
- Strategic vision of the resources consumed in the processes. Assessment of the tasks being carried out within the organization. Assessment and analysis of high-cost tasks. Elimination or reduction through automation of tasks that add little value to the client. that they provide high value to the client (internal or external) and that they are not given the attention they deserve.
When should an activity cost management system be implemented?
- When the percentage of indirect costs over the total costs of the company has a significant weight, although it is true that its implementation would not make sense if the company manufactured a single product for a single client. A second case of application of ABC is in companies where they are subjected to strong price pressures in the market and wish to know exactly the composition of the cost of products, since traditional management systems usually incorporate indirect manufacturing costs based on volumes of units produced or sold and therefore some of the products may be subsidizing the cost of others and, ultimately, prices may be incorrectly defined.A third case where the implementation of the ABC could be advised is in companies that have a high range of products with different manufacturing processes and where it is very difficult to know the proportional part of indirect costs affected by each product. to come up with the recommendation to implement the ABC in companies with high levels of structural expenses and subject to major strategic-organizational changes.
There is little doubt that volume-based product costing methods are a major flaw in most current management accounting systems.
Methods that allocate large portions of total cost (overhead) using labor or machine-hours allocation as a basis are imprecise, and in complex product line environments are not strategically usable.
There is also little doubt that the ABC approach is substantially more accurate in allocating the actual total cost to the products that cause it.
But the superiority of the ABC method over volume-based costing by assigning actual current indirect costs to products does not mean that ABC is a strategic panacea or that formal cost accounting systems must be massively changed from the rules that they govern cost allocation based on volume to standards that are based on activity.
If you look at activity-based costing from the perspective of strategic cost management, ABC is considered a very useful financial tool for strategic management. But ABC is not necessarily a basic financial tool, or even one of the most important. It certainly is not a management accounting panacea. Furthermore, experience indicates that the benefits provided by ABC in product line evaluation and managerial activity can be much better achieved by avoiding its formal inclusion as part of the general accounting system. The probability of achieving strategic benefits is inversely proportional to the degree to which the concept is routinized as part of general accounting systems.
The ABC costing method and its relationship with strategic cost management.
Currently human knowledge has been in constant development and the changes are seen as permanent and lasting in terms of time and results that are desired to obtain.
The main objective of the traditional accounting system is to target third-party users of accounting information, call them, banks, investors, etc. which can be nurtured, from the accounting information that emerges from a balance sheet, from a series of data for decision-making. But this information suffers from a great inconvenience, it is relative to the past, which in a certain sense disables it to make decisions regarding the future.
Thus, the main objective of accounting is to provide timely, truthful, reliable information, but oriented to decision making.
In other words, there is a dilemma, there are accounting systems that record the past which constitute sources for future decision-making that, in the current world of permanent change, is, in the opinion of specialists, insufficient to meet these objectives., criterion to which the author adheres.
Decisions are actions that will be taken in the future, whether near or far, which must be supported by information. For this, a distinction must be made between, data, information and knowledge. The data is an isolated fact that describes the reality and / or temporal spatial circumstances. Information is the systematization of data in a logical and orderly way.
Knowledge is the work carried out on this information, thus obtaining a subsequent development that validates it as such.
Putting things like this, decision-making both at a managerial and operational level requires information obtained from systems that allow the formulation of guidelines and criteria, which, when combined and systematized, make it possible to direct actions towards the future.
From this macro idea, a series of techniques and approaches have been developed that come to solve, in part, the dilemma raised, orient to obtain information that becomes vital for decision-making.
Strategic cost management (GEC) is one of them and its approach is very particular since its authors have incorporated the strategic issue within the scope of costs, which in itself is novel.
Conclusions
- In the activity-based cost system, the cause-effect relationship is achieved more precisely between the absorption bases and costs, establishing appreciable differences between them; In this sense, the implementation of the ABC can induce costs for service lines that are markedly different from those obtained by a traditional cost system.
- The activities method introduces new techniques in terms of the precision and flexibility with which the cost analysis can be carried out.
The precision is given by the quality of the representation of the operation of the company and not by the level of detail and therefore, the faculty. The introduction of the ABC allows to achieve a better allocation of indirect costs to the 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.
Kaplan S. Robert and Cooper Robin. "Cost and Effect". 2000 Management. Second Edition. Barcelona. Spain. 1999.
