The objective of this article is to offer an analysis that synthesizes and systematizes the theoretical framework of activity-based costing, through the study of its main concepts and antecedents and identifying its advantages and limitations, so that it allows to determine the possibilities of this method for its introduction into the hotel business.
What has been raised emanates from the fact that the determination of costs is increasingly becoming a competitive advantage in the field of business management that is responsible for the search for optimal levels of efficiency for its proper insertion into the international economy. This aspect for a country like Cuba is of particular importance if the urgency of generating the necessary resources for its socioeconomic development is taken into account.
The question that is the subject of this article as expressed is the following: What are the benefits that the use of activity-based costing could bring to users of an accounting information system in a hotel company? Associated with this concern, the central idea of this part of the research is that activity-based costing is a complex and contradictory phenomenon, due to the variety of limitations it offers, however it presents multiple elements that could be useful to streamline the accounting system of hotel companies that seek to optimize cost management.
The organization that this article follows goes from the logical to the historical, at first it initially places the conceptual aspects of the investigation, highlighting its place with respect to the strategic management of costs, and then entering the antecedents of the object studied. This allows us to determine its advantages and disadvantages.
In a clarifying way, it is important to establish here the assumptions of the author of this research, the first is that this work starts from recognizing that the costing method is not only identified with activity-based costing, but that he himself is part of a set of existing costing methods. A classification of these according to the part of the costs that are attributed to the products, according to Amat Oriol and Soldevila Pilar is the following:
- Partial Cost Systems: including the direct cost system, evolved direct costs, variable costs, evolved variable costs. And on the other hand, there are the Complete Cost Systems, the following being the best known: Cost systems by sections and Cost systems based on activity.
However, due to the importance that the accounting literature has been giving to the activity-based costing method, this research focuses on this issue. The second assumption is that the more general conception of production cost as the monetary expression of the material, human and financial resources used to obtain a product or service is not abandoned, and that they should be recovered with the sale of the finished production. and / or for the income obtained in the provision of services.
Basic Conceptual Aspects of ABC Costs
For the reader unfamiliar with the subject, it is convenient to clarify that the term activity-based costing comes from its English counterpart Activity Based Costing, which is identified in the literature on the subject by way of simplification as ABC.
Basically the ABC this activity is associated with products or services that are obtained as a result of successive activities, which require the consumption of resources or human, technical and financial factors. From which it follows that the costs borne by a company are the result of carrying out certain activities, which, in turn, are a consequence of obtaining products or services sold by the company.
Figure 1.1 ABC Philosophy. (Source: self made)
The objective of the application of ABC is not to obtain more exact information or a more correct appropriation of costs.
The basic difference between the ABC method and the traditional one is that the former considers costs from the point of view of the activities, while the traditional one considers them from the point of view of the functions. This difference is due to the type of information required by the higher levels. The ABC, precisely, derives from a requirement made by the management based on the activities (Activity Based Management - ABM).
Within this management approach, what is important is to control and analyze the activities in order to decide on a correct disposition of the available resources. Once its cost has been determined, it will be possible to decide whether to modify the activity, contract it to third parties, or eliminate it.
We must modify those activities of which we have certain expectations of improvement. We will have to refer an activity to a third party that, depending on its operational structure (lower fixed costs with a higher degree of specialization in the task or service) gives us a much lower cost of activity than ours or a level of satisfaction much higher than our. The last step to consider, I think should be the elimination of the activity. For such consideration, said activity should not add any value to the product or service that we are considering.
The ABC philosophy is based on the principle that the activity is the cause that determines the incurrence of costs and that the products or services consume activities. An activity can be defined as the set of tasks that generate costs and that are aimed at obtaining an output to increase the added value of the organization.
Activities are actions or set of actions necessary to achieve the goals and objectives of a function. We understand by activity, «the set of tasks established in such a way that the costs with respect to them can be determined in the most direct way possible and, at the same time, that they allow to find a cost generator that makes it possible to transfer to the product the consumption that of that activity does, to the extent that it is feasible.
Activities are usually classified according to various criteria:
- According to the functions of the company in which they are included (research and development, logistics, production, marketing, administration and management).
- According to their relationship with the products or services that the company produces or markets: in this sense there are the main activities (directly related to the products or services) and the auxiliary activities (they support the main activities).
To identify the activities, a previous diagnosis is necessary, as well as a deep knowledge of the company, its characteristics and applied processes. Selecting many activities can complicate and make the costing process more expensive. On the contrary, if few activities are selected the possibilities of analysis are reduced. Therefore, the optimal number of activities must be selected to enable the proper functioning of the system.
It is important to differentiate activities from tasks. In principle, an activity is made up of a set of tasks and to make the cost system operational, it is essential to select activities that bring together a set of tasks. A significant difference between activity and task is that the former is aimed at generating an output, while the latter is a necessary step for the completion of the activity.
Taking its relationship with the product as a reference, according to Cooper (1990) four categories are distinguished: at the unit level, at the batch level, at the product level and at the factory level.
On a unit-level scale, those activities whose costs increase or decrease depending on the volume in number of units are framed, so their costs are usually variable.
At the batch level, activities are characterized because their costs are related to the number of production batches manufactured. Consequently, the cost that corresponds to each unit of product quantity will vary depending on whether a complete batch is made or not. Also in this case the costs that form them are usually variable.
At the product level (product-sustaining level) or at the line level are the activities that support the products. Its costs are considered to be, fundamentally, fixed and direct with respect to a specific product.
At the factory level (facility-level) or at the company level are the organization support activities, that is, those that include general plant costs, hence they cannot be associated with a specific product or organization because they are common to all of them.
From the analysis proposed, it is evident that the cost of the first three categories of activities can be distributed among the products, using distribution bases that largely maintain the cause-effect relationship between the activities and the products. In the case of activities at the factory level, it is very difficult to assign it to products, so among several variants it is recommended as the best, to consider it as a group of costs and to distribute its cost among the rest of the activities with which it is related..
And sections, or cost center, are related to the organization chart and have a person who is responsible for their goals and their costs, clusters costs (cost-pools) are units of smaller size and are related directly with the activities. Cost groupings are used to locate indirect costs relative to products or other cost targets. In a way, it could be said that cost centers are groupings of costs. In contrast, not all cost groupings constitute cost centers. Therefore the number of cost centers of a company is less than the number of cost groups that are used in the ABC model.
Another important contribution of ABC is that it refers to the measurement of activities. These activities are measured by the so - called cost drivers (cost drivers of the English) which ultimately are responsible for the costs or variability factors of costs. Cost drivers are not so much related to volume, but on occasions, it may be more interesting to analyze the behavior of the activity and the costs that fall on it, based on indicators not related to volume, such as in based on the number of times an activity must be performed.
Cost drivers are classified into two types: first-level cost drivers, those used to distribute the cost elements to all activities, and second-level cost drivers that are the basis for distribution through which the cost of the activities is distributed among the products.
The ABC system allows the determination of the cost of the service or product through a process that consists as a general rule of the following stages:
- Direct costs are assigned directly to products or services Divide the company into sections or areas of responsibility Decide the criteria to be used to charge indirect costs in sections or areas of responsibility Divide indirect costs by sections or areas of responsibility according to the selected criteria Define for each area of responsibility the activities that will be used in the system, in addition to determining which are the main activities and which are auxiliary ones Locate the costs of the sections in cost groups corresponding to the activities Load the costs of ancillary activities to the main activities Select the cost drivers of the main activities Calculate the cost per driverAttribute costs of core activities to products or other cost targets through second-level cost drivers.
In summary, we can say that the ABC model has as its fundamental objective the allocation of indirect costs to products and services. For which, three major steps are developed: the first will consist of the distribution of indirect costs among the cost groups, the second consists of distributing the cost groups to the different activities and the third consists of the distribution of the cost of the activities to products.
The aspects raised allow us to conceive the ABC, as a system in a certain way perpendicular to traditional systems, which arises as a consequence of its inherent philosophy and which highlights the need to manage activities, instead of managing costs, which is the guidance taken by traditional accounting systems.
This statement is not intended to invalidate conventional cost systems, but rather to emphasize that activity-based systems sometimes significantly increase the reliability of cost information. It is about achieving new ways in the conception and use of business information, in accordance with the external and internal characteristics of the company.
Figure 2.2 Distribution of costs to products and / or services in an ABC system. Source: self made.
From this approach, it is a question of conceiving a cost system that allows linking each cost concept to a single activity, since what determines the consumption of the factors are the tasks that must be undertaken and the way in which they are executed. In this way, it is avoided to link costs with the elements that constitute the final objective of the operation. This orientation around the activities, allows knowing the true causes that motivate the occurrence in costs, to adopt the courses of action that lead the company to achieve a competitive cost structure, and also to be able to identify and eliminate the costs related to sterile or unnecessary activities.
The activity-based costing philosophy is built on the principle that the activity is the cause that determines the incurrence in costs and that the products consume activities, for this reason, the ABC highlights the need to manage the activities, instead of managing costs. Essentially, each component of indirect costs is caused by some activity, that is why the ABC principle is that each product should be charged for the part of the component in which it participates, based on the proportion it causes in that activity.
From this principle, the analyzes carried out on ABC place the emphasis on the activities, highlighting the following features of this philosophy:
- Managing achievements, what is done more than what is spent. It means the need to control activities more than resources, trying to satisfy the needs of customers as much as possible. They will be the ones who really determine what activities we have to carry out Analyze activities as integral parts of a business process and not in isolation Eliminate activities that do not add value to the organization, instead of improving what is really suppressible. Activities must be framed within a global action plan. Support, commit and seek the consensus of those directly involved in the execution of the activities, since they are the ones who really find possibilities for improvement and differentiation in the activities they usually carry out.Maintain a goal of permanent improvement in the development of activities, and the presumption that there is always a way to improve the performance of activities.
ABC and its interrelation with the Strategic Cost Management.
So far, basically the essential characteristics that define the activity-based costing are located, however, its level of interrelation with the Strategic Cost Management (GEC) approach, which has come to occupy a place, remains to be clarified. recurrent in the analyzes carried out in the 1990s, based on the fact that the cost systems used by large companies tend to be declared obsolete. Among its main diffusers are J. Shank and V. Govindarajan with their work Gerencia Estratégica de Cosos (1993), in which the authors demonstrate that the GEC is the first analytical scheme to relate the appropriate information to the company's strategy.
To respond to the assumption that explains the interrelation of (ABC) and GEC, it is necessary to place the concept of GEC, it consists of the use that management makes of cost information in one or more of the four stages of strategic management, which is specified in business management, conceived as a continuous cyclical process of: 1) Formulation of strategies, 2) Communications of these strategies to the organization, 3) Development and use of tactics to implement strategies, 4) Development and establishment of controls to monitor the success in the implementation stages and, consequently, measure the degree of success in achieving the strategic objectives.
The appearance of the GEC results from the combination of three fundamental themes, each of them taken from strategic management publications: value chain analysis, strategic positioning analysis and cost causal analysis.
On the analysis of the value chain and its relationship with ABC, an article by Rubio Misas M. states the following: It is often stated (Johnson, 1988) that the philosophy of activity management has its antecedent in the works of Porter (1985) on the value chain; For Porter, the value chain in any area of the company defines the interrelated set of value-creating activities, which extends throughout all processes, ranging from the procurement of sources of raw materials for component suppliers, until the finished product it is finally delivered into the hands of the consumer. Here the question is what does this concept entail?.
It involves several things, first an approach external to the company, considering each company in the context of the entire chain of value-creating activities of which the company is only a part, ranging from the basic components of raw materials to the final consumer. It suggests an analysis of the activities of the company, considering the added value that the realization of each of them implies for the client.
Understanding therefore, according to Johnson, that companies to be competitive need their managers to identify and eliminate activities that do not generate value and to be profitable, they require information that allows them to manage the cost of activities (Carmona, 1993: p. 316).
Therefore, the concept of value chain by placing emphasis on the activity is connected with the ABC, from which it follows that it is part of the GEC approach. On the other hand, it can be pointed out that this concept is different from that of added value, since from the strategic point of view, this second concept according to criteria begins too late and ends too early, because the fact of starting the cost analysis With purchases, you lose all opportunities to take advantage of existing ties with the company's suppliers.
The levels of interrelation of ABC and GEC become clearer, if an examination is carried out on the causes of costs, in the field of the second aspect, in this, it is accepted the fact that costs are caused or driven by many factors, which are interrelated in a complex way. Therefore, understanding the behavior of costs means understanding the complex reciprocity of the set of cost causes that work in a given situation.
This issue has its peculiarities depending on the degree of analysis that is derived, in traditional managerial accounting, the cost is basically a function of a single cost factor: the volume of production. In the GEC, the volume of production as such is considered to capture very little of the richness of the cost behavior. Accordingly, the cost causes are divided into two large classes: The structural causes and the basic execution reasons.
The basic causes of execution include at least the following: commitment of the work group, total quality management, capacity utilization, efficiency in plant distribution, product configuration, and use of existing ties with suppliers. and / or customers through the company's value chain.
The structural causes of costs are the following:
- Scale: Amount of investment to be made in the areas of manufacturing, research, development and marketing resources Extension: Degree of vertical integration. Horizontal integration is more related to scale. Experience: Number of times the company has done what it is now doing again in the past. Technology: Technological methods used at each stage of the company's value chain. Complexity: Breadth of the line of products or services to be offered to customers.
This last aspect, that of complexity as a structural variable, has become an object of interest for accountants. Some examples of the potential importance of complexity as a determinant of costs are found in the activity-based costing work by Kaplan (1987) and Cooper (1986).
The levels of interrelation of the ABC and the GEC reside, in that they place attention on the different stages of the entire value chain, of which the company is a part, under the particularity of an external approach, considering the concept value-added a limited concept, in them the cost is considered a function of strategic selections, based on the structural causes and cost execution.
An analysis of the basic aspects of the paradigm of strategic cost versus managerial accounting, allows us to observe the levels of rupture of these and the essential tasks that the ABC involves as part of the GEC.
| The managerial accounting paradigm | The Paradigm of Strategic Cost Management | |
| What is the most useful way to analyze costs? | Depending on products, clients and functions.
With a very marked internal focus. Added value is a key concept. |
Depending on the different stages of the entire value chain, of which the company is a part.
With a very marked outward focus. Value added is considered a strongly limited concept. |
| What is the goal of cost analysis? | Three objectives fully apply regardless of strategic context: record keeping, management by exception, and troubleshooting. | Although the three objectives are always present, the design of cost management systems changes substantially depending on the strategic positioning of the company, either under a cost leadership or product differentiation strategy. |
| How should we try to interpret cost behavior? | The cost is basically a function of the production volume: variable, fixed, stepped and combined cost. | The cost is a function of the strategic selections on the competing scheme and of managerial skills to execute the strategic selections, based on the structural cost factors and the cost execution causes. |
Final Considerations
- An activity-based system can provide a clearer and more convenient framework to obtain a much more precise cause-effect relationship between absorption bases and costs. These differences can be substantive, in such a way that, in many cases, the implementation of ABC can provide costs for product lines that are significantly different than those shown by a traditional cost system. It can be said that the method of activities determines an innovation in terms of the precision and flexibility with which cost analysis can be carried out. The idea of precision is delimited not by the level of detail, but by the quality of the representation of the operation of the company, and the consequent membership of this representation for decision-making.The goodness of a cost system lies in its ability to measure the use of productive resources throughout the process; For this reason, it does not make sense, in principle, to reject or accept a system if a detailed analysis of its advantages and limitations is not made first. The implementation of ABC allows a better allocation of indirect costs to products and / or services, in addition to enable better control and reduction of these, provides more information about the activities carried out by the company, allowing to know which ones provide added value and which ones 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 ABM and ABB techniques, ABC is very useful in the planning stage,as 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 appropriateness of traditional cost systems to be discarded With an ABC system, there is a danger of increasing arbitrary imputations, 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 drivers. Their 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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AUTHOR INFORMATION:
NORGE GARBEY CHACON
THEORETICAL FRAMEWORK OF COSTING BY ACTIVITIES
AMAT ORIOL and SOLDEVILA GARCIA PILAR: «Accounting and Cost Management», Editora Gestión 2000, Spain, 1997, Chapter 2, page. 48.
AMAT ORIOL and SOLDEVILA GARCIA PILAR: «Accounting and Cost Management», Editora Gestión 2000, Spain, 1997, Chapter 5, Page 136.
AIMAR FRANCO OSVALDO. ”: Activity-based cost systems. Past, present and future." Costos y Gestión Magazine, Spain, March 1995, Publication T.IV-No.15, Page 241.
RUBIO MISAS MARIA: «Cost systems based on activity. An application to the hotel company », Actualidad Financiera Magazine, Spain, June 1995, Page 866.
AMAT ORIOL and SOLDEVILA GARCIA PILAR: «Accounting and Cost Management», Editora Gestión 2000, Spain, 1997, Chapter 5, Pages 136-137.
RUBIO MISAS MARIA: «Cost systems based on activity. An application to the hotel company », Actualidad Financiera Magazine, Spain, June 1995, Page 866.
When the allocation can be done objectively and without the need for distributions, it is called affectation. On the other hand, when the allocation is made after a process of cost sharing between different departments, it is called an imputation.
CASTELLO TALIANI EMMA.: »The activity cost system is imposed«, Harvard-Deusto Finanzas & Contabilidad, Bilbao. 1994, p. 29.
SHANK JK and GOVINDARAJAN V.: «Strategic Cost Management», Editora Norma, Spain, 1995, Chapters 1, p. 5-8.
RUBIO MISAS MARIA: «Cost systems based on activity. An application to the hotel company », Actualidad Financiera Magazine, Spain, June 1995, Pg. 864-865.
Despite the fact that in the literature that explains the concept of Strategic Cost Management this is located in the 90's, this research considers the ABC as a particular form of management of the same and therefore it could be assumed as its antecedent.
SHANK JK and GOVINDARAJAN V.: «Strategic Cost Management», Editora Norma, Spain, 1995, Chapters 2, Pages 26-28.
SHANK JK and GOVINDARAJAN V.: «Strategic Cost Management», Editora Norma, Spain, 1995, Chapters 2, Page 35.
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