Proposal of a methodology for the determination of the cost based on activities

SUMMARY

This research work focuses on the Proposal of a Methodology for the determination of Cost based on Activities (ABC). Its main objective is to propose a cost methodology that allows providing information for the management and calculation of the costs of each activity. In turn, that the proposed system facilitates decision-making by company managers. A broad search of criteria from different authors was carried out on the evolution of Management Accounting, analyzing its main contributions and demonstrating the advantages of ABC over Traditional Costs.

As a result of the research, important conclusions are reached that contribute to improving the way of managing the resources and activities that are consumed and executed in the area under study.

INTRODUCTION

The current business environment imposes the need for organizational units to modify the management of their processes and activities. In turn, business improvement seeks greater efficiency in Cuban companies, so that they are recognized both in the national and international markets.

A new organizational culture is gradually being reached in companies, trying to adapt to the new environment that surrounds them, in order to increase their market possibilities. To the extent that this occurs on the outside, important changes occur within it with the same speed, both in organizational structures and in management.

New techniques and tools are able to replace the traditional ones, in order to establish maximum efficiency in business management, and for this, new procedures are introduced aimed at internally strengthening the organization, with respect to the environment and customer demands..

At the end of the 1980s, the Activity-Based Cost System (ABC) became more popular, especially in Europe and North America. In this sense, it can be pointed out that the ABC is a different model from the known ones and although it has elements of the previous systems, it shows advantages already proven in companies that want to be leaders in the market. The ABC system when compared with the previous ones, since it creates a new causal relationship, based on the fact that costs depend on the execution of certain activities, which in turn, are a consequence of obtaining products or services that customers demand. This Cost System could be adapted and adopted by any company, but the degree of generalization is low in most of the countries that are pioneers in this powerful management tool (USA, Canada,Australia, France, Spain and Japan).

In Cuba, there is still no adoption or implementation of the ABC system by companies, although it should be noted that research in this regard has been accelerated for its future introduction. Based on these arguments, this work was developed in a company in full swing of accelerated development and with a favorable climate, to make changes that generate results, which could raise the prestige of the organization in the market.

Even though notable business development has been achieved within this organization, they do not have a system of tools with a management approach linked to the costs incurred in the organization. The positive results that have been achieved with the introduction of quality management, processes, management control and, the balanced scorecard have reduced the degree of uncertainty among the company's employees to test the ABC system as a management tool and calculation of costs.

The novelty of this research will consist of adapting the Activity-based Cost System Methodology.

1.1- Some aspects of the Evolution of Management Accounting.

Since ancient times, dating from 4500 years before Our Era (ane), accounting documents are reported in ancient Mesopotamia, which had salary cost determinations and some of them indicated the existence of inventories. Already in the Middle Ages the union organization was reached as the socioeconomic basis of production, but only with the development of the Industrial Revolution, did the improvement of cost systems begin, which is attributed to the technological advance of the time, which led to an increase in production capacity as the principle of specialization of large-scale work was applied, leading to a notable decrease in the unit cost of products. Although it is to be noted, that it could not be said that it was already a finished or perfected cost accounting,since the cost elements that were considered were: direct material (MD), direct labor (MOD), not addressing in this way the problem of the analysis of indirect manufacturing costs. Furthermore, the information provided by these very traditional systems was not used to make competitive or market decisions.

In the 19th century and in the 40s of the 20th century, a higher stage of Industrial Capitalism developed with a greater technological and business boom, and it is where indirect costs begin to be taken into account as the most developed aspect of Cost Accounting. Later in the 1950s, when the costs of establishing responsibility centers were incorporated, Cost Accounting became the center of Management Accounting, considering that the information was more accurate and contributed to decision-making.

As of this date, the need to improve the aforementioned aspects of Management Accounting constituted the fundamental concern of many researchers and professionals related to Cost Accounting.

In the following two decades and as a result of these investigations, numerous works were published, which contributed to determining the fundamental aspects of Management Accounting (Guillermo, 2003) 1:

1. Implementation of the transfer pricing technique to solve the problems derived from the service session between sections, in the context of the responsibility centers, enunciated by Hirshleifer (1956 - 1957). Development of analysis techniques derived from costing direct costing, mainly studies on the deadlock and costs – volumes of operations – profits, aimed at changing the very restrictive hypotheses stated at the beginning (Jaedicke, 1961; Charnes and Cooper, 1963; Jaedicke and Robicheck, 1964) Traditional strategic planning and management control in the context of the budget system, described by Anthony (1965), which contributed to differentiate different levels in the area of ​​planning and control.Deepening of studies on the allocation of costs in joint production and its arbitrariness, where the main contributions were made by Shapley and Shubick (1969) and Thomas (1971). Theory regarding the decentralization of companies in decision-making, assuming responsibility aimed at effective coordination and motivation (Simón (1977), exposed the most important advances in this field). Agency theory to the system of relationships that are established in a descending way between superiors and subordinates, within the organization where the works started by Holmstrom (1975), continued by Shavell (1979) and perfected by Baiman (1982) stand out.Theory regarding the decentralization of companies in decision-making, assuming responsibility for effective coordination and motivation (Simón (1977), presented the most important advances in this field). Agency theory to the relationship system that is established they establish descendingly between superiors and subordinates, within the organization, where the works initiated by Holmstrom (1975), continued by Shavell (1979) and, perfected by Baiman (1982) stand out.Theory regarding the decentralization of companies in decision-making, assuming responsibility for effective coordination and motivation (Simón (1977), presented the most important advances in this field). Agency theory to the relationship system that is established they establish descendingly between superiors and subordinates, within the organization, where the works initiated by Holmstrom (1975), continued by Shavell (1979) and, perfected by Baiman (1982) stand out.within the organization where the work started by Holmstrom (1975), continued by Shavell (1979) and perfected by Baiman (1982) stand out.within the organization where the work started by Holmstrom (1975), continued by Shavell (1979) and perfected by Baiman (1982) stand out.

The current development of technology has led to the acceleration of Management Accounting, not only from a theoretical point of view but from the perspective of the adoption and implementation of systems with a philosophy of activities, and with a management approach.

These arguments lead to an analysis between Traditional Accounting and Management Accounting in the next section.

1.2- Relationship of Traditional Cost Accounting and Management Cost Accounting.

1.2.1- General Characteristics of Traditional Cost Systems.

Traditional systems, in principle, were focused on environments in which the decision-making process was not excessively complex and the organization of production required coordinating specific and repetitive tasks in a more or less stable environment.

The cost systems give the possibility to evaluate the methods that can be used to know the costs of the different objectives (products, activities, cost centers) and determine the result of the period.

To understand the development of this work, the criteria provided by some renowned authors about the concept of system will be mentioned below:

Hernández Cotón (1982) 2: “A set of objects, phenomena and relationships, whose interrelation will produce the appearance of new qualities not inherent in the isolated components that constitute the system. The system has new qualities not implicit in the components that make it up ”.

Carnota Lauzán (1987) 2: “It is the set of elements, properties and relationships that, belonging to objective reality, represent for the researcher the object of study or analysis. A system is a whole, and as such it is capable of having properties or results that cannot be found in its components seen in isolation (synergetic effect). All this complex of elements, relationships and results occurs in certain conditions of space and time. " This definition summarizes the criteria proposed by Omarov (1979), Hernández Pérez (1980) and Balada (1984).

Uriegas Torres (1987); Hicks (1989) 2: "It is the set of elements that act in a coordinated way to achieve certain objectives".

Cuervo (1994) 2: “System is made up of a series of two or more elements of any kind (concepts, ideas, objects, people), fulfilling that each part influences the whole but in isolation from the other components of the system. Furthermore, each possible subsystem has the same properties as the system that contains it ”.

Nogueira Rivera, Medina León, Quintana Tápanes, (2000) 2: ”It is the natural or artificial set of elements, properties and relationships that, belonging to objective reality, act in a coordinated way to achieve an end or objective. Each part or subsystem has the same properties of the system, influences the rest and from this interrelation new properties arise that the elements do not have separately. The system is delimited by theoretical or physical biological factors and the existence of the system is associated with conditions of space and time.

Starting from the concept of system and being in accordance with the definition of Nogueira, Medina and Quintana (2000), we proceed to expose the various definitions related to the concept of cost of a product or service:

Mallo Rodríguez, (1991) 3: “The cost does not arise until the consumption is made, so it cannot be identified with the concept of expense that precedes the cost. While the cost concept attends to the moment of consumption, the expense refers to the moment of acquisition ”.

Lawrence, (1960) 4: "The cost of an article is the sum of all the disbursements or expenses made in the acquisition of the elements that go into its production and sale."

Polimeni, Fabozzi and Adelberg, (1990) 5: “The cost is the value sacrificed to obtain goods or services. The sacrifice made is measured in dollars by reducing assets or increasing liabilities at the time benefits are realized. At the time of acquisition, the cost is incurred to obtain present or future benefits. When the benefits are realized, the costs become expenses. An expense is defined as a cost that has produced a benefit and is expiring. The unexpired costs that may give future benefits are classified as assets ”.

Encarta Encyclopedia, (2000) 6: “It is the amount paid to buy or produce a good. The calculation of the cost in a company is immediate: they consist of the price of the good plus the financial costs of the company (when purchased in installments). The calculation of the cost of production is somewhat more complex, because it is necessary to take into account the cost of the raw materials used, that of the labor used and the proportional part of the costs of the capital investment necessary to produce the good or service in question ”.

Pedersen, (1958) 7: "It is the consumption valued in money of goods and services for production that constitutes the objective of the company".

Schneider, (1962) 8 “It is the monetary equivalent of the goods applied in the production process”.

Coinciding with the concept of product or service cost addressed by Polimeni and Fabozzi, it is necessary to analyze the elements that make up the cost of a product, and for this, reference is made to the one analyzed by Polimeni (1990) 5. Likewise, figure 1 shows the elements that make up the cost of a product or service.

Direct Material:

They are the main goods that are used in production and that are transformed into finished articles with the addition of labor and indirect manufacturing costs. The cost of materials can be divided into direct and indirect materials.

Direct materials are those that can be identified in the production of a finished product and that can easily be associated with the product / service.

Direct Labor:

It is the physical or mental effort expended in the manufacture of a product. This can be divided into direct and indirect. The direct is one that is directly involved with the manufacture of a product, that is, it is the workforce that works in the transformation of raw materials and materials into the final product.

Indirect manufacturing costs:

They are all the concepts that include the cost pool and are used to accumulate indirect materials, indirect labor and all other indirect manufacturing costs. These concepts are included in the indirect manufacturing costs because they cannot be directly identified with the specific products.

There are different ways to calculate and record costs in a traditional way, these are:

Historical or Real Cost: It offers as a result the costs actually incurred in the production or service and has the disadvantage that it lacks a standard or plan to exercise its control and determine its correlation. In addition, the registration and calculation generally produces late and inoperative results in communication with the client (Pérez Barral, 2001) 2. It coincides with the valuation made by Lizcano and others (2000) 10: Cost System in which the cost of production is recorded as it has been incurred, once the different costs are known.

Predetermined Calculation Cost (estimated or standard): It is the prior determination of the amount of resources necessary to execute a given production or service, and has the advantage that the difference between the real and the regulated can be analyzed in future process planning, thus contributing to the control of actions in the company. According to Lizcano and others (2000) 10 it is used in order to achieve greater efficiency and control of productive factors. The standard costs represent what the cost should be, that is why the estimate of the cost of production is made.

The advantages of the Standard Cost, cited by Ripoll et al. (2000) 11, are set out below:

1. They represent measurable and achievable objectives and, therefore, provide the basis on which the analysis of detected and accounted deviations must be supported. They are the basis for the preparation of budgets, financial studies and pricing policy. They allow administrative efficiencies in the valuation of transactions that affect the inflows and outflows of inventories.

Due to their calculation method, costing methods can be:

Costing by Absorption (Full Costing) or Complete Costs: It is defined as the approach by which all direct and indirect costs, including fixed indirect manufacturing costs (rent, insurance, taxes), are charged to product costs. Complete cost systems provide a greater amount of information that is not relevant to the product, therefore the information provided does not satisfy the requirements of the competition.

Some authors (Lizcano, 2000 and Ripoll, 2001) 2 consider that its main advantages and limitations can be summarized as:

Advantage:

1. Compare the final cost of a product with its selling price, and consequently measure its profitability; Study in detail the different moments of the accounting process in terms of costs; Offer an assessment of the permanent inventories of finished products and products in progress.

Currently its main limitations lie in:

• It does not offer adequate information to make certain decisions about the manufacture or not of a certain product It does not provide the necessary information to establish a correct pricing policy Given the inflexible principle of having to apply everything, distribution procedures are used truly arbitrary indirect costs, which is of no benefit

Direct Costing or Variable Costing (Direct Costing): It is considered as the method by which all direct and indirect variable costs, that is, excluding the fixed part of indirect manufacturing costs, are charged to the product. This method considers fixed indirect costs as period costs, that is, they are charged to income and not as a product cost (See Figure 2).

Among the fundamental aspects that characterize the direct cost method are: a) It only considers variable costs as product costs; b) Fixed costs are considered as costs of the accounting period in which they are applied and, c) Fixed costs are excluded from the industrial valuation of final products.

Advantages offered by this method:

1. It allows to identify the relative participation of each product in the results of the company It facilitates decision-making in the different cost analytical centers regarding the optimization of costs controllable by their managers It reduces the arbitrariness in which many times it is incurs, when trying to distribute the fixed costs among the products manufactured in a period It allows to calculate the breakeven point and guide the policy of sales prices by zones In the cases of under-activity or shortage of orders, it allows to determine prices with precision limits below which the manufacture of the product does not interest.

LIMITATIONS OF THE METHOD

• Inadequate for determining product costs on farms with differentiated production schedules Further complicates the problem of joint cost sharing May lead to distorted cost information from cost analytical centers by not taking into account their structure loads.

Accounting by area of ​​responsibility: System designed to accumulate and report costs through individual levels of responsibility. Each supervisory area is only responsible for the costs for which it is responsible and over which it has control (Fabozzi and Polimeni, 1992) 2. With this system, the fundamental cost objectives are achieved, related to control and planning, inventory valuation, measurement of results, emphasizing control of the person in charge of the area.

Most important advantages of costing by area of ​​responsibility:

1. Eliminates all costing work that does not lead to a better quality of control, thus reducing the volume of administrative work. It allows the effort of each leader to be assessed, and facilitates executive work by precisely locating problem points and Those responsible. The deficient planning of an area can affect the overall objectives and goals of the organization.

Traditional Cost Accounting is a classic form, which is fundamentally characterized by providing information that helps the organization's internal decision making, ensuring the registration and control of product costs, associated with production volume, that is, with a purely internal and limited view of the Company; with a formal and rigid profile, focusing their attention on the resources that the product consumes and not on those aspects that really added value in the process of making these.

In the 1980s, several researchers (Cooper, Kaplan, Polimeni, Mallo, Ripoll, Amat, Amat J., Fabozzi and, Porter), suggested that traditional cost systems, based on the hypothesis of long production cycles of a standard product, they had immutable characteristics and specifications and whose cost was made up, to a large extent, by that of labor, expressing that the other cost elements were not relevant at that time. At this stage, the need for a change in cost accounting was already perceived, that is, to reach management accounting.

In the works of Cooper (1989) 2, Prieto and Azofra (1996) 2, the factors that have determined the obsolescence of the traditional management systems implemented for conditions different from the current ones were analyzed and which can be summarized as follows:

1. The increase in competitiveness, the saturation of the markets reduces the margin of freedom of the companies that are conditioned by the behavior of those that belong to the same sector. The growing instability of the business environment, together with an increase in uncertainty. The demands of customers and the expansion of markets means that customers have scope for a greater diversity of products from which to choose. Development of new technologies The existence of products with increasingly shorter life cycles.

In the comparison between Traditional Costs and Management Accounting, it stands out that the latter is based on the ability to maintain a stable system or on the ability to ensure the effectiveness, efficiency and effectiveness of the decision process. This approach tries to integrate all the factors in order to achieve improvements in the organization, thus facilitating internal and external decision-making. It integrates financial and non-financial, quantitative and qualitative indicators into its analysis, raises the demand for a change in focus of management control systems, which helps to improve productivity, thus contributing to the monitoring of the factors that determine business competitiveness (quality, customer service, fast deliveries) and systems that manage to motivate staff and evaluate their performance (Nogueira Rivera &Medina León, 2002) 2.

Some authors refer to Management Accounting as follows:

Álvarez López (1995) 12: “It allows evaluating the economic contribution of the different activities carried out by the company. It is an information system for management that, through the performance of the accounting process, provides information ”.

Mantilla (2000) 2: “Modern Managerial Accounting, consists of the comparison (benchmarking) between internal information (processes, activities, capacity, resources) and external information (environment, especially within the industrial sector to which it belongs). For this, Integrated Information Systems (Balanced Scorecard) have been developed that combine short and long-term information, internal and external, financial and non-financial ”. Ercole (2000) 2: "Management, in short, must have double control, responding to operational planning and at the same time being linked to the organization's strategy, in order to achieve objectives".

Balada Ortega and Ripoll Feliu (2000) 13: “It is a branch of Accounting, which aims to capture, measure and assess internal circulation, as well as its rationalization and control, in order to provide the organization with relevant information for business decision making ”.

Armenteros Díaz and Vega Falcón (2000) 2: "Management Accounting aims to provide relevant information, historical or provisional, monetary or non-monetary, segmented or global, on the internal circulation of the company."

Management Accounting is a part of Accounting that is responsible for capturing, measuring, registering, valuing and controlling the internal circulation of values ​​of the company, in order to provide information for making decisions about production, training internal cost price and on the sales price policy and analysis of the results, by contrasting with the information provided by the factor and product market, based on the technical laws of production, the social laws of organization and the laws economic market.

Management Accounting allows answering questions such as:

What products are profitable?

From what sale price does not lose money with a certain product?

How much does a certain department cost?

How much does a part of the production process cost for an item?

What is the profitability that is achieved with a certain type of client?

Is it worth outsourcing a certain activity?

Management Accounting has the following fundamental objectives: a) Keep people within the organization informed. It will inform through the information system to each part of the company the information that is necessary for the management (costs, profitability and non-monetary indicators); b) Group and guide all the efforts of the organization

towards the achievement of objectives, seeking efficiency and effectiveness in the use of resources. To do this, it uses the budgets, the analysis of deviations and the taking of correct measures and, c) Contribute so that all those responsible feel motivated to achieve their objectives. In this case, the incentive systems linked to the control of the management carried out are of great help.

Summarizing the above, Management Accounting is dedicated to: 1) Improving the organization; 2) Greater competitiveness; 3) Efficient management in all areas of the company and, 4) Customer satisfaction;

Management Accounting aims to serve as an orientation or reference point for all kinds of internal decisions at different levels within the short-term time horizon.

Therefore, it must link its action with the strategies, goals and objectives of the organization, giving participation in the entire process to the company's employees.

The study of Management Accounting is inherent in the analysis of systems based on activities. Therefore, the next section will address the beginnings of the emergence of the Activity-based Cost (ABC) system.

1.3 - Need for the Emergence of the Activity Based Cost (ABC) system.

The use of a system of Costs for Activities acquired special relevance in a controversial and dynamic environment such as the final stage of the 20th century. Given the conditions in which business managers needed information that would allow them to make decisions in relation to the combination and design of products, as well as in technological processes, elements linked to the profitability of the organization on a global scale.

In this sense, it is convenient to point out some of the relevant changes that affect the cost calculation and management system, highlighting the following: (Amat and Soldevila, 1998) 14

1. Technological advances and increased competitiveness cause the need to increase the product catalog, simultaneously with the shorter and shorter life cycles of these products, to reduce investment in assets and thus be able to operate with better financial costs, There is a growing need to reduce stocks, which requires shorter production runs. These technological advances also have an impact on a reduction in the weight of direct labor by increasing indirect costs. This is due to the need for organizations to be more flexible and customer-oriented, which causes a greater weight of costs related to research and development, launches of shorter series, production scheduling, logistics, administration and commercialization.This generates a greater weight of indirect costs, the need to avoid the existence of activities in the cost centers that do not generate value.

These changes cause the need to allocate indirect costs to cost objectives (products, customers, services, among others) in a more reasonable way, as they are done in conventional cost systems. This is a consequence of both the need to obtain more detailed information on costs and the loss of reliability of conventional cost-sharing criteria.

In the conventional methodology, costs are assigned to products at the unit level; This assumes that all costs depend on the volume of production, whereas in the ABC system, although costs are also assigned at the unit level, in many cases the allocation is made at the lot, product or infrastructure level. This means establishing a differentiation between the different types of activities that have been developed throughout the manufacturing process and identifying the way in which each product has consumed activities.

The foregoing corroborates that the calculation of product costs went to the background, giving priority to their management, but emphasizing the activities that consume the products or services.

The analysis of cost management starts in principle from the processes that occur in the company, since these are derived in various activities that guarantee the product / service that the client demands.

Some of the definitions related to the processes are:

Gaitanides (1995) 15: “Sequence of activities linked in an orientation logic to produce an output requested by a receiver (client). They are configured as cross-departmental ”.

Müller (1993) 16: “It is constituted by defined relationships between supplier and customer. The development of an order is a cross-departmental process. There are material processes (purchases, manufacturing, shipments) and formal (planning, deciding, controlling…) ”.

Wegner (1993) 17: “The process orders object-oriented activities within a transformation flow (from inputs to outputs)”.

Brimson, (1991) 18: "A coordinated set of tasks that lead to obtaining a specific product or service."

Castelló y Lizcano, (1994) 19: "Set of activities carried out with a specific purpose, which pursues a global object and which can lead to a material or immaterial output".

Regarding the origins of ABC Jonson (1993) 20, he pointed out that “there are two paths that lead to the current ideals of analysis by activities”. Both paths are born in the business world and not in the academic world. Some management accountants in academia, notably Gordon Shillinglaw at Columbia and Geoge Stabus at Berkeley, outlined the concepts of activity-based analysis in the early 1960s. However, the activity concepts they enunciated appear not to have influenced academic thought (except at present), nor do they seem to have had an impact on the two development of ABC in the business world.

The first development of ABC began in the early 1960s at the General Electric Corporation (GE), where employees of finance and management control people sought better information to control indirect costs. In this sense, GE accountants 30 years ago may have been the first to use the word activity to describe a cost-generating task.

The other path leading to Activity-Based Costing appears to have originated independently of GE's progress in activity costing. The ABC system stems from the efforts of companies and consultants in the 1970s to improve the quality of Cost Accounting information.

In other studies on the subject, four basic moments are identified (De Rocchi, 1994) 21. A first moment is related to the works of Church, in the first decades of the 20th century; This author emphasized the study of the generating causes of indirect costs, however, his proposal proposed to collect and store an enormous amount of data that required a complete and intensive analysis of the same, something that traditional accounting was not possible, for What arises from the difficulty that the determination and analysis of costs had to be done manually, which implied higher costs; this being the reason why Church's model was not widely accepted in his time. This author,He understood that accountants made mistakes in spreading indirect costs over a single activity basis related to direct costs, usually direct labor. Which brought with it a very arbitrary way of assigning or prorating indirect costs to the product. In this sense, it stated that the real source of costs were the underlying processes and that these should serve as a basis for the allocation to individualized products, to allow their reduction and control, thus avoiding waste.stated that the real source of costs were the underlying processes and that these should serve as the basis for the allocation to individualized products, to allow their reduction and control, thus avoiding waste.stated that the real source of costs were the underlying processes and that these should serve as the basis for the allocation to individualized products, to allow their reduction and control, thus avoiding waste.

There are other investigations on the subject in which the so-called Platzkosten, created by Mellerowicz in the 50s, stands out in a second moment; in a third moment, the costing method proposed by Staubus (1971) was highlighted and, finally, in a fourth moment, the costing based on transactions, proposed by Miller and Vollman (1985), which was later disclosed by Johnson and Kaplan (1995).). In the case of Mellerowicz's work, this did not have a major impact and fell into oblivion.

However, that of Staubus (1971), had a greater acceptance, so much so that a large number of scholars on the subject consider the origin of Activity-based Costing based on the proposals that the author makes in that publication, where he raises the need that Accounting Information Systems will provide managers with everything they need to make the right decisions and dedicate special attention to various aspects of Cost Accounting, including: the meaning of costs and the identification of relevant costing objectives.

Therefore, the relevant costing objectives are activities about which decisions must be made. These objectives suggest some questions with his approach to the analysis of the cost of activities, among them: What should be the cost of typing a letter sheet and sending it within the United States? What is the annual cost of maintaining a thousand square foot space for an executive's office?

Finally, the great dissemination that Activity-Based Costing currently has is due to the book by Johnson and Kaplan: "Relevant losses: emergence and failures of Accounting Management" published in 1987, where the changes that had been taking place in the production and commercialization process, due to the new programming and control techniques that were being put into practice; facilitates the search for new tools for the determination and analysis of costs, in tune with the new environment in which businesses are developed.

There is a common element that all of these researchers have and it is their concern to optimize the return on capital, based on the reduction and control of costs, increasing their management and reducing waste where possible.

Based on the above criteria, some concepts related to the ABC system are set out below:

Cooper and Kaplan, (1988) 22: “The ABC method allows the lack of productivity, reducing and questioning all those activities that do not generate added value. In this way, an increase in the global competitiveness of the business organization is achieved ”.

Amat and Soldevila, (1998) 14: "It is based on the principle that the activity is the cause of determining the incurrence in costs and that the products consume activities".

Blanco, (2000) 23: "Identifies the resources that are used in the management of each activity, quantifies the cost of the resources used in the management of each activity and determines what activities are necessary for a product."

Santandreu, E. And Santandreu, P. (2000) 24: “It states that it is not the products or the services that consume costs, but the activities. It deepens the analysis of the activities, their usefulness and, above all, their cost. It focuses more on the fact of eradicating unnecessary costs, than on limiting itself only to distributing them ”.

The previous concepts are based on some ideas of Santandreu and Santandreu (1998), which are summarized below:

1. Cost management should focus mainly on the activities that originate them. Optimal management of activities will reduce the costs that derive from it, establishing a cause / effect relationship between activities and products or services. It follows that higher consumption of activities corresponds to the allocation of higher costs and vice versa. Greater objectivity in the allocation of costs. If the cost of each activity is known, the allocation to the product or service will be based on the activities that it has produced or consumed.

In turn, Amat and Soldevila (1998), evaluated the effects on costs in which the ABC philosophy is applied. These are summarized in:

1. Products or services with a higher sales volume see the costs assigned to them reduced. Therefore, it is possible that they become more profitable in the company as a whole; the opposite happens to products or services with greater volume of activity. Consequently, they bring a more negative or less positive result to the company as a whole.

These authors also summarized some advantages and disadvantages of the system that will be discussed below.

Advantages of the ABC system:

1. It allows you to calculate costs more precisely. Especially those related to certain indirect costs of manufacturing, administration and marketing. It provides more information on the costs of the activities carried out in the company, both those that add value and those that do not. The latter are the ones that can be tried to reduce or eliminate Identify unprofitable products, customers or other cost targets Allow costs to be related to their causes The ABC philosophy can be used for budget control and is called ABB It is applicable to all kinds of organizations.

Disadvantages of ABC:

1. There may be a tendency to discard the appropriateness of the current cost system. If too many activities are selected, the costing system can be complicated and more expensive. Certain indirect costs of administration, marketing and management are difficult to allocate to the activities.

The need for the emergence of a new cost system is justified by the increasing limitations of the existing cost system. In this sense, the next section will evaluate some of the differences most discussed by the authors in relation to the ABC system and the Traditional Cost Systems.

1.4- ABC System vs Traditional Cost Systems.

Traditional Systems generally do not provide the information managers need to make important decisions at the right time or in the desired way. However, the ABC system bases its reasoning for the distribution of indirect costs on the activities that add value to the final product and makes it clear that the activities consume resources and that it is the products that consume the previously selected activities. Therefore, it can be known previously, what resources will be consumed in those activities that add value and which activities are those that generate waste. Likewise, the ABC system, even differing in some respects from traditional methods, has common elements with them, these are:

1. The ABC system is based on the full cost, since all costs become part of the cost of the products or services. The ABC system admits treatment in both historical cost and standard cost, that is, it is also adapted in depending on the temporality of the information to be used. The ABC system can be combined with the direct costing method and, with the treatment of costs by areas of responsibility.

Other more marked differences between the evaluated systems are addressed in the following table (Pérez Barral, 2003):

Traditional Cost Systems	Activity Based Costs
They limit themselves to calculating the cost of the products.	Manage product value and improve processes.
Imputation of indirect costs of the structure based on volumes.	Indirect cost allocation based on resources consumed per activity.
Based on parameters that affect only production processes.	It affects all areas of the organization.
Grounded in functional organizations.	Able to assess any proposed change in the organizational structure.
Oriented as an internal control tool.	Oriented to the exterior, capable of generating added value.

Following the criteria of Blanco, (2000) 23. The author points out that traditional methods are based on considering that the products are those that consume the productive factors and that the management of these is done in each of the corresponding cost centers.

As some of the authors consulted point out, the ABC considers that it is the activities and not the products that consume the productive factors. In turn, the activities are consumed by the products based on a mixture of three variables:

1. One fixed, linked to the mere existence of the product, another proportional, based on the batches treated, another based on the volume sold.

Based on the criteria and schemes of the consulted authors, the traditional systems follow a very linear process, as shown in Figure 1:

Figure 1: Process flow in traditional systems. Source: self made

In turn, the ABC system follows the process as follows (See Figure 2):

Figure 2: Process flow in the ABC system. Source: self made

At this point, it can be argued that activities are the main link for determining Cost based on Activities, which leads to evaluating some concepts and characteristics that are identified with them.

Activity concepts:

Armenteros, M25.: “They are defined as a set of actions or tasks that have as their objective the attribution of an added value to an object, or at least, allow to add that value, for the customer; the activities constitute the substance of the company and its execution can be evaluated in terms of efficiency. "

Castelló Taliani, (1992) 26: "An activity is a set of actions or tasks that aim to apply, at least in the short term, an addition of value to an object, or to allow adding this value."

Amat and Soldevila, (1998) 14: “Set of tasks that generate costs and that are aimed at obtaining output to increase the added value of an organization. They are carried out to satisfy the needs of clients, whether internal or external. "

Some characteristics of the activities are summarized below (Armenteros, M.) 25:

1. Tasks performed by an individual or group of individuals Homogeneous nature Managing achievements means the need to control activities more than resources, if activities are properly controlled this leads to a reduction in costs in each of them. fully satisfy the needs of internal and external customers. They will be the ones who really determine what activities we have to carry out to improve profit margins Activities should be analyzed as integral parts of a business process and not in isolation Eliminate activities that do not add value to the organization, instead of improve what is really suppressible Activities must be framed within a global action plan Support,commit and seek the consensus of those who are directly involved in the execution of the activities, since they are the ones who really find possibilities for improvement and differentiation from the activities they usually carry out Maintain an object of permanent improvement in the development of the activities, the presumption that there is always a way to improve performance of activities.

There are different elements to consider when defining activities, these are:

1. The objectives of the organization, because based on these, the activities will be defined and classified. The object that is pursued with the cost system itself based on the activity. The characteristics of the organization, since these will determine the degree of centralization and decentralization in decision-making, and therefore, the usefulness of the information derived from the designed model. Being an important variable for the adoption and implementation of the system in the company. Critical variables for business success. These should be the focus of the entire process of continuous improvement in the execution of all the activities carried out. Staff motivation. The definition of activities should be oriented in such a way that employees feel motivated to collaborate.The stage of the life cycle in which the products are found, because both the determination of the cost and the management of the activities will depend on the phase of the cycle in which the company is located. The diversity of products, since it is source of activity The complexity of products and processes. This can be the cause of a good number of actions at all levels. The characteristics of the product, since a large number of productive activities will depend on these and their design. Existing information systems, since when it comes to Designing the ABC model will be able to benefit from the information available. The existing technology, because the execution of the activities will largely depend on it. The business processes.These must be the new focus of the current cost and control systems, since their coordination and planning and, in general, all their management, is essential in the search for continuous improvement and business excellence.

The classifications of the activities were approached with enough precision by Amat and Soldevila (1998):

1. According to the functions of the company in which they are included (research and development, logistics and 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 related activities directly with products or services) and auxiliary activities (they support the main activities).

According to Santandreu and Santandreu, (1998):

1. Fundamental activities: They are indispensable, which implies that their analysis is unnecessary, or at least very limited by their very nature Discretionary activities: They must be the subject of an exhaustive study based, above all, on analyzing to what extent this activity contributes to the obtaining the benefit, and depending on that contribution seek greater opportunities, or otherwise eliminate it.

Following Blanco, (2000):

a) The added value that they generate:

There are activities with added value, if their performance increases the customer's interest in our product or service, and activities without added value that, although they can be eliminated in a reasonable period of time, are currently necessary to be able to carry out those, which do add value. added.

b) To your relationship:

1. Primary, Secondary.

The criteria of Norkiewicz, (1994) 28 classify activities in:

1. Unit activity: It is an activity that increases or decreases in a one-to-one ratio with critical business processes. Batch activity: It is an activity that increases or decreases with the workflow, it is a lower ratio of one by another. Product support activity: They support all products and cannot be distributed directly to work units Organizational support activities: These are activities carried out to support the business unit Corporate support activity: By the central organization they cannot be directly associated with a specific product or organization and must be arbitrarily distributed (annual audits, president's expenses, preparation of board minutes).

Previously reference was made to activities with added value. In this sense, it is defined as value: “The sum of the perceived benefits that the client receives minus the costs perceived by him when acquiring and using a product or service” (Porter, 1985) 29 and, it is also defined by Tränckner (1990) 30, as “Several singular processes that form a chain when they group all the fulfillment of tasks in a delimited system, independently of the subjects that execute the tasks”.

The activities with added value are those that the company must promote based on customer demand, the analysis not being in the same way with those that do not add value. Well, the latter should only be taken into account if its execution is essential to achieve the desired service, otherwise it should be reduced or eliminated.

An activity that does not generate value is an insignificant activity, which is the consequence of a mistake, which those responsible for quality try to eliminate. It should be eliminated as far as possible, so you should avoid making investments on it, because sometimes they incur unnecessarily high costs.

It is important to know some characteristics related to the activities that do not generate value, as this avoids considering them as important in the analysis of the ABC system:

1. Any activity that is not profitable Those that waste time, money or resources and that do not contribute to increasing sales Those that add unnecessary costs to any product, at any point in its life cycle Those that can be reduced or eliminated.

The added value is measured taking into account the following aspects:

1. It adds value to the customer It adds value to the company It adds value to the human component.

Finally, note that the activities allow:

1. Understand how the cost is generated and how the execution of significant activities is carried out Provide a basis to be able to determine alternative activities of lower cost and / or better execution, identifying opportunities for cost savings and improvements in efficiency Provide a basis for the continuous improvement of processes by streamlining the activities carried out, allowing the characteristics of the activities to be identified and thus being able to classify them, better understanding the production process and operation of the entire organization, that is, the internal process of the company, this facilitates decision-making. Understand how costs evolve throughout the life cycle, and determine the real cost of products based on the stage in which they are.Obtain structural information about what a company does and how it does it.

While the correct selection of activities is important. Cost drivers are too. In this sense, some criteria of important authors linked to cost generators are related.

According to Amat and Soldevila (1998): "They are the ones who measure the activities that are the cause of costs or factors of cost variability".

Santandreu and Santandreu, (1998): “It is equivalent to a center of activities that in turn is integrated as something that forms a part of the production process. This activity center must collect separately the cost of the activities carried out in them. The best cost generator of an activity is the cause of it. The fundamental difference with traditional systems is that: While the homogeneous work unit is representative in traditional cost centers, the cost generator seeks the reflection of causality with the specific activity. Likewise, it could be the number of trips that supervisors have used to control a series or production processes, since that activity has been the one that has really caused these costs.

According to the criteria of Blanco, (2000): They are the cause of the costs of the activities. The activity measure does not have to coincide with the cost driver. The best cost driver of an activity will be the cause of it.

The choice of cost generators should not be made arbitrarily, therefore the following requirements should be considered (Santandreu and Santandreu, 1998):

1. That they are easy to observe and measure. That they are representative of the usual functions that the company performs. That they can reveal the causal relationship between costs, activities and products or services.

Likewise, the first premise to consider is that the choice reflects in the most faithful way, the objective of the cost generator that has been selected, that is, that it highlights the causal effect between: cost - activity - product. Well, it is very important to know what is going to be calculated, since the level of activity is not always the same.

At this time, the general characteristics and the methodology that it is proposed to follow to determine the costs of the company and the business areas are analyzed in the next section.

1.6 - Proposal for calculating the Cost Based on Activities.

The Activity-based Cost System approach focuses on the processes and the set of activities that are derived and that must be undertaken to obtain a product / service. This approach allows working from the perspective of 2 types of analysis: analysis in terms of cost (vertical analysis), and analysis in terms of activities (horizontal analysis).

The horizontal analysis leads to prioritizing the concept of activity management, thus focusing its objective on the continuous improvement of the actions to be carried out in the Company, determining the activity inducers and establishing the execution measures. In other words, it is a system that integrates all the cost analysis in detail, and with a more efficient management approach by analyzing the processes and activities that are actually executed and that incur significant costs.

The analysis of the activities allows to identify those that add value to the products or services offered by the Company and those that add value to the customer. In order to correctly identify the activities, it is necessary to know what its concept contains, as was well explained in the previous chapter and is now taken up:

Activity: Set of tasks or acts attributable to a group of people or a person, a group of machines or a machine, related to the precise field. In other words, it is all that action or set of actions that are carried out in the Company, aimed at obtaining a good or service.

Through the activities, the value chain is analyzed from the beginning of the process, that is, from the entry of resources or factors, until their transformation into a good or service.

This system offers the advantage of measuring quantitative aspects as did traditional cost systems, adding the ability to measure qualitative ones as well.

The application or implementation of an Activity-based Cost System can become a reality when: a) The percentage of indirect costs over total costs has a significant weight; b) There are several products or services for different purposes, and it is very useful to know or delimit the proportional part of indirect costs that correspond to each of them and, c) The Company is subject to strategic / organizational changes.

It is frequently asked why to use the concept of activity to pay. The reasons that motivate this are set out below:

• Activities can be easily viewed Activities are those that really consume resources Activities are easy to understand by all people Activities link planning and control and also integrate financial performance measures Activities promote interdependencies between various departments.

Secondary activities serve as support for primary activities, ensuring that they are executed with the required quality. In addition, it allows more information regarding the business area to be analyzed. This means that it provides information related to the indirect costs that occur, allowing to assess whether it was necessary to incur them.

The analysis of indirect costs can be enriched if there is a correct selection of cost drivers or cost drivers, which establish the most exact causal relationships between services and activities consumption, than the units of works used to relate indirect costs to the products or services. In this sense, various cost generators can be related to the same activity, but the most important thing consists in selecting the most appropriate one to use.

Knowing in a general way some elements related to the Activity-based Cost system, we proceed to present the proposal of the methodology to be followed by the system under study, with the aim of managing and controlling the cost of the activities carried out in the selected business area.

1.6.1- Proposed methodology for the application of the Activity Based Costing system.

Before developing the steps to follow for the determination of cost based on activities, it is necessary to expose some terms that are used in the methodology.

Basic Services: It is defined as the different services offered by the Company, that is, those services that interest the client.

Activity Center (Business Centers): It is a level of grouping of costs and expenses, of one or more activities that are based on one or more services.

General Services: These are the activity centers that carry out a set of tasks aimed at Basic Services, for example: control of Fixed Assets, control of Cash in the Department of Economy. In other words, they identify with secondary activities. Also included are services whose costs and expenses are identified with the period, such as: Administration and Human Resources, among others. The latter are not assigned to Basic Services, taking them directly to the Income Statement as well as fixed charges.

The proposed model contains three phases and twelve stages that will be explained below (Figure 3).

Figure 3: Phases and Stages of the ABC32 System Application proposal.

Description of compliance with the different stages of the ABC Model.

Phase I: Location of the activity centers.

In this phase, all the activity centers that exist in the entity were located and identified taking into account their impact on Basic Services.

Stage 1: Define the activity centers.

At this stage, the definition of all the activity centers that are inherent to the entity is established. For this, a tour of the entire organization was necessary to detail all the activity centers that are physically located and offer their services to customers.

2nd Stage: Identify the activity centers linked to Basic Services.

They are the Basic Services related to all the Business Areas.

3rd Stage: Identify the activity centers linked to General Services, whose costs are assigned to Basic Services through cost generators.

It is the activity centers related to General Services that need a cost generator, since indirect costs are not arbitrarily assigned to certain activities of the process that respond to Basic Services. They are taxed on more than one Basic Service, therefore, sometimes a cost generator is needed to distribute between the different services that are inherent, that is, it allows to assign the costs and expenses that correspond to each service.

4th Stage: Identify the activity centers whose costs and expenses are directly identified with the period.

It refers to the activity centers whose costs and expenses will not be assigned to Basic Services, considering these as expenses for the period, but they are controlled by the activities.

Phase II: Determination of the cost of the activities of each center.

In this second phase, the costs are assigned to the activities that belong to the various centers, in this way the activities become the focus of the proposed model.

5th Stage: Location of indirect costs in the centers.

Indirect costs are located with respect to Basic Services in each of the centers in which the Company is divided. This location is limited to placing the costs in the center where the activity is carried out and corresponds to the activity centers linked to General Services, which are assigned to Basic Services through the selected cost generators.

Although these costs are classified as indirect, they are essential for the general operation of any entity. Therefore its management and control allows to improve the living conditions and the work of the workers. It also guarantees the performance of Basic Services.

6th Stage: Identification of activities.

Depending on the Basic Service to which each center belongs, so will the activities carried out in it. Each of the activities carried out in each one of them are identified and to achieve compliance with this stage, interviews with those responsible for each center are necessary, as well as observation of all the activities carried out there. This whole process is of great importance in the model, since the activities identified here will be those paid for or assigned by the cost generators to Basic Services, therefore, any activity that generates value should not be ignored, as it entails a distortion of the cost of service unnecessarily.

7th Stage: Grouping of the main activities of each center.

After identifying the activities, following the criteria of those in charge of each center, with the corresponding verification thereof, we proceed to the grouping of all those that are considered as main or guiding activities. In this stage, what is called opening the range of activities is developed, considering that the real costs of the activities are made up of that of all the activities that are grouped in them. In this stage the activities that are considered homogeneous are grouped.

8th Stage: Choice of cost drivers.

Within each activity carried out in the centers linked to General Services, the cost generator must be chosen, which best identifies with the cause-effect relationship between:

Figure 4: Cause-effect relationship in the ABC33 System. Source: Taken from the reference of Pérez Barral (2005)

The ABC system allows a group of activities to carry the same cost generator. This occurs because these activities are interrelated with each other, based on the same purpose; where the selected generator is used in different activities.

There are activities that correspond to a single Basic Service and therefore, it is not necessary to use a different cost generator to assign the cost of said service, since the assignment occurs directly to the corresponding Basic Service.

9³ Stage: Distribution of costs between activities.

The costs of the activities are identified according to the cost components, that is, direct materials, direct labor and indirect costs; knowing in this way the costs of all activities, both those that are assignable to the Basic Services through the generator, and those that are distributed according to the service to which it corresponds.

10th Stage: Calculation of the cost of cost generators.

The identified cost generators are adapted to the information corresponding to the different activity centers. It is calculated what percentage corresponds according to the selected generator, for the various activities according to the business centers, then adding the percentages calculated for said centers, obtaining the percentage that will be applied of the total value of the generator, to the costs detected in the stage above and they are assigned to the corresponding Basic Services.

Phase III: Determination of the cost of Basic Services.

In this last phase, the indirect costs of the activities are assigned to the Basic Services, in addition to the direct costs corresponding to these services. In this way, the total cost of the service requested by the client is formed.

11th Stage: Allocation of the costs of the activities to the Basic Services.

It is known that products consume activities and these consume resources, in turn, cost generators relate directly to each other. At this point in the allocation process, the costs of the activities and the percentages that will be applied to Basic Services are already known, therefore, the costs of direct materials, direct labor and indirect costs that were determined for each exercise.

12th Stage: Allocation of direct costs to Basic Services.

Once all the indirect costs between the Basic Services are known and assigned, the allocation process will culminate in this stage, transferring the direct costs to said services as appropriate. Therefore, the total of the three cost elements, or the member of the cost that is affected for each related activity in the direct activity centers, that is, that corresponds to a single Basic Service, will be assigned to the corresponding service directly..

CONCLUSIONS

With the research work carried out, the following conclusions are reached:

1. Current procedures for determining cost in companies limit timely decision-making and do not improve the management of the various business areas.The ABC system helps to better manage the resources consumed in the activities carried out in business areas. There is still resistance from accounting personnel to the future application of the ABC system. Well, they see the system only from the point of view of accounting and not of the management and determination of the cost of the services that the client demands. The ABC system covers all areas and departments of the organization. Which adapts to the organizational structure that the company adopts in the new competitive environment.The key concepts of cost and expense are used in the same way,without establishing their differences at the time they participate in the complete process.The proposed design of the ABC involves prioritizing the concept of activity management, focusing its objective on the continuous improvement of the actions to be carried out in the Company, determining the inducers of activity and establishing execution measures. ABC is a system that integrates cost analysis in detail, with a more efficient management approach by analyzing processes and activities that actually incur costs and add value to the service and the The bibliographic search of works published by national and international authors contributed to the correct orientation of the criteria to be followed to support the research carried out.It involves prioritizing the concept of activity management, focusing its objective on the continuous improvement of the actions to be carried out in the Company, determining the inducers of activity and establishing the execution measures. ABC is a system that integrates the analysis of the costs of detailed way, with a more efficient management approach by analyzing the processes and activities that really incur costs and add value to the service and the client The bibliographic search of works published by national and international authors, contributed to the correct orientation of the criteria to be followed to support the research carried out.It involves prioritizing the concept of activity management, focusing its objective on the continuous improvement of the actions to be carried out in the Company, determining the inducers of activity and establishing the execution measures. ABC is a system that integrates the analysis of the costs of detailed way, with a more efficient management approach by analyzing the processes and activities that really incur costs and add value to the service and the client The bibliographic search of works published by national and international authors, contributed to the correct orientation of the criteria to be followed to support the research carried out.determining the drivers of activity and establishing the implementation measures. ABC is a system that integrates cost analysis in detail, with a more efficient management approach by analyzing the processes and activities that actually incur costs and add value service and customer. The bibliographic search of works published by national and international authors, contributed to the correct orientation of the criteria to be followed to support the research carried out.determining the drivers of activity and establishing the implementation measures. ABC is a system that integrates cost analysis in detail, with a more efficient management approach by analyzing the processes and activities that actually incur costs and add value service and customer. The bibliographic search of works published by national and international authors, contributed to the correct orientation of the criteria to be followed to support the research carried out.it contributed to the correct orientation of the criteria to be followed to support the research carried out.it contributed to the correct orientation of the criteria to be followed to support the research carried out.

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