Summary
The airline Cubana de Aviación SA, uses a traditional cost system for work orders, where its volume of indirect costs shows a significant increase from one year to another, playing a preponderant role those associated with the maintenance and repair of aircraft. The assignment of these to the flights as cost object is done by calculating a distribution coefficient where the flight hours are taken as the only basis, and the types of maintenance activities that are carried out are not taken into account. aircraft as a fundamental link in the service provision process. As a consequence, there is no guarantee that aircraft maintenance and repair costs are being allocated in the most accurate way.This work shows a proposal to improve the allocation of these costs by using the Activity Based Costing Method or ABC (Activity Based Costing), and the advantages that the use of it can bring to the airline, taking as a reference the IL aircraft -96 for being the largest in the company. A comparison is made between the unit costs per flight obtained through both cost methods, yielding a positive variation in favor of ABC, which allows the company to set more advantageous prices and improve market competitiveness. The advantage of using the ABC method is also shown in terms of the analysis of maintenance activities and decision-making in this management area.and the advantages that the use of it can bring to the airline, taking as reference the IL-96 aircraft as it is the largest in the company. A comparison is made between the unit costs per flight obtained through both cost methods, yielding a positive variation in favor of ABC, which allows the company to set more advantageous prices and improve market competitiveness. The advantage of using the ABC method is also shown in terms of the analysis of maintenance activities and decision-making in this management area.and the advantages that the use of it can bring to the airline, taking as reference the IL-96 aircraft as it is the largest in the company. A comparison is made between the unit costs per flight obtained through both cost methods, yielding a positive variation in favor of ABC, which allows the company to set more advantageous prices and improve market competitiveness. The advantage of using the ABC method is also shown in terms of the analysis of maintenance activities and decision-making in this management area.throwing a positive variation in favor of ABC, which allows the company to set more advantageous prices and improve market competitiveness. The advantage of using the ABC method is also shown in terms of the analysis of maintenance activities and decision-making in this management area.throwing a positive variation in favor of ABC, which allows the company to set more advantageous prices and improve market competitiveness. The advantage of using the ABC method is also shown in terms of the analysis of maintenance activities and decision-making in this management area.
Introduction
Business excellence requires new cost management systems that provide information to managers and allow them to make appropriate decisions to achieve the objectives of the organization, and efficiency in production and service provision.
Currently, those companies that intend to reach a competitive level need a good cost system that serves as a basis for decision-making, since these are the ones that determine the viability of the business, the degree of productivity, and the effectiveness in the use of resources.
The cost model traditionally applied to companies, in recent times, has lost validity for some entities that have a high volume of Indirect Costs, since productive efficiency does not refer only to maximizing production and reducing costs, but also, it is reflected in the precise allocation of the resources consumed to the products or services that are offered.
The system for calculating costs based on activities is a novel strategy to improve business processes, as it focuses on providing companies with the exact cost of the products and services they have, turning it into an operational tool that can be used in the realization of valuable analyzes, to improve the performance and in the decision making of organizations.
The Activity Based Costing method is based on the fact that a company to produce products or provide services, needs to carry out activities which consume resources, so they are first paid for, and then assigned to the different products or services that demand them. Its fundamental purpose is to modify the way in which Indirect Costs are calculated and distributed.
The airline Cubana de Aviación SA, is inserted in the growing group of those who opt for business improvement, for which the analysis of the current cost system implemented is essential, so that it is facilitated, in the short, medium and long term, the perfection of new mechanisms for control and decision-making, in order to achieve yields in accordance with the interests of the country and itself.
The company employs a traditional work order cost system, where each flight is a specific arrangement. It uses an automated system which classifies its costs into Direct and Indirect Operations, and Period Costs.
The volume of Indirect Costs of the company shows a significant increase from one year to the next, with the costs associated with aircraft maintenance and repair playing a preponderant role in this.
The allocation of these costs in particular is carried out by calculating a distribution coefficient which takes flight hours as a basis, and does not take into account the maintenance activities carried out on the aircraft. As a consequence, precision in the allocation of these costs is not guaranteed, since flights with more hours may be overvalued, and vice versa, that is, those with lower volume may be favored in terms of costs.
Research Problem:
There is no guarantee that aircraft maintenance and repair costs are being assigned in the most precise way to flights by the Order Costing System used by the Cuban Aviation Company. Hypothesis:
If the ABC (Activity-Based Costing) costing method is applied in the distribution of aircraft maintenance and repair costs, greater precision will be achieved in the costs of the flights of the company Cubana de Aviación SA
General objective:
Refine in the company Cubana de Aviación SA, the allocation of maintenance and repair costs for aircraft, through the use of the ABC costing method.
Specific objectives:
- Collect information related to costs, their classification, and costing systems, as a theoretical basis Investigate the ABC method and its application environment Deepen the classification, allocation, and ways of calculating costs in the Cuban airline of Aviation SD Define the activities related to aircraft maintenance and repair, their content, and resources for their development, as part of Indirect Operating Costs. Propose the application of the ABC method in the distribution of aircraft maintenance and repair costs. application of the ABC method with respect to the Traditional by Orders to determine the unit costs of a flight.
Feasibility:
Because it is aimed at the transportation of passengers and cargo on regular flights and charters, the activity of Cubana de Aviación SA is inserted in a leading way in the programs of the Revolution, contributing to the income of foreign currency to cover the projects that allow our people, achieve higher levels of well-being and security.
This research contributes to the precision of the costs of each flight, which has a great influence on the rates and prices to be applied to passengers, and therefore, on the generation of income to the country, in correspondence with point 61 of the Draft Guidelines of the economic and social policy of the Party and the Revolution, which states that "The price system should be subject to a comprehensive review that makes it possible to correctly measure economic events, stimulate efficiency, increase exports, and replace imports, eliminate subsidies and undue gratuities. "
I- Costs
1.1 Costs
The cost is the valuation of the consumption of the resources used in a process, in order to obtain a product or service with a certain quality. The elements that make up the cost of a product or service are: direct materials, direct labor, and indirect manufacturing costs.
Costs are classified according to different general criteria, in this work the identification of the cost with the costing unit or object is explored.
According to its identification with the costing unit, it is classified as:
- Direct costs: those that a company is able to identify with its areas, or with its products or services. Indirect costs: are the costs common to many products or services and therefore are not directly identifiable with them. Indirect cost allocation involves the use of a base or index that reflects how indirect cost is used in different sections.
There are two basic or traditional systems for calculating and determining costs, these are:
- Order Costing System: it is more convenient for companies where the products or services do not require the same amount of resources, that is, the production process is heterogeneous. The companies that generally use this system are: printers, construction companies, aviation companies, among others. Process Costing System: it is a system for accumulating costs by department or cost center. It is used in companies where production is massive, and the production process is continuous and homogeneous.
Today, there are more modern costing methods that allow companies to have greater control of resources and better precision in the calculation and distribution of their costs. Among these methods is the Activity Based Costing System or ABC (Activity Based Costing). The present work focuses its study on this type of system, due to its incidence in the precision of costs.
1.2 ABC Costing Method
The birth of the ABC Costing Method (Activity Based Costing) is due to the need to solve the problem of allocating indirect manufacturing costs to products or services.
ABC intervenes in indirect manufacturing costs, distributing them among the activities that consume these resources. Therefore, indirect costs are not assigned to the products, but to the activities carried out to produce these products, as shown in Figure 1.
Comparison between the Traditional Method and the ABC Method
Figure 1. Comparison between the Traditional Method and the ABC Method
Source:
For the implementation of the ABC System, there are two fundamental phases. The first is the determination of the cost of the activities, where the fundamental activities involved in the production process are identified and analyzed and the cost of each of them is determined. In the second phase, the cost of the products is calculated, assigning the cost of the activities involved in their production.
For most companies, it is vital to identify or decide which Cost System best reflects their situation, according to the activities or production or service processes that they perform.,.
In this sense, it is possible to apply ABC costing in entities:
- Where the percentage of indirect costs over total costs has a significant weight Who are subject to strong price pressures in the market and want to know exactly the composition of the cost of products or services Where growth is observed, year after year in its indirect costs, with high volume in its fixed costs.
Due to their characteristics, companies related to commercial aviation are more than interested, forced, to adjust their activities, and use more efficient costing systems, which allow them to directly and more accurately reflect the reflection of their economic activities.
II- Costs in Cuban Aviation
2.1 Costs in Cubana de Aviación SA
Due to the nature of the activity carried out, Cubana de Aviación SA is classified as a Service Company, where its final product or service is the transport of people or cargo from one point to another, using aircraft.
The airline's costing object is defined as the flight, that is, the unit between “plane-route” because that is where the differences between one service or another lie, and the costs with each operation are perfectly identifiable.
The Company uses a Cost per Order System, identifying each flight that is performed as a specific order. It has an automated system that generates a cost sheet for each flight that is made or planned, which incorporates into the final cost of each flight, all the concepts involved in the service provision process, classifying them into three large groups:
- Direct Operating Costs: these are the costs that are generated each time the flights are made and can be identified with each of them Indirect Operating Costs: these are the costs that are associated with carrying out the flights but cannot be identified with each one in specific. Period Costs: are the administrative costs.
The Maintenance and Repair group is made up of the main costs generated in the maintenance and repair of the aircraft, which have the greatest weight within the total Indirect Operations Costs of the airline.
For the allocation of maintenance costs to flights, a distribution coefficient is used, which is based solely on flight hours. The calculation of these coefficients is performed by dividing the total annual amount budgeted for each item of expense associated with maintenance (parts and pieces, lubricants, paints, tires, among others), by the airline's flight hours.
A critical appraisal, carried out from the planning of the last 2 years, shows a continuous increase in the costs of maintenance and repair of aircraft. At this point, the internal management of the company can influence to achieve greater accuracy in its calculation and distribution. The activity-based costing method (ABC) has proven to be a tool that can efficiently distribute the elements of indirect costs by assigning them to the activities carried out by an entity, and in this sense, it becomes a solution strategy for the allocation of aircraft maintenance and repair costs in the company.
Below is a summary of the proposal developed to suggest the use of the ABC costing method in the calculation and distribution of aircraft maintenance and repair costs, due to the advantages that it provides to the airline.
2.2 Proposal for using the ABC method
For the development of the proposal for the use of ABC, the IL-96 aircraft was taken as a reference, as it is the largest aircraft available to the airline. As part of the first phase of the ABC method, the main maintenance activities carried out on the IL-96 aircraft were determined, which are shown in table 1.
Activities
Table 1 Identification of activities.
- Inspect the airplane after each landing (A1) Inspect the airplane before each flight at the base airport (A2) Inspect airplane and engine systems (A3) Inspect airplane systems and perform engine tests (A4) Complete Form 1 Maintenance (A5) Perform Form 2 Maintenance (A6) Lease Engines and Parts (A7) Change Tires (A8)
Source: self made
After identifying the activities, the cost of each of them was calculated, taking into account all the necessary resources for their development, such as: parts and pieces, tires, paints, lubricants, fuels, among others.
As part of the second phase, the total cost of the flights planned for this aircraft during a year is determined. For this, the direct operating costs were first assigned, then the costs of each maintenance activity as part of the indirect operating costs, and finally the costs of the period, obtaining as a result the total cost per flight according to the ABC costing method.
In order to evaluate the proposed use of the ABC method, it is decided to compare it with the Traditional Cost System used by the company, in order to assess its effectiveness for the allocation of costs for aircraft maintenance and repair.
A global review of the costs per flight using both methods showed a positive variation in favor of ABC. With its use, the unit costs for each flight made by the IL-96 aircraft reach an approximate decrease of 3% with respect to the traditional method.
With the above, it is demonstrated that the implementation of the ABC system is advantageous and beneficial for the airline, since: it provides greater accuracy in the calculation of costs, allows in-depth analysis and supervision of all maintenance activities defining how they are carried out, how many man-hours and resources they require, and above all the value they have in the development of the airline, and perfects the distribution of indirect operating costs.
In this sense, it can be stated that the ABC system can become a very useful tool for decision-making and for improving the company's market competitiveness.
Conclusions
Through this research it is possible to reach the following conclusions:
- The ABC costing method is favorable to apply in civil aviation companies, as they are prone to high and increasing volumes of indirect costs, strong pressures in the price market, and consequently, strict control of their expenses. orders currently used by the airline Cubana de Aviación SA uses distribution coefficients to determine its indirect operating costs, which may, in some cases, not accurately reflect the costs For the application of the ABC costing method to the calculation and allocation of the costs for aircraft maintenance and repair, a set of 8 related activities were defined, necessary to develop these services.With the use of the ABC System, the total value of all the activities associated with the maintenance and repair of the IL-96 aircraft under analysis was determined, demonstrating greater control over its costs, and providing a useful tool for decision-making. comparison between the costs assigned by the traditional method and the ABC, yielded a positive variation in favor of the latter, since it offers an interesting reduction in the unit cost per flight, according to the experiment developed with the IL-96 aircraft, which can decisively influence the company's market competencies, by allowing the most advantageous price analysis.The comparison between the costs assigned by the traditional method and the ABC, yielded a positive variation in favor of the second, since it offers an interesting reduction in the unit cost per flight, according to the experiment developed with the IL-96 aircraft, which can decisively influence in the company's market competencies, by allowing the most advantageous price analysis.The comparison between the costs assigned by the traditional method and the ABC, yielded a positive variation in favor of the second, since it offers an interesting reduction in the unit cost per flight, according to the experiment developed with the IL-96 aircraft, which can decisively influence in the company's market competencies, by allowing the most advantageous price analysis.
Bibliography
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