Economics/7.
Accounting and audit
Ibraeva Zh.O. the master student
of the group UA-11 NP
Karaganda economical university of
Kazpotrebsoyuz, Kazakhstan
The system ABC: the implementation, advantages and
disadvantages
In
the early 80-ies of the 20th century American economists: Anthony Atkinson
(Anthony Atkinson) from the University of Waterloo, Robert Kaplan (Robert
Kaplan) from Harvard University and mark young (Mark Young) from North of the
University of California, after a deep analysis of the existing systems costing
products came to the conclusion that these systems do not meet the current
realities, and the information provided by these systems is not sufficient for
justifying and making effective management decisions.
Economists , Bere, R. Cooper, T. Johnson, Atkinson and
Caplan have set ourselves the task to find out why at the enterprises producing
diverse and complex range of products, costs are higher than in enterprises
limited range of products. According to research results, they stated in their
scientific works of conceptual ideas, which are the basis of the ABC system,
published in 1988 in the USA and Europe. This method uses about 10% of large
companies, including in the USA, the UK, continental Europe, Australia. Start
using it and in Japan. The universality of this method allows to use it not
only industrial enterprises, but also in organizations of wholesale and retail
trade, sphere of services. Thus, identifying a number of shortcomings of
traditional systems of calculation described in the previous Chapter of this
work, they have developed a system of calculation of cost-based activities,
linking resources to the activities performed, and then with such cost items as
products and customers.
This
developed system of cost management by activity (activity-based cost, ABC) or
functional cost of production genious ollivaud indirect costs and costs of
support (providing) activities to individual products, services and customers.
Of the ABC system use a simple two-step approach, which, although it resembles
the structure of the traditional systems of management accounting cost, but it
is more General. The traditional system of management accounting use real
departments or cost centers for accumulation and redistribution of costs. Of
the ABC system use activities for the accumulation of expenditure rather than
cost centers; in other words, instead of asking how to share the cost of
ancillary units for the production workshop, the developer of the ABC system
asks what types of activities involved resources departments. The spending of
these resources relate to activities on the basis of whether they are necessary
or is used to perform these activities [1].
There
are three main reasons why the cost accounting system is required to obtain
information about the relevant costs for decision making, namely:
- for the decision of many indirect
costs are relevant;
- system information, attracting the
attention of management, is required to identify potentially profitable
products in which it is necessary to conduct more detailed studies;
- decisions on selection of
ingredients for production are not independent from each other.
Activities is the
sum of many different tasks that describe the respective actions. Typical
ancillary activities is the scheduling of production, commissioning of
equipment, materials handling, purchase of materials, production control,
registration of incoming materials, forwarding of goods and the processing of
orders of consumers. Industrial activities include processing production and
assembling. If to speak about production processes, functional cost centre
often identical to centers of the costs associated traditional systems (figure
1) [2].
Support
activities also sometimes identical to cost centre of traditional systems when,
for example, the procurement of materials and activities for procurement of
materials and procurement activities equally treated as a cost centre. However,
in General, in functional systems, as a rule, cost centre significantly more [2.1].
As
can be seen from figure 1, during the second stage of a two stage process
distribution is the distribution of a cost centre (pools) on products or other
selected target costs. In these systems by tracking overhead products that is
based on the basis of a small number of cost drivers of the second stage, which
vary in proportion to the volume of products. Instead of the term «cost factor»
is increasingly used and terms such as «base distribution» or «distribution
rate overhead costs», which is typical for Kazakhstan accounting practices. As
such databases, which, as a rule, are used in traditional systems, perform the
hours of work of key employees or operation of equipment. Conversely, in the
system of ABC at the second stage there is a lot of factors of costs, including
those not directly related to the production volume.
a) Traditional system costing
The first stage of distribution The second phase distribution
(based on hours of work of key employees or hours of work equipment) Center costs 2 (usually at the level
of the workshop)) Center costs N(usually at the level of the
workshop) Center costs 1 (usually at the level of
the workshop) Accounting overhead costs (for
each category of expenditure, such as depreciation)
Target costs (production, services and customers) Direct costs
b) system abс
The first stage of distribution
(resource cost drivers) The
second phase distribution (based on hours of work of key employees or hours
of work equipment) Center costs 1 Center costs 2 Center costs N Target costs (production, services and customers) Direct costs Accounting overhead costs (for
each category of expenditure, such as depreciation)
Figure
1. The main differences between a traditional system of cost calculation and
system costing ABC
For
example, the number of runs products (loops) during its production - for
production scheduling or the number of orders for procurement of materials for
procurement activities. Another distinctive feature is that the traditional
system, as a rule, allocate the cost of ancillary activities are production
centers. These costs are merged with the costs themselves production centres
and, as such, are included in cost rates of the production centres. In the
system ABC, on the contrary, there is a tendency to allocate separate rates for
cost determinants across all support centres and to allocate costs to support
activities directly to the target spending level stage of redistribution of
their production centers.
The
main difference of the ABC system from traditional systems of distribution of
overheads is that the system ABC denies the principle of direct correspondence
of invoices and direct expenses, and as a base distribution selects the
activities or processes, i.e offers functional principle of distribution. The
system ABC in practice often referred to as functional, or operational, cost
accounting [3].
You
can select the following advantages of the ABC system:
- study of the allocation of indirect costs by
function, and identification of the most important functions from the point of
view of their priority improvement;
-
define what functional areas, such activities should be implemented
independently, and which
-
to use the services;
- monetary
modeling of business processes, definition of their optimum cost [4].
A comparative example, which is
based on the data of the Japanese companies With Moore LTD. The company with
the Moore LTD produces two products To and M on the same equipment with the use
of similar production processes. Products vary in terms of production volume.
To mass produce large quantities, and M is small-scale. Data on input
materials, production volumes and costs of the various activities (table 1):
Table
1 The calculation of overheads conventional unit
|
Indicators |
Product M |
The Product К |
Total |
|
1.Mosina-HR at 1 product |
2 |
2 |
|
|
2.
Labor-HR at 1 product |
4 |
4 |
|
|
3. Volume of annual production units. |
1
000 |
10
000 |
|
|
4. Time of equipment operation, h |
2
000 |
20
000 |
22
000 |
|
5. The time of production workers, h |
4
000 |
40
000 |
44
000 |
|
6. The number of purchases of materials |
80 |
160 |
240 |
|
7. The number of setups equipment |
40 |
60 |
100 |
|
8.
Overhead by specific functions: |
|
||
|
With
respect to volume of production |
110 000 |
||
|
Related
to the procurement of materials |
120
000 |
||
|
Related
to the adjustment of equipment |
210
000 |
||
|
Just overheads |
440
000 |
||
|
P R I m e h I g n e -www.fmc.uz. |
|||
It is necessary to allocate
overhead costs per product (per unit and total), using:
a) traditional costing system
b) the system ABC
a) distribute the overhead costs according to
the traditional system of calculation. For simplicity, this example skipped the
first stage of distribution. In the framework of a traditional system of
calculation assumes that there is only one cost center. Therefore, we can
immediately proceed to the second stage. To do this, we calculate the
plant-wide rate of distribution:
The distribution rate HP, conventional
unit for 1
mash/h= 20 (conventional unit 000/22 000 mash/h)
The distribution rate of HP una 1 Tr/h= 10 (conventional unit 000/44 000 Tr/h)
Let us consider the overhead products, using the found rates (table 2).:
Table
2
The
calculation of overhead costs according to the traditional costing system
|
Indicators |
Product M |
The Product To |
|
1. Overhead costs per unit,
conventional unit/unit |
40 |
40 |
|
2. Total HP, distributed on the
annual production volume, conventional unit |
40 000 |
|
|
Just, conventional unit: |
440 000 |
|
|
P R I m e h I g n e author's Calculations |
||
The
traditional system perform the allocation of overhead costs on products using
limited number of databases for distribution (as a rule, these are the working
hours of production workers or hours of work equipment), which vary in proportion
to the volume of production. It follows that the costs were allocated to food
and M on the basis of use as bases of allocation or hours of work equipment, or
hours of production workers. The cost per unit is identical, regardless of
which database because the time and work equipment and working hours of
production workers are consumed each product in equal proportions.
b) now applies the system ABC (table 3):
Table
3
The calculation of overhead on the system ABC
|
|
Calculation |
|
|
The
rate of HP by volume of production, conventional unit /mash/h |
|
|
|
Or:
conventional unit /Tr/h |
2.50 (110 000/ 44 000 Tr/h) |
|
|
|
500 (120 000/240 procurement) |
For
HP-related function of the procurement of materials, causal factor cost is
the total number of purchases |
|
Rate
HP for commissioning, conventional unit /1 adjustment |
2 100 210 000/100 magazine) |
For
HP-related function of adjustment of equipment, the causal factor cost is the
total number of setups equipment |
|
P R I m e h I g n e author's Calculations |
||
From
the definition of the ABC system above, it is clear that we need to calculate
special rates for distribution HP associated with each function (production,
procurement and commissioning of equipment), based on the needs of the products
in these functions (activities):
Applicable
found rates (table 4):
Table
4
The calculation of overheads products M and
products К
|
Indicators |
Product M |
The Product К |
|
1. HP by production volume
conventional unit, /unit |
10 |
10 |
|
2. HP procurement, conventional
unit/unit |
40 |
8 |
|
3. HP for commissioning,
conventional unit/unit |
84 |
12.60 |
|
Total NR 1 product, conventional
unit/unit |
134 |
30.60 |
|
Total
HP, distributed on the annual production volume, conventional unit |
134 000 |
306 000 |
|
440 000 |
||
|
P R I m e h I g n e author's Calculations |
||
You
should note that the system ABC uses many factors costs as allocation bases,
while the traditional accounting systems tend to use up to two base
distribution costs. Therefore the rates of cost drivers in the system ABC are
more concerned with the causes of overheads. In our example, the system ABC
uses three of the base distribution (hours of work equipment or hours of
production workers, the number of setups and the number of purchase orders),
while the traditional system uses one base distribution (or hours of work
equipment, or hours of production workers). Cost of products obtained with the
use of each system, we will write for comparison in table 5:
Table
5
Comparison of the cost of production M and
products Кconventional
unit
|
Indicators |
The traditional system |
System ABC |
|
Product M |
40 |
134 |
|
The
Product К |
40 |
30.60 |
|
P R I m e h I g n e author's Calculations |
||
Traditional
cost accounting cost of large-scale product equal To the cost of small-scale
product M. the Reason is that both products require for its production of an
equal number of hours per unit. Therefore, overhead costs per unit will be
distributed (on the basis hours) the same, as per unit of product and per unit
of product PM
Comparison
of the results of the two systems of evaluation of cost of products shows that
the traditional system overstates the cost of large-scale product To be
compared with small-scale product PM The reason for this is that, despite the
fact that large-scale products consume 10 times more hours than the small-scale
(based on the entire volume of production, purchase of materials for production
of large-scale products only twice the purchase of materials for production of
small series (respectively 160 orders compared with 80 orders), and
commissioning of equipment was manufactured in only 1.5 times more often than
in the case of small-scale product (60 setups compared with 40 settings).
Traditional accounting system based on indicators related to the production
volume, ignore these differences in the relative consumption of overheads. As a
result, the cost of large-scale products overestimated, and the cost of
small-scale, on the contrary, is underestimated.
The
system ABC acknowledges differences in the relative consumption of inputs and
traces their corresponding amount up to each product. As a result, in
statements reflect the higher production costs for small scale product, since
the latter consumes a larger number not related to production inputs. And at
use as a base distribution indicators related only to volume production, on a
large scale products will be distributed excessively high share of costs.
Large-scale products in that case it would be "subsidized"
small-scale, taking away some of the "other" expenses. The company
with the Moore LTD can make a wrong decision regarding the nomenclature of
production, expanding the production of small series of products through large
scale [5].
It
should be noted that the system ABC extends not only to indirect costs in a
production environment, but also concerns the costs of administration and sales
(sales expenses).
The
system ABC answers the question is not «what are spent», and «how expended
resources. As a rule, indirect costs as products are hidden in regulatory
costs, which represent the processes, time and labor costs that do not create
value added products. As generators
overheads can be the volumes party line, orders, etc. is Important not only to
identify the actual amount of expenses, but the reasons for their deviations
from the planned costs.Early the ABC system was subjected to increased
scrutiny, especially because of their insufficient theoretical justification.
The answer to these criticisms became the theoretical development of these
systems, which appeared in 90-th years of XX century the First theoretical work
in this area has become the classification of activities in the framework of a
hierarchical structure consisting of several levels:
- separate unit
of production where kinds of activities at the level of a unit of production
consume resources in proportion to the number of items produced or volume of
sales. Costs in this category include labor costs of key employees, the main
production materials, energy and other costs are proportionally to the time
machine processing (e.g. for maintenance). Typical cost factors for this level
- hour labor production workers, the hours of work equipment and the number of
processed material.
-
party manufactured products, where such activities as production of equipment
or order for the purchase of materials, are carried out every time produced a
lot of products. These costs depend on the number of the released parties, but
are shared (or permanent) for all items included in the party. The more parties
are produced, the more consumed resources associated with adjustment.
-
ensuring the release of the product or service. At this level activities provide
the production and sale of products and services, which include the costs of
developing, modernization of production and technical support for individual
products and services, etc.
-
ensuring of functioning of the production structure. At this level activities
are used to support the production process at the enterprise, and integrate the
work of administrative staff, managers of industrial and property management.
The
second major work - the application hierarchy cost / benefit analysis (from
scholarly works Cooper and Kaplan, 1997). Here the main goal is to distribute
all the organizational costs of those organizations and hierarchical levels,
where you can establish a causal relationship, and thus get rid of the
distribution of costs from conventional methods of their calculation. It should
be noted that cost-effectiveness analysis based on the application of the ABC
system provides information that allows to attract the attention of interested
parties, indicating unprofitable products for analysis which are appropriate to
conduct an in-depth study.
Economists Kaplan and Cooper in 1998, based on
a hierarchy of costs, has developed a card «type of activity - profitability»
for different target cost, i.e. the analysis of profitability. By Kaplan,
practical capacity is the amount of work that can be performed using the
resources acquired for the purpose of production or rendering services. While
the cost of unused capacity (or the value of unused capacity) Kaplan treated as
expenses, determined by the number of unused during production resources. The
cost of the unused capacity of the resources should not be produced or services
rendered during a period of time. The rate of expenses by types of activity
should reflect the basic process efficiency - the cost of the process - the
value of resources used to process each order for production. This efficiency
will be estimated more precisely, if at calculation of rates on factors of
costs of activities in the denominator (denominator) to use the capacity
purchased and available resources. The numerator in the formula of calculation
of cost rates per unit of factor activity cost is the cost of providing power
resources for the job. The denominator should match the numerator, expressing
the amount of work that can be performed using the resources.
The cost of
untapped power, however, cannot be ignored; they are the responsibility of any
persons or units [1]. Organizations often have unused capacity, however, is not
taking any steps. They hold (accumulate) existing resources, even if the demand
for the activities performed with the help of these resources, decreased
significantly. They also cannot find new activities in which it is possible to
use already acquired resources. In this case the organisation does not have any
benefits from their decisions. Decisions, such as reducing the diversity of
assortment, solely on the basis of use of the resource system (ABC) can be
problematic, if managers are not able or not willing to reduce expenses in
order to adjust the supply of the resource, taking into account the lower level
of demand in the near future.
The
system ABC must meet the criteria of the ratio of benefits derived from their
adoption, and implementation expenses. The organization can go to the
complication of the applied systems of accounting to that level until the
marginal benefits of improving this system will exceed the costs of this
process. Most likely a complex of the ABC system is more suited for
organizations with intense competition, the high share of indirect costs and
variety of assortment of manufactured products.
In
the system ABC applies much more centers and cost drivers causal type [2].
Thus, the optimal system of accounting of the
cost price of production (works, services) for each organization has its own.
Simple traditional system can communicate reasonably accurate data on the cost
of production in organizations with the following characteristics:
- low level of
competition;
- indirect costs
are a small part of total costs;
- quite a
standardized range of products, the consumption of organizational resources of
each component is in equal proportions.
The
third and most important theoretical development has become a scientific work,
in which the system ABC presented as a model of resource consumption. The
difference between the cost of delivered resources and the resources used
indicates the size of the cost of unused resource capacity. The cost of the
unused capacity on each activity become a mechanism that allows you to identify
areas where you need to adjust the supply of resources, taking into account
their actual use.
Thus,
the optimal system of accounting of the cost price of production (works,
services) for each organization has its own. Simple traditional system can
communicate reasonably accurate data on the cost of production in organizations
with the following characteristics:
-
low level of competition;
-
indirect costs are a small part of total costs;
-
quite a standardized range of products, the consumption of organizational
resources of each component is in equal proportions.
Conversely,
for some organizations, the best option may be innovative system abs. This
organization, in which:
-
intense competition;
-
indirect costs account for a larger share of total costs;
-
heterogeneous composition of manufactured products, the consumption of
organizational resources of each component is significantly different.
Of
course, a complex system costing ABC give a more accurate value of the product
cost. However, the costs of implementation of these systems and ensure that
their work is much larger than in conventional systems costing. In particular,
the requirement for training or staff of the applied software can hamper the
use of such systems in small organizations. Incomplete costs reported in the
systems of the calculation of direct costs, and distorted data on costs, issued
by the traditional systems, can, when decisions are to lead to significant
errors (such as implementation of unprofitable products or, alternatively,
abandoning the production of profitable products), which can happen because of
such systems, exceed the additional costs for the introduction of the ABC
system and its operation, the organizations should switch to such a system.
In other words,
the choice of costing systems ABC is carried out on the basis of the ratio of
costs and benefits, and the organization can go to the complication of the
applied systems of accounting to that level until the marginal benefits from
its improvement would exceed the cost of this process, i.e. while these costs
and the benefits are equal.
Literature:
1. Atkinson, E.,
bunker R., Kaplan R., Yang M Managerial accounting. Moscow: publishing house
«Williams, 2005. - S
2. Drury K. Managerial and cost accounting.
Moscow: UNITY, 2003. - S
3. Horngren'clock, foster D. Accounting:
managerial aspect. Moscow: Prentice Hall, 2003. - S
4. V.V. Efimov ABC Method. Ulyanovsk: UlSTU,
2006. - P.32
5. www.fmc.uz