Activity based costing (ABC M ethod)
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Finance - Accountancy 59
Activity based costing
(ABC M ethod)
~ Prof. Ph.D. S aveta T udorache
~ U niversityL ecturer A nca B ratu
Abstract: In thepresentpapertheneedandadvantagesarepresentedofusi ngtheActi vityBased
Costingmethod,needari singfrom theneedofsol vingtheinformati onpertinenceissue. Thi
sissuehasoc-
curreddueto thelimi tati
onofcl assi
cmethodsinthi sfi
eld,l
imi tati
onalso refl
ectedbythedi sadvantagesof
suchclassi
cmethodsi nestabl
ishingcompletecosts.
Key words: costing,cost indicators,operations,activities,processes
1.General Aspects Ȭȱ ȱȱȱȱȱǻ Ȭ
ria,keys) – given the fact that not all producȬ
ȱȱ¡ȱȱ£ǰȱ Ȭ tion expenses can be directly allocated to each
prises need a complete and pertinent costing product,and the lack of objectivity of the seȬ
system. C omplete costs established by clasȬ lected repartition bases leads to cost subvenȬ
sical methods (global, phases based, comȬ tions, meaning some products increase or
decrease their costs, in the disadvantage or
mands based) have some disadvantages:
advantage of other products due to activity
Ȭȱ ȱȱȱȱ
diversity,expenses heterogeneity etc.;
the decision making process – given the fact
Ȭȱ ¢ȱȮȱȱȱȱȬ
that complete costs methodology refers to
mation obtained at the end of the production
allocating the entire mass of expenses over process and therefore it cannot be available
products (it is inevitable, so it includes some for decisions made earlier than that.
irrelevant elements),w hereas in order to make A solution for the information pertiȬ
correct decisions,irrelevant aspects should be nence problem delivered by classic complete
excluded for decision making reasons; costs is the A ctivity Based C osting method.
No. 7 ~ 200860 Finance - Accountancy
The concept of the method is grounded the activities and thus generating costs.
on the ascertaining that not products are reȬ This measure answers to the needs of a
sources consuming, but activities, and variȬ systemic vision over the enterprise and to a
ous activities of the enterprise are used by global approach of productivity, closer to reȬ
products. That is why the enterprise should ality. It is grounded on the concept – value
be divided into activities, and not into funcȬ chain of Porter, the framework division of
tions or products. ȱǻǯȱȱȮȱȂȱȱ·ǰȱ
The distribution criteria are replaced by Paris 1986) is as it follows:
cost indicators which are elements starting
Company infrastructure
Limits
Support H uman resources management
activities Technology development
Acquisitions
M ain Internal loȬ External M arketing
Production Services Limits
activities gistics logistics and sale
ȱȱȱ£ȱȱȱ for its clients by consuming in this way minȬ
for identifying the activities that contribute imum volume of resources. The notions of
to the production manufacturing and to the costs and value are connected.
ȱȱȱȱȱȱȱ¢Ȃȱ The basic principle of the ABC method
limits, representing competitive advantages consists in practicing an as realistic affecting
defined and sustainable compared to other as possible of the indirect costs compared to
enterprises in the same sector. traditional methods, eliminating as much as
ȱȱ¢Ȃȱȱ possible conventionalism from cost allocatȬ
is a matter of its capacity of producing value ing.
Traditional approach
R esources D irect costs PR O D U CTS
R esources Indirect costs Analysis centers PR O D U CTS
Approach by the ABC method
R ESO U R CES Costs Activities PR O D U CTS
No. 7 ~ 2008Finance - Accountancy 61
Explaining the ABC method implies apȬ tion system for products costs, but also a reȬ
proaching three analysis levels: operation, sources consume system, because by this sysȬ
activity and process. tem the transfer is made from traditional logic
Operation is the first level in describȬ in costing, according to which “products conȬ
ing the labor process and it does not imply sume resources” towards an undertaking in
the calculation of any cost, being the part which “products consume activities, which
of the production process which is homogȬ in their turn consume resources”.
enous from a technological stand point and Therefore, according to the ABC methȬ
which represents the object of a work norm od, clients are those generating the existence
that must be performed during a given time
of calculation objects (products, works, serȬ
interval, by an executive – either individual
vices, commands) which in their turn genȬ
or collective – on a certain job, specifically
erate the creation of resources consuming
equipped and fitted with tools.
activities: material, human, financial, inforȬ
Activity is a set of ordinate and connectȬ
mation.
ed operations for the purpose of achieving a
certain objective. Clients
ȱȱȱȱȱ£ȱȱ
aiming towards the achievement of a comȬ cause
mon objective and it has three characteristics:
Costs objects
Ȭȱ ȱȱ£ȱȱȱȱ Ȭ
(products, works, services, orders)
ȱȱȱȱ£ȱ
and to the main functional structures of the
which cause
enterprise (production, marketing, sales, fiȬ
nancial, planning, purchase etc.) Activities
Ȭȱ ȱȱȱȱȱǻ¢Ǽ
Ȭȱ ȱȱȱȱȱ¡ȱǯ which consume
The relationship between the operaȬ
tions, activities and processes in an enterȬ
Resources
prise is as it follows:
In order to establish and manage the acȬ
tivities based costing, each activity must be
Homogenous
associated to an explanatory factor for the
operations
cost variation, named cost inductor.
Homogenous activities Cost inductor is a repartition (allocaȬ
tion, imposing) basis for indirect expenses
Enterprise processes (functions)
over the activities and calculation objects:
products, works, services, orders. Each cost
The transfer is made from the hierarchiȬ ȱȱ¡ȱȱȬȱ Ȭ
cal and functional approach of the enterprise tion with the indirect expenses, meaning it
towards a transversal one, as the enterprise is ȱȱȬȱȱȱȱ
ȱȱ£ǰȱ¢ȱȱȱȱ costs. The cost inductor measures the renderȬ
ȱȱ£ȱǯ ȱȱ¢ȱȱȂȱȱȬ
The ABC method is not only a calculaȬ tivity. Depending on the type of performance
No. 7 ~ 200862 Finance - Accountancy
it influences, the inductor can be: cost related, The graphic representation of the activiȬ
quality related and execution term. ties based costing model (Epuran and collabȬ
orators) is depicted as it follows:
Activity 1 Activity 2 Activity 3 Activity 4
Regrouping center 1 Regrouping center 2
Cost inductor 1 Cost inductor 2
Inductor 1 volume Inductor 2 volume
Unit cost of inductor 1 Unit cost of inductor 2
Product s, works, services, orders
2. Working phases ǯȱ Ȭȱȱȱȱ
on a cost inductor – all activities of the same
The practical application of the method ȱȱȱȬȱȱȱȬ Ȭ
implies the perusal of the following phases: ȱǯȱȱȱȬȱȱ¢ȱ
a. Identifying the activities in the enterȬ one cost inductor (activity inductor) is mainȬ
prise – each working center in the enterprise is tained;
associated to a process, which is then decomȬ d. Calculating the unit cost of the cost
posed into elementary activities. The identiȬ indicators
fication of the activities is made grounded on ȱȱȱȱȱƽȱ¡ȱ
their justification in the value creation proȬ ȱȱȱȬȱȦȱȱȬ
cess in the enterprises grounded on detailed
ume of the cost inductor
study of the accountancy documents; each
e. Imputing inductors costs over the
ȱȂȱȱȱȱȱȬ
products, works and services. The complete
ǯȱȱȱ¢ȱȱȱ ȱ
cost of the sold product can be obtained by
ȱDZȱȱ¢Ȃȱǰȱ¢ȱ
adding to the cost of the materials and diȬ
its output, specific performance indicators,
rect works cost the indirect expenses of the
the connection with other activities ahead
Ȭȱȱȱȱȱȱȱȱ
and behind, the nature of consumed resourcȬ
products.
es in order to asses its resources consume;
b. Identifying explanatory factors – of
the resources consume: cost inductors – for 3. Case study
each individual activity an explanatory facȬ
tor for the resources consume will be aimed, „VADMAR” enterprise produces and
ȱȱȱ ȱȱȱ¢Ȃȱ sells two products, M and N knowing that:
cause;
No. 7 ~ 2008Finance - Accountancy 63
Explanations Product M Product N
Direct expenses (unit) 2400 1600
Produced and sold quantity (pieces) 2000 800
Unit sale price (unit) 2.5 3.5
The entity is structured into three responsibility centers and the indirect expenses afferent to
ȱȱȱ£ȱȱȱǰȱȱȱȱ ȱDZ
Responsibility Total indirect Activities Activity related expenses
center expenses
Production 1000 u. Equipment maintenance 1000 u.
320 u.
Sales 960 u. Delivery quality control
640 u.
Administration 351 u. G eneral administration 351 u.
The cost inductors specific to each activity are as it follows:
Activity Activity cost Cost inductor Cost inductor volum e Unit cost ofthe
cost inductor
1 2 3 4 śƽŘȦŚ
Equipments
1000 u. W orking hours 250, out of which 180 for M ŚȱǯȦ
maintenance
Control time, in
Q uality control 320 u. 100, out of which 70 for M řǰŘȱǯȦ
hours
Delivery 640 u. Ballots number 80, out of which 60 for M ŞȱǯȦ
G eneral adminisȬ
351 u. Turnover 7800 u. 0.045
tration
In the general administration the calculation is made of the unit complete cost and of the
analytic result, as in the following:
Explanations Product M Product N Total
Direct expenses (1) 2400 1600 4000
Activity cost:
*Equipment maintenance (2) ŗŞŖ¡ŚƽŝŘŖ ŝŖ¡ŚƽŝŘŖ 1000
*Q uality control (3) ŝŖ¡řǰŘƽŘŘŚ řŖ¡řǰŘƽşŜ 320
*Delivery (4) ŜŖ¡ŞƽŚŞŖ ŘŖ¡ŞƽŗŜŖ 640
I G lobal production cost (1+2+3+4) 3824 2130 5960
II Unit production cost 3824:2000 pieces 2136:800pieces
–
ƽŗǰşŖŘȱǯȦ ƽŘǰŜŝȱǯȦ
*G eneral administration (5) śŖŖŖǯ¡ŖǰŖŚśƽŘŘś ŘŞŖŖǯ¡ŖǰŖŚśƽŗŘŜ 351
III G lobal complete cost (I+5) 4049u. 2262u. 6311
IV Unit complete cost 4049:2000pieces 2262:800pieces
–
ƽŘǰŖŘŚśȱǯȦ ƽŘǰŞŘŝśȱǯȦ
V Unit sale price ŘǰśȱǯȦ řǰśȱǯȦ –
VI Analytic result (V – IV) ŖǰŚŝśśȱǯȦ ŖǰŜŝŘśȱǯȦ –
No. 7 ~ 200864 Finance - Accountancy
The activities based costing, as well as creation process, thus shaping a new sysȬ
any other information regarding costs is not tem for managing the enterprise: the activȬ
an exact measurement of the resources conȬ ity based management (ABM). By ABM the
sumers, yet it represents a more precise asȬ manager takes into account the costs generȬ
sessment of such, because it performs a more ating processes before attaching such costs
detailed analysis of indirect expenses the to a calculation object. Therefore, the activity
share of which has increased in the total cost. based management focuses on the causes of
Representing the enterprise as a network of resources consume, as much as possible even
activities creates the possibility to perform from the moment of the consume, in order to
simultaneous analyses both to the resourcȬ operatively intervene over the costs of the acȬ
es consummation process, and to the value tivities delimited in the company.
REFERENCES:
ŗǯȲEbbeken,K,Possler,L,Ristea,M – Calculatia si managementul costurilor, Editura Teora 2000
ŘǯȲǰȱǯǰȱ©©ö©ǰȱǰȱ ǰȱǯ – Contabilitate si control de gestiune, Editura Economica, 1999
řǯȲGevrois,M. – Contrôle de gestion 5e édition, Editura Economica, 1994
ŚǯȲIvascu,I. (coordonator) – Control de gestiune, Editura ASE Bucuresti, 2001
śǯȲTudorache,S. – Contabilitate de gestiune si calculatia costurilor, Editura Cartea Studenteasca, 2007
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