One of the most interesting areas of cost accounting and costing can be considered cost accounting by function (ABC method - Activity Based Costing). This method widely used in European and American factories. Functional accounting was developed by R. Cooper and R. Kaplan in 1988. In some sources, it may also be called operational costing.
Fundamental difference ABC method from other methods of cost accounting and costing consists in order of allocation of overhead costs. Functional costing provides the most rigorous approach to including overhead costs in product costs and provides executives with information critical to decision making.
To determine the cost of consumption in functional accounting, the so-called factors (carriers)costs(cost driver), which are events or efforts on which the amount of costs for a particular type of activity depends. The cost factor (driver) is an analogue of the cost distribution base in classical accounting systems. Based on these cost factors, resources are allocated to cost centers and then allocated to individual products.
In this case, accounting is organized in several stages:
1) The division of the production process into component functions (activities or operations). The number of activities depends on its complexity: the more complex the business organization, the greater the number of functions will be allocated;
2) Determination of costs for each of the functions. The overhead costs of the organization are identified with the identified activities;
3) Definition of the cost carrier for each function. Each type of activity is assigned its own cost carrier, estimated in the appropriate units of measurement;
4) Estimating the unit cost of the cost carrier by dividing the amount of overhead costs for each function by the quantitative value of the corresponding cost carrier;
5) Determination of the cost of production (work, services). To do this, the unit cost of the cost carrier is multiplied by their number for those types of activities (functions), the implementation of which is necessary for the manufacture of products (works, services).
Thus, the object of cost accounting in this method is a separate type of activity (function, operation), and the object of calculation is the type of product (work, service). The ABC method, in its essence, is an alternative to the order-based method of cost accounting and costing.
A very important point is the decomposition of complex operations into the simplest components and the possibility of using different cost carriers for different components. Presentation of production or the entire economic entity as a set of certain operations (functions) allows for a qualitative assessment of activities in various fields and contributes to increasing the competitiveness of an economic entity, provides information to managers various levels management.
The use of costing by function is of great importance for manufacturers of a wide range of products in a single production process. This system helps to determine the causes of occurrence and changes in overhead costs.
The ABC method allows you to take into account differences in the consumption of resources for unequal products at the input and track such consumption throughout production cycle, up to the formation of the final cost. If there is a need to expand or reduce economic activity(i.e. in additional or excess resources), then the feature costing system measures the total amount of resources consumed by each product.
In general, cost accounting by function helps to identify excess costs, useful and useless costs, allows you to determine the elemental impact of costs on product quality and to carry out effective forecasting and budgeting.
The system under consideration is not ideal and has drawbacks. For example, its implementation requires large material costs and qualified personnel. But despite the shortcomings, the ABC method allows you to manage costs using control over activities, helps to determine the cost of a product at all stages of its production - from design to the cost of delivery to the consumer, assembly, installation, etc. and identify the causes of costs.
4. JIT- calculation.
In the mid-1970s, Japan developed and implemented a method for calculating the cost of production using a just-in-time or just-in-time delivery system. JIT - costing(from English Just in time - JIT - "right on time"). This system is based on the principle: nothing will be produced until it is needed».
The JIT system aims to avoid holding excess stock as much as possible, thereby reducing the associated costs. All processes of supply, production, and sales occurring at the enterprise are organized in such a way as to minimize unproductive costs, eliminate operations and processes that do not provide additional improvements to products or services.
To better understand the mechanism of the just-in-time system, let's consider it in more detail. In contrast to the traditional (centralized) production model based on planned deliveries finished products consumers (the more the better) just-in-time system operates in accordance with a system that is precisely focused on real demand (i.e., is decentralized), where the focus is on close coordination of departments, the use in production of only those resources that are needed on this stage production process.
In an ideal just-in-time system, the time spent on a product is exactly equal to the time it takes to produce it. This ratio is of decisive importance in the system of organization of production. It is believed that in enterprises that have not implemented a "just-in-time" system, as well as a planning system material resources, most of the time (about 90%) is spent not on production as such, but on related processes, such as storage, quality control, transportation, internal movement, etc. These costs increase indirect costs, but not the cost of production. Therefore, the minimization of the time of preparation of products for release, characteristic of the "just-in-time" system, gives it important advantages in reducing costs:
There are insignificant inventories or none at all;
Materials are delivered to production departments when needed, sometimes within hours;
The production process is carried out in several workshops without warehousing stocks of work in progress;
Finished products are not produced in excess of received orders from customers.
Costing when used in an enterprise just-in-time systems can combine the features of both order-based and process-based costing methods, so this the system belongs to mixed cost accounting systems. One of the main characteristics of the JIT system in terms of its contribution to management accounting is that it has become possible to simplify the procedure for calculating costs in the production process. This is due to the following reasons:
1. Control of materials is most effectively carried out by enterprise managers. Absence huge amount materials and work-in-progress allows them to spend more time observing and monitoring their inventory of materials and work-in-progress.
2. Due to the shortened production lead time and the pre-order production system, work in progress accounts for lower costs as a percentage of total production costs.
3. Reducing the need for detailed accounting of the costs associated with the correction of marriage, which may occur at different stages of the production process. Detailed accounting is necessary if the cost of correcting the marriage is directly related to a specific type of work to correct the marriage.
However, the accountant production costs assigned important role in the implementation of a material requirements planning system that requires accurate and timely information about materials, the production process and finished products.
Next, the cost accountant must calculate the costs associated with the organization of each production process in the plant, determine the cost of downtime and storage of inventories.
Companies that have switched to the "just-in-time" system modify the order-by-order or process-by-process method by accounting for costs only when the finished product is released, not accounting them separately on the accounts of work in progress, on accounts reflecting inventories (as is done in by order and by process methods). These accounts are usually replaced by the "Materials" and "Work in Progress" accounts. Incoming materials from suppliers are immediately sent to production. The accountant reflects in accounting the direct costs of the wages of production workers, as well as production overheads in the account "Conversion (added) expenses", which is not closed until the finished product is released from production. When the products are already completely out of production or even sold, all costs are reflected in the accounts "Finished products" and "Cost of products sold". Thus, the process of maintaining accounting records and other accounting documentation is simplified.
Having considered the main issues of the functioning of the "just-in-time" system, we can distinguish a number of its advantages especially in financial terms:
Reducing the volume of warehouse stocks by 75%, which leads to minimization of investments in raw materials and materials;
Reducing the cost of internal movement of inventories;
More rational use space, storage facilities for materials and finished products also leads to lower investment;
Improvement of relations between suppliers, transport organizations, customers;
The need for less equipment and labor costs for workers;
Reducing the number of unforeseen, unplanned circumstances;
Reducing costs associated with the risk of obsolescence, loss, damage to inventories;
Reduction of all costs in general, including overhead costs (loading and unloading, maintenance of product quality control inspectors, storage of raw materials and materials, etc.);
Reducing the clerical work associated with paperwork (after the introduction of the "just-in-time" system, there is no need to issue orders, requirements, orders);
Reducing the cost of equipment changeover by 20%.
It is quite natural that for each phenomenon the presence of both advantages and disadvantages is characteristic. The just-in-time system in this case is no exception, having many positive aspects, it also has a number of negative features. Specialists, scientists distinguish the following shortcomings, inherent in the system "just-in-time":
Problems that arise in the event of untimely fulfillment of orders for the supply of inventories;
Problems associated with incomplete delivery, incompleteness, lack of any part;
Delivery of not those components that were required;
The danger arising from the presence of one supplier;
Lack of highly qualified personnel.
The method of cost accounting by function, or the ABC method (from the English Activity Based Costing - ABC), in essence, being an alternative to the custom method of cost accounting and costing, is effective for enterprises characterized by high level overhead.
The fundamental difference between the ABC method and other cost accounting and costing methods is the order in which overheads are distributed.
The algorithm for its construction is as follows: 1) the organization's business is divided into main activities (functions, or operations). In particular, they can be: placing orders for the supply of materials; operation of the main technological and auxiliary equipment; operations for its readjustment; quality control of semi-finished and finished products, their transportation, etc. The number of activities depends on its complexity: the more complex the organization's business, the greater the number of functions will be allocated.
The overhead costs of the organization are identified with the identified activities;
- 2) each type of activity is assigned its own cost carrier, estimated in the appropriate units of measurement. In doing so, they are guided by two rules: the ease of obtaining data related to the cost carrier; the degree of compliance of cost measurements through the cost carrier with their actual value. For example, the processing of orders for the supply of materials can be measured by the number of orders placed; equipment changeover function - by the number of required changeovers, etc.;
- 3) the cost of a cost carrier unit is estimated by dividing the amount of overhead costs for each function (operation) by the quantitative value of the corresponding cost carrier;
- 4) the cost of production (work, services) is determined. To do this, the unit cost of the cost carrier is multiplied by their number for those types of activities (functions), the implementation of which is necessary for the manufacture of products (works, services).
Thus, the object of cost accounting in this method is a separate type of activity (function, operation), and the object of calculation is the type of product (work, service).
The order-to-order method, for the purposes of allocating overheads, takes into account the behavior of only one indicator, ignoring the influence of other factors on them (such as quality control and equipment changeover). Being faster and simpler, the order method can be used only when the influence of other factors on the organization's overhead costs is insignificant. Otherwise, the distortions are significant and the ABC method should be used. Using the ABC method allows you to take more effective solutions in area marketing strategy, product profitability, etc. Moreover, it becomes possible to control costs at the stage of their occurrence.
To effectively manage a business, company managers need to know:
- 1) what is the cost of individual services and their components (for example, operations of receiving correspondence by courier, tracking the movement of goods in information system, invoicing, etc.);
- 2) the provision of which services is more profitable;
- 3) which clients bring the company the minimum profit, which ones are unprofitable, etc.
This and other information can be obtained using the ABC method of cost accounting and costing. It allows you to understand how the services provided by the company, as well as the customers served by it, affect the volume of activity and how much different kinds activities consume resources. This, in turn, contributes to the management of not so much the costs themselves as the activities that consume these funds.
The algorithm for constructing the ABC method is as follows:
Stage 1. Definition of the main and auxiliary species company activities.
The main activities include operations directly related to customer service. The cost of carrying out the main activities is determined by the nature of the order being executed.
Ancillary activities are understood as those activities that are not directly related to customers or products, but which provide the necessary conditions for the normal existence of the main activities (for example, the functioning of the personnel department, the department information support etc.).
Stage 2. Distribution of activities between departments.
Each department is assigned a code and the types of activities in which this or that department is involved are determined.
Stage 3. Selection of the distribution base for each cost item.
Using it, the costs are distributed among the activities of the company.
So, wage The company's personnel is distributed between individual activities in proportion to the time they spend. Some types of costs, without being distributed, completely transfer their value to certain kind activities.
Stage 4. Distribution of departmental costs between activities.
Calculations are made in the form of special tables. The first column of the table indicates cost items (for example, staff salaries, fare etc.), in the second - the corresponding amount of costs for the year. For each type of cost, the percentage of their assignment to the corresponding types of activity is displayed and the costs for each type of activity for all departments are calculated.
Stage 5. Determination of the cost of each type of activity.
To do this, the data for all departments obtained at the previous stage are summarized.
Stage 6. Distribution of expenses for auxiliary activities between the main activities and calculation of the full cost of the latter.
Calculations are made in the form of special tables, the lines of which are the main types of activities and their cost, calculated at the previous stage. The columns of the table indicate the codes of auxiliary activities. Their cost is distributed among the main activities with the help of cost drivers.
Stage 7. Calculation of the unit cost of the cost carrier.
To do this, the total costs by activity, calculated in step 6, are divided by the number of cost carriers. The latter are taken from company statistics. As a result, the unit cost of each cost carrier is formed, i.e. the cost of one operation.
Step 8. Determine the total costs for the main activities related to a particular product or to a particular client.
To do this, the company's statistics on the number of cost carriers, depending on the line of business, are multiplied by the unit cost of the carrier.
The total costs for various activities are determined by summing the results obtained. Similar calculations are carried out in all areas of activity.
Stage 9. Calculation of the total cost of the company's activities.
Add "non-attributable" costs to total costs.
So, the ABC method contributes both to control over the level of expenses of the organization, and more good governance her profit.
The ABC system can be conditionally divided into two areas:
- 1) cost management;
- 2) profit management.
The first direction allows managers to manage departments or processes more effectively. Understanding how the work of their departments is built and what factors determine the amount of this work creates the necessary conditions for eliminating overhead costs, and therefore reducing costs in general.
In this case, the subject of study and evaluation are individual operations (secondary activities) that make up the main activities.
The ABC method allows not only to analyze costs by categories of secondary activities, but also to determine which items of expenditure and in what proportion make up their cost.
The second direction is by no means limited to cost-plus pricing. Profit management rather consists in achieving a deeper understanding of what exactly is its source:
- -what products;
- - what kind of clients;
- -what geographic segments;
- -what are the commercial zones;
and how to change the commercial and market strategy to increase profits.
The ABC method allows you to evaluate the "contribution" of each client to the formation of the final financial result. So, a large client who sends correspondence often and in large quantities can actually bring only a minimal profit, or even turn out to be unprofitable due to the fact that the efforts and funds expended on it are not fully covered by incoming payments.
Purpose of the method
It is used to obtain information about the costs and non-financial information about the activities of the organization, necessary for decision-making. The ABC method is a tool for improving the organization's activities.
Purpose of the method
Identification, determination and accounting of costs by types of activities of the organization to establish its financial condition.
The essence of the method
ABC method (Activity Based Costing) - a special form functional analysis costs (Function Cost Analysis), providing modern understanding and a more accurate description of costs and displaying financial condition organizations are better than traditional methods accounting.
The ABC method is based on the assumption that "activities consume resources and products consume activities." In other words, products are the result of activities related to the consumption of resources, the cost of which is kept on the corresponding accounts.
Action plan
- The organization establishes all activities and determines the average cost for each activity.
- Activity is represented as a set of processes (operations, transitions).
- The costs for each type of activity necessary for the manufacture of products are determined as the product of average costs per unit of time by this species activities for the duration of this activity.
Method features
Conceptual diagram of ABC
consumer chain. Each process is a consumer for another process and in turn has its own consumers. Together they form a chain that works to create use value.
The expression "the next process is the consumer of your process" was first introduced by K. Ishikawa in 1950.
Resources- these are the economic elements necessary for the implementation of activities, the source of costs.
resource factor- indicator of resource consumption used to determine the share of total costs resources assigned to each activity that uses the resource.
activity factor- an indicator that characterizes the result of activity. Each activity has its own activity factor that allows you to transfer its costs (resource allocations for this activity) to cost objects.
Cost object (costing)- the result of activity.
Cost Factor- a characteristic that determines the workload and effort required to carry out the activity, as well as the necessary resources.
Efficiency (performance) characteristic- an indicator that evaluates the results of activities.
Additional Information:
- The approach, which is based on the use of the ABC method, pays attention, first of all, to the activities (processes, procedures) that are carried out within the organization, and only then to the objects of calculation.
- The ABC method proceeds from the fact that the cause of costs is the activity, and the product (cost object) is the result of the activity.
- The application of the ABC method to improve business is called management based on the ABC approach, or simply ABM (Activity Based Management).
- The term "ABC method" is pronounced "ABC method".
Advantages of the method
The ABC method allows you to develop an effective strategy for choosing products and consumers, as well as a strategy for improving the design of products and the production process compared to traditional methods.
Disadvantages of the method
- When considering and determining the costs of activities, the need for this activity is not questioned.
- When using the ABC method, the payment rather than the cost aspect prevails.
Expected Result
Increase the efficiency of the organization by obtaining and using more accurate ABC information about costs, activities and facilities.
One of the principles for calculating the cost of products (works, services) is the choice of a method for distributing indirect (overhead) costs between the objects of calculation. For a long time in domestic and foreign practice, the basis for the distribution of overhead costs was direct labor costs for the production of a unit of output, since they were easily planned and taken into account. Automation production processes and rising cost of infrastructure resources not directly related to production activities(expenses for the sale, adjustment and readjustment of equipment, technical control of products, etc.), contributed to an increase in the share of overhead costs in the cost structure and created the prerequisites for expanding the list of methods for distributing overhead costs.
Modern possibilities of automation of accounting and settlement tasks allow an economic entity to choose methods for distributing overhead costs, based on the specifics of their activities, and to coordinate them with methods of cost accounting and costing. At manufacturing enterprises, the following methods of cost accounting and costing are used: standard, custom, per-order, per-process, cost accounting by function.
Consider the features of the application of the order-by-order method and cost accounting by function. The use of both methods requires a reliable system in the enterprise production planning and control.
Custom method
With custom costing the costing object is a single order, separate work , which are carried out in accordance with the special requirements of the customer and the lead time for which is relatively short. A separate analytical account is opened for each order, and until the end of the work, all costs are considered work in progress. When placing an order, accounting estimates are prepared.
An order passes through a series of operations as a continuously defined unit in a factory or workshop. Each cost unit is different from any other cost unit. If some orders are repeated periodically, the costs are determined anew. With a large variety of orders, work on each of them is carried out on production equipment for brief periods of time.
Cost information is accumulated separately for each executed order. The primary record for this information is the Order Fulfillment Cost Sheet/Sheet or Quote Card, which is completed on a case-by-case basis for all orders and is regularly adjusted to reflect any costs associated with a particular order. The calculation card is based on the construction of the type of calculation account.
Data about full cost for the execution of the order, entered in the cost accounting card, can be immediately analyzed in comparison with the information of any preliminary assessment made before the start of work on the order and indicated in the same card. Special purchases or other direct costs incurred are also recorded on the cost card.
As the order passes through the various production cost centers of the enterprise, each order receives its own share of the plant's production overheads. Accrual is carried out on the basis of the selected distribution bases.
The time spent on each order is taken into account in order shop orders or time sheets by the persons performing the work, estimated by the costing department, and the corresponding data is entered on the cost accounting card. After the order is completed, a surcharge is reflected in the order-based cost accounting card to cover the costs of sales and administrative costs. The agreed selling price is then compared with the total cost of the order and the financial result of the order is determined.
A continuation of the order method is the contract method of costing, which is used in cases where the orders (contracts) in question are large-scale and their implementation provides for a long period of time (usually more than one year). Examples of industries where contract costing methods are used are mechanical engineering, road construction, etc.
Cost accounting by function (ABC method)
Apply costing by function or ABC-method also has a number of features. The object of cost accounting in this case is a separate type of activity (function, operation), and the object of calculation is the type of product (work, service). Fundamental difference ABC-method from other methods of cost accounting and costing is in the order of allocation of overhead costs.
Consider the algorithm for calculating the cost using ABC-method.
First, the main activities of the organization are distinguished - functions or operations. The number of activities depends on its complexity: the more complex the business, the more functions will be allocated. The overhead costs of the organization are identified with the identified activities.
For each type of activity, its own cost carrier is determined, which is evaluated in the appropriate units of measure. Wherein two rules must be followed:
- data relating to the cost carrier should be easily obtained;
- the measurement of costs through the cost carrier must correspond to their actual value.
For example, the equipment changeover function can be measured by the number of changeovers required, the order taking function by the number of registered orders.
Overhead costs are distributed per unit of output: the cost per unit of the cost carrier is multiplied by their number for those types of activities (functions), the implementation of which is necessary for the manufacture of products (works, services). As a result, all costs are summarized and the unit cost of a product (work, service) is determined.
Note! ABC- the method is effective for enterprises whose activities are characterized by a high level of overhead costs, and is an alternative to the order-based method of cost accounting and costing.
Example
We will calculate the cost of production using the ABC method and the order method and compare the results.
As an example, consider the virtual enterprise "Stack", which produces shelving structures for various purposes: cargo, archival and universal.
An analysis of the shelving manufacturing process revealed eight main functions (activities):
1) labor consumption;
2) ;
3) placing orders;
4) changeover of equipment;
5) delivery of materials;
6) ;
7) product quality control;
8) .
Each activity has its own cost driver. Table 1 presents data from accounting registers, distributed by type of activity and by type of product.
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Table 1. Functions and their corresponding cost drivers |
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Functions |
Cost carrier |
Cost object value (number of operations), total |
including by type of product |
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cargo racks |
archival shelving |
universal shelving |
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Labor consumption |
man hours | ||||
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Operation of the main equipment |
machine hours | ||||
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Order processing |
the number of orders | ||||
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Equipment changeover |
number of changeovers | ||||
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Delivery of materials |
number of batches received | ||||
|
Tool consumption |
tool quantity | ||||
|
Product quality control |
number of control operations | ||||
|
Operation of auxiliary equipment |
machine hours | ||||
In order to form the cost of each type of rack structures, it is necessary to calculate direct costs and overhead costs.
We will calculate the direct costs for the production of each type of product. Table 2 shows the unit costs (columns 3, 5 and 7) and the volume of output of each type of product (column 2), on the basis of which the total costs of time, materials and labor costs are calculated.
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Table 2. Calculation of the fund of time and direct costs associated with the release of products |
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Product type |
Number of product units |
Direct labor costs per unit of output |
Total time |
Direct material costs per unit of production |
Total direct material costs |
Direct wages per unit of output |
Total direct labor costs |
|
4 |
5 |
6 |
7 | ||||
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Calculation algorithm |
gr. 2 × gr. 3 |
6gr. 2 × gr. 5 |
gr. 2 × gr. 7 |
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cargo racks | |||||||
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Archival shelving | |||||||
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Universal racks | |||||||
The next step in the calculation is the allocation of overhead costs. To calculate the cost per operation, we divide the amount of overhead costs for each function (type of activity) by the number of operations for the corresponding cost carrier (Table 3).
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Table 3. Calculation of the unit cost of the cost carrier by type of activity |
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Function |
Overheads, |
Cost object value (number of operations) |
Unit cost of the cost carrier (amount of cost per operation) |
Cost Object Units |
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Calculation algorithm |
gr. 2 / gr. 3 | |||
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Labor consumption |
rub./person-hour |
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Operation of the main equipment |
rub./machine-hour |
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Order processing |
RUB/order |
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Equipment changeover |
rub./changeover |
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Delivery of materials |
RUB/delivery |
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Tool consumption |
rub./tool |
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Product quality control |
rub./control |
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Operation of auxiliary equipment |
rub./machine-hour |
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Let's allocate overhead costs by type of product. To do this, we multiply the costs per operation (item 4 of Table 3) by the number of operations for each cost carrier (Table 4).
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Table 4. Distribution of overhead costs by type of product |
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Function |
cargo racks |
Archival shelving |
Universal racks |
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|
cost object value (number of operations) |
Cost, rub.) |
cost object value |
Cost, rub.) |
cost object value |
Cost, rub.) |
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|
Labor consumption | ||||||
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Operation of the main equipment | ||||||
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Order processing | ||||||
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Equipment changeover | ||||||
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Delivery of materials | ||||||
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Tool consumption | ||||||
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Product quality control | ||||||
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Operation of auxiliary equipment | ||||||
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Total overhead | ||||||
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Number of products released | ||||||
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Overhead costs per unit of production | ||||||
So, one cargo rack accounts for 10,359.07 rubles, for archival racks - 8539.17 rubles, and for universal racks - 3578.11 rubles. overhead.
The calculation of the unit cost of rack products using the ABC method is given in Table. 7.
Now consider the formation of the cost of production using the order method. We will choose direct labor costs as the basis for the distribution of overhead costs.
Let's calculate the budget rate of distribution of overhead costs (tab. 5). To do this, we divide the total amount of overhead costs (Article 2 of Table 3) by the working time fund (Article 4 of Table 2).
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Table 5. Calculation of the budget rate for the distribution of overheads under the order method |
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Name |
Meaning |
Unit |
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Overheads | ||
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Direct labor costs | ||
|
Budgeted overhead allocation rate | ||
Direct material costs and wages, as well as the fund of time by type of product are known (Table 2). Calculate production overheads: multiply the budget rate of distribution of overheads by the time of manufacturing a unit of production. Let's determine the unit cost of each type of rack products (Table 6).
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Table 6. Calculation of the unit cost of rack products when using the order method |
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Expenses |
Product types |
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cargo equipment |
archival equipment |
universal equipment |
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|
Direct salary, rub. | |||
|
Issue volume, pcs. | |||
|
Total time, h | |||
|
Time to manufacture a unit of production, h | |||
In table. 7 introduced comparative analysis results of production costing using two methods.
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Table 7. Comparison of costing results when using ABC- and custom methods |
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Expenses |
ABC- method |
Custom Method |
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cargo racks |
Archival shelving |
Universal racks |
cargo racks |
Archival shelving |
Universal racks |
|
|
Direct material costs, rub. | ||||||
|
Direct salary, rub. | ||||||
|
Production overheads, rub. | ||||||
Summary
1. The order-based method allows you to quickly and easily allocate the organization's overhead costs, but it takes into account the behavior of only one indicator - labor costs per unit of production - and does not take into account the influence of other factors, such as product quality control. Therefore, the custom costing method should be used in cases where the share of overhead costs in the total cost is small, otherwise the distortion of the degree of influence of individual factors will be significant.
2. For an enterprise whose business process consists of a large number of operations, the ABC method is preferable. Its use will allow you to make more effective decisions in the field of marketing strategy, product profitability, etc., because it gives you the opportunity to control costs at the stage of their occurrence.
3. The correct assessment of the real cost is one of the levers for managing profits and business performance. And the definition of ways to reduce costs is the most important factor in the development of the economy of an economic entity.
I. N. Kostenko, Art. Lecturer, NOU HPE "Tomsk Institute of Business"
Advantages and disadvantages of using ABC-Costing compared to traditional accounting methods.
Andrei Mitskevich
ABC-Costing for practical use
"Economic Strategies", No. 3-2005, pp. 118-122
History and basic concepts
АВС is an English abbreviation that stands for Activity Based Costing and is translated into Russian as "accounting method by type of activity" or "activity based costing". The alphabetical order of the letters in the name, according to the authors of the method, emphasizes, firstly, the accessibility of the method for understanding and implementation, and secondly, its structuredness, which allows sorting out all indirect costs on the shelves, from "A" to "Z". If only everything was that simple...
It is believed that the ABC concept was first outlined in a series of articles by Harvard University professors Robin Cooper and Robert Kaplan in 1988. This is not entirely true. The concept is really as simple as a bicycle, especially since a similar bicycle was invented long before the respected Harvard professors and it was called "functional cost analysis" (FCA).
The roots of the FSA go back to the 1950s. It was quite widely represented not only in foreign, but also in Soviet economic literature (Gorlova L.P., Kryzhanovskaya E.P., Muravskaya V.V. Organization of the functional cost analysis of enterprises. - M .: Finance and Statistics, 1982 ; Karpunin M.G., Maidanchik B.I. Functional cost analysis in sectoral performance management. - M .: Economics, 1983; Chumachenko N.G., Degtyareva V.M., Igumnov Yu.S. Functional cost analysis . - K .: Vishcha school, 1985, etc.). The connection between ABC and FSA is obvious, but they are not exactly synonymous. Let's leave the search for historical truth to historians, and let's get down to business ourselves.
It is thanks to Cooper and Kaplan that since 1991 ABC has been widely recognized as a basis for improving profitability and making strategic decisions. The information obtained as a result of applying the ABC method is widely used today for control and continuous improvement (reengineering of business processes). The method has received a great deal of attention as an innovation in cost management. If you look at all the articles published between 1994 and 1996 in the leading specialized publications (Management Accounting and Journal of Cost Management), it turns out that 35% of them are devoted to ABC.
Causes of ABC. The ABC method appeared in the 1980s, when traditional costing methods were gradually losing their relevance. The latter appeared and developed at the turn of the last and the century before last (1870-1920). But since the early 1960s. The change in the way we manufacture and do business has led to traditional cost accounting methods being referred to as "manufacturing's enemy number one" because their usefulness has become highly questionable.
Here are the two biggest drawbacks of traditional cost accounting methods:
1. The inability to accurately convey the costs of production of a particular product.
2. Failure to provide feedback, that is, information for managers necessary for operational management.
ABC-Costing was called upon to solve these problems.
The developers of the ABC method, R. Cooper and R. Kaplan, identified three independent, but coordinated factors that are the main causes practical application ABC:
1. The cost structuring process has changed very significantly. If at the beginning of the century labor was about 50% of total costs, material costs 35%, and overheads 15%, now overheads are about 60%, materials 30%, and labor only 10% of production costs. . It is clear that using working hours as a basis for allocating costs made sense 90 years ago, but with modern structure costs have lost their power.
2. The level of competition faced by most companies has increased significantly. Knowing the actual costs is very important to survive in such a situation.
3. The cost of performing measurements and calculations has been declining as information processing technologies have advanced. Even 30 years ago, the collection, processing and analysis of data needed for ABC were very expensive. And today not only special automated systems evaluation data, but also the data itself, which, as a rule, is already collected and stored in one form or another in each company.
In many cases ABC system used in conjunction with other process improvement techniques such as Just-In-Time (JIT) or universal control quality (TQM). The advantages of the ABC method are most clearly manifested when it is used at large enterprises producing a large assortment products. In this case, more complex products are associated with a significantly higher share of indirect costs than simple ones, since they require a disproportionate amount of attention, maintenance, investment in technology, etc.
ABC system as it is today
The ABC system is based on a simple idea: in an enterprise, overhead costs come from the business processes required to successfully manufacture products. The cost of products is related to the cost of these business processes. This is the main idea of ABC. It is also important that ABC provides not only accurate data on costs, but also information on the sources of these costs. The latter is not available to traditional cost accounting methods. The ABC method acts not only as an accounting technology, but also as a reengineering tool.
The ABC method singles out individual actions within a business process, the cost of which is determined by factors called cost drivers (cost drivers, or distribution bases). For example, the carrier "number of received orders for this product" determines the amount necessary action performed by the company's employees processing these orders. Cost drivers must be quantifiable and measurable. Cost drivers are used to allocate process costs to products based on the level of product consumption of the results of a particular activity. IN ABC result is a technology that allows you to evaluate the real value of a product or service, regardless of the organizational structure of the company. Both direct and indirect costs are allocated to products and services depending on the cost of the processes required at each stage of production. Therefore, one of the central issues of ABC is the determination of the cost of the business processes themselves.
In essence, the ABC method as an accounting one works according to the following algorithm:
1. The sequence of functions necessary for the production and sale of goods is determined and rationalized. First, all possible functions are identified. They are divided into two groups: those that affect the value of the product and those that do not. Next, at this stage, the sequence is optimized: steps that do not affect value are eliminated or reduced, and costs are reduced. This is one of the reengineering functions of ABC. Evaluation: This step of the ABC method can be evaluated positively - it is both useful and real.
2. For each function, the full annual costs and the number of man-hours for its implementation are determined. Evaluation: This step is assessed by us ambiguously. It just seems to be easy to do. IN Russian conditions even if it is possible to perform such calculations, they are not always determined by the cost driver. For example, the more changes, the worse. But if the costs do not depend significantly on the number of changeovers, then the ABC method practically does not work. Thus, the applicability of the ABC method is limited both in terms of estimating costs by functions and in terms of the relevance of these costs (that is, these costs do not always change along with the value of the cost driver).
3. For each function, cost drivers (cost driver) and their quantitative characteristics are determined. For example, if the annual cost of operating a press, including direct and overhead costs, is estimated at $250,000 per year and 25,000 products pass through it during this time, then the approximate cost per unit cost carrier will be $10 per product. It is good if each function corresponds to one cost carrier. But this is not always the case. Examples will be given below.
4. Once all functions have their cost drivers identified, the final cost estimate for the production of a particular product or service is made. In the case of excessive detailing, the ABC calculation can become very complicated. The realistically achievable degree of complexity of the calculation must be identified at the very beginning, otherwise too detailed analysis will cause additional costs, as a result of which ABC will be ineffective. For this, in particular, our version of the method is used (see below).
Cost levels. In popular modifications of the ABC method, cost drivers are divided into several levels. Here are the most important ones:
- Unity level. This level considers media for each unit of output produced. This is an analogue of direct costs in classical methods.
- Batch level. These carriers are no longer associated with units, but with batches of products. The cost carrier is usually the number of batches.
- Product level. Here we are talking about sources related to the release separate species products, regardless of the number of units and batches produced.
- Enterprise level. Costs of this level are not directly related to products, they are general functions associated with the operation of the enterprise as a whole. The costs incurred by them are further allocated to the products in the traditional way.The Batch and Product levels are the subject of the ABC method.
Functional costing methods
The success of ABC has spawned other similar methods, called functional costing methods, combined into a managerial direction, called cost management. These methods have in common that they link the costs of management functions, business processes, primarily with specific products, departments and consumers. Rarely, ABC-Costing and other functional methods are used to estimate the costs of other accounting objects.
Accounting for the costs of the life cycle of products. In addition to ABC, LCC (Life Cycle Costing) is the most popular among functional methods. This approach was first applied in the US and UK in defense projects that were funded on the basis of the full cost of the contract or program, and not on the cost of a particular product.
Technological advances have shortened the life cycle of many products. For example, in computer technology the time of production of products became comparable with the time of development. The high technical complexity of the product leads to the fact that up to 90% of production costs are determined precisely at the R&D stage. There are three main reasons for applying LCC in the private sector:
- a sharp reduction in the life cycle of products;
- increase in the cost of preparation and launch into production;
- the need for an almost complete definition of costs and financial results at the design stage.
Advantages and Disadvantages of Functional Methods Compared to Traditional Methods
Often, enterprises, pursuing the goal of reducing costs, implement a policy of total cost cutting. This solution is the worst, since in this case all jobs are subject to reduction, regardless of their usefulness. The ABC methodology, combined with value chain analysis (another name for LCC), allows an enterprise not only to reduce costs line by line, but to identify excess consumption of resources and reallocate them in order to increase productivity. Using the ABC method, you can quickly estimate the amount of profit expected from the production of a particular product or service. It will immediately become clear which products or services will be unprofitable (their selling price will be lower than the estimated costs). Based on this data, you can quickly take corrective actions, including revising business goals and strategy for the coming periods. But functional methods also have disadvantages.
Advantages
1. A more accurate knowledge of the cost of products makes it possible to make not only the right tactical, but also strategic decisions on:
a) setting prices for products;
b) a combination of products;
c) the choice between the ability to make one's own or purchase;
d) investing in research and development, process automation, promotion, etc.
2. Greater clarity about the functions performed, through which companies are able to:
a) pay more attention managerial functions such as improving the efficiency of costly operations;
b) identify and reduce the volume of operations that do not add value to products.
3. ABC and other models are organically complemented by reengineering. The flexible ABC model is strategic, but the rigid model is not. It will be flexible in case of periodic review and focus on the development of business processes.
4. The theory of functional cost analysis recognizes that only what is done, that is, functions, can be controlled, and prices change as a result. A systematic study of the functions performed not only reveals the factors that influence the increase or decrease in productivity, but also reveals the misallocation of resources.
5. Traditional costing systems are more focused on organizational structure, not on an existing process. They cannot answer the question: "What should be done?" because they don't know anything about the process. Process-oriented functional methods enable managers to most accurately match resource requirements with available capacity.
6. Compared to traditional methods, cost management increases costs for small and complex lots and reduces them for large and simple ones. This is much more true.
7. ABC can be used to develop new products that benefit the company.
8. It allows the company to successfully operate in a multifaceted business environment, it is applicable in all types of organizations, in addition to the usual for the classics area - production.
Flaws:
1. The feature description process can be too detailed, and the model is sometimes too complex and difficult to maintain.
2. Often the stage of collecting data on data sources by functions (activity drivers) is underestimated.
3. High-quality implementation requires special software. They are clearly not enough in popular software systems type 1C.
4. The model often becomes outdated due to organizational changes.
5. Implementation is often viewed as an unnecessary "whim" financial management, is not sufficiently supported by operational management.
6. The main disadvantage of functional methods is professorial complications, unnecessary generalizations. The consequence of this is the multivariance of methods, difficulties in their practical implementation. The result of this state of affairs: it turns out difficult, expensive - and it is not clear why all this is needed.
Although the method has been widely adopted and accepted, opinions differ about its effectiveness. Despite managers' claims that traditional accounting methods easily pass the cost-benefit test, there is still not enough empirical evidence to substantiate the benefits attributed to the ABC method.
Nevertheless, ABC-Costing, according to many American authors, eventually turned out to be one of the most important innovations in management in the last hundred years. Today, after the romantic period of development of the ABC method, a sobering up naturally occurred. The difficulties in the way of implementation and limitations in the use of the method became clear. The expected mass distribution of the method did not take place.
Nevertheless, the ABC method has made a significant contribution to management accounting, and its elements have found application in life. The fashion for it has passed, and the bottom line is still unsatisfactory, especially in Russia. Our goal is to make ABC an accessible and familiar tool, to find a place for it among other widely used accounting methods.
Sources:
1. Cooper R., Kaplan R.S. How cost accounting distorts product costs, Management Accounting, (April 1988a), p. 20-27.
2. Cooper R. The Rise of Activity-Based Costing. – Part One: What is an Activity-Based Cost System? Journal of Cost Management, Vol. 2, no. 2, (Summer 1988), p. 45-54.
3. Cooper R., Kaplan R.S. Measure cost right: make the right decisions // Harvard business review, September-October, 1988, pp. 96-103.
4. Hicks D.T. Activity-based costing: making it work for small and mid-sized companies, 2nd ed., John Wiley & Sons, New York, NY, 1999.
5. Narcyz Roztocki and Kim LaScola Needy "Integrating activity-based cost-ting and economic value added in manufacturing". - Internet.
6. Functional cost analysis. Prepared based on materials from foreign sites. Translation: Intersoft Lab. - Internet.
Product Lifecycle Costing (LCC) example
The plant produces three types of products: A, B, C. At the stage of designing a complex technical product A, the issue of the volume and level of detail is decided. technical description. Let's assume that the development detailed instructions maintenance will cost 250 thousand rubles. Plus the publication of instructions for each set of equipment - another 7 rubles. Moreover, the presence or absence of instructions will not affect the sale price of the product (1 million rubles), since warranty obligations include service with a visit to the customer. That is, the consumer will not be very interested in the accompanying documentation because of the confidence in technical support. The service department of the manufacturing enterprise works on a salary basis, and the cost of maintaining it is 50 thousand rubles. per month.
It follows from the condition that the product life cycle at our enterprise consists of the following stages:
- design;
- production - estimated circulation of 10,000 products in two years;
- service.
Using traditional methods management accounting- in this case, the marginal approach - prescribes to refuse to issue maintenance instructions, as this will lead to a decrease in marginal income by 7 rubles. per unit of output. If we include development costs in the cost price, then additional losses will increase by 250,000 / 10,000 = 25 rubles.
The application of the LCC method prescribes to analyze the impact of issuing instructions on costs throughout the life cycle of the product. This will require solving the following tasks: determining the factors that affect service costs (cost drivers); attributing service costs to the cost of the product life cycle in proportion to the consumption of each cost driver; calculation and analysis of the costs of the life cycle of the product, taking into account the appearance of instructions.
Let the cost driver for the activity of the service department be the number of calls per month. The average variable cost per call is 400 rubles. (average travel costs plus staff hourly rate times average call time plus hourly rate for call waiting time). The average number of calls is 100 per month, and they are distributed as follows: product A (release without instructions for use) - 60; item B and C, 20 each (included with instructions). The difference is 50,000 - 400 x 100 = 10,000 rubles. between actual and estimated costs is a reserve for the maintenance of an additional repairman for emergency cases.
By allocating the variable component of service costs to the cost of products in proportion to the use of the cost driver (and not in proportion to the volume of output or the size of direct production costs), we get an increase in the cost of product A by 400 x 60 = 24 thousand rubles. per month. Using the ABC accounting technique, one can estimate the impact of the preparation of instructions on the total amount of costs.
From the experience of manufacturing and servicing products B and C, we assume that the release of operating instructions will reduce the number of calls from 60 to 20 per month, that is, will lead to a reduction in the cost of service maintenance for 40 x 400 = 16 thousand rubles. per month. Life cycle product A is 2 years, so service costs will decrease for the entire cycle by 16 x 24 = 384 thousand rubles. The total additional costs at the design and production stages will be 250,000 + 7 x 10,000 = 320 thousand rubles, which is 384 - 320 = 64 thousand rubles lower than the savings on service. Thus, the joint application of the LCC and ABC methods revealed the need and effectiveness of issuing operating instructions.
