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Chapter 2 COSTING BASED ON ABC ACTIVITIES - Coggle Diagram
Chapter 2 COSTING BASED ON ABC ACTIVITIES
A cost management model is justified because:
It allows to determine the viability of the businesses. A company is viable when it achieves its goal. Generally, the goal is determined by economic or social profitability and this is low or negative, when costs and expenses are almost equal to or greater than income. The closer costs are to selling prices, the easier it will be to understand that the path to profitability and stability lies on the side of efficiency costs.
In an environment of high competition, discretion on prices tends to disappear, only the costs to achieve the objectives remain. The profitability will depend on the skill with which they are managed.
WEAKNESS OF TRADITIONAL COST SYSTEMS
Anyone who has had the opportunity to read a text on traditional cost accounting or work in a cost department of a company, can testify that the purposes of one or the other, in most cases, do not go beyond presenting a methodology for preparing accounting records or calculating costs of inventories, with some exceptions.
Financial accounting systems exist in all companies because they have been instituted as mandatory instruments by governments to exercise taxation and
some controls. Not all have seen in them essential tools to guarantee efficient management; Furthermore, the number of managers who have thought in terms of costs and has believed that through strategic management of them, they can guarantee goals and ensure the viability of their businesses. Those who have tried to use traditional cost models with aspirations other than registration have encountered some limitations
LESS TECHNIQUE AND MORE MANAGEMENT
Only a few have believed in the costs; and those who have trusted them have done so from an accounting perspective; clinging to traditional systems that have little sympathy with
actual conditions.
In a competitive environment, only the efficient will survive. As profits can no longer be achieved through easy pricing management, only the costs and expenses to do so remain. In fact, all companies in the world have a commitment to efficiency. The
If they do not commit to making changes to face the competition, they put their future at risk.
BASIC DEFINITIONS OF COSTING BASED ON ACTIVITIES
Defining those words that are specific to this cost system will help to understand the
environment in which ABC operates. Its characteristic vocabulary is reduced to a few keywords that are defined below:
Resources: are all the means used in the development of activities, duly grouped according to their homogeneous characteristics. In this system, resources are both homogeneous groups of costs and expenses. Within the resources are among others
Activity: it is a set of homogeneous actions that have a common objective and consume resources. They are carried out by an individual or group of individuals and have the following characteristics:
They suppose or give rise to a specific knowing or doing. They employ a series of physical, human and technological resources.
They are homogeneous tasks from the point of view of their behavior, cost and execution. They allow to have a result, either internally or externally (product). They are focused on satisfying the needs of a specific client, which can be internal or external.
The level of activities is the recommended minimum level up to which a company should implement the ABC, with the aim of properly managing its resources and aligning the institutional objectives with the strategic direction. The activities constitute the most coherent management base with a philosophy of continuous improvement.
COSTING BASED ON TIME INVESTED BY
ACTIVITY (TDABC) This method eliminates the costing of activities and processes and replaces it with the traditional costing of departments and products / services. In Kaplan's words: the innovation of the TDABC model is that it uses time to allocate costs directly from resources to cost objects, completely eliminating the tedious phase of assigning resource costs to activities
The costing model proposed by Kaplan and Anderson is simply an updated version of what in cost theory has been called the departmentalization of costs, combined with some standard cost tools, in which costs are grouped by departments and They are classified into two large groups: support and operational, to later assign the costs of the support departments to the operational departments and then these to the products or services generated there, through a
predetermination of the time invested in carrying out the activities of each department.
Benefits of the TDABC
There are few new benefits and contributions that the TDABC has made to the ABC, highlighting the following:
Some of the TDABC postulates could be used as a complement to ABC in the drivers stage, which means using time and capacity as cost drivers, which in fact is already happening.
The TDABC recognizes departments as one of the fundamental levels in the calculation of costs, a level that had been made invisible in the original Kaplan model but that many academics and professionals who are experts in ABC costs have already been using.
LIMITATIONS OF ABC The ABC
Methodology is simple, but its implementation requires elements that may seem complex, since it seeks to pay for the cost objects according to the consumption of activities, which is why it is essential to identify some limitations that arise when implementing this management system.
The key elements: The success or failure of an activity-based costing model is directly proportional to a complete activity dictionary definition, objective accounting information, and an accurate selection of drivers.
The key elements: The success or failure of an activity-based costing model is directly proportional to a complete activity dictionary definition, objective accounting information, and an accurate selection of drivers.
Implementation of ABC simply for fashion: adopt an activity-based costing system for your company if you consider that your philosophy accommodates the information needs you require; But do not be fooled into thinking that the simple implementation of
ABC will help you decrease your inefficiencies and become a strong competitor and
Implementation of ABC as an isolated system, from the other management models: from the proper adoption of the process approach, an organization can use different measurement and performance models to serve multiple purposes and consider aspects such as efficiency, effectiveness and effectiveness, which currently constitute the factors on which attention is focused in organizations.
For these measurements to be reliable, the company must formulate adequate information systems, structured on a solid basis and based on the philosophy of processes.
The excessive amount of unnecessary detail and degree of precision: Gary Cokins continues in his paper Why Does Traditional Accounting Fail Managers ?, saying that “some engineers and accountants assume that“ input data with a lot of precision will produce outputs with great precision ”». The logic used by ABC for cost reallocation does not allow errors to multiply, or accumulate, but to compensate as they approach the last cost receiver.
ABC cost structures: when talking about structures, reference is made to the logical distribution and allocation of costs and expenses that must be followed in an ABC model, starting from resources, going through activities to finally reach the cost objects; but depending on the organizations and the information needs of each one, these structures can be either too complex or too simple.
In ABC, it is not known exactly what the level of detail of the cost information should be and therefore the structure that is required.
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