In recent years, there has been an increasing shift from functional management to process management. Management staff focus primarily on the processes and activities taking place within the enterprise, rather than on organizational departments as was previously the case.
Intensified competition means that management needs increasingly accurate information to make sound decisions. An important economic category about which managers want to know as much as possible is the costs incurred by the enterprise in connection with its operations. Traditional methods of allocating indirect costs to a unit of product or service are not accurate enough to satisfy the information needs of management, as they very often distort the picture of unit costs. The reason for this state of affairs is the constantly growing share of indirect costs in the total costs of the enterprise. On one hand, there is more efficient use of direct labor and machinery, and more economical technologies are being implemented (limiting the costs of direct material consumption), while on the other hand, indirect costs are rising – both departmental and general administrative costs (for example, repair costs, service costs, market research costs, quality maintenance costs, etc.). This state is a consequence of, among other things, the growing automation of production processes and the increasing importance of peripheral processes, such as logistics. Therefore, allocating indirect costs to products and services according to traditional methods in relation to direct labor and direct material costs no longer ensures the receipt of accurate information. One can even speak of a distortion of information regarding the unit costs of a product and its profitability. This phenomenon is particularly visible in the case of calculating products manufactured in short series or produced on special order.
The answer to the demand for more accurate information on costs incurred (for the needs of process management) is Activity-Based Costing (ABC). This accounting method was developed in the 1980s by R.S. Kaplan and R. Cooper. The specificity of activity-based costing is that “it enabled the attribution of indirect and support costs primarily to activities and processes, and subsequently to products, services, and customer service. Thanks to this, management gains a clearer picture of the economics of their operations.”
Among the most important motives prompting enterprises to implement ABC, besides more accurate service cost calculation, is the identification of activities that do not bring value to the enterprise. The consequence of developing an ABC system and obtaining information about activities was the emergence of the concept of “Activity-Based Management” (ABM). Activity-based costing allows managers a completely different, new perspective on incurred costs. It provides greater opportunities for their analysis and, consequently, their reduction. It is the basis for introducing process management. In activity-based costing, there is a different approach to the issue of cost generation. It is commonly believed that costs arise by themselves, or that an employee generates costs, etc. According to this accounting method, the process of cost generation is a sequence of events: a cost object, in order to be realized, forces specific activities – resources are necessary for the realization of these activities – and only the consumption of resources causes the emergence of costs. Therefore, the fundamental assumption for the concept of activity-based costing is that activities consume resources for production/service provision, and products and services (cost objects) consume activities. Consequently, activities cause the emergence of costs, and the product or service creates the demand for these activities. The first and primary goal of implementing activity-based costing in an enterprise is most often the actual assignment of costs to a cost object (unit cost calculation). To achieve this goal, one must go through successive stages.
Stage I – identification of significant activities in the enterprise
The appointed project team should create a so-called activity dictionary, i.e., isolate significant activities in the enterprise. These activities should be repeatable and allow for tracking their progress and controlling costs. The most common problem at this stage is determining the number of significant activities. It is known that the more activities are isolated, the more accurately the calculation will be performed. Managers must maintain common sense at this point and remember that a situation cannot be allowed where the costs of applying (maintaining) activity-based costing exceed the benefits achieved from the more accurate information obtained through this accounting method. The number of activities that should be isolated for the needs of activity-based costing depends on two fundamental factors: 1) the complexity of the processes taking place in the enterprise, 2) the primary task for which the activity-based costing system is being constructed. Regarding the second factor, if the primary task of the ABC system is to estimate the costs of products/services, the number of activities in many cases can be narrowed down to even 20 – 30. More extensive activities will be found in systems aimed at improving and redesigning processes. Example activities include: client presentation, material procurement, warehousing, production control, technical production support, product design changes, loading preparation, transport to the client, issuing shipping documents, debt collection, advertising organization.
The article comes from the magazine “Logistyka” 4/2008.