The rapid and recent changes in the business field have led to the emergence of modern systems of costing and the fast increase in global competition to maximize the role of cost management. The precise knowledge of the product cost and its pricing as well as proper planning concepts became more important than they were in the past. Each establishment is seeking to gain a competitive advantage to enable them to survive and continue in the global market competitiveness (Abbas,2009).
El-Gibaly and Diab (2012) mentioned that Egyptian businesses are now working in a very competitive environment in making significant process improvements in areas such as productivity, quality, and innovation because the customer need more product choices, at the best prices, with faster delivery and higher quality. It is also clear that companies nowadays need more timely, accurate, and reliable financial, operational and information to enable the managers to make effective tactical and strategic decisions about product line development, pricing, product mix, investment decisions, ….etc.
Kevin(2000) illustrated that (ABC) ACTIVITY BASED COST is a methodology that measures the performance and the cost of activities, resources and all other cost objects providing accurate cost information for managerial decision making. (ABC) ACTIVITY BASED COST is not exactly an accounting exercise but rather a methodology that produces a bill of activities that shows the cost buildup for individual products, services or customers.
Szychta(2010) revealed that ACTIVITY BASED COST (ABC) methods used in service units supply information on costs of provided activities and services are used for understanding the profitability of groups of customers and markets. Such information should provide a basis for the managing of customer profitability and improving customer relations.
Marx (2009) showed that the Traditional Costing (TC) methods are utilized as a one-figure volume-based cost driver. This is the reason why the old school product costing method alters the cost of products. He also added the ACTIVITY BASED COST (ABC) method is a different approach, which improves understanding and controlling of overhead by a cost/cause relation, which is activity and cost. He also concluded that ACTIVITY BASED COST (ABC) method obligate the manager to investigate fixed costs more closely. And this helps the management to identify areas of cost inefficiency as well as recognize the cost which we could have perceived as fixed but, which are in the fact, variable or even semi-variable to the production.
The past decades were characterized by local, regional and international developments and challenges in many aspects, which had a great influence on the economical units working in the Egyptian business environment. To face these developments, modern administration methods should be utilized to form radical changes in the method of administration because the Traditional Administration (TA) methods are no longer capable of dealing with such developments. The Activity Based Cost methods are regarded as one of the most important of these methods, where they began to be utilized during the end of the twentieth century by Cooper and Kaplan. They used this method in U.S.A because of the severe competition faced by the American companies where existing systems were not able to supply these companies with accurate costing information to enable them to plan and take monitoring decisions (Grasso,2005).
Noting that the Traditional Costing (TC) methods were not suitable to function in the current business environment even though these methods were suitable for work during the beginning of the twentieth century but not nowadays (Kaplan,1984 and Johnson,1987).
Needles et al.(1999) illustrated that the additional industrial costs before the last two decades in the past century were approximately 25% of the Total Product Costs (TPC). But changing the methods of production from manual, most of the costs took the form of direct wages and direct materials, to the mechanical production, resulted in an increase in the invested capital in the fixed assets and also led to the introduction of developed means in the manufacturing environment and consequently, an increase in the depreciation as one of the additional cost factors in addition to a reduction in value of fixed wages where large amount of labor force became dispersible and the additional industrial costs became representing 50% of Gross Product Costs (GPC).
Therefore, allocation of these costs according to non-logical methods including the direct labor hours which was the prevailing base for the allocation of these costs that resulted in wrong
Hence, the Traditional Costing (TC) methods do not succeed in dealing with the problem of allocating additional costs; and to avoid the deficiencies in these methods, the Activity Based Costing (ABC) methods came in hand to achieve costing characterized with high degree of accuracy of the product or provided service which resulted to an increase in dependence on these costing information.
Abbas (2009) concluded that the presence of the open environment and ease of communication between competitors was to increase the competition among enterprises which led to increased reliance on cost management to achieve competitive, advantage and the best proof of that is an entrance to some facilities accounting for the Activity Based Costing (ABC) system.
Tudose (2012) examined the research development on capital structure and enterprises performance. She stated that the effective analysis showed that the expert publications have been enhanced with theoretical powerful disputes. The actual research has provided significant analytical schemes for establishing, understanding and executing to identify enterprises performance policies and to quantify the impact of the financial structure of the enterprise’s performance. Also, the analysis revealed that anterior research has certain reservations that impose challenges for more investigation. She added that according to a summary (illustrative and decisive) concepts, levels, practices, approaches and tools associated with the study and theoretical or practical understanding of the effect of capital structure on enterprise achievement. The study suggested that there is noticed improvement in the scientific research and accordingly, in the application of the detailed techniques.
Ungureanu (2012) illustrated that according to the general perspective of globalization that is mainly based on information access, any corporation that ignores the advanced methods and wide-range technologies will have no place in such an intense aggressive competition environment. She added that principally the information access is accomplished by the accounts. So if the company has a powerful system of an integrated accounts, it can easily obtain a high level of decision making efficiency and reach a leading role in its specialized field.
She also stated that directors of enterprises should not ignore the important role of the financial and managerial accounting in influencing the decision making process, as professional accounting is not only used in the archiving process but also in providing information accurately and efficiently which guarantee a strong decision making system.
Bogdanoiu (2012) showed that in today’s market economy and the current requirements of the European Union (EU), management accounting has become a necessity for efficient pilot age of an organization that wants to remain competitive.
She also stated that her study, through the findings which will emerge from detailed analysis of the organization way of managerial accounting and cost calculation in a dairy products industry corporation, represents an alternative regarding concrete way that such an enterprise can improve their management and its leadership through costs.
Busan and Ciurlau (2012) mentioned that the ABC was accepted globally due to the dissatisfaction of the traditional systems of managerial accounting which led to the modeling of a new system to calculate relevant costs adapted to the corporation productions needs. With this procedure, the assignment, permitting a new vision in the corporation and cut cross vision, turn out to be the center of characterizing and modeling of entity and serves as an interface between the consumed resources and cost bears. They also added that by that mean you get real cost, based on strategic decisions by cutting out non creative actions and using the basis of allocation of costs it generates activity.
Hicks (1996) pointed out the importance of cost information usage by classifying the cost information users according to use type (table 1). From table 1, it’s obvious that managers use extensively most of cost information for decision making in businesses on daily basis. Other external users, like shareholders, tax officers and creditors mostly care about the income that is borrowed from their financials, capability to settle financial obligation and tax liabilities.
Table 1 : Cost information users.
Sr. No.UseUser type1Income and total inventory evaluation, sold product’s cost used for profit account.External.2Conformity with GAAPExternal.3Strategic plan.Management.4Capital budget.Management.5Operational plan.Management.6Operational budget.Management.7Cost control process.Management.8Cost & profitability of product.Management.9Product cost control.Management.10Financial analysis.Management.Source: Hicks (1996).
Sokda (2009) concluded that the ABC model structure provided a different preference objective in the excessiveness in particular posts and determined that gross salary isn’t the vital element to be taken in consideration. Information Technology, IT tools, telecommunication cost, post specific assets and other associated costs’etc. reformed the classification of excessiveness of these particular positions. He also showed that by allocating the overhead costs of by-products, in addition to the unit costs determination, the primary aim of the application was to demonstrate that while using the Activity Based Cost system (ABC), the cost management will increase and reach highest levels of performance. He added that the allocation procedure increased the cost information accuracy and improved the data base for the outcome decisions.
Johnson (2008) illustrated that on various business levels, the corporations management needs reliable information in order to lead the different tasks efficiently and decision making procedures decisively instead of founding crucial decisions on inaccurate data that weakens the corporation and ruin the long term strategies. That matter demonstrates the necessity of the board’s initiative to provide data and information and keep open-channels flow. He also reported that ABC system is considered valuable to most of the successful corporations as management accounting due to the fact that managing costs and earning awareness become internal competitive advantages.
Maiga and Jacobs (2003) pointed out that currently by studying the business world, it’s remarked that most of the corporations face various challenges such as deciding the most effective strategies and goals dealing with the limited resources and deciding the most convenient mean to obtain additional resources and how to distribute them to reach the optimal level of success. In addition, enterprises need to evaluate the link between the different inputs, goals and the related enhanced outcome in their procedures.
Divandri and Yousef (2011) stated that the ABC was established to bring better vision to how to distribute the overhead costs to the sole products or clients. Firm that uses Activity Based Costing system connects the resources expenses which are provided to the firm to the enterprise’s performed activities. By utilizing the ABC system, the expenses are distributed from the resources to the activities then to the outcome whether it’s product or service.
Neely (1999) showed that through the ABC process, firms receive better visions of effective and ineffective activities according to the clients preferences. Therefore, ABC method is considered a measuring tool for enterprises to produce income and provide a clearer vision for consumers best value. ABC is appreciated by many firms as it helps them to realize and measure their Matrics precisely.
El Gibaly and Diab (2012) mentioned that firms are now running in intensive competitive environment to make significant process improvements in areas such as productivity, information and quality because the customer expects more product choices , at lower prices, with faster delivery and higher quality. They added that is evident that firms , nowadays, timely and reliable financial and operational information to permit the managers to make effective strategic and tactical decisions about pricing, product mix, product line development, need more accurate, investment decisions, process improvements….etc. Also, they found out that there is a significant positive linear connection between ACTIVITY BASED COST method and performance improvement of some Egyptian companies also, the significant relationship between performance improvement and business efficiency is worth mentioning.
There is a close relationship among the cost systems and the environment in which it works. Whenever the cost systems succeed in expressing the nature of the events in the environment in which it works, its effectiveness increases in the service of the management through supplying it with the suitable information which reflects positively on taking the successful administrative decisions (Abd Al-Rahman,1996).
The costs system was developed over the following three stages:
The first stage was achieved during the half of the past century on year 1930 when the attention aimed at achieving the efficiency in the performance of the industrial operations and therefore the concentration was on determining the product costing where there was no importance in allocating the indirect costs (Mahmoud,1997).
The second stage started with the rise of the industrial revolution at the beginning of year 1950 where attention started with the principles of the standard costs to increase attention to monitoring (Ion,2012).
The third stage was achieved in the light of the fast technological developments where attention increased towards the problem of allocating the indirect costs as the consequence of increasing the large investments in the advanced technology (Stabus,1988). This resulted in indirect costs rate increase and the necessity to a better allocation of these costs (Mohamed,1996).
By early 1980, many criticisms were directed towards the deficiencies of the applied cost systems, which pushed the academic and applied researchers to search for new developed methods to match with these modern environmental variables and overcoming the deficiencies which happened to the Traditional Cost (TC) systems. Then, in America and Europe, cost allocating method on the basis of activities has appeared. But Japan, used some modern administrative philosophies such as the production philosophy Just In Time (JIT) and a group of methods for managing the costing, were developed in all stages of the product. According to what stated above, the justifications of the development in the costs system are represented in the changes emphasized in the modern manufacturing environment which were reconsidered in the familiarized cost systems to be evaluated and showing their efficiencies.
Those who follow the research and literature of the cost accounting and managerial accounting since the beginning of the eighties from the previous century, can witness in the last few years the birth of a new costing system which resulted in considering the previous costing system as an aging traditional system which does not match with what happened in the last three decades especially with the increase in the severity of the international competition as the consequence of the international orientation towards the liberation and the globalization of the economy.
The various types of firms faced several problems in the traditional methods for indirect costs allocation within the framework of large development in the information systems and the multiple activities and the complexity of the work procedures. This matter resulted in a change in the relative importance of the costs factors as a consequence of a reduction in the volume of the direct labor force resulted from the industrial development and the transformation of most of the manual work to a mechanical work and a weak existing relationship among the worker and the production unit and the aging of the costing reported and the unsuitability of their contents and the length of time for preparing these reports. Hence, the environment of the modern firms need instantaneous information to take spontaneous decisions which necessitates the speedy change to the costing systems supporting the administration activity and concentrating on the use of ABC system (Zaki, 2000).
El-Alkawy (2004) mentioned that the Traditional Cost (TC) method became unable to satisfy the administrative and technical needs in terms of information which assist it in making the decisions which are specific to these products and services; which resulted in the appearance of a new system in dealing with the costs based on activities especially in the United States of America and became widespread in various world countries including the Arab Countries.
Samy (2000) showed that the Activity Based Costing (ABC) method became an important tool used by the organizations to achieve their objectives, where this system attempts to discover a direct relationship between the activities performance costs in organization and the products, customers and those beneficiaries from those activities.
Witherite and Kim (2006) illustrated that the Activities Based Costing (ABC) method became recognized as a widespread system because it is a main method for allocation of indirect costs.
Abd El-Karim and El-Kakhn (1997) stated that the Traditional Costing (TC) methods remained in wide use until the year 1987 when the two researchers (Cooper and Kaplan) presented a new method for allocation which was defined later as ABC method which has good characteristics compared to TC method especially in the field of providing the information suitable for taking the operational and strategic decisions and consequently, this new method was approved by both the academic and managers and its use became widespread especially in the large industrial firms in America and Europe.
Oglesby (2008) stated that management’s resistance to ABC results from lack of understanding benefits associated with ABM and a failure to recognize the bottom line impact of ABM/ABC linkage. He also added that since his study involved a small group of not -for- profit agencies in Midwest. He recommended the study is to be replicated in a broader environment to determine adoption of ABC in other areas of the country.
The concepts of managerial accounting have not drastically changed since the 1920s. When Henry Ford introduced the assembly line for the Model T, there was a need for better cost control. He was reported to have detested cost accounting, but became a multimillionaire in spite of his continued antipathy toward cost control methods. The global environment has changed drastically since the Model T. Worldwide competition has forced U.S.A. manufacturing companies to examine their production systems. Some major U.S.A. industries will not survive unless they make pervasive changes in the utilization of both physical and human resources. Many business practitioners and some of their former professors have already joined forces to modify and adapt the managerial accounting practices to the needs of production system changes in response to worldwide competition. The U.S.A. dominated the industrial world for three decades after World War II. It also aided the war-devastated countries, particularly its enemies, to rebuild their industries for a world of peaceful trading partners. Not until the late 1970s did U.S.A. recognize that West Germany and Japan were producing high – quality products more efficiently (Lewis,1993).
There is an urgent need to use a financial accounting module for analyzing the financial firms position in order to determine their performance efficiency (Mates, 2004 ; Petrescu,2008 and Stefea,2008).
The factor analysis shows that the ABC concept consists of four aspects which are the total performance, the developed competence, the developed effectiveness and the strategic cost distribution process. The regression outcomes are compelling at 5% level which shows that ABC as a measurement tool of strategic cost distribution, developed competence, and developed effectiveness have important and positive impact on the total company’s performance (Zaman,2009).
There is a great need to illustrate the recent debate around empirical positivistic study in managerial accounting, the sound definition of the managerial accounting constructs, the closure of the gap among case studies and analyses in managerial accounting study, the appropriate use of statistical tools for assessing hypotheses in managerial accounting and the use of graphics to map theory-consistent empirical research (Kholeif,2011).
There is a lack of consideration describing the role of Management Accounting (MA) and MA systems (MAS) in valuing decisions (Laitinen,2011).
In the 1980s, Cooper and Kaplan (1988b) promoted the AB approach with concepts such as cost pools and drivers. The AB approach includes product, customer costing (and profitability), costing of distribution channels, budgeting, cost management, performance management and decision making. AB case studies and surveys have been conducted in many countries ‘ particularly in the 1990s and 2000s. Researchers have explored several topics relating to the AB approach, including measures of success, factors associated with success, diffusion (including demand and supply factors), power and politics and organizational culture, effects on financial performance, changing role of management accountants and manager’s views (Innes and Kouhy,2011).
Lana and Fei (2007) revealed that the application of the study of the ABC approach was primarily concentrating on companies in advanced or ‘more economically developed country’ (MEDC) rather than the ones in the economically developing countries which doubts the success of the implementation process.
Also, Attia (2006) illustrated that industrial firms is facing now new conditions are represented in severity of competition at Global class, particularly from Japanese and South east Asian firms, and technological complexity in the business environment, in addition to disappearance of the border among the countries in the light of communications revolution, GAAT and WTO regulations which made the world a small village. Also, this matter led to the industrial firms reconsider the concepts of control systems of costs improvement of production means in order to ensure survival. By taking a deep look at the future, it can easily predict how the future manufacturing firm will be characterized the type of cost accounting system inside this firm (Matei,2013).
On the other hand, Abou El-Enein et al. (2013) stated that building the best practice standard] By using a modern technology i.e. Clean-Room-Technology Assessment Technique (CTAT) [which can be used to improve performance and eliminate human errors.
Lewis (1993) and Dandago (2003) indicated the future factory will be established on a set of Computer-Integrated Manufacturing Systems (CIMS) will coordinate and control various flows of materials, laborers and overhead activities through the following sub-systems:
1- Computer Aided Design (CAD) systems:
These systems facilitate setup, design, engineering and planning processes.
2- Computer Automated Manufacturing (CAM) systems:
These systems include machines, process control tools, automated inspection for each machine and its components.
3- Flexible Manufacturing Systems (FMS):
By using these systems, all productive processes will be carried out automatically without any intervention of human elements and thus shortcut several manual activities which will become useless such as handling and setup.
4- Production and Inventory Management (PIM) systems:
These systems include inventory control methods such as Materials Requirement Planning (MRP) and Just-In-Time (JIT) systems.
With regard to Future Cost Accounting System (FCAS), it is a system which aligns with the future factory requirements.
The method of ABC is considered as an advanced method to perform allocation process approaching the justice and achieving the criterion of the Cause / and result where this method allocates costs through the following steps: 1) Determining the activities performed by the firm. 2) Determining the activities which cause the occurrence of costs. 3) Classify these activities according to the added value and getting rid of non- values added activities. 4) Then, the activities costing are distributed over the costing units where these costing units cause the occurrence of these activities (Baker, 1998 and Sand, 2012).
ACTIVITY BASED COST system was largely advocated by academic and practitioners. Mohamed (1991), Atkinson et al. (1997), Balakrishnan et al. (2013) , Stefea et al. (2013a), Abbas (2014b) and Kutac et al. (2014) agreed on that this system was developed from view point of the methods of allocating the indirect costs and will be developed through determining the costs drivers and the activities performed by the various managerial departments in the company which eventually lead to return each costing to the activity which could be used to fix the followed consequences in determining the products costing on the basis of consumed activities.
Mistrust the accuracy and transparency of the management accounting system leads to the ABC methods implementation (Cokins, 2014).
The Activity Based Costing (ABC) system provides qualitative, quantitative and economical information for the organizations especially those organizations which care about the continuous improvement and program the satisfying the customers needs. But the information provided by ABC system can not be considered the only type of information needed by the managers. They desire to get information about the process time, quality and costs of activities. Also, ABC system provides the activity costs from these required information and supports the accurate decision making , profitability analysis and it is considered an excellent method in cost calculations (Kaplan,1992 ; Cai and Yang, 2008 ; Khataie et al., 2011 ; Lutilsky and Dragija, 2012 and Austill, 2014).
So, the firm must know how integration occurs among the other information linked to the quality and the customers preferences…etc. The costing information are important to enable the managers to understand the practical economies and their outputs, but they do not represent the only appropriate measure and the ABC system doesn’t offer straight quality measures and the timing of the processes. On the contrary, the systems which evaluate time and quality, don’t illustrate the costs and the quantities of the utilized resources in the process (Norris, 1997 ; Raiborn and Kinney, 2010).
The first utilization of ABC approach concentrated on cost allocation dimension which aimed at increasing the efficiency of the measurement to reach determination a more accurate cost of the products. Soon afterwards, the use of ABC method was modified for reducing costs dimension which contributes in reducing the costs. Wherefore, in the light of previous views, there is a great necessity to determine the relationship among the ABC method and the other modern accounting concepts. Dutch, medium sized manufacturing companies mostly embrace and use ABC at balanced levels of product diversification rather than high levels. Also, the diversification of the product is undoubtedly associated to the ABC approach(Schoute, 2011).
The current method of cost calculation used in Romanian and Egyptian business entities, which causes a historical cost, used to settle post factual production costs and which allocates indirect costs according to some subjectively chosen basis, can not provide the management with the possibility of satisfying the need for information as well as the fact that in today’s changing technological conditions the calculated cost of production is not a real cost. Thus, it is required to adopt some methods of management accounting and cost calculation to enable a more rigorous allocation of indirect costs and to be operational in order to meet information needs of administration in decision making (Manea and Barbu,2012 ; Abbas,2013).
On the other hand, Khaled (2005) revealed that non industrial section, the predominant costs in the structure are the fixed overhead costs while the material-related costs and labor costs are insignificant which cause the ABC implementation in this kind of sector more questionable. Accordingly, the current research will concentrate on the industrial sector and since ABC is mostly applied by larger corporations.
Also, C”pu”neanu et al. (2011a) defend that the ABC application in small and medium enterprises (SME) in Romania will be an optimal solution for the coming future.
C”pu”neanu et al. (2011b) and Abbas (2013) mentioned that in the last ten years, many corporates in many countries including Egypt and Romania, made efforts to apply the Activity Based Cost method.
El-Dyasty (2006) stated that several researches indicated that there are many cost tools which are considered a main base for implementing the cost strategic management. There is a good chance to use these tools, in a single or integrated form for facing the challenges in the modern business environment such as ABC, TOC, RCA, ABM, TQM…etc.
Tobor (2013) proposed to bring a significant contribution to the wine sector in Romania by approaching a modern calculation method (ABC) and with favorable influences on the administration of costs but also a monitoring and performance measuring instrument such as Balanced Scorecard.
The second axis of development strategy in Egypt is to improve the business and investment environment. He added that Egypt strives to provide a good investment climate over the coming years (El-Sisi,2015).
Several studies showed the importance of utilization of an effective method for improving the business environment. These studies may be summarized as follows:
The selected Cost of Quality (CoQ) has to fit the status, the domain, the goal and the demands of the company to get an opportunity for a strong methodical system in a program of quality management (Schiffauerova and Thomas,2006).
In the generation that is based on technology and high competitive environment, executives are always stressed to find methods to mention their competing advantages. Also, there are many ways which have been enhanced to put together value to the essence of the company’s activities. ABCM is one popular way between firms. The ABCM helps executives to reach a better strategic vision that is necessary to the competing domain of the corporate. (Beheshti, 2004).
ABC tool may be a path to enhance the profits and cost management, further strict decisiveness of Romanian firms products cost in each growth level. They added that it’s very important for these firms to revise the actual cost system to insure their responsive adequacy to different modifications in rivalry and innovation (C”pu”neanu et al., 2011b).
As the Activity Based Costing method is suitable for the industrial domain, it’s as well suitable for services domains such as healthcare institutions, commercial businesses and governmental institutions (Chea,2011).
ABC tool can offer ways to find better effective cost bearing actions and to distribute costs fairly to each product. As company’s executives may allocate resources wrongly and mix products decisions (Tsai et al.,2010).
Activity Based Costing is not only a modern way to cost accounting, but also a precondition for a more quality and modern way of managing a company. They added that ABC method provides better business operations recognition and guidance and clearer cost framework, because of methodology adjusted to the company’s operations. Also ABC method gives an excellent ground to trace cost, management and analysis that require high quality strategic and operational decisions for the firm on the long-run. ABC, directly informs management about the possibilities of achieving competitive advantages not only based on low cost, but also based on value added as a result of effective expenditure incurred. It follows that ABC is a powerful tool whose use improves company competence in managing competitive advantage (Kalicanin and Knezevic,2013).
The Activity Based Costing has been considered a given tool to the management to provide precise cost of products. Also, the information acquired from the ABC system is useful for budgeting, planning and measuring performance. In addition, the ABC offered the organization total beneficial in the process of the decision making (Maelah and Ibrahim,2007).
Therefore, the objectives of the present research may be illustrated by covering the following items:
‘ Strategic cost management and its goals in light of contemporary business environment.
‘ A critical study for Traditional Costing (TC) method.
‘ Concept, notion and significance of ABC method.
‘ Motives of appearance ABC method and its supporting conditions for applying.
‘ Steps of proposed design of an applied ABC method.
‘ The components of ABC method.
‘ Levels of progress of ABC method.
‘ Requirements and obstacles of application ABC method in Egyptian enterprises.
‘ Role of ABC method in planning and decision making fields at the firms.
‘ Application methods importance of Activity Based Costing method in order to increase efficiency of business environment in the world and Egypt.
‘ Applied stages of ABC method in Egypt and other Countries.
‘ A comparative case of conformity and variance factors for ABC method with other modern accounting concepts.
‘ Characteristics of Future Cost Accounting System (FCAS) inside modern manufacturing firms.
‘ Test of proposal Tetra Dimensional Integrated Model (ABC, KAIZEN, TOC and RCA) by applying on manufacturing firms in Egypt.
Chapter 1: THE SCIENTIFIC FRAMEWORK ACTIVITY – BASED COSTING (A B C) METHOD AND ITS APPLICATION
1.1. Strategic Cost Management and its goals in light of contemporary business environment:
Strategic Cost Management (SCM) system works on the development of information because it includes all of the fiscal and non-fiscal information (Deaconu,2012). In the past, institutions focused on measures of financial performance such as: a) growth in profits, b) growth in sales, c) growth in market share, d) cash flow, and e) growth in the share price. But with the development of the environment and manufacturing technology and converting the environment into a dynamic – variable – volatile environment in terms of product variety and taste volatility of customers and increase competition, those financial criterions failed to meet the purpose of management and stakeholders at the same time. This matter led to search for appropriate standards for that environment. This concept steered the institutions towards strategic success measures that includes fiscal and non-fiscal criterions. The financial criterions are showing impact of policies and procedures institution on the financial situation of the institution and the rate of current yield to shareholders. On the contrary, the non-fiscal systems emerge impact on the current and potential competitive position of the institution. The non- financial criterions include three aspects as follows: customer criterions, internal process criterions and criterions of learning and innovation.
El-Dahrawi(2010) illustrated that the Strategic Cost Management may lead to accurate cost information for managerial use during the different stages of the cycle of strategic planning , which consists of the following stages:
1. Formulate strategies.
2. Connecting these strategies to all organizational units.
3. Development and implementation of strategies methods.
4. Development and implementation of control means for obtaining the top of the application steps, thus succession in achievement of planned targets.
He also showed that managerial accounting engaged in crucially in every stage of strategic planning. This type of accounting has been called SCM which is also known as the organizational benefit of data value for the previous cycle’s stages of strategic management. He also added that the Strategic Cost Management is associated with three methods of analysis:
1. Value Chain analysis,
2. Strategic positions analysis and
3. Cost drivers analysis.
These three methods represent a modern integrated framework which is quite different from the traditional concept of managerial accounting. With regard to the method of the value chain analysis, it represents a strategic dimension to the cost in term not only of cost analysis within the institution but also outside this institution beginning from suppliers to customers. Therefore the value chain represents the interdependence of activities which creates the value or benefits for the institution from the suppliers till the delivery of goods to customers and customers of customers. According to this concept of the institution is seen as an open system affects and is affected by the external environment.
As for the method of analysis of the strategic position, it is meant to achieve a distinctive competitive position either through excellence in product quality which is known as the strategy of differentiation or through a strategy of cost leadership or through a strategy of focus. On the other hand, cost driver’s method is intended to decide the purposes of cost by selecting a complex series of cost which is represented in the main and subsidiary activities.
The cost management may be considered as an information system which supports managerial functions such as strategic management and planning in the long term, operational decision making and control mechanisms. Thus it can differentiate between strategic management of the cost which supports strategic decisions such as the selection of products, mechanisms of production, distribution channels and operational management of the cost operational cost management and the strategic management which supports in the short term decisions such as production planning, pricing and incentive systems. So, the Strategic Cost Management use the cost information during all stages of strategic management (Determination of cost strategy, delivery strategy, collection and benefit of the necessary means in application of strategy and usage of control methods for determining the extent of success in achieving strategic objectives).
Some studies have pointed to the use of three tools for the application of Strategic Cost Management:
1 – Competitive advantage analysis,
2 – Cost drivers and
3 – Value chain analysis.
Indentifying the strategy requires linking two sets of activities:
a) Major activities which includes supply and logistics, Operations, Marketing, Sales and Services.
b) Supportive activities which include the infrastructure of the institution from human resources management, technology development and organizational structure.
El-Dyasty (2006) proposed an integrated framework to connect the tools of SCM in order to create a value institution and stakeholders. This framework represents an integrated information system for Strategic Cost Management and provides all data to achieve strategic objectives during all the stages of strategic management.
He added that the tools of Strategic Cost Management (SCM) which are proposed may be used in each stage of strategic management. These stages may be stated as follows:
1 ‘ Strategic analysis:
It is intended to identify the necessary factors of the success of institution by using Benchmarking and SWOT analysis.
2 – Determination of strategy:
In this stage, the institution determines the strategy which should be followed to keep the competitive advantage and on the basis of this strategy which will be followed by institution, the performance criterions will be determined by using the Balanced Scorecard system.
3 – The application of the chosen strategy and analysis of the value chain. At this stage value chain is divided into two types:
a – Internal value chain for measuring the cost during the Product Life Cycle Costing.
b- External value chain which represents foreign suppliers, customers and distributors. This chain requires creating a value for all parties, cooperation and coordination rather than competition.
Also, the proposed framework uses seven tools of Strategic Cost Management (SCM) namely:
1- Target Cost (TC):
It is used in the stage of the design and the production of the product through value reengineering and continuous improvement of the cost.
2 – Activity-Based Costing:
It is utilized in allocation of indirect costs for the products in light of technological development which led to increase the percentage of indirect industrial costs. This matter requires accurate more allocation of costs to help the managerial staff in pricing decisions making and composition of the products.
3 – Theory of Constraints:
It is used to determine choke points (constraints) which cause disrupting the operations and try to treat the causes of these chokes. Thus, it improves the flow of material between processes.
4- Just In Time (JIT):
It helps to reduce the unexplained investments in stock.
5 – Resource Consumption Accounting (RCA):
It realizes the optimal exploitation of the institution resources through determining, planning and actual cost on the basis of what are consumed resources to serve customers in the form of quantitative size. This cost flows from resource pools to cost objects (Activities, Operations, Products or Customers) taking into consideration that of overlapping relations among resources so that every resource may help another one. As there are some resources may be useful for the topic of cost measuring directly. Thus, RCA is an analysis based on supporting the nature of cost and illustrates to managerial staff the types of excess and idle capacities in the institution. This concept will support the competitiveness ability of the institution and help in the definition of the interests of suppliers, creditors and bondholders where this matter will show the extent of need for resources and how to finance them.
6 – Total Quality Management (TQM):
It aims to achieve customer requirements to earn their satisfaction and loyalty through the planning, implementation and quality control.
7 – Continuous Improvement (KAIZEN):
It’s applied for standards improvement and cost reduction quality at all stages of the value chain. Thus, this matter will support the necessary factors of success of institution and maintain the competitive advantage.
Many researchers stated that there are a lot of tools can be considered as the basis of the application of Strategic Cost Management and these tools can be used individually or in integrated manner to compete all difficulties of the modern commerce industry (El-Dyasty, 2006). These tools and their definitions can be illustrated in Table 2:
Table 2: Strategic Cost Management tools and their definitions.
No.ToolDefinition1Theory of Constraints (TOC)A way to improve the conversion rate of raw materials to the final product and the treatment of choke points.2Benchmarking (BM)The process of determining the necessary factors for the success of the institution and studying the best practices of competition institutions to improve operations and control of the market.
No.ToolDefinition3SWOT analysisStructured process to identify the success factors of institution by determining the internal Strengths (S) and Weaknesses (W) that affect the competitive position of the institution and to identify the factors and external Opportunities (O) that require exploitation of the internal strengths and getting rid of weaknesses to face external challenges and Threats (T).4Value Chain Analysis (VC)Add value to stakeholders through the value chain, reduce costs and improve quality.5Competitive Advantage Analysis A tool for determining the strategy which will be followed by the institution to outdo its competitors such as cost leadership strategy, strategy of commodity excellence and strategy of focus on a certain sector of the market.6Target Costing (TC)
A Managerial tool to cost reduction of the outcome during the product’s existence period and it depends on the beginning of identifying target selling price minus target profit to reach the allowable cost.7Lean ProductionThese systems are used to reduce losses and waste of resources and facilitate the flow of material to get rid of the waiting time in order to improve productivity and quality.
Table 2: Continued.
8Product Life Cycle CostingA mechanism uses the comparative evaluation of the costs which will be abided by the institution in a certain period, taking into consideration all economic factors which are related both to the initial costs and the costs of future operations in order to reach optimum performance of the product.9Just-In-Time
A tool is used to decrease inventory levels of raw materials, stocked units which are under production and inventory of produced units, thereby improving the efficiency, quality of production and profitability.10Kaizen costing (KAIZEN) A system aims to fix the current levels of cost to produce the product. Also, it tries to achieve a continuous and systematic manner to reduce costs to lower levels than it is. So, it is a cost management system.11Total Quality Management (TQM)A managerial tool is interested to customer satisfaction and requires an active participation of all workers and employees in the institution at all levels, not only production, but also all operational processes to improve quality and reduce costs to satisfy customers.
Table 2: Continued.
A tool depends on TQM system and sigma analytical measure. At the beginning, Six Sigma concept has been developed by Motorola Company and was used by many other institutions as a strategic tool to help in the long-term decision making not only in quality improvement programs.13Resource Consumption Accounting (RCA)It is an integrated and intensive system for cost management. It depends on three main elements: resource classification, determining the nature of the costs and quantitative approach for the classification of costs. This system affects all the institution operations.14Activity – Based Costing
A cost system intend to develop efficiency in calculation of each product cost and identify the demand of various activities of institution resources. Thereby allocation of costs on basis of diversity products, different degree of complexity and variety of customers, not just based on the volume of production.15Activity- Based Management A system is designed to satisfy customers and improve profitability through pricing decisions, product assortment, how to reduce costs, operations improvement, product design, finding ways to reduce the consumption of resources by getting rid of non added value activities and reduce the waste of resources.
Table 2: Continued.
No.ToolDefinition16The Balanced Scorecard (BSC)A scale consists of a collection of fiscal and non-fiscal completion evaluation. It has been developed by using four essential aspects: Business perception, client perception, operational procedures perception and development scope. It is considered an integrated framework which links between the strategies and processes to balance the needs of the stakeholders. Source: El-Dyasty(2006).
Abbas (2015) concluded that a field questionnaire determined the most important modern cost accounting system which is currently applied in some Egyptian manufacturing firms. There was a significant difference among application extent of ABC and other modern cost systems inside some manufacturing firms in Egypt at significance level of 1%. He also added that according the application extent indicator, the currently cost systems in Egyptian manufacturing firms may be arranged as follows: a) Activity Based Costing system, b) Target Costing system, c) Resource Consumption Accounting (RCA) system, d) Activity Based Management (ABM), e) Other systems, f) Theory of Constraints (TOC) and g) Value Chain (VC) analysis.
1.1.1. Determination of important cost types for costs manger in some Egyptian manufacturing firms which have impact rule on product cost and affect the effectiveness of ABC method:
Seiler et al. (2013) outlined efficiency as gaining the top potential performance for annual spending resources.
Illmer (2011) illustrated that performance is very adaptable expression because every researcher can put suitable definition according to real conditions inside the organization. However, performance is considered as outputs of organization activities during a certain period of time. He also indicated that performance is an important operation for determining the effectiveness and efficiency of past activities. Therefore, it may be concluded that efficiency indicator is considered one of the main performance drivers for arbitrating the level of business environment quality.
EPA Victoria (2008) showed that improvement of resource efficiency at business environment must be passed on some main tips and hints. Those advices will assist for improving the performance of business environment through raising output and decreasing production cost. Efficiency of resource is considered a fast and inexpensive method for avoiding the production obstacles such as decreasing losses will minimize the cost and volume of them at any stage.
The recent and fast modifications in commercial environment conducted to the emergence of some modern technologies and systems of cost and the increasing global competition in order to maximize the role of cost management. The accurate knowledge of product cost and its pricing as well as appropriate planning concepts became more important than they were in the past. Each establishment is seeking to gain a competitive advantage to enable them to survive and continue in the global market competitiveness (Abbas,2009).
Morrow (1993) indicated that, in the last two decades of the twentieth century. It has been an intense environment of challenge in the production fields. He also added that, in order to keep up the profitability, the firms must continually enhance the tools of the cost management.
Johnson and Kaplan (1987) revealed that TC accounting techniques failed to meet the updated data requirements of production management. Nowadays, executives realize that TC techniques have failed to sustain the process of the decision making in cost field. They also added that various firms find the TC techniques are behind time and too accumulated to sustain the decision making process in costing.
Burritt and Luckett (1982) illustrated that although a re-defined direct costing system which avoids the problems associated with incorrigible cost allocation issues is discussed, it is considered unsatisfactory. In turn, this matter leads to contemplate other allocation-free solutions to the inventory valuation problem.
Abernethy et al. (2001) and Al-Omiri and Drury (2007) stated that from logical economic perception, enterprises acquiring ABC system should, mostly, directed by some modern high-tech parameters, of which products diversification is specifically recommended to mainly decide of the requirement of Activity Based Costing system.
On the other hand, Scrivo and Krichbaum (2013) reported that the costs for any product or service are usually broken into three categories: a) Direct costs, b) Variable overhead costs and c) Fixed overhead costs. They also added that it is important to correctly costs identify to gain a true understanding of the impact of new contracts or new opportunities. Direct costs are highly visible and therefore more or less obvious and are usually adequately addressed. Overhead costs , however, are not obvious and are frequently handled poorly.
Matsui (2013) investigated the choice of the method of the cost-based valuing between incorporation costing and direct costing for amalgamated companies in competitive inter-firm. He confirmed that the effective system relates to an actual cost distribution to the transfer value, inconsiderately if the value broadly noticeable or unnoticeable. He added that the analysis of results demonstrated that no actual cost distribution to the associate departments by the direct costing system can control the incorporation costing if any company is the leader and the other is participant; the customary outcome occurring from previously collections of transfer valuing patterns inverts when risks are taken into consideration.
Schoute (2011) mentioned that, just as with any research, the conclusion of this research depends on the possible restrictions. As transversal study can set up combinations but not adversity. The objective of impacts can’t be set up with inevitability. In addition, there are variables can be eliminated that can adjust the outcome. A different concern that can possibly affect the conclusion is assessment flaw. The collateral factor, ABC embracement, is a classic pattern of a practical factor and these factors are mostly to endure from assessment flaw than theoretical factors. Study achieving a more suitable assessment tool for this factor can remarkably help to the research.
Kutac et al. (2014) showed that various firms in Czech with down use of their manufacturing capacities find it questionable to contend with firms in Germany with better use of their manufacturing capacities considering the cost. Consequently, the value cost should be distributed to manufacturing amount that corresponds to the normal stage of capability use in the trading field in doubt. According to these facts, the actual cost per unit of manufacture evaluated production utilizing this way and the full cost per unit of manufacture will be less than that if the cost was evaluated from minimal actual capability use.
Fisher and Krumwiede (2012) pointed out that it’s difficult to evaluate the advantages of enhancements to a cost system. But a company may quantify the advantages for particular determination and utilize it. Also, staff who are poorly performing and affected by the new product cost method which can cautious of changing the system.
1.2. A critical study for Traditional Costing (TC) method:
The product cost consists of the following three main items: Direct materials, direct wages and additional costs. Since the first two items are costs that are spent on the product directly, then there is no problem in allocating these costs because they are related to specific products and consequently, the share of the product unit is directly calculated after completing the production. But the matter differ completely as far as the third item because of allocating and distributing them on the products represent a main problem for all the economical units because these costs can not be allocated or linked directly with production units and loading it accurately on a certain product is difficult.
Johnson and Kaplan(1987) stated that using the TC methods don’t provide accurate costing information because these systems ignore complications of the productive activities which will result in distorting product costs and being unsuitable for monitoring and planning purposes especially that there are various products where these systems are not taken into account the effect and cause relationship between product cost and the resources used in producing it. They also showed that these systems do not provide useful information which can be used to improve the production performance in the economical units where the environmental, administration and technological changes which took place during the last thirty years, made these systems irrelevant in those economical units now.
Raffish(1991) showed that the Traditional Costing (TC) methods only provides the economical unit administration with information specific to value of the stock and costs of sold products to specify the results of the unit’s works in terms of profits or losses but do not provide another type of information which aids the management in taking various decisions which in turn confirms the scope of deficiencies suffered by these systems. He also confirmed that the product cost which is provided by the Traditional Costing (TC) methods, are inaccurate costs.
Cooper and Kaplan (1988a) stated that the process of cost allocation of additional costs on the production units in the Traditional Costing (TC) systems, passes through two stages as shown in Fig.1.
Fig.1: The two stages of the cost allocation system.
Source: Cooper and Kaplan(1988a).
During the first stage, the costs are collected in (Cost pools) named (Costing centers). In the second stage, the costs of these centers are loaded on the final products using some averages or basis of loading related to the volume such as direct work hours or tools operation hours or number of production units, despite of many additional costs factors which are not linked to these bases.
They also showed that knowing the cost of the product is very important and since the Traditional Costing (TC) system is based on loading the costing center costs on the final product using some loading basis linked to the volume; then the cost of products calculated in a method which lacks accuracy and leads to distorted costing information could actually lead to following non-suitable pricing policy. On the other hand they illustrated that the costing system must provide a database to support the management decisions related to pricing or to submitting, stopping and re-engineering the production lines which is something that is not provided by applying the Traditional Costing (TC) systems.
From the previous studies, it may be suggested that applying the Traditional Costing (TC) methods in light of the economical, technological and management changes witnessed by business environment, will be something un-acceptable since using them will result in distorted costing information; in addition to the inability of these methods to provide non-financial information which results in taking un-wise decisions that would reduce the potential of the economical units to compete and keep going on.
1.3. Concept, notion and significance of ABC method:
Bogdanoiu (2009) defined the ABC method as a tool that is offered for precise information to use in the process of the managerial decision making. As it measures resources, the activities cost and efficiency and objects cost whether a product or a service.
The economical units became in a severe need to accurate information accompanied by ABC method to face the deficiencies and criticisms directed to Traditional Costing (TC) methods to reach effect and cause relationship between the product cost and resources used in producing it. Many studies covered the concept of this method as follows:
Cooper (1990a) defined ABC as a system which analyzes the activities that are practiced in the company ; then collecting the additional costs for each activity separately i.e. allocating them on the activities done by the company first then costs of activities are allocated to the products or services or customers according to how they should be utilized.
Krumwiede and Roth (1997) defined the ABC method as a system of accounting that concentrates on measuring the activities and customers efficiency and measuring the cost. It’s a method which gives more precise costing data compared to methods which allocate the costs on basis of volume.
Also, Raffish (1991) defined the Activity Based Costing as a system which collects a group of operational and financial information to follow important activities in the economical unit to reach the cost of the product where the product which does not use a certain activity, must not bear any costing from those activity. He stated that this method aims at serving the decision-makers through the following three axes: a) Differentiation between the products on basis of their various accurate costs in the light of Traditional Costing (TC) methods, b) Specifying the activities and their cost drivers and c) Specifying the non value-added costs.
According to the previous definitions, the ABC is based on measuring the resources costs used to perform the activities; then linking the activities costs with end products using standards which express the activities needed by these products.
Also, the Activity Based Costing may be defined as the method which is based on collecting the overhead costs in cost pools; then loading them on the activities performed by the economical unit using clear cost drives; then distributing the costs of each of activities among cost objects (Product or service or customer or production line) which results in accurate costing information that would support guiding the decision taking in this economic unit.
Innes and Mitchell (1997) illustrated the general framework for ABC method by using a flow chart (Fig.2).
Outputs products Activity costing pools
Fig.2: The general framework for Activity Based Costing (ABC) method.
Source: Innes and Mitchell(1997).
Granof et al. (2000) illustrated the various aspects between Activity Based Costing and Traditional Costing methods as shown in Table 3.
Table3:Variation aspects between the Activity Based Costing (ABC) method and the Traditional Costing (TC) method.
Variation aspect.Traditional Costing method.Activity Based Costing method.Cost pool.Costs are collected in costs centers where the collected costs in the one center are not homogenous and does not refer to one factor.The costs are collected in cost centers on basis of cost divers where each center contains costs of activities which share the same cost drivers.
Variation aspect.Traditional Costing method.Activity Based Costing method.Rules for overhead costs distribution.
Overhead costs are distributed according to the quantity of production on basis of direct work or on basis of tools operation hours.Costs are distributed to services or products or over costs target from collections of activity costs using a base which is proportional to cost drivers.Hierarchy of costs.All the variable costs are the consequent of one driver which is the volume of production.Differentiates between the linear variable costs which change with the change of production volume and the non-linear which is not affected by production volume.Cost objectives.All costs are concentrated on one element which is product or service unit.Several costs positioned whose outputs are the operations, batches, production lines or costs related to customers,…etc.Decision Making support.This method causes loading of the costs on the products by excess or loss and consequently, there is no confidence in the output information from the method and consequently, the method does not guide decision Making.Allocation is achieved according to cost drivers where method helps better in guiding the administration decisions because of quality and accuracy of information which are obtained as output from the method.Costs of implementation.Implementation and maintenance costing is relatively low.Implementation and maintenance costing is relatively high.Source: Granof et al. (2000).
As for the assumptions used by the Activity Based Costing (ABC) method, there is a match between Holmen (1975) study with Zaghloul (2008) study in the assumptions used by ABC method which take form of the following seven assumptions:
1) Products and customers consume the activities.
2) Activities consume the resources where consumption of resources leads to costing.
3) Concentration on basis of measuring the consumption and not on measuring the expenditure concerning the production resources.
4) There are many drivers for consumption of resources.
5) Possibility of specifying and measuring the activities.
6) Conformity of costing pools.
7) Costs of cost pool vary and is proportional to the change in the activity.
1.3.1. Justifications of cost methods development:
The changes in the business environment took two parallel trends representing both: a) A great development in the production technology and b) An increase in the severity of the competition. This matter led to direct several criticisms to the Traditional Cost (TC) methods in terms of the method used by these systems in the scope of allocating the secondary costs. This is because of the un-suitability of these methods to the modern business environment which are characterized by relying to the mechanism and increasing the complexity of the production operations and a reduction of the product life period. The majority of these criticisms revolve around a) Inaccurate values of the resulting costs from these systems (Banker and Johnston,1993). These matters led to in the presence of severe competition, an increase in the costing resulted from making wrong decisions which in turn weakens the competitive potential of the company (Cooper,1991).
According to the previous opinions , the researcher will present the development justifications of the Traditional Cost (TC) methods where they became unable to cope with the occurred changes in the modern manufacturing environment as follows:
18.104.22.168. Changes which occur in the modern manufacturing environment:
The industrial revolution which occurred in 1880, led to the transformation of the industry from the manual system and working in the houses, to building the huge factories of mass production, establishment of markets and widening of the transactions among the various countries which resulted in an increasing use of the robot. The statistics show that there are 7000 robots in the United States and 8000 robots in Japan and more than 4000 robots in the United Kingdom.
The current success of the business organizations became related to the increase in the dependence on the mechanism, the computer, reduction of levels of the stock and the direct labor, increasing the concentration on the planning of the production and shortening the Product Life Cycle (Brimson,1997). Also, the employment of the robot in the production of the production by using a new technology for manufacturing with diverse aspects including the flexible manufacturing systems, computerized manufacturing and the total control of quality (Abd Al-Rahman,1996).
Therefore, the modern business environment is characterized by the technical development, the diversity of the products, the increasing wishes of the customers, increasing the severity of the competition and respecting the standard specifications of the products. This matter leads to the most problems which face firms may be confined in the deficiencies of the Traditional Cost (TC) methods to match with these modern variables cost and increasing the severity of the competition.
1) Effect of the technological development on the cost methods:
The accounting science has faced and still facing daily vast challenges because of the advanced technology appearance which is increasing day after day in progress, complexity, intensity of competition and remove the limits of this competition. The problem of changing the frame and behavior of the costing accompanied the massive technological progress. This matter showed that there was a necessity to search for more subjective and suitable methods to be adapted with the changes which occurred to the frame and behavior of the costing. This modern technology led to the indirect costs became more important item with the reduction in the effect of the direct costing (Especially the labor force). This is due to increasing the mechanisms degree in the methods and procedures of the production. Therefore, it became important to match this matter by the appearance of new tools which their usage lead to more accurate and subjective results, the reliance on more safe information to reach just decisions especially in the multi-products industrial activity together with achieving a real, rational and permanent reduction in the costing. It is possible to clarify the impact of technological developments on the cost form as follows:
A) Effect of the technological development on the costs structure:
The increase in relying on the modern manufacturing technology which increases the ratio of the fixed costs and reduces the role of the direct labor, the complexity of the production process and the diversity of the products. This matter leads to change the ratios of the costs elements (Direct materials, direct wages and indirect costs). In the past, the direct costs elements covered a large ratio inside the costs structures and the indirect elements formed a small ratio of this structure. But now, a great transformation in the ratios of the previous elements took place where the indirect costs occupied a much larger ratio than that it occupied in the past.
The performed study in Kingdom of Saudi Arabia on both the cement and printing industries confirmed that the transformation towards automation in the manufacturing changes the costing mixture which exists inside the industrial costing structure. This matter leads to a reduction in the ratio of direct industrial costs and a rise in the ratio of the indirect industrial costs (Ashour,1991). The technological advances affect the costs structure where in the advanced industry environment, the technology plays a main role in the integration of the various automatic functional fields. The advanced industry environment reduced the labor force element but it simultaneously led to an increase in the indirect costs and a reduction in the direct labor force element (Gunasekaran et al.,1999).
The reduction in the relative importance of the indirect costs in a previous period of time, was a justification to use certain measures (Theory of Costing Centers) despite its deficiencies in terms of accuracy in the measurement. But, after the increase in the relative importance of these costs due to the modern technology of production. Therefore, the adhering to use same standards leads to maximizing its negative effect on the precision of the measurement (Ashour,1998).
The inaccuracy in determining the products / services costs to the Traditional Cost (TC) systems, may be due to selecting a single basis (Direct labor hours) to allocate the costs on the products. This is due to this basis assumption doubles the number of the product units, and also means doubling the cost inputs which are consumed by the product. This basis is considered one of the loading bases which are related to the volume such as machines operating hours and it is called cost of direct materials (Cooper,1988a).
The ABC method is considered a substitute better than the costing centers method where the secondary costs are allocated by utilizing the cost factors which have a difference in its concepts and numbers than the loading bases used in the Traditional Cost (TC) methods. This allocation is achieved according to the number of the required activities to perform the products.
B) Effect of the technological development on the formation of the products:
The modern manufacturing environment and its accompanies modern techniques in the production systems made the production operations to be characterized by flexibility and the companies started to produce various formations of products which differ from each other in terms of volume and specifications. This matter is in contrast to the previous manufacturing technology which is characterized with the steadiness of the production lines and specialty in the production of patterned products. There is no doubt that the increase in the variations among the products in terms of volume and specifications and the extent of complication in the manufacturing process, lead to the variations in the types of the activities and in the standard of the required to efforts service and production of these products (Ali,1994).
When the Traditional Cost (TC) systems allocate the indirect costs, they do not differentiate among the non-complicated (simple) products which need less amount of planning, scheduling of the production and inspection services and among the complicated products which need a greater amount of the previous services (Al-Helbawi,1995a).
Despite the previous criticism of the Traditional Cost (TC) systems, these systems are linked to the production systems in which every production line specializes in producing patterned products. These products converge the amount of consumptions of the various resources. This was a justification to the use of the costing centers despite their deficiencies in accurate determination of the product costing. As the increase in the formation of the products due to the modern production technology. The holding with these systems may result in non accurate determination of the product costing. This is due to the increase in the usage of modern production technology which results in an increase in formation products.
The needs increase to the use of ABC method because of increase in variation of manufactured products by the firms. In the past, the firms produced either a single product or products with similar nature. In this case, the indirect costs Which are used by the different outputs are comparably same. Thus, the use of one base or several loading bases may result in a little distortion in the cost of the product. It can not say the same result for the contemporary firms. A consequence of the modern industrial methods usage such the flexible manufacturing, the firms can produce several and varied products which may be different in their nature. In this case, the consumption of the indirect costs vary significantly from one product to another which requires using the ABC method (Latshaw and Danile, 2002).
The performed study on the Railway Authority Data in Egypt supports implementing the ABC method. This study signifies the relationship among the accuracy of the costs information and the non-homogenous mixture in the light of the Traditional Costs (TC) and the ABC methods usage. Also, the study proves the existence of a reduction in the rate of actual indirect costs on the lines and the calculated indirect costs. The high accuracy was reflected on the total indirect costs, in addition to the advantages which are achieved through improving the activities management and the decision-making process. This is due to determining the performed service more accurately (Yousif,1997).
2) Increasing the severity of the competition among the International and Egyptian firms:
The Traditional Cost (TC) systems started in the light of business practicing environment which are characterized by the limited competition markets or the regional markets. The customs duties and restrictions on the imports formed a protection for this type of competition for a long period of time (Ashour,1998). After implementing the International Organization decisions, the limited competition markets turned into the opening markets which we call the international market. The business environment is characterized by the following features:
a) A growth in the volume of the competitors, b) A growth in the customers desire for more renewing and creativity and c) A reduction in the output life period. The increase in the severity of the competition resulted in maximizing the role of costs management, the accurate determination of the product cost, the correct pricing and the good control of costs became more important than they were. With this international competition, the inaccurate determination of the cost results to a non-deliberate mode, a weakness in the competitive capacity for the organization where the pricing mistakes lead to economical losses and they cause inaccurate information about the cost in finding a difficulty in the competition especially with a reduction in the costs of the competitors (Turney,1992a).
The competition among the Egyptian firms has several components such as the dependence on the practical productive technology, reducing the cost and giving attention to the quality. Also, specifying the accuracy is an important factor for competition because it creates a good distribution of the resources among the alternative uses in order to determine a better formation for the products and concentrate on the markets and the profitable customers which reflects in increasing the profitability. The use of the organization of the target costing system (According to this system, the cost is determined depend on the product’s value in the market after expelling the required profit margin from the price) is considered as the main impulses for the organizations to search for a system to determine the product pricing more accurately. If the organization uses a system which specifies the product costing accurately, it will enable us to make the correct decisions in relation to the production or discarding of the products. This matter is carried out through the comparison between the cost resulted from implementing the system and the cost of the market. If the cost is not determined accurately, the organization will make wrong decisions and produce products which appear superficially profitable but in fact they may cause losses.
22.214.171.124. Criticisms which face the Traditional Cost (TC) methods:
The Traditional Cost (TC) methods were designed for a certain environment when the direct labor and the direct materials were the main elements in the production and when the technology was stable and there were a limited number of products. In this environment, the attention in evaluating the stock and determining the products cost was to prepare the financial statements.
Nowadays, with last business environment changes in terms of the technological developments and the increase in the severity of the competition, the data provided by the known Traditional Costs (TC) method became not conforming with the requirements of this modern environment. These data are characterized by deficiencies because some products or customers are loaded with a greater cost than they should be whereas others are loaded with a less cost than they should be. This, matter affect the decisions-making. These decisions become negative such as the decisions related to the concentration on the less profitable products or customers and dispelling the more profitable products or customers and the pricing decisions with less or more than it should be.
Criticisms which face the Traditional Cost (TC) methods may be mentioned as follows :
1) The information provided by the Traditional Cost (TC) methods in terms of products cost data may be characterized by deficiencies because of non-existence of a causative relationship between the product cost and the firm resources which are used to produce this product i.e. there is no relationship between the costs existing in the costing pool and the basis used in the distribution of the costs (Sourwine,1989).
2) The reliance of these systems on the direct labor hours as the basis for the distribution leads to an increased concentration by the departments managers on the distribution of the direct labor hours. This process gives an extra attention for the direct labor and reliefs the attention given to the increasing indirect control of costs. This matter may lead to an increase in the profitability of the department, but also leads to a reduction in the profitability of the other departments. This is considered as one of the problems resulted from the incorrect distribution of the indirect costs and creating the problem of the partial maximization of the profits (Zedan,1996).
3) The Traditional Cost (TC) methods assume that most costs are linked to the volume of production but this assumption in not correct because of the presence of several indirect costs which are not only related to the volume of production but also with other causes such as: a) Times number of equipment preparation, b) Times number of receiving and inspection of commodity. This matter leads to the use of direct labor hours or the value of the direct wages as the basis of distribution which gives relatively inaccurate and unreal information about the product costs and profits (Frank et al.,1989).
4) The Traditional Cost (TC) methods concentrate on the products and not on the activities when determining the cost of the product unit. But, with the diversity of the products and the increase in the productive processes, variations happened in the types of the activities and the level of the required efforts to serve and produce these products. This matter led to the need to a cost system which is based on the technical relationships between the products and the required activities to produce these products.
5) All types of competition pressure on the firms forced, in particular, the industrial firms to think seriously and deeply in the correct concept of their costs structures (Abdallah,1994), through referring to use a system as a connection chain among the performance of the activities and the demand of these activities on the firm resources (Ali,1994).
6) The Traditional Cost (TC) methods became unable to conform with the renewable needs of the management and potentials became deficient in providing the required information to make the correct decisions in the current industrial business environment.
7) The Traditional methods of distribution such as: a) Total distribution method, b) Individual distribution method, c) Descending distribution method and d) Mutual distribution method, lead to an inaccurate cost information. This is due to non-existence of the cause and influence relationship i.e. there is no causative relationship (Mohamed,1991).
8) The ABC method is one of main alternatives to cost systems for manufacturing firms, however this method has not wide spread in Egypt. There are some aspects of obstacles for applying ABC system in Egyptian manufacturing firms. These obstacles may be arranged, in descending order, according to their impact severity for applying Activity Based Costing (ABC) system on Egyptian firm performance as follows: a) The weakness of support from top management, b) Resistance to change, c) The weakness of system accounting, d) The costs of design and application system, e) The weakness of human expertise, f) The random behavior of indirect costs [Technical dimension] (Stefea et al.,2013a).
1.3.2. The Activity Based Costing method:
Researcher tries to illustrate the concept of ABC as a system which concentrates on how the activities consume resources and the final cost units consume the cost of these activities. This is in addition to stating its importance and stages of development. The literature related to ABC method started in 1954 and then the studies rolled after.
Cooper and Kaplan(1992) performed a study titled ABC systems: measuring usage of resources costs. This study was the second development for ABC system. The researcher presents the dimensions of this method which is represented in two dimensions (Measuring dimension and reduction dimension). The measuring dimension provides more accurate and subjective information about product cost because of using the activities and the cost drivers. Then the role of cost reduction dimension comes after that. This dimension aims at cancelling the activities which consume resources without adding a value and getting rid of the expenditure on these resources or re-distributing of these resources on the other activities which add value. The researcher will cover the ABC methods on basis of system in terms of concept, the stages of the development and its dimensions as follows:
126.96.36.199. The concept:
The ABC method got considerable appreciation both on the academic level or on the applied level. There are several definitions for ABC method. Some of them may be mentioned as follows:
The first definition:
The ABC system is a method to determine the product cost. It represents a supply or development to the methods for calculating the costs which have two stages and on which rely most of the modern cost systems (Cooper,1988a).
The second definition:
The ABC method is more accurate concept for determining the cost of the product through the accurate determination the cost drivers which are used in follow up and allocation of the indirect costs and it provides a comprehensive view for all the costs which are connected to providing product or service (Hardy and Hubbard,1992).
The third definition:
The International Organization for Industry by using the Computer, defined the ABC method a methodology for measuring the achievement and cost of operations, assets and cost units. where the resources are allocated on the activities and then allocating the activities on the cost according to unit usage level for these activities. The ABC method has a causative relationship which links the cost divers with the activities (Pollen and Landau,1994).
The fourth definition:
The ABC method is defined as the process of following up the costs of activities to the products. These products may be commodity or service (Hixon,1995).
The fifth definition:
The ABC method is a framework aims at achieving a distinct level in the matter of efficiency in calculation of cost data through analyzing the activities inside the organization and the collection, functionality and following up the costs what are linked with these activities. This method depends on activities usage as a foundation for calculating cost where activities use the available resources whereas the producing units consume these activities (Yousif,1995).
The sixth definition:
ABC method is an outlook the examining and costing of operations which concerns following the assets consumption and evaluating the final outcome. Resources are allocated to operations and operations to cost goals according to estimation of consumption. The last mentioned utilize cost factors to engage operation cost to outcomes (CIMA Official Terminology,2005).
The seventh definition:
The ABC is a managerial tool that can enhance decision making by clearing a clearer picture of the costliest activities of a service. The implementation of ABC leads managers to better decisions and a tool to use in providing more efficient services (Wilson et al.,2007).
The eighth definition:
Adamu (2010) indicated that the basic principle of Activity Based Costing is that operations manage costs of any firm by resources consumption.
The ninth definition:
Raiborn and Kinney(2010) stated that, in an ABC method, the costs are accumulated into activity centre cost pools, which are cost pools of which a separate reporting of costs is needed. These kinds of pools are gathered by pooling up the costs that have the same cost driver. After this the costs are further allocated out of the activity centre by using an activity driver, which measures the demand placed on activities.
The tenth definition:
The Activity Based Costing (ABC) method for cost accounting is established majorly on regarding that all products which a firm needs to perform a collection of operations and these operations flow in cost that have to endured. So the ABC method is formed on the costs which are crucial to relate to new production which are straightly directed to the operations that create this production. Consequently, to distribute the cost of the operations on the production depending on the level they gain from these operations (Al-Refa’ee ,2012).
The eleventh definition:
The ABC system is used as a method for allocating the indirect costs of the products in light of technological development which led to increase the percentage of indirect industrial costs (Abbas,2013).
The author sees that the ABC method is a technique that evaluates the efficiency and cost of cost items, assets and operations. Cost items use operations and operations use assets. Assets costs are allocated to operations according to their utilization of these assets and operation cost is reallocated to cost items (production) according to the cost item partially utilization of these operations. ABC method consolidates the mutual link between cost items and operations and between operations and assets.
The researcher notices that these definitions dealt with the ABC method as a more accurately method to determine the product cost through analyzing the activities and follow up their related costs. The ABC method is also characterized as a reduction dimension and an assisting element in finding new indicators. Therefore, researcher sees that the ACTIVITY BASED COSTING is a method which deals with aspects of the associated deficiencies with the Traditional Cost (TC) methods as the consequence of the occurred changes in the modern manufacturing environment from the viewpoint of the distribution of the indirect costs. Also, through determining the activities which are operated in the firm then follow up these activities based on many of cost drivers in order to be distributed on the products according to their consumption of these activities. This matter contributes in the accuracy of calculating the indirect costs, the non added value activities will be cancelled and the costs also will be reduced.
188.8.131.52. The stages of the development:
Yousif (1992) illustrated that the appearance of the related articles to Activity Based Costing (ABC) system were in some studies 1954 by Volter. Also, studies of Stubus in 1971,1980 and 1991 revealed a general framework for Activity Based Accounting. But the second development of this system achieved by Cooper and Kaplan who developed it to serve various aspects.
Latshaw and Danile (2002) showed that ABC method may be applied by using the following two stages:
The first stage:
In the early sixties, the accountants in General Electric Company strived to upgrade the utilization of accounting data in directing the continuously raised secondary costs. These increasing costs were the consequence of the decisions which were taken long time ago. For example, making the decisions to modify the engineering design, oftentimes, results a significant increase in the request to spare parts. In this case, the engineering administration department does not expect the negative effects because of this step on the other departments of the organization. The attempt of General Electric Company may be called ABM.
The second stage:
This stage has been initiated by number of experts businessmen and production firms at the end of seventies and early eighties. Those consultants attempted to develop the ABC method to improve the product cost information, to help in making the decisions are related to the pricing and the formation of products. In general, the development which the ABC method has passed though, has the following two objectives:
1) Providing the possibility of managing the indirect costs (Activity- Based Management).
2) Providing costing information about the product which are more accurate than what was available in the Traditional Cost (TC) methods (Activity Based Costing).
184.108.40.206. The dimensions:
Some studies showed that the ABC method, has the following two dimensions:
1) The measurement dimension.
2) The cost reduction dimension.
1) The measurement dimension:
The measurement dimension means allocating the cost. It is represented in the vertical part in the model as shown in Fig.3 (Yousif,2004). It reflects the organizational need to allocate the activities cost then to the objectives of the cost (Commodity / Service) to analyze the decisions which are needed by the management such as (pricing, products formation, purchasing and supplying sources and product design decisions).
The ABC system depends on a simple concept which is that all the firm’s activities exist for the manufacture and marketing of the output. Therefore, it must be taken in consideration that all these costs are connected to the product and they almost are divisible and non-detachable. So, they can be divided into parts and can be related to individual products or a group of the products (Al-Ghorory,1992).
Fig.3:Two dimensional model for Activity-Based Costing (ABC) system.
Source: Al-Ghorory (1992) and Yousif (2004).
Allocation of the cost process is performed on the following two stages:
The first stage:
This is the stage of allocating the indirect costs elements on the activities. The goals of this point is to determine operating cost. It includes all the production elements i.e. production, individuals, equipment, transport expenditures, computer systems and other resources which are employed to perform the operations. The activity cost is determined through following up the cost and the cause and influence relationship. This follow up is reasonable process because the resources are allocated to perform a single activity. When the resources are used to perform several activities, then they must be divided among all activities.
The second stage:
This is stage of allocating activities to the cost units. All the activities cost are distributed to costing units or the subject of cost. The subject of cost includes the producing units, the customer, the distribution channel and the supplier (Kennedy,1996). Often there is difficulty in allocating activities cost on cost units when the activities cost follows the subject of the cost. This matter is carried out by determining the cost drivers (Booth,1997).
The accounting method concerning the indirect costs depends, in allocation process, on idea of cost centers. The cost center is an activity circle for collection of the costs elements. This means that method links the costs with the productive or services costing centers as activities. This method achieves a great success according to the Driver/Result criterion. But when re-allocation of the services centers on the production centers or allocation of the production centers on the products, the violation of the driver and result criterion may occur due to the use of the basis for the distribution of these costs which are not considered from their drivers. This matter may lead to a deviation of product cost. Despite that this method considers the activity as the basis for the collection of the costs but it is not used as the basis for the allocation (Hagag,1992).
Therefore, it becomes clear that the ABC method, even if it is similar in the implementation steps with the Traditional Cost (TC) methods for allocating by using the cost centers idea, but the ABC method is distinct from the Traditional Cost (TC) methods in the following points:
First: The idea of the traditional cost center no longer conforms with the modern environment because the center contains a number of the non-homogenous activities, especially, after following the concept of (Group technology) which depends on the cost center is containing a various groups of equipment which perform various tasks on the product unit in the same center.
Second: The ABC method allows for identifying the calibration of the activities levels. Consequently, realization that the cost driver of the activities in each level will differ from the cost drivers of the activities in the other levels. This matter gives a good chance to use of the suitable cost driver.
Third: The ABC method gives an opportunity to the process of improving the cost through the possibility of identifying the useless activities and attempting to dispel them or at least reducing the cost and duration of these operations.
2) The cost reduction dimension:
Cost reduction dimension is represented in the horizontal part as shown in Fig.7. This dimension offers data about the performed business in operation and business relationships among the activities i.e. the processes include data about cost factors and evaluation of performance for every operation or procedure which are non-financial basis and are useful in how to improve the activity and the performance as follows (Turney and Stratton,1992).
Cooper and Kaplan (1991) explained how the ABC system can contribute in reducing the consumption of resources and requires reduction in the resources consumption as follows:
a) Reducing the times of performing the activity for the same outputs such as changing the formation of the products.
b) Reducing the consumed resources for producing the same production formation volume and the current customers.
The steps for reducing the consumed resources are considered as only the first round and even the improvement programs will only be effective when the organization makes another round with the reduction dimension for demand of the consumed resources. The managers have either to get rid of the surplus resources or re-distribute and use them in the production of additional outputs.
To conclude, it may be said that the ABC method is a concept to improve the process of follow up the indirect costs of the cost units through determining what these units consume in terms of the organization resources, centering the activities among the costing units and the resources taking in consideration determining the non added value activities and expel them or trying to reduce their costs. In this way, the ABC system will be an assistant factor in finding new indicators which reflect the accuracy of calculating the costs and also reflects the fields of the reductions.
1.4. Motives of appearance ABC method and its supporting conditions for applying:
El-Hebeity (2002) mentioned that the Administration Accounting (AA) system in particular was criticized concerning the suitability of methods and procedures of the currently followed costing systems in the light of new developments which took place in the industrial or services organizational environment. This pushed many researchers to improve methods and schedules for allocating costs in order to specify accurately the costs of products and services and the provision of information suitable for administration purposes.
Garsso (2005) illustrated that the Traditional Costing (TC) method was distorted and received late support by administration in the planning and monitoring phases and the provision of data about the operations related to products and services.
Also, Ross (2004) stated that there are several convincing reasons for improving the methods of calculating the costs such as: fast growth of indirect costs the increase in the diversity of the service of patients and the reduction in the direct costs.
Abu Khashaba(1999) mentioned that in year 1987, with the increase of criticisms directed towards the Traditional Costing (TC) method, Cooper and Kaplan(1988a) submitted a new system for allocating the indirect industrial costs called “Activity Based Costing method”. This method was considered as transformation mechanism that allocates costs on products or services which matches the technical developments witnessed by the organizations in the current era and which also relied primarily on analyzing the operational activities as a basis for allocating the indirect costs on products and services to reach the required accuracy for costs and the possibility for supporting the management with other techniques that would re-engineering the operations and the comprehensive quality management, costs reduction programs and analysis of profitability (Abdallah,2004).
The following are the major features, which were specified by some researchers, and must be available in the business cost environment so that it can become suitable for applying the ABC method:
1)Increasing severity of competition in the market between various types of organizations as a consequence of the globalization of the market through the great opening in the international trade where these organizations became concentrating largely on the type of product or service that they offer (Abora,2005 and Farahat,2005).
2)Changes in the operational environment for the organizations and the increasing needs by managers for immediate and more accurate information which includes all aspects of work (Abdallah, 2004 and El-Zatma,2006).
3)The radical changes in the structure of costing through the growth of the rates of the indirect costs in light of the high mechanical levels and the modern time-management systems and the changes in the manufacturing environment (Abd El-Ghany,1999).
4)An important rise in the utility of assisting activities in the organization such as the engineering design, programming, marketing in addition to the use of the advanced manufacturing systems in the production operations at which it becomes difficult to load the costs on the products using the traditional basis related to direct work (Abu Khashaba,1999).
5)The increase in the extent of variation in products was accompanied by an increase in the extent of complication in the industrial operations where the production operations became more complicated and the scope of products became widespread which resulted in shortening the product’s life cycle or service and resulted also in a significant rise in the quality.
6)The availability of an accounting system, makes it easy to obtain precise and detailed information to specify and measure the relationship between the cost and its causes; and leads to a reduction in cost (Abd El-Karim and El-Kakhn,1997).
7)The increase use of the common elements which are used in manufacturing more than one product or service i.e. What is called (Standard average) which equals the number of elements or the shared parts divided by the sum of the elements in the Product (Dergham,2005).
8)The non-precision of the Traditional Costing (TC) method related to the just allocation of indirect costs to the products or services, would result in the distortion of costs of the products or the services.
Those previous conditions, made the mechanism for allocating the indirect industrial costs over the production units on the basis of direct work hours, not correct and the Loading Average used in the Traditional Costing method became un-suitable and distorts measuring classes of production units. Therefore, there must exist a new precise methodology in allocating the indirect burdens over the activities and the production units where this new methodology in allocation take the form of ABC method (Fakhr and Al-Dolaimy,2002).
Hence, applying ABC system in the services or industrial sector, depends largely on the results of analyzing the costs related to the method compared with the benefits achieved from applying it ; in addition to the presence of several features characterized by the organizations and which must be applied to the ABC system stated by Cooper and Kaplan(1988a). These organizations are as follows (Abdallah,2004):
1)The organizations which serve large area of the market such as services organizations which are characterized of a large volume of expenditure.
2)The organizations which produce various products and have large number of customers with various supply needs and with various production volumes.
Mobark et al.(2003) pointed out that the ACTIVITY BASED COST method is used in both the industrial organizations and with the services companies and organizations which do not aim for profit and in government organizations.
1.5. Steps of proposed design of an applied ABC method:
The researcher reached no compromise in introducing specific steps to design and implement Activity Based Costing (ABC) method. Despite this, Cooper (1990a) stated that the Activity Based Costing (ABC) system, consists of an integrated and comprehensive framework which is designed through the following five steps:
1)The collection of the economic unit works in activities:
This is achieved through collecting similar works in one activity and using one driver where the dependency of each work of the economic unit works is specified on certain activity to follow up the cost of this activity to the products or services. The designers of costs system must select the optimal drivers which achieve a high degree of accuracy and does not lead to a significant rise in the costs of the measure.
2)Measuring the cost of every activity:
The collected costs are specified for each activity independent of other activities.
3) Settling the activities centers:
The activity’s center represents that part of production process which performs a repetitive work to perform a certain task. So, the costs of the center activity are determined independent of other centers.
4)Selecting drivers of costs at first level:
These are the factors that are used to distribute the overhead cost factors on the previously specified activities.
5)Selecting drivers of costs at second level:
These are the drivers used in allocating the activities costs on the products or services which consumed these activities. Note that selecting the cost drivers for the second level, specifies the accuracy of product or service costs on which the report is based.
Grasso (2005) stated that steps used in implementing the ABC system specifies the activities performed; then allocating the resources cost to conduct the activity on the activity cost set whether by direct or indirect proportion utilizing the resource factor. Finally, allocating costs for each pool of the activity costing pools on the products or on the other cost targets depended on the activity cost drivers.
On the same context, Krumwiede and Roth (1997) used the following steps in implementing Activities Based Costing (ABC) method which are clarified as follows:
1) Determining the targets of costs which its costs should be calculated (Product, customer or service).
2) Determining the main activities and costing report for each of them.
3) Selecting the cost driver suitable for each cost pool activity.
4) Calculating unit average for all activity cost drivers.
5) Allocating cost on the cost targets based on the cost drivers rate.
It may be observed that despite variations in the implementation steps for each of the previously stated studies, but they all concentrate on collecting the economic unit works in a number of activities ; then specifying and collecting what is related to each activity from the economic unit resources. This is followed by allocating the cost of activities on the various cost targets based on rates of the pools of cost for each activity because the main target from implementing these activities is to measure the cost accurately and providing information which supports decisions making.
From the studies mentioned above, it may be imagined a framework for designing and implementing the Activity Based Costing (ABC) method inside an Egyptian establishment as follows (Fig.4):
1) Determining the resources used in the economic unit works.
2) Determining the costs linked to operating these resources and placing them in costs collections.
3) Analyzing and determining the activities which are being practiced in the economic unit and consumes the preciously determined resources and the pools cost specific to those activities.
4) Determining what is elated to each activity in terms of costs of economic unit resources using cost activities pools
5) Distribution of activity costs on the various costs targets according to rate of utilizing from these activities where the target of the cost is not being utilized from un-loaded activity with any cost from this one.
Fig.4: Flow chart of proposal applied framework for Activity Based Costing( A B C ) method inside an Egyptian establishment.
Source: prepared by the researcher(Own processing).
The precious presentation shows that the activities are the basis of this method; then the activities determination process is very important whereas the classification of activities was important for many researchers. The author sees that the opinions of these researchers vary between them in terms of classification of these activities where some were classified according to their calibration and others were classified according to their consequences in terms of value of product or service.
Hilton (2005) showed that it is possible to classify the activities performed inside the economic unit to produce a product or provide a service according to its hierarchies of activity, into five main groups as follows:
1) Activities related to unit-level of product:
Activities performed for each product or direct service with variations in number of producing units, activities are performed for each unit of the product or service and consequently, cost driver is the number of product units. The occurrence of these activities is directly proportional to volume of the production.
2) Activities related to group-level:
They are the activities used for every production or services group regardless the number of production units specific to each batch. This represents the activity pools where the cost of these activities is common to all the produced units.
3) Activities related to product-sponsoring-level:
Performed activities to the specified product units and which are not useful for other products or services. The costs of these activities increase by increasing the number of products; consequently, these costs are loaded on the product using suitable costs pools.
4) Facility-sustaining-level activities:
Activities required to support the economic unit processes as a whole; and provision of the administrative infrastructure which makes possible the production process or provision of service. Since, it is difficult to allocate costs to activities, they are considered as common costs for all products or services and consequently they are loaded as total sum of money in the income list for all production lines as periodical costs.
5) Customer-level activities:
Activities related to specific customer including customer market research activities and the technical support not linked to certain product.
Whether those activities perform overhead value to the product or service or not, King (1991), Nichollas (1992) and Lawson (1994) classified these activities into two types as follows:
1) Value added activities to the output:
Activities which the client is willing to pay value for them; and which are performed highly efficiently and are necessary to achieve the organization objectives. Avoiding these activities result, in the long term, in reducing the value of the provided product and make it doesn’t respond to the customer’s expectations which have a negative influence on the organization sales and its share in the market.
2) Non value added activities to the output:
These activities can’t be discarded without losing satisfied clients and not affecting accomplishing the corporation’s goals.
From the previous studies, it may be deducted that classification of the activities according to the added value, gives the economic unit the possibility of studying the costs of activities in an analytical method. Then, discarding the high costs activities which are non-value added; and reconsider them in methods of performing activities with weak added value to improve them.
It may be observed that the previously-stated various classifications of activities do not present conflicting classifications but they are classifications which can be used complementary where more than one classification can be used simultaneously because each has what justifies it from the practical aspect.
1.6. The components of ABC method:
The researchers effort continued to find an alternative to the Traditional Costing (TC) method. Abd El-Karim and El-Kakhn (1997) presented a new method for allocation of costs which is called ACTIVITY BASED COST method by Cooper and Kaplan (1988a).
El-Hebeity (2002) revealed that the analysis of the activities in any organization is considered as the starting point on which ABC method is based. It is important to correctly perform the required activities which are indispensables and influence positively the organizational works, its results and achieving satisfaction of stockholders in the company. This is reflected in achieving continuous results in expanding the market ratio and increasing the profits and productivity.
Abu Khashaba (1999) illustrated that the components of the new method are characterized by good specifications if the activities such as the cause of the costing where the final products do not consume the organizational resources but consume activities (such as tools supply activities, material receipt activity,…etc) where these activities exhaust the organizational resources. Therefore, loading the products and services with indirect costs on basis of activities which were depleted by these products or services will result in an increase in accuracy in specifying the numbers of costing and as a main support to the ABC system which are represented in specifying the causes of costing to ease linking the costs with the product.
Dergham (2005) summarized the major components for applying the ACTIVITY BASED COSTING method as follows:
1) Management belief that the Traditional Costing (TC) method which is based on the direct works costs in calculating the loading averages, distorts the cost of product or service.
2) Variation in the volumes and production quantities of the produced commodities with intensifying competition in the market in which the organization works either locally or internationally.
3) Availability of accounting systems which can provide precise and detailed information easily and with the least costs to specify and measure the relationship between the costing and its causes.
4) An increase in the use of the supporting activities in the organization such as engineering design, management, programming, marketing, equipment maintenance, accounting…etc.
5) The change in the modern industrial environment in terms of an increase in the usage of advanced manufacturing methods in the production processes which resulted in a reduction of direct works costs from total product costs and raising ratio of indirect costs from total product costs.
6) An increase use rate of shared elements used in manufacturing of more than one product or service, for the total elements which form the product or service. This criterion rate equals number of shared pats divided by total number of elements of product.
7) The mixture of indirect costs form large proportion of the framework of product or service costs. It does not change relatively with the volume of activity related to each product or service separately.
8) The organization producing a various combination of products or services and complicating the production operations.
9) Difficulty in defining costs of some products or services and in explaining the profitability of some expensive or cheap products.
10) Low prices of the competing products or services in the market and loss several tenders without understanding reasons behind losing them.
Samy (2000) stated that to guarantee success of Activity Based Costing (ABC) method as information system, We should consider the following considerations:
1) Evaluating the organizational needs in terms of information and nature of information structure which include timing for obtaining the information and how they are employed optimally for all organizational levels.
2) Evaluating the potential of information system concerning the flow and supplying information to various levels in the organization.
3) Evaluating the available resources which can be used (Time, human resources, and financial resources).
4) Developing and training the human resources.
5) Using the method of preparing the budgets for the organization.
6) Preparing frameworks for reports which are satisfactory for obtaining the information.
Abu Khashaba (1999) also stated that the ACTIVITY BASED COST method specifies the causes of costing to enable a link between the costs and the product; having established the cause of the costs, then using the activities as a just basis for distributing the indirect costs becomes more subjective in increasing the accuracy in specifying the costs of services or products. This is because ABC method follows up all the costs to their original sources during the operation of allocating the costs (Ross, 2004).
Also, He illustrated that the successful application of ABC method depends on comprehensive understanding principles of behavior of costing and the potential to record and processing the costs accurately which is accompanied by the organization top management encouragement to the importance of using the modern advanced scientific methods.
El-Gibaly and Diab (2012) suggested to use a modern strong method which helps Egyptian firms in their achievements to improve operations, directing to greater efficiency and completion. This tool is known as the ABS.
Syzchta (2010) also suggested to use a modern version of ABC, TDABC as a recent method in order to omit the obstacles related to the application in large-scale ABC due to the different approach of collecting information on the time needed to execute operations and an adjustment in calculating the cost of the activity. This kind of TDABC can hasten and ease the activity calculation process, the cost of the product and the client in different types of industries.
1.7. Levels of progress of ABC method:
The ABC method passed through many stages of development. Several researchers studied the changes required to implement these methods. Aiyathurai et al. (1991) showed that the Activity Based Costing (ABC) methods passed through three stages to reach the current familiar form:
First Stage: The Activity Management (AM):
The concentration on the concept of value chain was greater than the financial analysis, where the object from activity management was to specify the activities that do not contribute to this chain to discard them through transforming to use the buying method for just in time selling which results in expelling the activity which keeps the stock. This stage aimed also to support and improve the contributions of the remainder through quality and speed of response to the customer’s requirements.
Second Stage: The Activity Cost Accounting (ACA):
This stage was to ensure that all costs were minimized through specifying the cost drivers and their links with the activities and follow up their reactions with other activities.
Third Stage: Activity-Based Costing method (ABC):
This method gives great importance to analyze the costs to specify accurately the costs of supplied products or services which enable the decision-makers to take wise pricing decisions. In addition to considering this method the best one in analyzing and estimating the costs for special objectives.
Turney and Stratton (1992) stated two dimension (Costs and process) models for the Activity Based Costing (ABC) method.
They added process views to the view related to the costs i.e. cost view where the cost’s view concentrates on allocating the costs which occurs through the following two stages:
1) First Stage:
The resources costs are allocated to the activities through cost drivers which are linked to these resources.
2) Second Stage:
The activities costs are loaded on the cost target regardless if it was a product or a service.
The process view concentrates on continuous improvement of performance through providing non-financial information about the cost drivers, which in turn added a strategic view to these activities.
Attempts to develop ABC method continued. Kaplan and Anderson (2004) gave a modernization of ABC methods which is TDABC. They used the modern concept to overcome the difficulties which appeared when implementing ABC methods widely.
On the same subject, Namazi (2009) stated that the important differences between the well-known Activity Based Costing (ABC) methods which were called the Traditional ABC methods and between the new methods called TDABC which takes the following form:
1) Using the TDABC for targets of costs (Departments, deals, products, services, customers).
2) The new method cancels the first step of the traditional method steps (Design various activities) where according to this new method, the activities are not specified.
3) The new method shows the costing process without relying on allocating the cost of resources on the activities before allocating them to various costs targets.
4) The new method determines the un-exploited energy through determining the general costs in advance through estimating them on basis of the practical capacity and determining the costs based on average use of the activities.
5) The new method can deal with the complications of production or services and determining the distribution of the exploitation of various resources.
On a related subject, Everaert and Bruggeman (2007) showed that the new concept can be implemented to the Activities Based Costing (ABC) method by depending on TDABC and by using the following steps:
1) Determining the various resources collections required to perform the activities.
2) Estimating the costs for each group of resources.
3) Evaluating the functional volume for each group of the assets.
4) Collecting the producing unit’s expenses for each group of the resources so that the total costing can be divided for each group of resources based on the functional volume.
5) Determining time needed for every action events depends on various time pools.
6) Calculating the cost for cost target through multiplying the Unit Cost (Step 4) by the required time (Step 5).
Turney (2010) studied the stages of development of Activities Based Costing (ABC) method. He showed that the beginning of ABC was during the period from 1984 until 1987 as an attempt to face the severe competition imposed by the Japanese Companies on the Western Companies. These accounting methods passed through four generations during the Period of 1987 ‘ 2010. He also added that these methods gained additional values and features with the successive generations which may be explained as follows:
1) The period (1987 ‘ 1991) : The first generation:
During this period, the concentration was in an attempt to reach an accurate costing for the products and maximizing the profitability through determining reasons to increase the costs and reduce profitability or losses. The cost measure in this stage was extended to cover customer costing measure and cost of the activity.
2) The period (1991 ‘ 1995): Appearance of criticisms:
Appeared many criticisms to these methods because of change of attention to some other administrative methods such as: Re-engineering the processes, Enterprise Resource Planning (ERP), Balanced Scorecard (BSC), and Theory of Constraints (TOC). The study also showed that this subject led to confusion on the Activity Based Costing (ABC) methods.
3) The period (1995’2000): The second generation:
The concentration in this stage was on correcting the overhead costs and customer profitability analysis. Also, attention was transformed into utilizing these methods to various other scopes on costs accounting methods such as: Management, Marketing, Development & Research, Logistics, Sales and Supply chain. During this time period, predictive modeling was built to calculate the costing of resources, capacity planning and opportunities for costs reduction.
4) The period (2000 ‘ 2006): The third generation:
During this period, the rates of implementing these methods in the economical units were increased and many methods appeared to reduce the efforts and costs related to implementing these methods. This period showed the use of following method such as: enterprise ABC solutions because the Enterprise Resource Planning (ERP) methods were not able to direct the managements of economical units towards the products or services to improve the financial performance of these units. The Activities Based Costing (ABC) methods well performed this role. Many improvements on the above mentioned methods appeared such as sharing in building models to services pricing models, determining target costing for product design and other uses.
5) The period (2006 ‘ 2010) : The fourth generation:
During this period, ABC methods were used as integrated system to manage performance in the economical units which included profitability, performance, financial and HCM. These methods played an important role in the financial planning, capacity planning, implementing the strategies, supporting the products, markets and targeted customers through analytical models which were built. Fig.5 shows the four generations of Activity Based Costing (ABC) method.
It may be noticed that Activity Based Costing (ABC) methods passed through many developments during period of 1987 ‘ 2010. It was directed towards accounting the costs; but it passed through stages and developments made it has many applications until it became a tool to manage the integrated performance and support the economical units.
1987 1995 2000 2006 2010 Year
Fig.5:The four generations of Activity Based Costing (ABC) method.
1.8. Requirements and obstacles of application ABC method in Egyptian enterprises:
Many studies concentrated on finding the factors influencing the successful structure and application of the ABC methods. Some studies presented the obstacles on implementing these methods.
1.8.1. Requirements of implementation of the ABC method:
Nolan (2004) determined the requirements for success of implementing ABC method. He mentioned that understanding these requirements by the organization will lead to the success in implementing the Activity Based Costing (ABC) method. This matter will lead to realize all its potentials, opportunities available and provision of information which the organization can use in many initiatives for improving the standard of performance and increasing the profit margin. He determined these requirements as follows:
1) Developing the administrative accounting standards and policies which do not give attention to costing.
2) Selecting implementing methodology for Activity Based Costing (ABC) method.
3) Accurate specifying of work scope of the works unit.
4) Determining the product for each of the departments.
5) Selecting the appropriate implementation for the Activity Based Costing (ABC) methods.
6) Selecting and training the work team.
7) Developing and maintenance of database related to the Activity Based Costing (ABC) methods.
Also, Dosch and Wilson (2007) determined the requirements for the success in implementing the Activity Based Costing (ABC) methods which is represented by the following ten factors:
1) Forming a supervision committee to design and implementation of the method.
2) Developing the accounting policies.
3) Keeping the simplicity of the method.
4) Determining the works terminating schedules.
5) Formation of the organizational frame for the economical unit.
6) Determining the requirements of the economical unit from the Activity Based Costing (ABC) methods applications.
7) Selecting the works team.
8) The comprehensive training.
9) The management communication with all parties.
10) The continuous support for maintenance of the method.
Estrin et al.(1994) pointed out that successful implementation of ABC requires that economic unit management must be convinced that the Traditional Costing (TC) method provides distorted costing information which make them support implementing this new method, as its presence in one of the economic units is considered, as an indicator to increase the need of this unit and to implement methods such as the product diversity and complexity of the production process and the increase use of shared factors which are used in manufacturing more than one product or service and a rise in rate of overhead costs in the frame of costs and the desire in cost reduction and other factors.
On the other hand, Krumwiede and Roth(1997) showed that there are six successive stages must be applied so that the Activity Based Costing (ABC) method could work successfully as information system in the economical units. These successive stages are as follows:
1) Initiation the implementation:
The consequence of presence pressures to change one of the applied costs systems because of the un-suitability of information which it provides according to what is required by uses of information or because of presence of some organizational problem.
2) The adoption of the system:
In this case, approval to implement the proposed method is obtained through convincing the authorities in the economic unit about the benefits of implementing this method in addition to availability of financial resources required to implement it.
3) The analysis:
Those responsible for implementation analyze the activities of the economical unit and link them with the proposed activities; in addition to determining the drivers of the costs on which the overhead costs distribution are done on its basis.
4) Acceptance of the implementation:
This is an important stage for the decision-taker where his acceptance for implementation only comes when the workers in the economic unit understand and agree on the benefits which will be obtained from using this method. Followed up by a belief that his acceptance to implement this method, will improve the decision making and taking.
This is the stage of the actual use of the method and results appearance. Note that when the workers in the economic unit use the information obtained through this method in taking the decisions, is considered as very important pointers for the success of the implementation.
6) The Activity-Based Management:
The activities information is used in taking the management decisions to improve the profitability and achieving the competitive features.
From the previous studies, it may be deduced that there are many requirements which must be available for the success of implementing the Activity Based Costing (ABC) methods. But, regarding to the Egyptian firms, the most useful requirements take the form in persuading the management and workers with the benefits of implementing these methods, providing the financial assets needed for application and sustainment of the methods database, good preparation for applying and selecting and training the work team.
1.8.2. Obstacles of implementation of the ABC mechanism in the firms:
Grasso (2005) stated that the criticisms to the Activity Based Costing (ABC) methods exceed the advantages expected from them where the costs related to implementing, developing and maintaining this method exceed the advantages which the method achieves such as improving profitability and increasing the competitive capacity for some American companies. He also pointed out that many of the companies which did not depend on implementing these systems, but they still rely on the Traditional Costing (TC) method.
Sievanen and Tornberg (2002) showed that the Activity Based Costing (ABC) methods are very complicated and very expensive. They also stated that the economical units are in dire need to provide a costing system which combines between the operational and strategic theory which is something not available in the Activity Based Costing (ABC) methods which have strategic view.
Turney(2010) confirmed that the rise in the costs linked to implementation is the most important obstacles of implementation which prevented implementing ABC methods at the economical units in addition to being among the methods which are described as complex methods.
Nicholls(1992) illustrated that the management opposition to get rid of the Traditional Costing (TC) method and implementing the ABC and its objection to modifications or to provide required financial resources, is one of the obstacles which obstructs implementing it.
Therefore, it may be deduced that it is possible to overcome the opposition of the management and workers in the economical unit to the changes through transferring them from receiving the changes to partners in the changes; in addition to persuading them of the benefits occurring to them and to the economical unit from implementing ABC method in suitable form and necessity to train them sufficiently on implementing this method.
Merchant and Shields(1993) stated that some economical units do not need to implement Activity Based Costing (ABC) methods because these units need concentration on providing competitive features without giving attention to providing accuracy suitable for costing because these units have some features such as relying on fixed technical product or producing products with relatively short life cycle which reduces their wish in implementing such methods.
Piper and Walley(1991) mentioned that the option of the cost factors is very difficult because the activities consist of a group of works which are practiced inside the organization; in addition to that each activity consists of secondary activities and then the workers select the costs drivers with a large number of costs drivers for works; and then select one of them only to become the cost driver for the activity which is something not easy.
From the previous studies, it may be summarized, that there are many obstacles to implement the methods successfully in the economical units; and that its most important to take the form in the management and workers objection to the change, the in-ability to provide the required financial resources and difficulty in implementing this method which are characterized by being complicated and difficulty in determining the costs drivers related to various activities.
1.9. Role of ABC method in planning and decision making fields at the firms:
The planning and decision making are very important where ignoring them will result in many severe problems which could have great influence on ability of the economical units to compete and continue. Hence, attention of the researchers came in showing the role of Activity Based Costing (ABC) methods in this scope which affect the performance and targets of these units.
James and Canby (1995) showed that it is possible to use the ABC methods as a mean for strategic planning in light of the current environment which is characterized by the strength of the competition.
Chen and Jones (2007) illustrated that the ABC method is considered as the most used administrative means in public and private companies and it is the most important management tool in the scope of strategic planning.
Nachtmann and Needy (2003) confirmed that implementing the Activity Based Costing (ABC) methods result in obtaining accurate information around product cost and process of production and it is a new method to take decisions especially in the light of uncertainty.
Rivero and Mblemsvag (2007) stated also that the possibility of using ABC methods in the long-term planning through preparing life cycle for the costs on the basis of the activity.
Cardinaels et al. (2004) confirmed the capacity of ABC methods at determining prices in the competitive markets and their potentials to do so even in the light of non-availability of the reverse feedback information of the market where it can aid in determining the behavior of the competitors. They also showed that ABC methods exceeding the Traditional Costing (TC) methods on this matter.
Pineno and Tyree(2006) stated that despite the nature specific to the organizations which do not aim for profit-making, but the costing systems on the basis of the activity, can contribute with the budget in producing more efficient information to support the management in making the suitable recommendations and helping these organizations in making the decisions and building the practical models.
Hobdy et al.(1994) confirmed that it is possible through the use of the Activities Based Costing (ABC) methods, to reach costing information which are more accurate in several fields. This matter can be very useful in a great extent in taking the correct management decisions.
On the same subject, Swenson(1995) illustrated that the Activities Based Costing (ABC) methods, provide information which can be used as a supporting tool to guide in making the decisions. Also, it can be used to improve the production though developing the design of the product in a form which achieves economic feasibility.
Gering(1999) showed that the Activities Based Costing (ABC) methods are considered as a good tool for strategic analysis where the study points out that the stated method can be dealt with four dimension matrix (Fig.6) which assists the strategic consultants in their analysis because it enables them to divide the products and customers according to their importance and their profitability for the economical units as follows:
1) Products or customers who represent great importance and high profitability:
It must be followed a strategy which enable keeping these products and these customers.
2) Products or customers who represent low importance and low profitability:
Since these products and customers do only represent complications for work, then we have to re-consider in the continuity of the economical unit in keeping them and the necessity to follow a strategy to discard them.
3) Products or customers who represent low importance and high profitability:
In this case, the economical unit must move and must follow a strategy which provides an increase in the volume of sales of these products and volume of transaction with these customers.
4) Products or customers who represent high importance and low profitability:
There is usually a belief that the efforts which are put into these products or with these customers will be greater than the gains which can be achieved. But this belief may be not correct because some may be used to develop and transform these products and customers from non-profitable to profitable.
From the previous strategic analysis it may be noticed that they took into consideration solving the specific problems to the customers and re-negotiation with them and re-engineering the processes based on the cost drivers. He also mentioned that analyzing the strategic activities Based Costing (ABC) method takes into consideration giving importance to the product and the customer in addition to giving importance to profitability.
Fig.6:Four dimension matrix for Activity Based Costing (ABC) method.
Source : Gering(1999).
He also deduced the following points:
– The suitable work is not just discarding the non-profitable customers or products.
– The poor readiness for work results in bad reputation of the economic unit.
– In regard to realize positive strategic decisions which lead to achieve real development, reduction of costs and increasing profitability, the following points must be carried out:
a) Discarding non-profitable activities.
b) Realizing the good service.
c) Re-negotiation of contracts.
d) Solving problems related to customers.
e) Re-engineering the processes based on analysis of cost drivers.
Therefore, it may be noticed that the use of this matrix is an important matter in the field of analysis and strategic planning. It enables the firm to take wiser strategic decisions which lead to follow policies, achieve development, reduce the costs and increase the profitability. Also, it becomes very clear that the Activities Based Costing (ABC) methods are considered as analytical and strategic planning method which is long-term and has a high efficiency. Then, it enables the responsible in the firm to make more efficient decisions in the long-term. This matter becomes very clear in the case of implementation fields expansion.
1.10. Preliminary conclusions:
The present research covered the subject of applying Activity Based Costing (ABC) methods. Also, the study revealed the following conclusions:
1) The transformation from the manual production to the automation had a great influence on changing the structure of the costs. This matter led to a reduction in the value of direct wags and a rise or doubling the value of additional industrial costs.
2) The Traditional Costing (TC) methods became un-able to provide accurate information required by the economical units especially in the light of increasing competition with other units where they use illogical basis to allocate the additional costs such as the direct work whose value was reduced with the automation process. Hence, the costing information obtained from these methods became inaccurate and distorted.
3) The Activities Based Costing (ABC) method then appeared to face the aspects of deficiencies and criticisms surrounding the Traditional Costing (TC) methods as an attempt to overcome the random allocation of additional costs and then reaching costs information which are characterized of a great deal of accuracy.
4) The ABC method is established on the fact that economic unit activities consume the available resources. This is achieved by using the cost drivers and concept of products consumes the activities.
5) Applying ABC method in the industrial or services sector depends largely on the results of analyzing the costs related to the method compared with the benefits achieved by applying this method.
6) There is no common trend for determining specific steps to design and implement the Activities Based Costing (ABC) methods. But the general framework revolves around the following steps:
a) Collecting the economical unit works in activities.
b) Allocating the resources to activities by using the costing drivers.
c) Allocating the activities on the costing targets according to how much to benefit from them.
7) There is no common opinion for determining a certain classification for the activities. Some researches classified the activities as follows:
a) Activities linked to the product unit.
b) Activities linked to the production batch.
c) Activities linked to the product.
d) Activities linked to the economical unit.
e) Activities linked to the customer.
Other researches classified them into:
a) Activities which are added value to the outcome.
b) Activities which are not added value to the product or service.
Other researches classified them as follows:
8) Many studies pointed out to the stages for development of the Activities Based Costing (ABC) methods which started as costing systems and activities management until they reached now as an integrated tool to manage the performance and to support the economical units.
9) There is a great necessity of availability of some requirements for the success of implementing the Activities Based Costing (ABC) methods in the economical units. The most important of these requirements are supporting the management and convincing them of the necessity to change the Traditional Costing (TC) methods and providing the financial support to modern costing systems usage, develop and maintain the database related to the system and using training programs for the team.
10) The obstacles in the implementation of Activities Based Costing (ABC) method may be summarized as follows:
a) Very expensive.
b) Extremely complicated.
c) Opposition and the non-willingness of the management and the workers in the Egyptian firms to accept the change and modern technologies usage.
d) The difficulty in determining the cost drivers.
11) Concerning the planning and decisions-making, the Activities Based Costing (ABC) method is considered a tool capable of long-term strategic planning and then making the long-term decisions.
According to a study of various aspects of ABC method in Egyptian firms as an attempt to achieve objectives of present research. It’s suggested to finalize a research which illustrates the perception and the advantages of ABC method and its application’s importance in favor of developing the effectiveness of the business environment in Egypt.
Chapter 2: METHODOLOGY OF ABC IMPLEMENTATION IN CORRELATION WITH EFFICIENCY IMPROVEMENT FOR BUSINESS ORGANIZATIONS IN EGYPT AND AT THE GLOBAL LEVEL
2.1. Cost distribution of using ABC method in some International and Egyptian firms:
El-Alkawy (2004) illustrated that the ABC method is a tool for calculating costs distributed over the organizational activities; then loading the products or services according to activities which these products or services use.
Abd El-Karim and El-Kakhn (1997), Hermanson et al. (2006) and Needles et al. (2010) showed that several modifications appeared in international industrial field as consequent of accelerated developments in the production systems and their influences on the organizational structure of costing as the consequence of replacing the labor force in the production process with the mechanical production and consequently an increase in the ratio of indirect costs.
Jiambalvo (2009) pointed out that firms distribute costs to output for the following motives: a) to motivate executives to measure the effectiveness of the inner supplied services, b) to supply data required for decision making, c) to assess the full cost of the production for fiscal reports and cost-base prices determination and d) to decrease the superficial utilization common resources.
Also, Saleh (2002) stated that allocating costs according to usage of ABC method in any company passes through the following two stages:
First stage: Distribution of resources to activities:
In this stage, the firm is divided into a group of main activities where each activity describes parts of the operations performed by the firm where the activity is defined as what the firm performs and takes time for the operation outputs. The main function of the activity is transforming the resources (Raw materials, labor force and technology) to outputs (Products or Services).
Second stage: Allocation of activities costs to the outputs:
In this stage, all the activities costs are loaded on the outputs from the activity units (either products or services) according to number of product units or the service to be performed. This is carried out by using the costing drivers as a measure of request which is measured by number of coefficients which were setup for the cost driver.
Hence, ABC methodology measures the costs of used resources to perform activities; then linking the activities costs with the final products which utilizes from these activities using measures which express the needs of these products from various activities.
Yousif (2004) also used the two-dimensional model for the Activity Based Costing (ABC) system (Fig.6).
First dimension (Related to costs):
It allocates the resources costs to the activities through cost drivers linked to these activities.
Second dimension (Related to operation):
It concentrates on the operations though providing non-financial information about the cost drivers i.e. cost drivers or activity drivers. This matter helps in the continuous improvement operation and improvement the performance.
Fakhr and Al-Dolaimy (2002) pointed out that ABC method specifies the cost driver for every activity and consequently for each activity costing center, which gives the allocation process much subjectivity and eradicate the causative relationship in the allocation process and consequently, becomes more representative for distributing the use of resources due to the use of resources directly over the products on basis if actual activities used in the production of any type of outputs, contrary to the Traditional Cost (TC) method which uses loading basis linked to the volume of production which resulted in rise at share of indirect costs for units by increasing the volume of production regardless of the nature of each produced type and about the nature of the activities to which the factors belong and eventually influence measuring the cost of each product and its profitability. The following two flowcharts show the distribution of indirect industrial costs according to ABC and Traditional Cost (TC) methods (Figs.7 and 8).
Fig.7:A flowchart for distribution of indirect industrial costs according to ABC method.
Source: Barber et al.(2006).
Fig.8: A flowchart for allocation of indirect industrial costs according to the Traditional Cost (TC) method.
Source: Barber et al.(2006).
Despite the criticisms directed to the Traditional Cost (TC) method, this matter does not mean that there is a defect in the theoretical framework of this method but these criticisms are based on changing the modern production environment and the accelerated developments in the Information Technology (IT) used in various applications (Dergham,2005). The deficiency in the Traditional Cost (TC) method, resulted in many organizations moved towards specifying the costs on basis of ABC method as a mean for supporting decision making (Geri and Ronen, 2005).
Consequently, it may be said that the ABC method is a development to TC method as a consequence of coping with the modern development in the production environment to match with the needs of management for making the decisions in all the industrial and services sectors.
Mobark et al. (2003) pointed out that they prefer implementing ABC method in the firms which have many products or services which carry large sum of indirect costs.
2.2. Usages and applying fields of ABC method in some International and Egyptian firms:
Yousif (2004) mentioned that the ABC system is one of modern systems which contributed effectively in: identifying the costs accurately, measuring the performance in a better way, supporting the continuous improvement operations, supporting costing reduction efforts by concentrating on the group of activities from which the firm is formed and following up the resources consumed by these activities using a wide number of cost drivers which influence volume of each resource inside each activity.
Maberly and Joly (2004) concluded that ABC method plays main role in improving the firm performance efficiency and achieving the following important purposes:
1) Strategic management of costs:
This matter may be achieved through the provision of tools which can measure benefits and costs of investments in products, new markets or modern technology, ..etc., in addition to providing the support to management through understanding the activities inside the firm and hence assisting in specifying those activities, operations, products, customers and business units which add value and that units exhaust the value.
2) Improving decisions making operations:
This purpose may be achieved through the provision of information which enable the managers in the firm to use the affecting cost factors in the short and long terms and consequently improving the tactical and strategic decision making processes.
3) Determining the costs of products or services:
This purpose may be achieved by expansion in analyzing the costs which cover inspecting and studying the main drivers of costs for the main stages of business. It may be noticed that the information specified according to Activity Based Costing (ABC) method to determine the costs of products or services, are not only applicable in the external market but it is also applicable on the internal services which contributes mainly in pricing the products or services precisely as the consequence of fair allocation of indirect costs.
4) Determining the profitability of customer:
This matter may be achieved by using the Activity Based Costing (ABC) method as a basis of analyzing the profitability of customers. The costs of providing a combination of products and services to a certain customer or a certain type of customers, usually, depends on information related to cost of product or service.
5) Managing the operational costs:
This purpose may be obtained through good understanding of activities and operational stages inside the firm and re-engineering the execution of business by improving the quality through better understanding of customers and activities needs. This matter may be achieved by getting rid of duality in activities and dispelling un-necessary activities.
6) Developing the budget:
This purpose may be obtained by providing detailed information about analyzing the cost and return and reducing the complications accompanying the preparation of budget which is used as a basis for evaluating the performance and a controlling method to achieve its future objectives.
7) Measuring the performance:
This purpose may be achieved by providing various financial and non-financial information by measuring, follow up, cost control and efficiency and effectiveness of activities which are performed inside the firm.
8) Reducing the costs:
This matter may be achieved through enabling the firm to examine the activities which are carried out at the level of the firm; analyzing the value of operations and searching for opportunities to improve methods of work by determining the repeated and un-necessary activities and hence knowing locations of activities which may be dispelled or gotten rid of.
Some researchers think that ABC method, can only be utilized successfully in the economical, large-scale economical units. Many researches aimed at discovering the scope of success of implementing these methods in other fields.
Kocakulah (2007) showed that the implementation of ABC method in banks has a success because these method helps in controlling process ,in a better way, for the Traditional Cost (TC) method which increases the profitability of the shareholders especially in the light of the competitive environment seen by these institutions. He also pointed out the possibility of implementing these systems in other financial institutions.
Sapp et al. (2005) confirmed that the highest success in implementing the Activity Based Costing (ABC) method are achieved in the financial institutions. They also confirmed that these methods help in improving the competitive position for this institutions where these methods are not only useful in increasing the institutions profitability but also increases the profitability of the customer where these systems provide the economical units managers with a more accurate costing information which make them enable to formulate the strategies and making the targeted decisions.
Needy et al. (2003) illustrated that there is a great success in achieving ABC methods in the small industrial units. They stated that these units need, to carry on practicing their works, accurate credible costing information where the Traditional Cost (TC) methods can not provide these units by information which enables them to make the pricing decisions. They also added that these methods can be used to support the administrations of these small industrial units in making more wise decisions.
Roztocki et al. (2004) pointed out to the significance of implementing ABC methods in small units (Less than 100 employees). They showed that the procedures required to be transformed from the Traditional Cost (TC) methods to the previously state method in such units. They stated a method which reduces the requirements for implementing this method where implementing this system need lots of resources in addition to its expected returns may not be guaranteed during short period of time. They also confirmed the necessity to be carried out gradually and without a main re-structuring where the expected information to be expected in reality in a future stage.
The aspects of achieve the ABC methods are not limited to previously stated applications, but spread to the potential of implementation in the Universities (Jarrar et al.,2007) and in the Governmental Units (Fortin et al.,2007).
Cohen et al. (2005) aimed at determining usages rates of ABC methods in the Greek firms which are working in three economic sectors (Industry, trade and services). They also tried to find out the reasons affecting the decision-making process which are concerning to changing the currently-applied Activity Based Costing (ABC) method. They showed an increase reliant of the Greek firms on implementing the ABC methods. Also accomplished that implementation rate of the firms which are working in the services fields is a higher rate compared with other sectors. The most applied Activity Based Costing (ABC) methods are not excessive in the details where they do not include a large number of the costs determinants which result in determining a small number of activities. They added that there is no specific pattern for the firms which can implement the Activity Based Costing (ABC) methods concerning the cost structure or firm size or the competition intensity or towards the overhead change of trend. The extent of the firms desire in implementing the ABC, depends primarily on the extent of their satisfaction of applied costing system. They added that the firms which implement the Activity Based Costing (ABC) method have several administrative experiences and that the advantages which can be obtained from applying them, exceed the disadvantages related to them.
Turney (2010) pointed out to the extension of the application of ABC methods in many of economical units and in several applications such as the units which work in the healthcare, insurance, banking, energy, packaged goods and other types of sectors.
Many researchers confirmed the possibility of implementing these methods in several applications such as: Industrial, services, small and large volume organizations, governmental and private organizations.
The author sees that the success in implementing ABC methods in one of economic units at business environment does not ,necessarily, mean that they are successful in the same business environment or others because there are important requirements ,stated previously, which must be available for the success of implementation of these methods.
Finally, the most important uses of the ABC methods, can be summed up as shown in Fig.9:
Fig.9:The important usages of the ABC method.
Source: Prepared by researcher (Own Processing).
2.3. Features for applying ABC method in some Multinational and Egyptian firms:
The ABC is defined as an accounting (Costing) and administration tool simultaneously where it presents two types of information: a) Financial information related to the costs of activities and products or services; b) Financial information related to those activities (Dergham,2005). Some modern manufacturing firms in Egypt trend using ABC because it achieves the following features:
1) Supporting mechanisms for controlling and managing the costs through specifying accurately the events and activities which drive costs. Also, ABC method assists in achieving the accurate following up of indirect costs which currently forms a big portion of the entire costs even in some economical services firms (Abd El-Ghany, 1999 and Needles et al.,2010).Also, determining the relationship among the costs and individuals. Consequently, ABC method evaluates the responsibilities of individuals towards using methods of the available resources and assists the management team in directing the method of control to achieve the target of sufficiency in performance (Balakrishnan et al.,2013).
2) Determining the important activities in the firms because it is a valuable managerial tool and it is useful in the service organizations which the Traditional Cost (TC) methods are not appropriate for the nature of services sector system (El-Erbeed, 2003).
3) Maximizing the profitability through providing efficient and well-timed data about costs at the light of severe competition in the aim of pricing the products or services. Hence, the income is directly related to costs where the selling prices reduce in case of mass production and the prices increase in case of small production volumes. Therefore, pricing strategies are considered a main element for maximizing (improving) profitability through specifying the production and the customer mixtures (Samy, 2000 and Mowen et al.,2012).
4) Justice and subjectivity in allocation of indirect costs through selecting cost drivers which are suitable for resources and the activities and which show the causal relationship of the cost behaviors (Abd EL-Karim and El-Kakhn, 1997 and Balakrishnan et al.,2013).
5) Making better managerial decisions through accurate determination of the products costs and hence making decisions related to stopping producing a certain product or expanding producing it or comparing between manufacturing an important part of a certain product or buying it from abroad (Chan, 1993 ; Dhaher, 2002 ; Needy et al., 2003 and Johnson,2008).
6) Rationalizing the internal and external management decisions because it provides the firms with the fiscal and non-fiscal data. Also, it supplies precise data about costs which results obtaining better information regarding costs of the production and their profitability and firm’s efficiency (Samy, 2000 and Witherite and Kim, 2006).
7) Contribution in provision of improved fiscal and non-fiscal data to the firms where fiscal data relates to determining the cost accurately, reduce the cost and resources consumption through linking among the activities and what they consume in terms of resources and the surplus resources in the firm. On the other hand, submitting non-financial information about the operations and activities of the firm, contributes in reducing the cost by improving the performance and raising the efficiency of performance of the activities and expelling the un-necessary operations that don’t add value to the firm (Chan,1993 ; Ramsey,1994 ; Samy,2000 ; Grasso, 2005 and Balakrishnan et al., 2013).
8) Determining the differences among the actually used resources and the available submitted resources or the cost of product or service and concentrates on idle work hours and defected materials (Sabry, 2002).
9) Increasing the importance of accountants role because the ABC method supplies more efficient and real data about the usages of the firms and about the activities which drive the costs. This matter leads to increase the firm management by managing these resources and raising the performance of the operational procedures and consequently raising importance of accountants in the fields of planning, control and decisions-making (Abu Khashaba, 1999).
Geri and Ronen (2005) stated that there are additional benefits as a consequence of using ABC such as the managers at all organizational levels consider the ABC method give more precise and trusted data than that are generated by the Traditional Cost (TC) method. They are ready to use this information to make decisions and evaluate the performance because this ABC method can illustrate a better concept of the costs and concentrating on understanding the activities which consume the organizational resources.
Nachtmann and Al-Rifai (2004) confirmed that ABC method helps the industrial and services firms in improving its competitive capacity which enable them to decide wiser according to the full understanding of the behavior of products and services.
Grandlich (2004) and Neumann et al. (2004) revealed that ABC method proved it a good tool to manage costs because it concentrates on re-designing the firm activities through dispelling the un-necessary activities. Due to the high-tech innovations, the easy access to the data and information and the advanced tools of communication. Firms are taking into consideration the innovative tools to administrate and follow costs. ABC tool the substitute to the TC methods was implemented to various fields and enterprises. Lately, outstanding applications in transportation and healthcare insurance fields were declared.
Also, Abd El-Karim and El-Kakhn (1997) and Drury (2008) illustrated that despite the novelty of ABC method, the modern surveys pointing out to increasing trend of the industrial and services firms for using this method. One of the surveys was performed on 300 British industrial firms, after a short period of appearance of this new method, showed that 3% of the firms sample had actually applied this method and 9% of them will apply it in the near future and 38% of them study possibility of applying. These results stated that applying ABC method in these firms are considered as a satisfactory outcome.
10) Existence some opportunities to improve Activity Based Costing (ABC) method in practice (Hermanson et al.,2006).
It became un-acceptable to rely on methods which do not get the accountants to the expected targets. Therefore, many researchers carried out many studies which aimed at reaching the features of the new managerial cost intellect. This intellect is called ‘Activity Based Costing (ABC) method’.
Turney and Stratton (1992) showed that the ABC is characterized by being a cost accounting and managerial system at the same time, where it provides accurate information especially that related to the production costs. At the same time, it provides other information about the activity costs and consequently this system can manage these activities successfully which in turn results in a continuous improvement for the performance.
Greene and Metwalli (2001) pointed out that the most important characteristics can achieve implementing the ABC method which characterized in accurate specification of product or service costs.
Sievanen and Tornberg (2002) stated that the front strong point for the Activity Based Costing (ABC) method is characterized by its ability to discover the opportunities to reduce the costs.
Harr (1990) mentioned that ABC method is suitable tool to guide cost, effectively, at an environment of continuing change and it can be used as a method to decrease costs without compromising the quality of service or product provided.
Kaplan (1992) stated that usage of ABC system can direct to reduce the additional costs which represent a great amount of the total cost in several firms.
Also, Kaplan (2008) showed that the way to utilize ABC for practical projection by using it estimating the stages of machinery, staff, telecommunications the company is required to provide to achieve the desired goals in the company’s project. That’s a strong analysis method that avoid all the assumptions, subjectiveness and debates usually accompanied with the procedure of planning and allocation.
King (1991) illustrated that implementation of ABC method will lead to reduce costs where will be determined the cost drivers in a more accurate method and exclusion of non-value added activities which will lead to produce the product at a low cost.
Lawson (1994) pointed out that ABC method is providing financial information in addition to non- financial information which are considered useful information in determining the non-value added activity which must be excluded.
Nolan (2004) showed importance of Activity Based Costing (ABC) methods usage for increasing the performance efficiency in the firms.
He said that application of ABC method in the firms leads to an integration among resource management, profitability and strategic management.
Innes and Mitchell (1997) stated that ABC method is considered active tool for measuring the performance efficiency in addition to the possibility to rely on this method to develop the budget of the firm. This method also helps in providing more accurate information to prepare budgets that are used as a basis to evaluate the performance efficiency and a control method to achieve the objectives of the firms.
Turney (2010) illustrated that the Activity Based Costing (ABC) method is a multi-faceted tool It is a database for fiscal and organizational data and it aids performance administration systems and provides the appropriate information for making the decisions. He added that this method can by utilized in several usages such as profit improvement, resource planning, predictive cost measurement, cost volume, capacity planning, performance gauge and others.
Gering (1999), matching other studies, confirmed that the ABC method is considered as good instrument for performance improvement. The performance improvement process represents one important uses of the Activity Based Costing (ABC) method; also it helps the firm to a top understanding of customers needs in addition to it is a framework which can be used to define and negotiate win-win client situations.
Cagwin and Bouwman (2002) added, to the previously stated features, that the presence of positive relationship among the stated system and the modern management methods such as TQM, JIT, BPR and the FMS; in addition to improving the average Return On Investments (ROI) in the economical units when implementation is carried out in various types of production and complicated processes.
The successful application of ABC method has a great effect in providing several features to the economical unit, which may be summarized as follows:
1) The appropriate allocation of additional costs.
2) Accurate measurement if the product or service costs.
3) Providing non-financial information linked to the activities and resources to enable managing them effectively and provides a support to rationalize the decisions-making processes.
4) Assisting in developing the budget based on the activities.
5) Discovering costs providing opportunities and determining the activities which do not add values to the product and service.
6) Supporting the performance measurement, planning the energy, forecasting the costs, understanding the customers needs and improving the profitability.
From the previous studies , the author may be concluded that the Activity Based Costing (ABC) method represents a modern perspective which can achieve several benefits to the an Egyptian firm such as contribution in measuring performance accurately through managing the costs by determining the activities which more linked to costs; then cancelling the useless activities. This matter gives the management team the opportunity for a better re-distribution of resources , preparing the budgets, control, evaluation of performance and provision of accurate costing information for the unit or the provided service. All these represent a better aspects for development and assistance in increasing the role and importance of the accountants and also gave a good chance to increase the efficiency of business environment in some International and Egyptian firms.
2.4. Disadvantages of applying ABC method in some Egyptian firms:
Despite the advantages of ABC method which takes the form of providing accurate information and assists management team in making the decisions, planning and controlling the costs but studies show some disadvantages of this method as follows:
1) The efficiency of using the ABC method, depends mainly on good selection of cost driver. Practically, it is difficult to select the cost driver which resulted in gaining assistance from external expertise. In addition to re-training the accounting cadre to guarantee the success in applying the method (El-Meshal, 2005 and El-Zatma, 2006).
2) Its inability in solving all the problems related to future planning because it is considered an analytical method which depends on historical information. So, it is observed with various aspects of accounting because there are negative aspects which relies on the measure according to historical numbers. Therefore, this matter is not appropriate to decisions which are related to future periods (El-Erbeed, 2003).
3) The Activity Based Costing (ABC) method still depends on the comprehensive loading method of costs, which is not useful in many of the managerial and strategic decisions (Abu Khashaba, 1999 and Balakrishnan et al.,2013).
4) The non-availability of sufficient experience for applying this method, especially in Egyptian firms, because it needs a costing awareness and sufficient knowledge from accountants and this is the same defect to those who use the Traditional Cost (TC) method (Samy, 2000).
5) The human element resistance to changes and their non-satisfaction of applying the developed systems either because of lack of their experience or because of their inefficiency in applying the system effectively (Abd El-Ghany, 1999).
6) The relative difficulty in applying ABC at the services organizations in Egypt and some other developing countries because of the following two problems:
The first problem is representing in difficultly of obtaining the information in the services organizations where many activities contain non-repeated human tasks which can not be recorded automatically.
The second problem is representing in a large percentage of the services industries, trend to be activity costs at the level of easiness which can not be followed up to any services submitted to the organization (Garrison et al., 2011).
7) Applying the Activity Based Costing (ABC) method requires: a) Detailed accounting records, b) Good method for symbols and c) Numbering the costs to allocate the costs precisely, then followed the products which require investment in the information system to cope with this purpose (El-Erbeed, 2003 and Balakrishnan et al.,2013). Consequently, this matter requires a high financial costs and a rise in the cost of operation specific to the method and then the economies of applying will be affected in the services or industrial or commercial sectors.
8) The Activity Based Costing (ABC) method assumes that the relationships type among the resources and the activities and among the activities and products are linear relations (Abu Khashaba, 1999).
9) The Activity Based Costing (ABC) method does not overcome the problem random allocation of indirect costs. For example, there could be a problem in distributing some industrial indirect costs accurately on various activities because of difficulty of specifying the cost driver related to some activities which result in inaccuracy of costs of products as the consequence of random distribution of some indirect costs such as depreciation of the factory buildings or the yearly tax paid on the factory buildings (Dhaher, 2002).
According the previous studies and practical experience in Egyptian industrial sector, the author observed that advantages of applying ABC method at Egyptian firms, in general, exceeds the disadvantages which limits its usage because it helps the management in making its decisions according to subjective and descent basis and when decisions are made, it must be taken in consideration the availability of components which are related to application because it can achieve the results expected from it.
2.5. Steps of applying ABC method at some International and Egyptian firms:
The ABC has progressed to face problems resulted from applying the Traditional Cost (TC) method in the organizations which are characterized of the intensive use of production technology where since the eighties of last century, a group of researchers headed by Kaplan, Professor of accounting, from Business School, Harvard University, raised questions about the validity of the actual usages of the Traditional Cost (TC) method. They criticized heavily the hypotheses which the Traditional Cost (TC) method was based on. They were considered un-suitable for the nature of developments in the advanced manufacturing methods (El-Meshal, 2005), until the appearance of ABC which was considered a tangible development for allocating and loading indirect costs and a method for accurate specification of the costs of production and services (Abu Khashaba, 1999).
Grandlich (2004) ; Maher et al. (2008) ; Mowen et al. (2012) and Balakrishnan et al. (2013) stated that applying the ABC method, includes the coming points:
1) Determining the activities which consume the resources through specifying the activities which affect the costs significantly.
2) Determining the cost driver used by the organization, which are either linked to volume of production or to complication of the production process.
3) Calculating average costs by splitting the complete indirect costs by estimated amount for loading basis.
4) Allocating the costs on products and services through multiplying loading rate by number of activity units.
El-Wabel and El-Gabaly(1996) pointed out that stages for setup of ABC method requires several steps to be executed in interims because it is not possible to implement all the procedures simultaneously either because of presence of financial obstacles or for the necessity for its successive implementation. These steps may be arranged as follows:
1) Determining and defining the appropriate activities analytically and in details (Chan, 1993).
2) Dividing the activities into costs centers taking in consideration the relative importance for each activity according to not only recently conditions but also the relative importance in light of future plans of the firm. In case one of the activity has a distinct nature, then it is preferable to put it in an independent cost center. To reach the scientific ease and to reduce the cost of measure, it is preferable to merge more than one activity in one cost center in case this matter does not affect the objective of implementing ABC method.
3) Defining main components costs to perform a appropriate allocation of cost over the costs centers.
4) Determining the relationships among the activities and costs through defining the costs components belongs to the costing centers.
5) Specifying the cost drivers (Basis for loading).
6) Formation of a model for cost flow. The formation of a model for the costs flow requires the necessity for specifying, accurately, the components of indirect costs and specifying the types of costing centers by which the firm is divided. Having done this, then it becomes possible specifying the form of cost flow.
7) Selecting methods for implementing the ABC and specifying suitable means required to implement model.
8) Planning a model for costs collection. This model is an effective tool used in the processes of planning, budgets, forecasting, capital expenditure decisions and long-term pricing in addition to being used as a tool to calculate the yearly average for loading the indirect costs according to ABC.
9) Collecting the necessary data to build cost collection model in condition that these data are correct and accurate.
10) Setting up cost collection model.
Cooper (1990a) illustrated that ABC system, includes the next steps:
1) Collecting the businesses in the form of activities:
The similar activities are calibrated within one activity which has one driver aiming to follow activity cost of products or services.
2) Measuring the costs of each activity:
This step may be carried out after collecting the businesses in the form of activities, then specifying the collected costs for each activity separately.
3) Specifying the activities centers:
The center of the activity represents the part of the production process which performs a repeated business to perform a certain function. Through this matter the costs of the activity center are specified independently by using general ledger books or Engineering studies or cost estimate as an information source. In General, specifying the activities centers is affected by the following factors: a) Location of tools and equipment, b) Responsibility centers, c) Product costs, d) Complexity of the firm processes and e) Level of automation in the firm.
4) Selection of cost drivers to first level:
The drivers of first level means those that are used to allocate the indirect costs factors on the previously specified activities.
5) Selection of cost drivers to second level:
These are the drivers which are used in allocating the activities costs on the products or services which consumed these activities.
2.6. Developing ABC method in order to enhance efficiency in Egyptian manufacturing firms:
As for the Steps for developing the Activity Based Costing (ABC) method, Baxendale and Dornbusch (2000) and Grasso (2005) stated a number of steps to develop the ABC method so as to enhance efficiency in an industrial firm as follows:
1) Formation of a multi-function work team.
2) Determining the costing objectives or cost items.
3) Placing the headlines for the method.
4) Determining and collecting the activities (Such as accounting).
5) Determining the cost drivers (Factors which cause occurrence of activity costs).
6) Allocating the activity costs according to cost targets or cost items.
7) Using information from the Activity Based Costing (ABC) method.
8) Making the firm cadre aware of the ABC.
9) Evaluating, analyzing data and results.
Stefea et al.(2013b) and Abbas (2014b) revealed that the Activity-Based Costing (ABC) has many applications even it became a tool to manage the integrated performance and support to Egyptian manufacturing firms. There are some vital aspects influencing the growth of ABC pattern in industrial companies in Egypt. These factors may be arranged ,in descending order, according to effect severity on evolution of ABC system in Egyptian firms as follows:
a)Profitability management ,b)Financial planning , c) The strategies planning , d)Performance management, e) Human capital management.
2.7. Determining the activities in some International and Egyptian manufacturing firms:
The ABC method concentrates on activities and operations more than concentrating on the products and services or centers. Instead of classifying the indirect costs on the basis of centers, the costs are classified according to the activities. This method imposes a basis that the activities exhausts the resources and the costs are used for activities purposes (Samy, 2000). There is no doubt that the activities represent the basis of ABC method. On the contrary, the activity may be defined as a certain process of production cycle inside the firm, which consumes a group of resources to perform production (El-Meshal, 2005).
Also, Maberly and Joly (2004) stated the definition of activity as a certain group of tasks which are carried out to produce outputs which can be linked together to form a part of the cost.
Whilst Fakhr and Al-Dolaimy (2002) defined the activity as a process or function or distinct task or a group of processes and procedures which deal with inputs and produces the outputs. They added that the activities interact with other activities in the project.
In General, the Activities may be divided into the following four main types (Dhaher, 2002 and El-Zatma, 2006):
1) The inputs activities:
These activities are related to the preparation of the product or providing the service. For example, research and development activity, product or service design activity, employees recruitment and training activity and equipment purchasing activity…etc.
2) The operational activities:
These activities are linked to process of manufacturing the production. For example, Activities which operate equipment used in manufacturing of products and Activities for storing production under operation.
3) The outputs activities:
These activities are related to dealing with customers. For example, activities for selling products or providing services and activities of the cargo.
4) Administrative activities:
These activities support the first three activities mentioned above. For example, accounting services activities and administrative and legal general services activities.
They proposed to express the activity types previously stated, and their relationships with each other, as showed in Fig.10.
Fig.10:The relationship among the organization activities and their types.
Source: Atkinson et al. (1997).
In this framework, it may be differentiated among four groups of activities according to their gradual level and which they are summed as follows (Abd El-Karim and El-Kakhn,1997 ; Atkinson et al., 1997 ; Cooper and Kaplan, 1999 ; Garrison and Noreen, 2003; Abdallah, 2004 ; Yousif, 2004 ; El-Meshal, 2005 ; Helles, 2007 and Kaplan, 2008):
1) Activities linked to the production unity:
The activities which are linked directly with a number of producing units or services. They take place when manufacturing each unit i.e. their occurrence are directly proportional with volume of production of these units such as the use of direct materials and direct wages. These activities are characterized by linking their costs with the producing units easily and directly depending on utilizing or consuming the producing unit from these activities.
2)The activities linked to the production batch:
The activities which are carried out at time of production of a production batch or services i.e. at time of executing a new order regardless of the units specific with each batch. For example, the activities to supply and prepare tools, programming the production, preparing orders for purchasing raw materials and primary inspection of the products. These activities are characterized that the costing factors which accompany them, are not affected by the volume of order and number of units which contain them. Therefore, an order of purchasing one megagram (ton) or one teragram (one thousand tons) of raw materials, the accompanying procedures and costs do not vary for each purchasing order. Consequently, the cost drivers are used in this group which is linked with the volume of production quantities which are produced and not with number of units which are produced such as volume of production orders and number of times for preparing the tools and number of times of inspection. So, this matter eases the process of activities allocation on various products.
3)The activities linked to the product in general:
The activities which lead to product units or service rather than other products or services. For example, activities for introducing product specifications, preparation the designs of the product and implementing selection methods for each product. These activities are characterized by their costs increase with the increasing number of products or various services. Note that the activities costs are loaded on services or products using cost drivers which match the products properties or the service itself such as the number of times for improving and developing the product or service as a cost driver for the research and development activity or number of components which are contained in the product or service or number of engineering changes required for the product or service.
4) The activities linked to the firm as a whole:
The activities which are performed to support the firm operations completely. They are general and common activities which provide the administrative infrastructure. This matter makes the process of providing the products or services is possible. For example, planning administration salaries, equipment depreciation, public relations, cleaning, security, heating and lighting….etc. The difficulty of allocating these costs may be because they are not linked with a certain product or a certain production line. Therefore, they are collected in one group and deducted from the total profits margin for the products or services which deducted from the income list as a period costs or they are allocated randomly.
5)The activities linked to the customer:
Dergham (2005) stated these activities are linked to certain customers and include activities such as : sales orders, sending catalogues, customer market researches and the general technical support which is not linked to a certain product. For example, one of customers requested 100 shirts carrying his firm’s slogan. This matter needs to design a specific mould to the customer or rhinoplasty operations vary from one person to another. Fig.11 illustrates groups of activities according to the gradual level and their relationships with the costs.
Fig.11: Groups of activities according to the gradual level and their relationships with the costs.
Yousif (2004) also showed that four levels (groups) of industrial cost combined with the four previous groups (levels) of activities which take the gradual form. On the other hand, the gradual analysis of the activities and their related costs reflect providing a clear vision of the cost behavior and data supply which assists management in a better planning and controlling the costs along Value Chain, beginning from research and growth stage until customer service and satisfying his needs. He mentioned that Fig.12 shows the graduation stage of the industrial costs.
Fig.12:The graduation stage of the industrial costs.
Source: Yousif (2004).
2.8. Value and non-value added activities in some International and Egyptian firms:
ABC method permits the possibility of determining total operations needed to produce the commodity and provide the service. This specification does not imply that all the performed activities are important or have added value. The definitions of activities with added value vary with the variations of the nature of economical units and the events which affect them (Saleh, 2002). Also, analyzing the organizational activities, provide a great opportunity to distinguish between two types of activities from viewpoint of the customers which are as follow (The Arabic Complex for Legal Accountants, 2001):
1) Activities which add a value:
The activity which adds a value is that activity which if it is dispelled, it will lead, in the long-term to a reduction of the product service or the customer. It does not satisfy his expectation which will influence negatively the sales of the firm and its shares in the market. Therefore, the firm attempts to not dispel these activities and performing them efficiently. For example, purchasing raw materials for the manufacturing of the product is an activity with value because without it, the firm can not manufacture the product. Also, painting a car with a good quality, is an activity with value because the customers are expecting this and desire it.
2) Activities which are useless:
Any activity which can not be classified as an activity with value, is considered as a useless activity from the viewpoint of customers. This matter provides the management with a great opportunity to reduce the costs without reducing the capacity of serving the product to the customer. For example, storing the raw materials or the completely-manufactured products, is considered as non-productive activity from customer point of view. Hence, there was the attempt to apply the policy of production at the specific time. Also, the costs of re-manufacturing of defaults units, is a useless activity for the customers which must be discarded. Note that useless activities from viewpoint of customers which cannot be completely dispensed by the firm but it can reduce its volume and performs the activity efficiently such as accounting department, data processing department, inspection costs, equipment preparation costs to produce a new product and operating a certain quantity for a specific product.
2.9. The cost drivers:
The ABC method is formed on specifying cost driver to link between the cost with the product or service. Since it is possible to specify the cost driver, then the use of activities as a fair basis for distribution of indirect costs and becomes more subjective in increasing the accuracy for specifying the costs of products or services (Abu Khashaba, 1999). The cost driver can be described as the event which creates the occurrence of cost as the consequence of using the activity. Any change in the cost driver leads to change the total costs linked to the cost of target (Dergham, 2005). It was also defined as the factors which cause occurrence of activity and implementing it (Maberly and Joly, 2004). Saleh (2002) defined it as the factor whose presence resulted in occurrence of cost and usually represents the main reason for the activity volume. Sheta (1997) defined it as a quantitative gauge for the event of activity which causes occurrence cost or financial scarifies which are supported by the firm in order to achieving a certain standard level from the driver volume levels.
Ramsey (1994) also defined it as any event which causes changes in the total activity cost. It can also called, by The Arabic Complex for Legal Accountants (2001) as cost sectors which it may be expressed as a measure unit to the level or the quantity of achieved activity. The cost drivers represent the variable factors which affect the costs and linked to it with a clear and strong (Drive ‘ Result) relationship. Most of the cost drivers represent quantitative measures which are easily linked with a certain product or a certain category of customers. The ABC method depends on a big number of cost drivers which reaches several hundreds, contrary to the Traditional Cost (TC) method which depends on limited number of drivers.
2.9.1. Types of cost drivers:
Due to links number and relationships among the activities and products or services, the designers of ABC can use several of the cost drivers which are showed as follows (Kaplan and Atkinson, 1998 ; Hussein, 2004 ; Dergham, 2005 and Garrison et al., 2011):
1) The operation drivers:
The drivers which concentrate on number of times of performing the one activity. This type of drivers are used when the outputs need the same amount of activity such as: preparing tools operation schedules for production and purchasing orders and maintaining a certain part of the equipment with taking in consideration that they consume the same time and efforts regardless of nature and type of final product and the operation drivers which have a less cost, but they are less accurate because they assume that the products consume the same time and effort to be performed. The operation drivers can be selected to give good results in the firms which produce one product or has simple variations among the products.
2) The time drivers:
The drivers which care about the time period which is consumed by the activity to produce a certain product or service. The time drivers are used when there is a huge time difference to perform the activity. There are products which need ten minutes of activity to prepare the machines whereas there is another product with a complicated nature which needs three hours of the activity itself. There are some examples of the time factors for example machine preparing duration, inspection duration and labor duration. This type of drivers is considered more accurate and more costly comparing with the previous type.
3) Drivers of actual usage:
This type of drivers is used in case of presence of products or services which need a special preparation and special equipment or high quality controllers or special operations which varies about other products or services and passes, with same activity, other factors than time. So, the time drivers do not allocate indirect costs precisely in this case. This type of drivers is characterized by accuracy but they are more costly.
2.9.2. Selection of cost drivers:
The cost drivers is considered the basis in following up the cost in light of ABC method. There are three important factors which must be considered when selecting the type of cost driver of activities. (Yousif,2004) classified these factors as follows:
1) The degree of correlation:
The main concept of the ABC is founded on following up the costs of each activity to product lines on basis of consumption quantity for each production line is resulting from the cost driver which specifies the activity. The accuracy of cost follow up results, depends on the grade of correlation between activity and cost driver consumptions.
2) The costing of the measure:
The Activity Based Costing (ABC) method is characterized by an increase in volume of activity collections and cost drivers related to them. The increase in number and type of cost drivers, which results in increasing the accuracy of following up the costs, will lead to increasing the measuring cost. Likewise, the increase in the grade of correlation between cost drivers and actual consumption of activity, leads to increasing the accuracy of specifying the cost and to increasing the costs due to the rise in measuring cost.
3) The behaviors influences:
Since the accuracy of following up the costs depends on type and number of cost drivers, then cost driver has desirable or harmful behavior affecting the performance level of the individuals. For example, for materials handling activity, it has desirable behavior influences which take the form of giving incentives to managers on reducing time for moving and transferring the materials inside the factory, Consequently, reducing the handling of the materials. It is also considered as number of communications with the resource which is resulted by appropriate cost driver for the purchasing activity in order to selecting the appropriate resources. If the procurement manager attempted to limit the number of times of getting in touch with suppliers, then this matter has negative influence on selecting the appropriate supplier where he will fail in selecting the supplier who has the highest quality and least cost.
In regard to the criterions for selecting the number of cost drivers, (Abu Khashaba, 1999) stated that the volume of cost drivers depend mainly on required precision in the products or services in addition to the extent of complications in the production operations where as the size of cost drivers increase, the extent accuracy of service or product costs increases taking into consideration the cost and benefit of using the cost driver.
2.9.3. The cost collections:
Since it is not practical to link the costs with the activities on the basis of classifying them in the accounts index. The practical actions are setup on the foundation of collecting costs calculations in the collections or a summary for the type of expenditures. The calculations which are collected in each collection, must be characterized by the same properties and the activities must be exhausted in similar method (Maberly and Joly, 2004). The cost collections are defined as a group of homogenous businesses which are performed inside the activity unit to achieve a certain objective. This group is considered a link chain among the firm resources and the final product where these activities consume the economical resources to perform the final product in terms of commodities and services (Helles, 2007).
Maberly and Joly(2004) illustrated that through the cost collections, calculations may be collected in the form of groups. Each group includes the calculations which have the same properties and are depleted by the activities using similar methods. Also, The Arabic Complex for Legal Accountants (2001) showed that the cost collections are related to collection of homogenous activities which are covered to the same cost driver. This is matter summarizes a number of activities and cost drivers. For instance, the maintenance activities and the programming of production may be collected in one cost collection considering the costs of these activities are significantly directly correlated with the same cost driver which is the machines labor hours or the activities costs of packing, tying and handling the materials may be collected in one cost collection considering that main cost driver is masses of raw materials.
2.10. Applied stages of ABC method in Egypt and other Countries:
2.10.1. Designing the rules of ABC method:
Cooper and Kaplan (1988b) ; Mowen et al. (2012) stated that there are some rules which must be used when designing the Activity Based Costing (ABC) method:
First rule: The concentration is on the resources of high costing:
Concentration is on those resources which, if the ABC method will be applied, will result in a variation in the unit cost of the product compared with the other methods of allocations. The industrial companies will concentrate on the overhead costs, whereas the companies which produce consumable commodities will concentrate on the costs of marketing, distribution and customer service.
Second rule: The concentration on the resources whose consumption of products vary significantly:.
These resources can result in a deviation in the calculated cost for the product unit of the various products in the light of the continuity in using the known cost system for calculating the unit cost.
2.10.2. Steps of designing the ABC method at International, Romanian and Egyptian firms:
The stage for designing the Activity Based Costing inside International, Romanian and Egyptian manufacturing firms passes through five steps as follows and shown in Fig.13(Manea and Barbu,2012;Abbas,2014a):
220.127.116.11. Determination and classification of activities:
1. Determination and definition of activities:
Activities are the backbone of the organization (Plowman,2001). The activities describe the organization performance in terms of time spending manner and the process output. The examples of the activities are: a) Collection of final product. b) Setup the customer invoice (Brimson,1997). The definitions of the activities may be presented as follows:
1- The activity: It is defined as an individual task (event, action, transaction or work sequence) and it is done by the company for manufacturing / delivering a specific product or service (Lttner et al. 1997 and Kieso et al. 2012). It is also defined as a process in the production cycle (Raffish, 1991).
2- The activities: These are forged by the business units or tasks (Drury, 2008).
First step Second step Third step Fourth step Fifth step
Fig.13: A flowchart for steps of designing the Activity Based Costing (ABC) method inside an Egyptian manufacturing firm.
Source: Prepared by the researcher (Own processing).
The last definition of activity illustrates that the one process may includes several activities. Also, the activity is defined as a certain procedure taken to perform part of the productive process from the instance of receiving the customer’s request until the time of executing it.
This way, the activity is considered as the main unit in construction of ABC and follows the costs on products. Therefore, Distinction must be made among the job, the stage of business, the activity and the task.
Brimson (1997) pointed out the differentiation among these concepts in a gradual sequence may be stated as follows:
a) The job:
It represents a description of a business or procedure of the same homogenous nature (Manual or mechanical cutting)
b) The business stage:
To perform any job, a number of businesses must be performed which have interrelated relations (For example: cutting requires measuring the cutting parts and setup the used machine).
c) The activity:
It represents describing how the firm employs its time and resources to achieve a certain objective and then activity represents the process of using certain resources to produce certain outputs which can be a part of a product unit. To perform the activity, a group of tasks must be performed.
d) The task:
It represents the assignment issued to those carrying out the business for performing its various stages. It represents the interaction among the business elements in terms of labor force, equipment and technology to perform the business stages of a certain job.
e) The process:
It represents the performance or actual execution of the task and which results in the occurrence of the cost.
Having identified the concept of the activities, there is absolute necessary to identify the various businesses performed by each department and collecting each group of tasks in form of activities. There are tasks which must have a correlation relationship among them. Then, the cost can be distributed by using one cost driver because it is not financially logical to determine a cost driver of every task separately. So, each activity should be defined and described accurately. This matter may be documented in the form of some flowcharts which include lists of the activities and their objectives which are performed by the staff in each department and the flow of information among them. This clarifies the relationships among the resources, activities and the purposes of the cost.
These data are considered the basis for building Activity Based Costing (ABC) method. When the performed businesses inside the firms are huge and variant, then these tasks must be collected in the form of activities pool considering the following two main conditions (Attia, 2000 and 2006):
The costs in each costing pool are the consequence of homogenous businesses. This means that the costs in each pool are consequences of an individual or group of businesses which have a high correlation relationship. Complete homogeneity occurs when the correlation coefficient becomes equal the one real number which means that the relative changes in the businesses inside a certain activity is equal.
Pool’s costs are should directly have the same ratio or relation with the activity. This means that all the costs in the cost pool must change proportionally with the variables at the level of the activity.
2. Classification of activities:
The activities may be classified as follows (Cooper,1990a ; 1990b and 1990c):
A) Hierarchical classification of activities (Activities sequence):
The indirect costs are distributed in the light of known accounting systems on the basis of distribution linked to the production’s volume such as the direct labor hours and the tools operational hours. But the indirect costs are distributed using the ABC according to the performed activities inside the organization and consequently selecting the cost driver for each activity or a group of activities on which is based the distribution of the indirect costs. On the other hand, Needles et al. (2010) showed several modifications appeared in the international industrial environment as the consequent of accelerated developments in the production systems and their influences on the organizational structure of costing as the consequence of replacing the labor force in the production process with the mechanical production and consequently a raise in the ratio of indirect costs. The activities are divided according to the hierarchical classification into four levels as shown in Fig.14 (Cooper and Kaplan, 1991; Kaplan and Cooper, 1998).
1. Activities at production unit level:
These activities occur when producing each product unit. They vary with the variation of types and number of the producing units. This means that they are often linked to the total volume of production such as the direct labor, direct materials, equipment, consumed capacity and maintenance.
2. Activities at production batch level:
These activities take place every time for manufacturing a batch of a certain products such as preparing the tools supplies, receiving the materials, purchasing orders and inspection. Hence, these activities costs are ir-related to the number of the producing units in each production batch.
3. Product- sustaining activities:
These activities are performed for producing a certain product which is not useful for other products. For example, processes engineering, product specifications, engineering changes and product development.
4. Facility- sustaining activities:
These activities assist in the production process or the firm as a whole. For example, factory management, buildings, lighting and heating. This means that these activities neither linked to a specific product nor with a certain batch but with the firm as a whole (Cooper and Kaplan, 1991).
B) Classification of activities according to its correlation with cost units:
These activities are classified into the following types:
1. The main activities:
Examples of these activities in the metal casting industry are melting, heat processing, formation and finishing.
2. The assisting activities:
The assisting activities are the indirect activities. These activities provide services to the direct activities. Examples of the assisting activities in the metal casting industry are maintenance, production engineering, research and development, industrial security and inspection and quality.
C) Classification of activities according to the added value:
The activities can be classified according to the addition of the value to activities which add value and activities which do not add value.
a. Added value activities:
These main activities are performed by the firm to achieve its own objective. They are classified to two types as follows:
a) Activities performing production process inside the organization such as the production and inspection activities.
b) Activities which get its value by performing direct services to the customers such as sales activities and marketing activities.
b. Non added value activities:
These are the activities which do not affect the firm and the cancellation of these activities does not also influence the progress of the firm’s performance.
The previous three classifications of the activities are all useful and important for the firm where each of them reflects a certain use.
Therefore, the importance of classification of the activities may be summarized as follows:
1- The hierarchical classification assists in achieving the good allocation of the cost which improves the accuracy of the measure.
2- While classification of activities into main and assisting activities contributes in identifying the activities which are consumed through other activities and consequently, they are directly allocated to the products. These activities are the assisting activities. Also, identifying the activities which are directly consumed through the products and consequently they are directly allocated to the products. These activities are the main activities.
3- Activities are classified into added value activities and non-added value ones contribute in supporting the continuous improvement (kaizen) efforts and leads to reducing the costs.
C”pu”neanu et al. (2011b) illustrated that the Activity Based Costing marks entities into: value activities and non-value activities. ABC facilitates an entity to seize opportunities to streamline, reduce or eliminate costs throughout the activity, when it is found to be worthless or non added value activity.
18.104.22.168. Determination of activities cost:
After determination of activities in the first step, this matter is followed by specifying the cost related to it. This cost is the value of production factors which are followed. It is related forms this activity. The costs related to usage of resources on the activities may be followed through examining the causative relationship among the use of the resources and the outputs of each activity and the main axis to determine this causative relationship. This matter is called measure of the activity (Cost driver).
22.214.171.124. Determination of activities centers:
Cooper (1990a and1990b) stated that the activity center is part of the production process that administration desires showing the activity performance costs in a report, separately. Al-Helbawi (1995b) defined the activity centers as functional or economical pools for several integrated or similar activities which are organized by the activity centre separately. On the other hand, Turney (1992a, 1992b and 2010) mentioned that the activity centre is a flexible tool to report the activities in various methods. It is used in reporting the similar activities information which may be interfered between the various departments. For example, the quality information related to the various activities exist in several various administrations such as departments of inspection, quality, ovens, pipe machines, heat processing and finishing. In addition, the information collection about all the quality functions inside the firm, representing the quality activity centres. So, the value of the quality activity centre is considered a report for all information related to the prohibition, correction and quality protection in same time (Turney, 1992a and 2005).
It becomes clear from what was previously stated that the activity centre is considered a pool of several activities or cost pools. This matter does not affect allocation of costs on units where the pools inside each activity centre represent an independent entity either in directing the cost elements or allocating the costs to the units. Therefore, the activity centre is considered as an organizational process for controlling and administrative purposes. This matter gives the managers a great potential to control the various activities. The collection of these activities is carrying out according to the homogenous and proportional conditions among the activities as previously stated in the first step.
126.96.36.199. Determination of cost drivers for each activity and their classification:
The essential variations between the Traditional Cost (TC) method and the ABC method is based on selecting type and number of the cost drivers because the Traditional Cost (TC) method often depends on the use of a limited number of the distribution bases such as machines rotation hours or direct labor hours. As for Activity Based Costing uses a number of cost drivers in the indirect costs allocation process.
1. Advantages of cost drivers:
The most important perks of using current cost driver concepts may be summarized as follows (Cokins and C”pu”neanu, 2010):
1. Periodically reviewing costs. Understanding cost drivers and their effect on cost behavior can help in the analysis of production costs in the short-term as well as the long-term. Many resource expenses, typically considered as period costs or fixed costs in the short-term, may be tested to determine if some of the resources (and their capacity level) are adjustable up or down as the planning horizon extends, thus resulting in classifying them as variable costs rather fixed costs. Thus all costs will be subject to great control.
2. Eliminating costs. Identification of cost drivers of non-value-adding activities (e.g., the number of inspections) facilitates the elimination of the activity cost if its purpose can be eliminated by removing the root cause. The indirect costs allocation method on products using cost drivers contributes to this effect.
3. Improving enterprise performances. Because many firms still use traditional management accounting and cost calculation methods using non-causal cost drivers, they produce unrealistic, inaccurate and flawed cost information. But based on new contemporary approaches to cost drivers and using advanced management accounting and cost calculation methods, as with the ABC method, reliable information can be the basis for intermediate and long-term decisions.
4. Actual costs to individual products. Compared with traditional cost allocation methods (i.e., non-causal), the most important advantage offered by cost drivers is far more accurately calculating total and per-unit costs of products, channels, and customers. Accurate determination of total and per-unit costs is invaluable when evaluating selling prices and profit margin layers to strategically rationalize types of products, channels, and customers to sell to.
5. Improving employee and manager awareness. Each employee or manager of a company should be aware of the benefits and the knowledge of costs causes which improve performance. Managing enterprise performance based on cost drivers can contribute to individual wage gains, such as bonuses, premiums, etc.
6. Controlling costs with better calculations. To have better control of costs we must control the causes, namely cost drivers. If one can reduce the quantity, frequency, or intensity of a cost driver, then its activity cost will be lowered. Using traditional cost calculation methods causal-based cost drivers are ‘hidden’. Consequently, with the desire to reduce indirect costs, managers and employees may be misled to reduce a non-causal cost driver (e.g., number of labor input hours) and have no impact on reducing the indirect costs. Using however causal-based cost drivers, the accountant will provide visibility to the work activities and their cost drivers that consume activity costs and in turn resource expenses.
From 2000 till present time, we witnessed the integration of the performance management in the ABC method. Similar aspects and differences are characterized by cost drivers (Cokins and C”pu”neanu, 2010) and critical performance factors. Allocation process becomes clear through understanding its concept, its various classifications and basis for selecting it.
2. Concept of cost drivers:
There are several definitions related to specifying the drivers. They are presented as follows:
a) Babad and Balachandran (1993) defined the cost drivers (Allocating bases) functioned in the ABC system as factors which enable to measure the performance and the size of the activities.
b) Brimson (1997) defined the cost driver as the main element which causes a cost.
c) Hicks (2002) and Horngren et al. (2012b) defined the cost driver as the main reason for the cost.
d) Also, Cooper (1990a) defined the cost driver as an event which is linked to the activity and leads to consuming the firm’s resources.
In General, it may be concluded that the driver is event or action that generates the need of activity which consumes the resources or the event which causes the cost. Therefore, a causative relationship resulted between the cost and the event.
3. Classification of cost drivers:
A) Classification of cost drivers according to driver type:
Activity Based Costing (ABC) system performance in firms depends on various types of the cost drivers. Kaplan and Cooper (1998) differentiates the drivers by type as follows:
First: Transaction cost drivers:
Drivers concentrate on times for performing a single activity. They are used if the group of products needs the same amount of activities such as number of times for preparing the machines or the number of times for receiving. Therefore, these drivers have low costs but they are less accurate because they are based on the assumption of steady resources used by the activity each time it is performed where it is assumed that the size of the activity is homogenous for all the outputs. For example, using the transaction drivers, such as the times of setups assume that the time consumed in each setup transaction equals any size of the production. So, this method is appropriate to the activities which have very small difference values in the uses of each cost unit. Consequently, when the quantity of required resources to perform an activity varies considerably from one product to another, then the matter requires more accurate cost driver.
Second: Duration cost drivers:
These cost drivers concentrate on the period of time consumed by the activity and which is required to perform a certain product. They are used in case of variation in the size of the activity required to be performed with the variation of the type and quantity of the final product. Examples of the duration cost divers are: labor hours, inspection and hours of setup the machines (Eissa, 1997). In general, the duration driver is more accurate than the transaction driver but it is more costly in implementation because this requires estimating the duration for each time the activity is performed.
Third: Particular cost drivers (Direct):
These drives mean a direct loading of the activity with its consumed resources where there are some activities which the transaction driver or the duration drivers do not achieve sufficient accuracy such as the pool products which need special setup processes, individuals with special skills , testing equipment and special measurements in each time of setup. Therefore, it is better to use particular drivers, i.e. the activity costs are loaded directly on the outputs. The direct drivers are the most accurate cost ones. They must only be used when the resources linked to the activity performance have high costs and they vary each time in which the activity is performed.
B) Hierarchical classification of cost drivers:
The Traditional Cost (TC) method depends on the cost drivers which are linked with the size or the product unit such as: machine operational hours, direct labor hours, value of resources or number of produced units. But the Activity Based Costing (ABC) method uses the drivers which are linked to the product unit and the cost drivers are not linked to the product unit. So, the used drivers in the ABC method using hierarchical classification of activities may be classified as follows:
First: Product unit related to cost drivers:
Allocating costs of activities linked to production unit. For example, the cargo activity uses the activity driver of the shipped quantity but the melting activity uses the activity driver of the melted quantity.
Second: Production batch related to cost drivers:
Allocating costs of activities linked to production batches where the machines setup activity uses the driver of times, number of machines setup or the driver of hour’s number for setup the machines.
Third: Product-sustaining related to cost drivers:
Allocating costs of activities connected to products where activity of amendment and design of product uses the changes driver in the production engineering.
Fourth: Facility-sustaining related to cost drivers:
Allocating costs of activities linked to the organization as a whole where the staff training activity uses the number of staff driver.
C) Classification of cost drivers according to the cost allocation stages:
The cost is allocated in the Activity Based Costing (ABC) method according to two stages as follows:
First Stage: Indirect cost is allocated to activities.
Second Stage: Costs are allocated to the products/customer.
4. Affecting factors in determining the cost drivers:
The ABC method seeks to reach the product cost’s accuracy by using of several drivers. The number of performed activities at any organization is often very large and it is not economical that not to use the same driver for all the activities. Therefore, several activities are collected together and using a single driver to follow these activities of products.
Cooper (1990a) stated that the technique of measuring systems of Activity Based Costing (ABC) system may be showed as taking two separate decisions, but they are linked at the same time, concerning the number of the required drivers and any used cost driver. The difficulty of good design of ABC is achieving operational economy of the system without introducing a deviation or distortion of products cost. The number of drivers needed by the system and selecting the appropriate cost drivers may be indicated as follows:
A) Number of required cost drivers for ABC method:
The minimum limit number of required cost drivers for the ABC depends on a certain required accuracy level of the activities related to products cost and the extent of complexity of the mixture of products. Therefore, there are some criterions which must be taken in consideration when determining the appropriate number of the cost drivers. These criterions may be concluded as follows:
1. Degree of required cost numbers accuracy:
Cooper (1990a) also illustrated that by increasing the number of drivers, leads to increase the level of data accuracy and increase cost of implementing Activity Based Costing (ABC) system. This matter means there is a direct proportional connection between the degree of accuracy required by organization and numbers of drivers. This means that whenever the organization desires to increase the accuracy of the cost reports, this matter would requires raising the number of drivers to achieve the required accuracy.
2. Complexity degree and products variation:
The production mixture plays an important role in determining the cost drivers where there is a directly proportional relationship between the variation and complexity of the production mixture for the organization and the number of the required cost drivers. This is due to increase the diversity of the commodity produced by the organization in terms of the non-homogeneity of using the activities (Then input elements). This matter reflects the variation of consumption of each product to the various activities. Assuming the collection of two activities and their allocation with a single cost driver, then this collection may lead to a deviation of the cost data.
3. Relative importance of cost pools:
There are some activities which their costs are related to the total overhead costs of the organization as a whole. These activities represent a small percentage comparing to the costs of other activities. There is no need for multi cost drivers for these activities even if each activity contains a group of non-homogenous business. But in this case, it is better to select the cost driver marked by a higher degree of correlation with costs group for this activity. As for the case of increasing the cost percentage of the activity assigned to total overhead costs of organization, the use of a single cost driver with no good relationship with the activity may cause a severe reduction in the level of accuracy which is desired to be achieved in the costs data and the need to achieve the condition of homogeneity of the performed business inside this activity and linking the collected costs with the cost of activity increases. Then, the direct proportional relationship between number of drivers and relative cost of various activities may be guaranteed by increasing the relative cost of a certain activity which may lead to an increase in the number of the required cost drivers.
B) Selection of the cost drivers:
Cooper (1989) pointed out that there are three factors which must be taken into consideration when selecting the cost driver. These factors may be mentioned as follows:
First: Cost collection of cost drivers information:
There might be a direct proportional relevance between number of drivers and cost of measurement. Therefore, this criterion must be taken into consideration as an important factor for governing cost drivers. If selected driver was characterized by difficulty in collecting its own costs, which means a high cost in measuring this driver. In this case, it must be ensured that the benefit resulted from this expansion of drivers number exceed costs of data drivers collection. But if this expansion does not lead to an increase in the cost of measure because the data related to these drivers may be easily available through the existing system or ease of data collection. In this case, it is appropriate to expand in the number of drivers to raise the accuracy degree of the costs data.
Second: Cost driver correlation degree with organization actual consumption of resources:
Usage of cost drivers which do not express, significantly, about the extent of consuming the products for the activities, leads to a deviation of the cost of products. For example, usage of a number of examined pipes as a cost driver for the inspection activity instead of the inspection hours, leads to a distortion of the cost of products if the process of inspecting the pipes varied between them in terms of consumed time in inspection process for each pipe.
Third: Cost driver behavioral influence:
During selecting a certain cost driver the effect of using this driver in the individual’s behavior must be taken into consideration. In general, the cost driver affects the individual’s behavior if they felt that their performance will be evaluated depending on the cost driver.
On the other hand, Cokins and C”pu”neanu (2010) stated that according to experts, the prime criteria for selection drivers are optional despite of their importance. They are as follows
1. Positive or negative effect on staff.
2. Easy recognition.
3. The direct connection between indirect costs and drivers.
188.8.131.52. Allocation of products according to their cost shares:
Since the Activity Based Costing (ABC) method depends on a main idea, which is the activities consume resources and consequently costs related to it and products consume these activities. This matter requires the cost of consumption must be loaded on these activities. Therefore, loading the cost of product activities (Allocation Processes) is carried out according to the need of each product to the consumed resources in fulfillment the activities and through determining the rate of indirect costs for each activity using the appropriate cost driver (Manea and Barbu,2012). Then, determining the final product cost is accomplished through following up all the activities related to this product unit. This follow up is executed in the light of product unit movement in amidst activities since start of its manufacturing until becomes a fully unit.
Cokins and C”pu”neanu (2010) revealed that there are three levels of cost allocation (Fig.15):
Level 1. Resources to activities. resources are allocated to activities (main and/or support) applies resource drivers.
Level 2. Activity to cost objects. By re-directing our focus to assisting activities into main activities (which is an activity-to-activity cost assignment as intermediate cost objects), prime activity costs are assigned and traced to costs objects using drivers.
Level 3. Cost objects to final cost objects. Cost object drivers are assigned and traced to other cost objects and definitely sum into the final cost objects (e.g., customers) using final cost object drivers.
Fig. 15: Expenditure identification and allocation scheme according to drivers.
Source: Cokins and C”pu”neanu (2010).
2.10.3. Application of ABC method:
After presenting design steps of ABC method which are: determining and classification of activities, activity cost, activities centers, cost drivers and finally, the activities costs allocation on the products by loading each product unit with what it was benefited of indirect costs. It is obvious that implementation of ABC method is considered as design steps and they may be converted from their theoretical form into a practical reality considering planning of the required resources , stages of implementation , setup the method follow up reports , study the implementation results and following up the method. Practically, the obstacles of ABC implementation can be overcome by giving the importance to behavioral and organizational variables (Krumweide and Roth, 1997).
Implementing ABC method require following stages (C”pu”neanu et al.,2011a):
Stage 1: Formulation of goals.
Stage 2: Organization chat drawing according to the transversal organization of the company.
Stage 3: Possible difficulties recognition should be met after covering the two stages and the searching for future opportunities.
Stage 4: Examine the proper implementation manner of ABC method by using information provided by means thereof.
These matters become clear in details in the practical part during the implementation of the costs system currently applied in the Egyptian manufacturing firms.
2.10.4. Evaluation of ABC method:
The ABC method obtained wide support from most academic and practitioners in the costs accounting. Also, it proved a clear success in several firms. The valuable information provided by ABC method assists organization understand its current situation, improve profitability and determine the fields in which the value increases or decreases (Van Raaij, 2005 and Dalci et al., 2010). It determines the trend which the organization has to pass through and helps in improving the follow up of the short and long term performance. As the consequence of this, the ABC was evaluated by many writers and academics. Therefore, the importance of the implementation, the advantages and the determinants of using ABC method must be discussed as follows:
184.108.40.206. Importance and advantages of implementing the ABC method:
Importance and advantages of implementing ABC method may be illustrated as follows:
1- ABC gives a share in the process of achieving the monitoring environmental costs through controlling the costs which occur at a certain activity level (Jasch, 2003). This matter is starting from the stage of purchasing the materials required for the product and before receiving them until ending the product, shipping and delivering it to the customer.
2- Turney (1992a, 1992b and 2005) emphasized that ABC is considered as a two-dimensional system. First dimension is related to cost (Measuring cost) and second one is related to process (Improving performance). This matter leads to support the decisions where they are based on the financial and non-financial information collection and directs products and customers strategy towards profitability opportunities and supporting the organization potential for improving both the processes and the customer service (Jelsy and Vetrivel, 2012a).
3-Activity Based Costing (ABC) method also assists in providing valuable information about the activities and the firm’s processes because it allows knowing the costs of designing the activities , new product costs , customer service costs and the administrative activity costs. So, it is considered one of the information systems which aids the managers for obtaining and making the accurate and rationalizing decisions making in a better way (Kaplan and Atkinson, 1998 ; Attia, 2006 ; Mohammad, 2008 ; Lee et al.,2010 ; C”pu”neanu and Briciu, 2011; Chea, 2011 ; Stout and Propri, 2011; Ray, 2012 and Al-Refa’ee,2012). Also, Cokins et al.(2011) illustrated that ABC synthesis documents purpose is to present and overview of the developments pursued by enterprise management through objectives and making decisions relevant to proper management. The main information source for defining accounting synthesis documents for ABC is the profit and loss statement of account. (Fig. 16).
Fig. 16: Accounting synthesis documents formation and ultimate goal.
Source: Cokins et al. (2011).
4- ABC method assists through activities costs collection and distribution of them over the utilized cost units according to appropriate distribution bases, in supplying the administration staff with more accurate information (Cost system outputs) and increases the effectiveness of relying on them , specially, in the field of making the different types of decisions which in addition to the importance of these outputs in the fields of planning, controlling and evaluating the performance (Cooper,1988a ; Cooper 1988b ; Cooper and Kaplan, 1988b ; Johnson,1990 ; Brignall,1997 ; Fayed,1997 ; El-Gibaly and Diab,2012).
5- Activity Based Costing (ABC) method provides much information which may be used in several aspects of measuring the performance (C”pu”neanu et al.,2013). In addition to the appropriate cost information which is provided by this system, it also provides a group of non-financial measures trough the individual cost drivers, (Brignall,1997) , such as number of machine setup times, inspections, executed orders and handed over orders to the customers and other non-financial measures which are used in determining the products costs according to their utilization extent of activities in addition to the contribution in measuring the accuracy of financial information and performance (Chea,2011 ; Segovia and Khataie,2011 ; Jelsy and Vetrivel, 2012b ; Hardan and Shatnawi,2013).
6- ABC method allows management staff the possibility of identifying the un-exploited energies which take the form of the resources of activities which remained idle by the final products and working on exploiting them either by using these energies to obtain other incomes or by reducing the expenditure on these resources and consequently, the optimization of the economical resources of organizations, takes place (Hagag,1992).
7- Activity Based Costing (ABC) method interested in all indirect costs (Cinquini and Tenucci,2010). This method is not limited to the industrial costs but also includes the costs of design, research, development and the distribution and marketing and administrative costs.
8-Setup the estimated budgets on regard to ABC method leads to determine the accurate financial aspects for each activity, activities, performance and cost objects in the light of the expected level occurrence for this activity. On the light of this level, the resources are allocated and the budget is prepared. This matter supports the effectiveness of the administrative decision in the fields of planning and allocation of resources and the majority of indirect costs among the activities to achieve the best possible exploitation of the resources together with achieving a high degree of controlling on the costs through linking them with their specific activities (Kaplan and Atkinson, 1989 ; Turney, 1989 ; Turney, 1996 ; Brignall, 1997 ; Yousif, 1998 ; Emblemsvag, 2001 ; C”pu”neanu and Lepadatu, 2008 ; Gervais et al., 2010 ; Stout and Propri, 2011 ; Lutilsky and Dragija, 2012).
9- Activity Based Costing (ABC) method matches the modern administrative methods through evaluation of the performance, human resources, distribution channels , customers profitability and others which is listed under the method of administration term based on ABM] Kennedy and Affleck-Graves, 2001 and Lambert, 2010[. It may say that ABC method supplies us with cost information which shows cost structure and profitability for organization products, while ABM describes the behavior to be taken into consideration to improve the quality, reduce the cost and the production cycle time as soon as obtaining information related to the activities costs which are provided by the ABC method (Attia,2006). Product profitability and cost information is a necessity for cost-conscious management, only if there is available cost information. Management is basically able to create different decisions while taking into consideration the cost perspective. Hence, comprehending product or service cost’s causes and effects is critical in terms of firm’s short and long-term planning. The contemporary service business and manufacturing environment are characterized by product diversity and automation. Total overhead has been highly regarded by some firms that a correlation no longer exists between it and direct labor. Company’s resources consumption is un-related to physical volume of produced units. The search for more detailed and reasonable approach of allocating overhead to unit cost continued until the emergence of ACTIVITY BASED COST (Terungwa, 2012).
10- Implementing the Activity Based Costing (ABC) method, also influences the marketing strategies through specifying a combination of products / the more profitable services based on their knowledge of the cost of services offered to the customers which are known by the ABC method (Ratch, 1990; Kuchta and Troska, 2007).
11- Implementing a successful adopted model of ABC method inside a firm is significantly associated with all dimensions of operational performance (Lee et al.,2010), process cost improvement, decision action increase, overall activity efficiency improvement and process cost savings (Aldukhil,2012).
12- Implementing Activity Based Costing (ABC) method inside a firm gives managers a clear perception of their operation economics (Kaplan and Cooper, 1998; Lana and Fei, 2007).
13- The ABC method provides a better assessment of costs, performance measurement and investment justification (Cokins and C”pu”neanu, 2010).
14- An ABC/ABM method grants the recognition and measurement of environmental and social costs by assigning them to products, processes, activities, or customers. ABC method’s advantage is that environmental and social costs relate to the activities that cause them, and formerly hidden expenses, such as the costs of (a)energy, disposal, water treatment and waste treatment; and (b) training, are clear and can be better governed. Environmental costs should be properly attributed to both current and past products so not to distort the economics of existing product lines. In Business review, analyzing energy usage and environmental consumption. professional accountants could allocate environmental costs to existing products as , these costs can also be allocated to current processes and products/services resulting from them, which should be assigned a share of the process- specific environmental costs (International Federation of Accountants [IFAC [, 2011).
The researcher may conclude that Activity Based Costing (ABC) method has some important advantages which formalize a reflection strength for professional staff in the firm for the purpose of obtaining a practice of performance management taking into consideration the existing possibility for fixing some real costs, predominately, in the light of the recent conditions of the severe competitiveness in the field of business environment.
220.127.116.11. Utilization determinants of ABC method:
Utilization determinants of ABC method may be summarized:
1- Despite the ABC method depends on loading the products with all types of costs which are afforded by organization for purpose of designing, production, marketing and servicing. These products but the costs of research and development must be excluded because they are correlated with the uncertainty factor. But it is possible to overcome this matter through dividing this type of costs into two parts. First part is related to improve the currently existing products and this cost type can be followed up to the products which will benefit from these improvements. As for the second part which is related to new products which are not loaded on the current products and are loaded on the products and they benefited during its life cycle (Cooper and Kaplan, 1988b).
2- Implementing ABC method requires the necessity for the availability of a group of the detailed information either about the resource or the activities or the cost drivers and performing a large number of accounting processes. This matter may not be available in many organizations, which make it face a serious problem (Nicholls, 1992). But this problem can be overcome through starting to implement this system, first on the partial level stages and then expanding gradually step by step (Al-Ghorory,1992).
3- Implementing the Activity Based Costing (ABC) method may face difficulties especially during its implementation in terms of the cost drivers (Number and type) which must reflect the cost behaviors inside each activity and the extent of its correlation with the amount of the firm’s resources consumed by the product (Tham,1999).
4- Despite that ABC method classifies the activities according to the hierarchical sequence for allocation of indirect costs; it also uses some governing rules which depend on the distribution size of some costs such as building costs which include rents, insurance and destruction. To determine the drivers of this type of costs necessitates that the firm performs some studies and analyses. This matter may be rejected, economically, due to the increase in costing over the expected returns from the studies.
5- The firm which desires to implement the Activity Based Costing (ABC) method may face reluctance of the top management in changing the traditional accounting method and it also faces resistance from the other departments in the firm to the changes or to provide the required information (Nicholls, 1992). Oglesby (2008) stated that management’s resistance to ABC results from lack of understanding of benefits associated with ABM and a failure to recognize the bottom line impact of the ABM/ABC linkage. But it is possible to overcome this reluctance through persuading the cost top management of this method, which leads to reduce the severity of resistance by the departments or employees and workers in Bangladeshi firms through training programs application (Hasan and Akter, 2010 and Shil and Pramanik, 2012). This matter also can be achieved when they participate in the primary stages of ABC method implementation and supplying them, in the same time, with knowledge, training, the required information and the continuing trend towards the successful implementation for the method (Husien, 1994 and 1998). There are several factors ensure the success of ABC: sourcing suitable ABC software, simplifying the ABC implementation process, top management support , and finally ensuring that all affected employees comprehend and actively support the implementation process (Majid and Sulaiman, 2008). It is also debated that the behavioral issues of relevant staff play a critical role to the success of ABC implementation (Shields, 2001).
6- Pools of several businesses in a single activity and the non possibility of using the cost driver for each business economically, lead to using a single driver to follow up resources consumed by products. There is no doubt that the increase of businesses collected in a single activity, leads to decreasing the ability of the cost driver in performing the precise follow up of the consumed resources by the products (Mohamed,1991).
7- Activity Based Costing (ABC) method illustrates the increase of its implementation costs which is represented in the following two factors:
a-The investment costs which are represented in the design cost method, the costs of the design team work and costs of training the workers to use it. Schneider (2010) provided a framework for managing cost at investment management firms in order to analyze and control these costs.
b-The measurement costs which are represented in the data collection and operation costs, cost of reports setup, cost of the required calculation processes to follow up the costs for the activities and calculating the share of the product from these activities.
2.11. Preliminary conclusions:
Through implementing the ABC method at some governmental and private industrial organization and firms in the world and Egypt and the results of the applied field study, it may be concluded the following important points:
1) Success of applying ABC method at industrial firms in the world and Egypt does not only rely on presence of an accountant who is completely aware of costs suffered by the firm, but it also needs the presence of a highly experienced work team and a wide knowledge of the activities practiced in the departments in the this firm and able to link between the activity and the service. It is easy to provide this cadre because it already exists but needs a little guidance and training on using modern technologies such as computer programs, data base to create new rationalization ways for transforming the useful activities (Un utilized activities) to useful activities (Utilized activities) so as to improve performance qualification and increase profitability in the firm, particularly in the Egyptian firms. This matter supplies the person who apply this system with correct information which makes him explain accurately the relationship between the costing and the activity and between the activity and the cost. Also, the firm must has available information systems which can provide the work team with any other information which may be needed.
2) Ability of ABC in providing cost information about the industrial services in a more accurate form than that provided by the Traditional Cost (TC) methods, which helps the decision-maker in taking the managerial decisions correctly and timely.
3) The ability of ABC method in decreasing the costs without affecting the quality by using re-engineering the operations as the consequence of analysis of the activities. Introducing a flowchart which shows the mechanism of work to provide the services to the customers quicker through merging some activities with each other or even cancelling some useless activities which is the main objective in the Activity Based Costing (ABC) method. This matter leads to utilize the optimal use of rare material and humanitarian resources to achieve their operational objectives efficiently and effectively.
4) Specifying and selecting the cost driver, is back bone of Activity Based Costing (ABC) method during applying this system in the firm departments all over the world, especially in Egypt.
5) The effective controlling of costs in the firm departments must be applied as the consequence of analyzing the activities and linking them with their own costs and knowing the deficient points and working to avoid them and promoting the strong points.
6) Despite the Activity Based Costing (ABC) method achieves many benefits, but there are factors which deter implementing it such as high cost of implementing , practical and economical difficulties concerning analysis of the activities and difficulty of studying and analysis of some activities costs.
7) The advantages of the Activity Based Costing (ABC) method can be implemented in both private sector (industrial and services) and public sector such as Ministries, governmental Institutions….etc.
8) The main difficulty facing managing the firm if it intends to implement the Activity Based Costing (ABC) method, is the non-availability of information in the form which it can implement this method. This matter forces the firm to make changes once only and there is no great difficulty, at the level of its accounting and information system, to move on from the status of random information to accurate classification of information especially those related to costs.
9) The ABC method is not made to issue immediate decisions, but to provide more accurate information about the provided industrial services and consequently, increasing the efficiency and effectiveness of performance by calculating the cost of industrial service at any time and aiding the managerial team in providing a database which helps the top management in the process of making the decisions.
10) Pricing process by using costs data is useful for both the firm’s management and the Ministry of Industry and those dealing with them in increasing the costing awareness which is reflected on the economical use and operation of available resources used in the firms to reach the targeted goals.
11) The information provided by ABC method can be utilized in several fields. These fields are planning, estimating the costs of activities performance, preparing the planning budgets on the several levels, controlling the costs, rationalization of decision making process and controlling and evaluating the performance.
12) The Activity Based Costing (ABC) method may be implemented, successfully, in any Egyptian firms in case of it has the same available conditions. The process of applying ABC in the firm as whole, may be costly and needs a great effort but the benefits to the firm after applying, will be superior.
13) The ABC method is a method which attempts to overcome the deficiencies of TC as the consequence of the changes which occurred in the modern manufacturing environment and the distribution of the indirect costs. This matter may be achieved by determining the activities which are operated in the firm. This is must be followed by following up process of the costs of these activities based on several cost drivers before distributing them on the products according to their consumptions of these activities. This will result in supplying the management with accurate information to make the strategic and operational decisions.
14) The contemporary business environment produced several changes and challenges to numerous firms which led to response of accounting thought to theses changes through the development of cost methods and measurement systems.
15) The cost systems usage lead to provide the managerial team in the firm with fiscal and non-fiscal information. This matter helps to achieve the objectives of maximizing profitability on short-term as well as to maximize the wealth of the owner on the long-term.
16) There’s a deficiency in currently cost scheme applied in many manufacturing firms to provide necessary information for managerial team of rationally making decision specifically in the fields of valuing and determining the productive mix.
17) In a general, there is weakness in the financial allocations for the improvement of cost systems and accounting business at Egyptian industrial firms.
18) The results of study showed that mostly of cost managers in Egyptian manufacturing firms which have a high level of modern technology are interested to classify cost structure to direct and indirect costs which is more than variable and fixed costs in light of firm usage of ABC method.
According to studying of various aspects of the ABC at Egyptian firms as attempt to achieve objectives of the present research, It’s suggested to finalize a research which illustrates applied stages of ABC in Egypt and a comparative study of conformity and variance factors for ABC with the other modern concepts.
Chapter 3: INTEGRATION OF ACTIVITY BASED COSTING (ABC) CONCEPT WITH OTHER MODERN MANAGEMENT THEORY CONCEPTS
3.1.Presentation of different modern management theory concepts that could be used to enhance ABC usefulness in a business environment:
Business environment changes, triggered by technological novelty and global competition, have developed new methods of using financial and nonfinancial information in organizations. New environment necessitates relevant information and data about costs and performance within the organization’s processes, products, activities, customers and services (Cardo” and Pete,2011).
Yet, many firms are not earning competitive advantages from these reinforced cost systems because they depend on information from a cost system created for a simpler technological age when fierce competition was only local instead of global, quality and performance were less critical for success and firms were producing standardized products and services. Using these systems managers do not have accurate and relevant information to lead improvement activities and they do not have precise and valid information to form their strategic decisions about customers, services, products and processes (Stefanovi” and Novi”evi”,2012).
3.2. ABC method and ABM concept:
In light of the current competition between firms in a large open market represented in the international economy, obtaining the information and how to use it represent an important basis in the possibility of success of these firms in the light of changing environment which is characterized by several desires and needs of customers. Therefore, there is a great necessity to think in a cost management approach by relying on the activities. This feature is found in ABC method where this method provides firm with information. The costs management uses this information efficiently in making the correct decisions in a form which matches the implementation of the firm’s strategies and improving the internal performance. There is a significant diversity of opinions concerning the efficacy of ABC (McGowan and Klammer, 1997). So, the present study will cover some important points related to Activity-Based Management (ABM) in terms of the concept, objectives, advantages and their relationships with the Activity Based Costing (ABC) method (Oglesby, 2008).
Clear comprehension of ABC method naturally leads to ABM: the entire set of actions that can take place, on a better informed basis, with ABC information. ABM enables company to achieve its outcomes with less demands on structural resources; that is, the firm achieves the same outcomes at a lower total cost. ABM accomplishes its objective through two complementary applications: strategic and operational ABM (Kaplan and Cooper, 1998).
Initially, ABC method is presented as a mean of establishing more accurately product cost. The emergence of ABM provides a mean of enhancing profitability. The theory of consumption is strengthening ABC with activities viewed as giving rise to costs. ABC is considering the analysis further in a way provides management with insights into controlling business overall. Basically, these insights are focused on a process view of business and a deeper understanding of product, customer and channel profitability (Plowman, 2001). On the other hand, Campbell and Frei (2010b) indicated that the main advantage of online banking channel (Modern technology) may be in attracting and retaining more profitable customers rather than multiplying the profitability of current customers.
What distinguishes ABM system is that it is based on an innovative cost determination attributing to various performed activities within the firm value chain and sharing them among the different outputs. In fact, the ABM is based on the principle that according to which costs are determined by resource consuming activities and products meet these costs as a consequence of selling, planning, production and distribution activities. ABM is the definition of a product full cost by recognition of indirect activities and offering a product cost determination system that distinguishes traditional criteria by cost dealing as costs are not related to output volumes (Tardivo and Di Montezemolo, 2009).
3.2.1. Concept of Activity Based Management (ABM):
There are several definitions of ABM.
These definitions of ABM may be presented as follows:
a) The ABM is an expansion of ABC method to include another group of factors such as customer’s profitability, human energy and distribution channels (Babad and Balachandran, 1993).
b) The term of ABM is a mean of activities analysis process to perform amendments on activities in order to improve performance, obtaining evaluation of financial and non-financial information, cancelling the losses, concentrating on the profitable operations, satisfying the customers desire and maximizing the return on the investments (Sharman,1995).
c) The Activity-Based Management (ABM) is defined as how to use the information resulted from the Activity Based Costing (ABC) method in the continuous improvement processes (Turney and Stratton, 1992 and Attia, 2006).
d) The Activity – Based Management (ABM) is considered as a cost system for satisfying the customers, improving the profitability by using the methods of pricing decisions, products set, reducing the costs, improving the processes, product design and finding the solutions for decreasing the consumption of resources by getting rid of non value activities and reducing the resources wastage (El-Dyasty,2006).
e) The Activity – Based Management (ABM) represents a cost approach creates vigorous tool for cost control in today’s health care organization by activating its three main components ]Analysis of activity, cost driver and performance measurement[ (Baker,1998).
In the light of the previous definitions, it may be concluded that these definitions share in defining the Activity-Based Management (ABM) as a method which is used to manage the cost management through the information submitted by ABC method. Therefore, it is defined as: a managerial approach which uses ABC method information to refine given value to the customer and increase organizational profits. In addition to measuring and analyzing activities to ensure efficiency, effectiveness and possibility to improve these activities.
3.2.2. The objectives of ABM:
The ABM is considered as a tool aiming to achieve the continuous improvement in all aspects of activity in the organization. So, the cost management carries out SWOT analysis through determining the aspects of Strength, Weakness, in available opportunities and threats which are resulted from the external environment and in the same time it gives continuous the firm a way to search for these opportunities and achieving their maximum exploitation. This matter leads to achieving the following advantages:
1- Improving the value the consumers obtain through satisfying their needs and desires considering the elements of quality and prices.
2- Improving the profits through using this value where it is not sufficient to satisfy the customer’s needs with the appropriate quality and price without considering that this given value will achieve profits to the company and consequently, guaranteeing the continuity and existence of the company in the market (Turney and Stratton,1992).
3.2.3. Advantages of implementing ABM method:
Advantages of implementing ABM concept may be concluded as follows:
a) ABM is not only a method, but also a managerial process leads the managers to understand how to manage the company’s activities through providing them with an integrated perspective of the organization as a whole. It also assists the organization to know the reason for occurrence of the cost and how to increase the efficiency of the activities inside the organization.
b) Improving the strategic situation inside the organization through directing the management view to a group of activities which must be performed to execute the defined strategy by the organization and the resources costs which must be reduced for these activities to implement the strategies in a way which the organization management is able to judge the possibility of success in implementing these strategies inside the organization.
c) Activity-Based Management (ABM) method benefits by the provided information when applying ABC method such as drivers, so as to place the performance indicators related to each activity in order to recognize the extent of performance improvement among activities which add value to organization and those do not add value.
d) The Activity-Based Management (ABM) performs an important role for improving the company’s performance through using the introduced cost information by Activity Based Costing (ABC) method. This matter is carried out by allocating the activities and changing the used method to manage the activities together with re-distribution of the used resources in this activity and some improvements of processes (Turney and Stratton, 1992).
3.2.4. ABC and ABM relationship:
It became clear that ABC method concentrates on the consumed activities of company resources. This matter led to attract attention the management to concentrate on the activities and how to manage the activities and how to benefit of the company resources. Therefore, the need to the costs management approach arose by relying on the activities.
ABC produces information and ABM uses this information. Also, the ABC method specifies the cost complexes and the activities using drivers and the causative relationship between them. In the ABM framework, it clarifies the role which is played by the introduced information when using the ABC method. This matter makes the management is able to study the possibility of performing the activities, more efficiently, through changing the processes or through performing the activities with various repetitions or through designing the product or change the formation of the products (Al-Helbawi, 1995a).
So, it may be concluded that ABC is an assisting factor for ABM as it provides information about unit cost, cost drivers and other information. Whereas the Activity Based Management (ABM) method uses these information in making the decisions related to the organization and maximizing the benefit of company’s resources. Therefore, ABM is defined as an accounting method which improves product and customer profitability, resource planning and processes inside the organization (Plowman, 2007). Fig.17 shows the assistance extent of ABC method in achieving objectives of ABM concept inside an Egyptian manufacturing firm.
3.3. Activity Based Costing (ABC) method and continuous improvement (kaizen) concept:
The continuous improvement (kaizen) means sustainable improvements which apply to all the factors related to the conversion process from inputs to outputs (Mostafa, 1999). This improvement includes the buildings, supplies, and materials, methods of work, performance and behaviors of the workers. This means that every individual whether in the top management or in the workshop is responsible for quality, time, efficiency and effectiveness of production process. According to the concept of this method, the labor force must be very skillful in dealing with the various machines and the role of the worker is not limited to manufacturing only but also extends to cover both the inspection and controlling the quality of the products and performing maintenance processes and preparing the machines to operate. This matter leads to decrease the percentage of direct labor in the advanced manufacturing environment (Al-Nashar, 2001). So, the study will cover some important points related to the concept and objectives of the continuous improvement and its relationship with the Activity Based Costing (ABC) method.
3.3.1. Concept and objectives of continuous improvement (kaizen):
a) The continuous improvement (kaizen) represents a continuous and gradual change process. It concentrates on the performance or carrying out the existing tasks in a more effective method and working continuously to achieve some improvements even if they were simple (McNair,1990).
b) The continuous improvement (kaizen) means those procedures and modern systems coming from the comprehensive controlling of quality which aim at providing the service and the continuous assistance to solve the performance problems and providing the procedures which prevents the future repetition of these problems (Al-Gabaly, 1993).
c) The continuous improvement (kaizen) is represented in these efforts which are activated, gradually, to achieve some improvements in the processes performance or in designing the products or both of them so as to achieve the competitive advantages (Abu-Shnaf, 1995). This definition shows that there are two types of the continuous improvement:
1- Continuous improvement (kaizen) of processes:
This means a trend for searching about the reasons of losses and the profusion of operational activities and working for avoiding these losses. Therefore, the processes of allocating the required time to prepare the machines, reduces the costs and improves flexibility and quality.
2- Continuous improvement (kaizen) of products:
This means a trend for the good design of products to guarantee satisfying the customer’s requirements and easiness and quickness of the manufacturing processes (Turney and Stratton, 1992).
Hence, According to the previous studies, the continuous improvement (kaizen) may be defined as: a research and development process which has no end for the sake of obtaining a higher level of performance for all the company’s processes.
3.3.2. ABC and continuous improvement (kaizen) relationship:
The relationship between ABC method and the continuous improvement (kaizen) concept may be clarified through mentioning the following stages (Al-Gabaly, 1993):
1. The detailed determination for activities of the beginning stage of achieving the added value for the product unit until the final stage which is related to the transfer of the product unit to the consumer.
2. Determining the aspects of gaining the customer satisfaction. The costs of these aspects represent one of the cost factors which must be loaded on the product unit cost and attempt to get rid of non added value activities.
3. Restricting and getting rid of the profusion and losses which are discovered in the processes activities. This matter is considered a developmental objective for the expenditure aspects.
4. Setup the indicators of efficiency and the limits of permissible losses in the various aspects of operating and analyzing the deviations at the level of the activities consumption unit (Inputs) and not on the operational outputs level.
In the light of the previous stages mentioned above, it turns out that there are difference and discrepancy between the ABC and continuous improvement concept. The difference is representing in the ABC method is considered as a strategic approach which cares about the resulting effects from measuring the costs the long term. It aims at trying to eliminate activities which do not add value to firm, whereas the continuous improvement is considered as an operational approach which aims at trying to reduce costs in the short term. As for discrepancy, it is represented in ABC method as a large cost drivers number which are inconsistent with the objective of reducing costs which is the main objective of continuous development. But, this discrepancy may be overcome through the use of more common cost drivers which are produced directly from the production unit itself. This matter leads to reduce the number of these drivers and consequently reducing costs which is fitting with continuous improvement (Al-Gabaly, 1993).
Consequently, the researcher concludes that ABC method is considered as assisting factor for continuous improvement process because it provides the managerial staff with detailed information about the activities inside the firm. This is in addition to specifying the added value activities and non added value activities; also the cost drivers illustrate the consumption extent of each activity from the firm resources. This matter leads to providing a good indicator for measuring the performance of the activity and easiness of carrying out a comparison among the number of the actual and the planned cost drivers at the level of each activity. Fig.18 shows the assistance extent of ABC method in achieving objectives of continuous improvement concept inside an Egyptian manufacturing firm.
Fig.18: Schematic form of assistance extent of ABC method in achieving objectives of Continuous Improvement (kaizen) concept inside an Egyptian manufacturing firm.
Source: Prepared by the researcher (Own processing).
3.4. ABC method and TQM concept:
TQM means complete products and services quality and confirms the importance of quality in each aspect of the processes. It has the following two steps:
1- Carrying out the businesses in a correct way from the first time.
2- Holding the continuous improvement.
It confirms the need to deal with all the productive functions as various stages and works on improving them.
The quality is a necessary advantage for competition and must be developed, preserved and improved continuously. The quality is considered not only the exerted efforts to control the manufacturing processes but also the needs and preferences of the customers which must be fulfilled continuously (Al-Nashar, 2001).
3.4.1. TQM concept:
There are many definitions of TQM. These definitions may be concluded as follows:
a) Federal Quality Institute’s Information Network (1991) defined the Total Quality Management (TQM) as performing the correct work in a correct form since the first step together with relying on the evaluation of the customer in knowing the extent of improving the performance.
b) The Total Quality Management (TQM) is creating a perspective for all the workers in various companies’ departments to develop method of business in order to guarantee workers are performing their jobs in an integrated form. This matter leads to providing a product with a standard level and also guarantees the customer’s satisfaction (Al-Khawas, 1996).
c) The quality was defined preciously as the product (Service) which matches its design specifications and achieves the expectations of the customers concerning the competitive price which they are ready to pay (Blocher et al., 2005). This concept was developed to achieve the Total Quality or Absolute Quality which means that the product does not contain defects so that the amount of defects equals zero percentage. In the past, it was allowed a certain percentage of defective units. But now, it became a must to keep the standard level equals 100% without any damaged or defected units.
Depending on the previous definitions, it can be concluded that these definitions have the same concept of product quality and the customer’s satisfaction. This matter is carried out by participation of the company departments staff. Hence, TQM may be described as: a managerial philosophy which aims at achieving the distinction in the quality of firm performance as a whole and continuously through satisfying the customers and the workers needs. This matter can be achieved by the shared-cooperative performance for each of management staff and workers through working as a work team.
3.4.2. Advantages of implementing the TQM:
Advantages of implementing TQM concept may be concluded as follows:
1- Reducing the total costs where this method adopts the concept of protective control and consequently, it can avoid all the costs resulted from the production of defected products and repairing them such as the re-operational costs and repairs and defected and damaged products.
2- Improving the strategic situation of the firm because implementing TQM, leads to improve products quality and consequently improving firm’s reputation and increasing the customer’s confidence in it and increasing the firm share in the market. This method is considered as one of the requirements for implementing most of modern manufacturing methods especially Just -In-Time (JIT) method.
3.4.3. ABC method and TQM concept relationship:
Both ABC method and TQM concept are considered appropriate methods for managing the total quality where they help in implementing the Total Quality Management (TQM) though the following two trends:
First Trend: Linking the costs with the activities and consequently determining the quality costs.
Second Trend: Providing many required costs information which they can contribute in rationalizing the quality decisions.
These two trends lead the firm to focus on determining its needs of activity costs which are related to the quality costs and means of improving them and classifying the costs according to the quality cost groups which are selected by the firm in order to use it. ABC method assists in understanding and analyzing activities costs during the executed business stages. It also helps in specifying the relationship between the ’cause” and “influence” through analyzing the method’s elements which it contributes in reducing or eliminating the loss. Perhaps improving the activities according to the quality management can lead to expelling the activities which cause the loss (Idle and un-useful activities). This assistance appears through the implementation of the following quality method steps (Horngren et al., 2009, 2012a and 2012b).
1- Determining the activities which are related to the quality and their cost pools.
2-Determining Bases Number of Cost Allocation for Activity Quality (BNCAAQ).
3-Calculating Cost Unit Rate by Allocating (CURA).
4-Calculating Quality of Activity Cost (QAC) by using the following equation:
QAC = (BNCAAQ) ” (CURA)………………………………………………………………………………………….1
5- Calculating the Total Quality Costs (TQC) by using the following equation:
TQC = (QAC) + (CFVS)………………………………………………………………………………………………….2
QAC = Quality of activity cost and
CFVS = Costs of all functions in the value series.
The commitment to the total quality philosophy necessitates knowledge of the productive processes and analyzing them to sub processes and activities then classification of these activities into added value and non added value ones in order to cancel the ones which do not add value. Also, measuring costs for each activity of the activities which add value to state the actual drivers cost and reducing this cost.
It becomes clear that all previous procedures are covered by ABC method. Therefore, it may be concluded that the ABC method is considered an assisting factor to implement the (Total quality) in the firms because of its ability to provide the appropriate information for the current business environment and aid the managers in improving the results and determine the possible opportunities to improve the performance and profitability. Fig.19 shows the assistance extent of ABC method in achieving objectives of TQM concept inside an Egyptian manufacturing firm.
3.5. ABC method and TOC:
Strategic administration seeks to reach the optimal exploitation of the available resources where it may face problems in the production processes such as processes of production cycle, quality management, purchasing and storage of materials. Perhaps the source of these problems cause bottlenecks in the production processes as the consequence of occurrence of deficiencies in the flow of some of the available resources for the activities. This matter affects negatively the timing and carrying out the operational program and leads to increase the costs and the need for using Theory of Constraints Analysis.
3.5.1. Concept of TOC:
The concept of TOC may be illustrated through the following definitions:
1- TOC is also defined as a strategy of integrated processes merge a group of designed tools to increase the organizational performance. This strategy manages the constraints in a way which leads to improve the operational variables such as production period, production cycle time and performance which must be done. This matter also leads to improve the operational performance (Balderston and Keef, 1999).
2- Theory of Constraints (TOC) is a the method of performing the productive process, determining and managing the constraints of the productive process (Huff, 2001).
3- Theory of Constraints (TOC) concentrates on managing the incomes and costs when facing the bottlenecks and aims to increase the performance and at the same time, reducing both of the investment costs and the operational costs taking into consideration the short run perspective (Horngren et al., 1997, 2009, 2012a and 2012b).
In accordance with the previous definitions, it may be observed that Theory of Constraints (TOC) cares about the productive process through an attempt to remove the constraints which cause the bottleneck in the production lines on the short run. Therefore, Theory of Constraints (TOC) may be defined as a managerial method aims at the optimal utilization of the resources through improving the productive process and supplying the managers with the information related to the distribution of the resources, in addition to removal or reducing of the constraints which retard or prevent the level increase of firm performance. When these constraints are removed and firm moves to a higher level of objectives, then a new constraint will be presented and consequently cycle of this theory will be repeated.
3.5.2. ABC method and TOC relationship:
The provided information by ABC method and TOC helps management in facing huge developments in the modern production techniques for existing growth and continuity in the world of business through achieving an excellence of costs and a leadership of the product market.
This information helps the managers in understanding the productive process of the firm and supply them with information related to the distribution of the resources. There might be a similarity in the objectives between ABC method and TOC, but used methods to achieve these objectives clearly vary where the ABC method provides the firm with more accurate information about the product cost whereas TOC represents the optimal production which supplies the firm with more information about the production process.
The importance of the integrated relationship between the ABC method and TOC is illustrated through providing the appropriate information for the decisions-making process. The concept of accounting the performance was used in the integration framework between ABC method and TOC as one of the modern management philosophies which aims at development and the continuous improvement in performance in order to achieve a fast response for executing the customer’s demands and reduce the inventory level and production costs. Accounting the performance aims at providing the appropriate information which assists the management in rationalization of the pricing decisions and a better reduction of available capacity cost. It was proved that the information provided by TOC is appropriate for the situations of internal-restricted resources (Internal constraint). But in the case of these constraints are internal such as insufficient orders to exploit the available resources or purchasing overhead capacity from the resource, ABC system can provide the appropriate information to support the rational decisions (Baxendale and Raju,2004).
The possibility of utilizing the merging between ABC method and TOC appears in providing the appropriate information for the decisions-making process. Both of two concepts are considered alternative tools for evaluating the economical results which are resulted from carrying out the management decisions. It was proved the suitability of the provided information by the ABC method for the long run through relying on the cost drivers to achieve the accuracy and justice in costs allocation processes. On the other hand, TOC concentrates on the short run through seeking to deliver continuous improvements in the process of using the resources, in general, and the restricted resources related to the production process, in particular. Kee and Schmidt (2000) concluded that the merging between ABC method and the TOC provides more accurate and appropriate information for making decisions.
Matai (2007 and 2008) indicated that firm benefited tremendously from its emphasis on global improvement direction guided by TOC approach.
From previous statements, it may be illustrated that there is a difference and an integration between ABC method and the TOC where the ABC method takes into consideration the long run analysis because the analysis includes all the production costs, as for the TOC, it takes into consideration the short run policy for analyzing the profitability.
There is also integration between both methods where the ABC method provides the comprehensive drivers analysis, in addition to accurate determination of unit’s cost as base for making strategic decisions of the long run pricing and products mixture. As for the TOC, it is a useful method for improving the profitability in the short run during the manufacturing and carrying out the modifications in the products mixture. Also, it concentrates on the production constraints (Hamad, 2002).
Therefore, the researcher concludes that the ABC method is considered an assisting factor for TOC where ABC method supplies TOC with the needed information it about the external constraints, the cost drivers and the product cost. Fig.20 shows the assistance extent of ABC method for avoiding weak points of TOC inside an Egyptian manufacturing firm.
3.6. Key factors of conformity and variance between ABC and RCA methods:
Researcher tries to illustrate the conformity and variance for ABC and RCA methods in order to identify the validity extent for using them as effective accounting systems. This matter may be occurred by achieving the following three comparisons:
3.6.1. A comparison of concepts for ABC and RCA methods:
Each ABC and RCA methods is based on the main idea of managing various activities which consume the firm resources and consequently, following up its available resources through those activities as a base for achieving the costs, taking into consideration the success of the firms is related to their capabilities in managing the activities which they perform. The RCA technique can be viewed as an evolution of ABC technique in ERP systems (Keys and Merwe, 2001). Two of the best-known management accounting techniques are ABC [Kaplan and Atkinson, 1998[ and RCA [White, 2009[.Therefore, both two methods are considered as a clear development to the Traditional Cost (TC) methods in terms of the perspective and the accurate inspection of the costs behaviors at time of consumption of the resources which reduces the cases of un-certainty and risk towards the costs. Whereas, the Traditional Cost (TC) methods concentrate on the products and their achieved costs only during the accounting period.
Despite the recent increasing interest to Activity-Based Costing (ABC) system, but the main philosophy behind its rise stops at “managing the activities concept” which is considered as a control factor in the consumption of resources. On the other hand, philosophy of RCA system extends to include the concept of “managing the productive capability of the business” (Ahmed and Moosa, 2011). This matter leads to an important result which is represented in the increase of the economical unit’s ability for managing in a better way. Also, it leads to a management which has more efficient cost way.
Johnson (2004) and Al-Koumy (2007) advocated this fact by saying: Managing the capacity, leads to a greater efficiency for managing the costs. The performance of any activity inside the firm means using a group of certain resources (Machines, individuals, money,etc) to produce the final outputs or a part of the final product. Hence, the resources and the activities must be the centre of attention of the costs system to reach a more efficient cost.
RCA is a control solution with a focus on actual versus predicted outcomes that will surpass ABC/ABM. It also provides a reflective view of operations, i.e., real-time performance measurements. This view allows users to concentrate on what is happening at the moment, not just historical or predictive data. These real-time measurements allow mangers to focus on cost and profitability of activities at time they are taking place. RCA’s detailed and large variance analysis capabilities which aid analysis process at each control and planning tier. Finally, RCA is not only a tool of investigation and corrective action with a concentration on organizational learning and control, but also a method of defining and searching for variances. (Keys and Merwe, 2002).
RCA is major concept in manufacturing management accounting. It combines ABC and marginal cost elasticity of Germany. RCA can be functioned to provide analysis and management E/I production, the basis for budget of project and supplies us with evidence for sub-projects and sub-contract (Qin and Yan, 2011).
Also, the researcher sees that there is an essential need to illustrate the aspects of conformity, variance and relationship between ABC and RCA methods through performing a comparison for three dimensions of hypotheses, objectives and uses of these two methods.
3.6.2. A comparison of hypothetical basis for ABC and RCA methods:
ABC and RCA methods are based on a group of main hypotheses which govern their concept and applications. The researcher found that there are some hypotheses are method in the two methods whereas there are other hypotheses which vary between them as follows:
First: There is an a general conformity aspect which is represented in the main hypothesis for each of two methods shows that there is difference between resources and activities consumption. Consequently, the activities consume the products and these activities consume the economical resources i.e. various activities consume resources and not the products ,consequently activities represent link between resources and products.
Second: The aspects of conformity and variance for hypotheses of ABC and RCA methods may be illustrated by performing the following comparison as shown in Table 4 (Abbas, 2013).
Table 4: Aspects of conformity and variance for hypotheses of ABC and RCA methods.
No.Activity-Based Costing (ABC) methodResources Consumption Accounting (RCA) method1 It requires availability of many cost drivers which cause the consumption of the resources where the Activity-Based Costing (ABC) method concentrates on following up the activities paths inside the firm as they are the drivers and the sources of occurrence of costs.
The consumption of the resources does not depend on the role of the activities in this consumption but requires determining the mutual and non-mutual relationships between the available resources either from a source to source or from a source to activity which is called the resource drivers. This trend makes the objective of this system is following up the path of using the resources. Logically, following up process of resource path costs is easier and better than following up process of costs of the activity path.2It necessitates availability of activity pools according to the causative relationship to show the relationship between the cause and the result i.e. the cause in occurrence of the cost and its occurrence is perfectly related to a single activity.It needs availability of pools for the resources which take into consideration the following matters:
First: There is direct link between occurrence of costs and resources, realizing principle of costs is in service of resources.
Second: Some resources exist to serve other resources. This matter provides detailed information about all mutual and interlaced relationships between resources and activities, also, resources and resources.3It is assumed that all included costs in each pool are variable ones which are directly related to activity. The reason of this hypothesis is due to the necessity of presence of proportion between quantity of actually used materials and the quantities of selected cost driver.It based on studying effect of the nature of costs on the consumption of resources. The cost nature is divided into the following two types:
First: The essential nature of the costs which can be either fixed or variable with samples of consumption of resources.
Second: The possible nature of the variable costs which make them vulnerable to the proportional change at the resources consumption points. This matter is called theTable 4:Continued.
(ABC) methodResources Consumption Accounting (RCA)
methodtotal loading of resources costs which concentrates on the proportional costs and it can be fixed or variable with the point of consuming the resources. The concept of the essential nature of cost includes the fixed costs which do not change with various models of the consumption. This hypothesis matches, particular, with the reality of the structure of the industrial costs and the effect of the automation in the manufacturing on the change of its behavior due to changing the costs mixing ratios of the cost factors. This matter leads to fixed costs percentage raise which it can not be ignored to variable costs. This hypothesis matches, in general, with the cause and result relationship in a more detailed form during determining the unit cost value and its use of the available resources (When allocating the indirect costs) which reflects the operational costs when allocating the costs.4It is assumed expelling the idle capacity (Un-useful capacity) and ignoring the non-productive costs for the value.
This matter leads to adapting the idle capacity to a certain activity or adding this capacity to each activity in the firm either it causes its occurrence or not.It based on a main hypothesis which was the reason in its appearance, which is the costs follows the capacity considering the used capacity represents an objective for cost according to its demand. This matter leads to the necessity to care about the unused capacity and the bottleneck which are faced by the firm.
Therefore, the costs of unused resources (idle capacity cost) = available resources cost ‘used resources cost.
(ABC) methodResources Consumption Accounting (RCA)
This hypothesis confirms that there is a necessity of following up and analysis of each of available resource costs to perform various activities and costs of used resources to perform these activities. This trend leads to determining the size of idle capacity which are loaded by the firm and analyzing it according to the activities and the departments.5It is assumed that the firm resources are valuable inputs for the activities and consequently depends on calculating the financial values] In Egyptian Pounds (L.E.) or American Dollars ($)[. This matter leads to the inability of the firm for planning, accurately, the excess capacity (Un-useful capacity).It based on the quantitative structure of the resources and consequently the firm resources which is considered as quantitative resources. This hypothesis gives a visualization of the causative relationships for the nature of the cost accurately. Also, it is showing the existing relationships between the resources which can be illustrated in a better form on a quantitative base (Units).
Source: Prepared by the researcher (Abbas,2013).
3.6.3. A comparison of objectives and uses for ABC and RCA methods:
Each method is characterized by a group of objectives and uses. They arise from the philosophy and hypotheses which are adopted by each method and the extent of its reflections on it.
The aspects of conformity and variance for objectives and uses of ABC and RCA methods may be illustrated by performing the following comparison as shown in Table 5 (Abbas, 2013).
Table 5: Aspects of conformity and variance for objectives and uses of ABC and RCA methods.
comparisonActivity-Based Costing (ABC) methodResources Consumption Accounting (RCA) method1
Controlling the Costs.
This method assists in achieving the effective controlling role because the control is applied on activities and not on products. By using controlling process post – control of activities and before ending of the products manufacturing stage, the firm can achieve the preventive control (Not post-control) which contributes in avoiding any deviations before their occurrence.This method contributes in achieving the various concepts of the real control such as the preventative control and concurrent control by following up the quantities of the used and unused resources, the continuous determining the idle capacity, constraints and bottlenecks in order to achieve the harmonization between offering the resources and requesting them. This matter helps in rationalizing the resources consumption cost and increasing the productivity in the successive periods.2Measuring the costs.The measurement process is achieved by allocating the indirect costs for the products according two stages as follows:
First: This stage is represented in allocating the resources costs for the activities according to the consumption extent of these activities by using the activities pools and consequently determining the activities cost.It depends on the same logic of measuring the costs through two stages as in ABC; in addition to a backwards step which aims at building the resource pools to show the interlaced relationships among the resource pools in the light of the proportional nature of the of costs during consumption of the resources.
Table 5: Continued.
comparisonActivity-Based Costing (ABC) methodResources Consumption Accounting (RCA) methodSecond: This stage is represented in allocating the activities costs for the final products according to consumption rate of these products to the activities by using drivers.3Evaluating the performance.This method concentrates on analyzing the performance of the firm by dividing it into groups of activities in order to achieve the integration among the producing activities and dispelling the non-productive activities. This matter shows the aspects of strength and weakness inside the firm. This trend contributes in avoiding the aspects of possible losses and deviations and in the same time strengthening the positive aspects of firm performance.This method measures the progress extent towards the objectives of reducing the resources cost either the used or the unused resources in order to activate the idle capacity and develop the producing capacity of the firm. This matter leads to rationalizing the costs of the used capacity and increasing the productivity which helps in developing the incomes of the final products.4Making the managerial decisions.This method provides the following two types of information in order to assists in improving the quality of the managerial decisions:
First type: Financial information are reflecting the accurate actual cost for the final products.This method provides the financial and non-financial information by using an forward looking business model (operational model) which helps the management staff in the following fields:
‘ Ability to predict the needs of each resource from other resources i.e. (Resource-to-resource).
Table 5: Continued.
comparisonActivity-Based Costing (ABC) methodResources Consumption Accounting (RCA) method4This information is a looking backward which assists in making planning decisions for future periods in the fields of pricing, purchasing and selling.
Second type: Non – financial information about the sources of the competitive value for the firm activities such as quality.’ Determining the size of the unexpected – lost resources i.e. (Un-predicted-wasted resources).
‘ Determining the idle capacities and not include it the units production costs which it did not cause its occurrence.
‘ Employing and activating the unused resources.Source: Prepare by the researcher (Abbas,2013).
Ahmed and Moosa (2011) also held a comparison between ABC and RCA systems in order to illustrate the differential aspects of these two systems as shown in Table 6.
Abbas and Wagdi (2014) stated that Egyptian manufacturing firms are Adopting Activity Based Costing (ABC) system more than the other cost systems, where 56.7% of Egyptian manufacturing firms apply Activity Based Costing (ABC) system, 5.3% of them apply Resource Consumption Accounting (RCA) system and 38% of them apply other cost systems.
Table 6: A comparison between ABC and RCA systems (Differential aspects).
No.Activity Based Costing (ABC) systemResources Consumption Accounting (RCA) system1 ABC model connections are often discerned through time-study snapshots and other subjective interviews.RCA model automates building and gathering relationship of actual operational and financial data into comprehensive applied business model. Relationships among cost objects, resources and cost drivers are automatically updated in course of work.2 ABC is generally regressive system as it uses historical information without recognition of current and future business amendments.RCA system provides a forward-looking business model.3ABC system, using full absorption approach, drives all supplied cost through business, without regard to actual resource quantity requested by service receiver.RCA system focuses on controlling resource capacity as basis for managing attributable costs, with costs driven requested capacity quantities.4ABC models are looking backward nature, (from resource to activity to cost object) regardless recognizing fully burdened resource costs. RCA system recognizes source interdependencies among cost centers themselves and sustains clarity of individual cost elements that create cost center pool.Source: Ahmed and Moosa (2011).
They also summarized the variance aspects between ABC and RCA systems by using a schematic form (Fig.21).
3.7. Characteristics of Future Cost Accounting System (FCAS) inside modern manufacturing firms:
Future Cost Accounting System (FCAS) must be characterized with the following properties (Lewis, 1993):
1- Concentration on both of raw materials and conversion cost which represent Services and Efforts Cost (SEC) of raw materials conversion to a final product. This cost may be calculated by using the following equation:
SEC = indirect labor cost + indirect manufacturing cost………………………………………………………..3
This property will be severely needed by future automated firm because its necessity for re-classifying the production costs. This is due to traditional classification will be ineffective to face requirements of modern technology inside the future firm.
2- Concentration on processes of raw materials and components flow and follow up and collect the operational costs at order, stage, and productive department levels inside the future modern firm.
3- Allocation costs must be changed or modified to be compatible with requirements of new manufacturing environment. For example, production means consumption must be utilized in flexible manufacturing systems by using production method based on estimated operational hours of machine and follow up them in relation to each product inside the system. In the traditional method, depreciation is loaded on overhead costs by using fixed rate method and overhead costs are loaded on production lines by using one of loading rates such as direct labor. Also, Matsui (2013) stated that results analysis demonstrated that no fixed cost allocation to subject division to direct costing strategy managing absorption costing if one of two companies is incumbent and another is an competitor; namely, the familiar result from mentioned series of transfer pricing models reverses when threats are taken into consideration. On the other hand, Scrivo and Krichbaum (2013) reported that direct costs are highly visible and therefore more or less obvious and are usually adequately addressed. Overhead costs, however, they are not obvious and are frequently handled poorly.
4- FCAS should pay attention to predetermined estimations of cost because making decisions process will be, basically, depended on fast response which does not wait for collection of actual cost data.
5- FCAS should focus on change drivers in processes and functions which do or do not add value to product. Also, it must be taken into consideration that costs of storage, setup, handling and inspection time present non added value costs. It should also try to determine the drivers change of these functions which do not add any value to product.
6- In the same context, the researcher sees that an excellent FCAS must takes into consideration three efficiency criterions as follows:
1) Technological criterion (Technical elements),
2) Economical criterion (Cost and profit elements) and
3) Environmental criterion (Circumstances surrounding the work environment).
This matter will lead to appear a modern generation of FCAS which care essentially for achieving the environmental requirements for purpose of improving a good performance quality inside modern manufacturing firms. These FCAS’s may be called Green Cost Accounting Systems (GCAS’s).
3.8. Definition of integration process:
The American Heritage Medical Dictionary (2007) defined integration process as the state of combination or the process of combining into completeness and harmony.
Also, Collins English Dictionary (2009) defined integration process as the act of combining or adding parts to make a unified whole. While Dictionary.com Unabridged (2014) defined integration word as combination, blending and fusing. Thus, integration process is considered a building process because it is carried out by combining or blending two or several elements in order to reach completeness and harmony.
Abbas (2013) mentioned that, through his essential information in the field of mathematics and the results of field study, the integration process is considered as a process includes several processes. These processes are assembling, blending, merging and building of information, data and values of a system or several systems. He added that the integration process always conductive to positive results when applied in theoretical and practical fields for this issue.
The author also sees that this process is a process of getting close and seamless coordination between several groups, departments, firms, systems, etc.
So, this process may be used as an effective tool for improving the performance efficiency inside manufacturing firms through fusing two or several applied accounting systems.
3.9. Importance of integration process application in the field of management accounting:
Kaplan and Cooper (1998) reported that firms could develop one integrated system to serve all these functions, strategic costing, financial reporting, performance measurement and operational improvement in addition to production and inventory planning, sales order fulfillment, engineering and customer administration. They added that innovative systems (Such as ABC, ABM, KC, TC and adopting companies can be supplied with more responsive, accurate and relevant information for making operational improvements and strategic decisions by using nonfinancial performance measures.
3.10. Proposal of Tetra Dimensional Integrated Model (ABC, KAIZEN, TOC and RCA) by applying on manufacturing firms in Egypt:
3.10.1. Overview of using integration process in the field of cost management:
There are many researchers investigated using integration process in the field of cost management. The following studies may illustrate the importance of using integration process among cost systems in order to improve the performance efficiency inside the firms:
a. Some modern International studies:
Melese et al.(2004) illustrated that modern governments throughout the world encounter a basic set of management challenges: a) to improve efficiency. managing costs, b) to improve effectiveness. emphasizing outputs over inputs and c) to improve accountability. tying budgets to performance. The study created a new operational model for government which overcomes these challenges. Combining key principles of ABC, BSC and TQM with the spirit of PPBS system providing a novel model removing the gap between business and government. This integrated public management model was implemented to extract fresh insights into two ongoing U.S federal management initiatives:
I) Congressionally-mandated “Government Performance and Results Act” (GPRA) and II) President’s “Management Agenda”. The objective of the study was to propose an economic benefit-cost approach to remove the gap between business and government. The study demonstrated how several popular business management frameworks can be integrated with a prominent public budgeting framework to help support this effort. Combined with the appropriate incentives, the SUCCESS model was designed to assist public officials to realize the three chief goals of GPRA, to increase accountability to taxpayers, to improve executive and congressional decision-making, and to promote better internal management of government programs.
He and Yi (2006) point out that ABC represents a radical departure from the TCA systems, which is an improved tool of recognizing high overhead costs per unit and exploring ways to decrease costs. Comparing with the TC method, ABC provides more accurate financial information and more detailed classification. ABC data can provide the high quality information needed to support the decision-making process. The process of developing BS clarifies and communicate corporate strategy to every employee in the organization. BS is conductive to evaluate each strategy’s efficiency and supervise its implementation. Logistics enterprises should combine the two together. In China, with the constant application and gradual popularization of computer and special logistics software in the logistics enterprises, the higher education pays attention to the training of logistics talents and the increase of the logistics worker training in the society, it will be popularize gradually to adopt ABC and BS to make cost controlling and effect management. The whole logistics cost of an enterprise could be well evaluated , and effective information is available for the enterprise to further reduce the cost. It is a kind of inexorable trend that LSPs adopt ABC and BS to control the logistics cost and measure performance in China. Therefore, the specific objective of their study was to undertake a study to integrate ABC and the BS to solve this kind of problems in some logistics enterprises in China. They revealed that as two new enterprise management methods, ABC and BS have their own advantages. ABC can provide the exact information of cost to logistics enterprises. The more accurate assessment of costs is obtained by an ABC system also can improve the accuracy of the performance measures of a BS. The study analyzed the problem of enterprise logistics cost management facing under the TCM system, and put forward homologous conceives to improve it, elaborated one of integration method of ABC and BS applied to the logistics cost calculation.
Awad (2009) showed that his study aimed to demonstrate the impact of linkage and integration between the ABC and BSC on enhancing performance of Palestinian banks. The study included a theoretical introduction to identify those two systems and how to link them. Regarding the applied side, Activity-Based Costing (ABC) has been applied on bank of Palestine by using (Cooper Two-Stages ABC system) and a proposal for a Balanced Score Card (BSC) of the bank of Palestine has been developed.
She has concluded the following findings: First, the use of financial and operational outputs information of ABC and BSC refers to the existence of a real integration between the two systems so as to direct the attention of administration and assist in solving problems related to price services, redesigning work procedures for the existing services and developing a strategy to provide services as well as improving the activities performed. Second, the ABC is the most appropriate tool for the treatment and indirect costs allocation, and leads to obtain more accurate data on the cost. Third, the Traditional Cost (TC) system used in the bank gives inaccurate results for the cost of banking services, leading to incorrect management decisions. Fourth, the Activity-Based Costing is able to reduce costs without compromising quality by re-managing operations as a result of the analysis of activities through the integration of some of the activities with each other, or even cancellation of some useless activities as a key step in the ABC, which will be reflected and represented in proper use of material and human resources to achieve the operational goals effectively.
She also proposed to apply the following recommendations: First, the need to develop systems of cost and management accounting in the Palestinian banks to provide the necessary data to support the competitiveness of banks in the modern business environment. Second, the need for more applied studies on the integration between Balanced Score Card (BSC) and the tools of modern managerial accounting as well as its impact on performance. Third, the need for carrying out specialized courses in areas of cost, management accounting and banking activities in particular to raise the adequacy of personnel in this area and take advantage of the possibility of applying the contemporary regulations on the activities of banking.
Toomanian and Mansourian (2009) illustrated that the study proposed instruments and frameworks from business management environment for the evaluation and implementation of SDIs. They first discussed different strategic and continuous improvement methods including Six Sigma, ABC, BSC and TQM. Then the applicability of each technique for implementation of SDI was investigated. The essential investigation showed that each of these techniques can be functioned in some aspects of SDI implementation. In a nut shell, an integrated general framework for the SDI implementation consists of the Six Sigma as a core methodology. They recommended for implementing an SDI, the DMAIC approach can be used, ABC for economic management of SDI, BSC for supervising the progress of SDI and TQM for the quality management of the entire procedure of SDI implementation.
He also emphasizes that evaluation and continuous improvement of SDIs, development and usage of proper frameworks for implementation is currently a prime research topic. A wide range of methods are being investigated. In this respect, methods and techniques on performance measurement and evaluation techniques from business management literature are not yet considered. Some techniques and methodologies from business management literature could be developed based on Six Sigma, ABC, BSC and TQM. Their study described these techniques and then provided an integrated framework, based on these business management techniques, for implementation and continuous improvement of SDIs. The study’s purpose is to address utilization of these techniques as an integrated framework for implementation and continuous improvement of SDIs. They indicated that such integration will cover different aspects of SDI implementation and evaluation requirements. With this in mind, first, the techniques are reviewed briefly and then their feasible applicability for SDI implementation and evaluation is described.
Dinca and Dinca (2010) revealed that in this study they aimed at discovering the possibility of integrating the ABC method of cost calculation with cash based value measure, i.e. the CVA. Their purpose was to develop an instrument for management of productive organizations that will allow them to control the process of value creation at the level of individual products or services. They added that the ABC method of cost calculation can be extended to the way of allocating the capital costs to individual products and services. The value based measures can register the shareholder’s value creation process only at the firm level and not for the products or services provided to customers as they lack the data regarding the assignment of capital costs to those products. By integrating calculus of Cash Value Added in the ABC method they considered that managers will own a prime managerial tool for the efficient allocation of the investment capital for various products or services, given their real profitability, which can be determined by including capital costs in overall cost of the services or products. So, the integrated ABC – CVA methods will provide aid managers to understand that the capital investments are a precious resource, which have to be functioned in the most efficient way possible. The capital expenses that are suggested to be added to the activities and identified down to level of products are meant to attract attention upon the level of the capital employed and to assist the managers in knowing the capital costs associated with the production process.
Tsai, et al. (2010) stated that the integration of ABC and ECA systems supplies companies with more accurate information to create both well-rounded and effective decisions. The purpose of the study was to present an effective approach to integrate both ABC and ECA systems. A case study analyzing process was used to establish a comparison between traditional accounting and ABC systems for allocating environmental costs. The results gives the managers the chance not only to understand financial information regarding the activities for environmental protection and the percentage of environmental costs in overall product costs but also to make more objective and accurate decisions.
Also, relevant product cost information permits management accountants to identify the costs associated with non-value-added activities. Furthermore, by identifying potential contingent environmental liabilities, environmental consultants, management accountants can work along with engineers, lawyers, engineers and others who have relevant information to evaluate the profitability of competing products. Therefore, the mixture of ABC and ECA systems will result in a more accurate product cost than the TCA methods. The ABC system can provide management with accurate product cost information and therefore, a realistic understanding of profitability was delivered.
El- Naer (2011) addressed the issue of integration between the Activity-Based Costing and Responsibility Accounting (RA) and its role in cost control in industrial establishments in order to activate the application of integrated systems strategies. This study aimed to clarify the appropriateness of Traditional Systems (TS) for allocating the costs to the environment of modern manufacturing and indicate the role of integration between the Activity-Based Costing (ABC) system and Responsibility Accounting (RA) in cost control process. The study relied on deductive approach in the formulation of hypotheses and determine the themes and historical method to keep track of earlier studies concerning subject of the search. It has also adopted the descriptive approach using the case study method to test hypotheses. The problem of the study was represented in the non-application of modern systems of costs in El-Rashidi Company for Integrated Solutions such as ABC system and RA and so rely only on TS that allocate indirect costs unfairly, which negatively affects the control of costs and also leads to information that is not accurate and thus make irrational decisions. The author tried to answer the following questions: 1. Are TS to allocate costs sufficient to provide appropriate information to make decisions in El- Rashidi Company for Integrated Solutions? 2. Are Traditional Systems (TS) sufficient to achieve effective cost control in the El-Rashidi Company for Integrated Solutions? 3. What is the impact of the establishment division to activities centers on the allocation of indirect costs in El-Rashidi Company for Integrated Solutions? 4. Is it possible to achieve effective cost control in the El-Rashidi Company for integrated Solutions through the integration of ABC and RA. The research tested a set of hypotheses, i.e. industrial cost allocation use of TS lead to make irrational decisions in industrial establishments, the use of Traditional Systems (TS) for industrial indirect costs allocation negatively affect the control of costs in the industrial establishment, the establishment division to activities centers leads to the allocation of industrial costs to products unfairly, and integration of ABC system and RA leads to effective cost control. The study found a range of results, including: Reliance on traditional systems as systems for the allocation of indirect industrial costs negatively impacted on decisions rationalization in industrial establishments, rely on Traditional Systems (TS) of allocation of indirect industrial costs led to a poor cost control in industrial establishments, the establishments division to centers of activities lead to the achievement of justice in the allocation of indirect Industrial costs, and application integration between Activity-Based Costing (ABC) system and Responsibility Accounting (RA) has led to effective cost control in industrial establishments.
Shafiee and Amooee (2012) indicated that in today’s advanced competitive environment, organizations should redefine their operations with customer focus as their primary core to ensure sustained profitability. Although using ABC system to estimate cost of manufactured parts is widely accepted, most reports do not mention how to use this approach for customer profitability analysis. Their study examined the profitability of customers with the support of ABC approach.
The outcomes showed a large improvement in customer relationship management projects success in various aspects such as: enhances in customer acquisition and retention in both cost and time, reduce customer services costs and even assist companies in more reasonable investments. Finally, they proposed a new framework to categorize customers and they recommended to use ABC approach to prioritize these customers and multiplying efficiency of customer relationship management projects by correct customer profitability analysis.
Shil and Bhagaban (2012) illustrated that the traditional ABC can be used as more solid and accurate pricing mean if integrated with EVA, a value-based financial performance measure. The study was targeted to discuss the integrated ABC and EVA system that is considered as engineering management mean used successfully to control both cost and capital. It allows enterprise managers to create shareholders value by cost structure improvement. In this integrated system, cost of activities includes an equitable charge for the consumption of resources at one end and charge for capital demanded and used at the other end. The system implementation’s process was discussed and a comparison with the traditional ABC system was made to make it simple and decisive to the users. The process started with the identification of activities and then income statement and balance sheet data was adjusted in line with EVA approach. This information was transformed into transparent capital charges using Activity-Capital Dependence (ACD) analysis, which has been added with the costs of each activity to have integrated total costs. The study concluded with a discussion of possible amendments to business performance and corporate strategies when the integrated ABC and EVA system was implemented in a manufacturing company for pricing their products. They also stated that the integrated ABC and EVA system by itself will not make improvements in business process, but rather will supply management with information that can direct improvement efforts. Management must be committed to deliver these necessary improvement steps.
Huynh et al. (2013) mentioned that integration of ABB and ABM supply required information for management to make proper decisions is very critical in today’s global competitive environment. It aids managers not only to solve the matters realize value-added activities and non-value ones but also to know the activities fall significantly outside results-based budgeting. Managers are alerted that there should be problems need attention. Also, an attempt has been made to propose the background of ABC/ABM and other management accounting methods integration in order to overcome shortcomings of ABC/ABM and foster their advantages to support each other for achieving the organization goals in the best results. They concluded that the integration of ABB and ABM concentrates on both actual results and results-based budgeting. It gives managers a comprehensive view of the organization’s results. Under ABB integrating with ABM, top managers can accurately assess the responsibility of all levels of management. The only shortcoming of ABB and ABM integration is that lacks to discuss TC. Further research will be done to join ABB and ABM integration method with TC. This presents a perfect method for managers to run control and make accurate decision in their organizations. ABC / ABM system was developed in the mid 1980s by Kaplan and it has been applied very popular in developed countries with obvious advantages. Although ABC system has more advantages than Traditional Systems (TS), but in today’s competitive economic environment it has not met fulfilled provision of sufficient information for decision-making. The ABC/ABM system alone, however, lacks the ability to support information for managerial decisions. The limitations of single ABC in today’s business environment may be summarized as follows: (1) lack of planning and control cost. ABC/ABM discusses a product has already been developed, has been incurred costs, and is ready to be marketed as soon as a price set, (2) ABC was originally developed because traditional costing appeared to be providing misleading product costs. Only single ABC using, it just provides an alternative way to trace costs to products, (3) lack of support for short-term decision. How can these limitations of ABC/ABM overcome?, (4) limit in finding opportunities for innovation. They added that their study draws the framework of integration of ABC/ABM with other management accounting methods as one way to overcome its limitation and innovation management accounting.
Kuma (2013) stated that implementing effective cost management approaches has recently earned momentum due to fierce competition and raising customer requests. In addition to, effective cost management approaches have contributed to firm’s competitive advantage in connection to cost leadership strategy. As a result, firms have implemented modern cost management systems, such as ABM, BPR, LCC, TC, and TOC, to enable them to become low-cost producers and compete effectively and sustain their performance. Moreover, contracting on cost management to improve profitability has resulted in the integration of ABC and TOC. Improvement in cost management will then result in sustained cost management. He also illustrated that sustained cost management is further enhanced with the investment in information technology that supports cross-functional decision making to continue creating customer and shareholder value to remain competitive in the market. He added that the purpose of the study was to discuss and review literature how integration of ABC and TOC can lead to improved and sustained cost management. While these methods have various approaches in addressing cost management, dealing with them as complementary cost management approaches can result in improved cost management due to improved cost reporting, improved product costing, improved cycle-time management and improved product-mix decisions.
b. Some modern Egyptian studies:
El-Rashidy (2009) showed that his study aimed to attempt to submit proposals for the development of the problems which are appeared by using traditional ABC system, increase the effectiveness of cost management in companies by applying the integrated approach system, also aimed to show the expected benefits of integration between Activity Based Costing (ABC) system and Time Driven (TD) way. For analyzing the data, the author followed the inductive approach, where he has conducted an analytical study of accounting literature that dealt with ABC system and TD way. He also used analytical method in order to identify whether the integration between ABC system and TD way will achieve sophisticated system of cost management as a whole. The results illustrated that the application of the integrated cost system i.e. TDABC is working to achieve the goals of continuous development, and the application cost of two systems at the same time generate a higher return than the cost in case of implementation of two systems individually.
Khatab (2009) investigated that the impact resulting from the integration of the German costing (GPK) with the ABC systems which is represented the in emergence of the term called the Resource Consumption Accounting (RCA). He proposed carrying out an integration between the ABC system and RCA, which will help in strengthening philosophy VBM through studying the nature of the German costs system (GPK) and its integration with ABC system as a beginning of the emergence of RCA. He also dealt with the concept and the nature of the Resource Consumption Accounting (RCA), and its bases and principles to access a proposed framework for the integration between the ABC system and RCA in order to enhancing philosophy of Value Based Management (VBM) and to access the concept of the value of the various parties that represent the value triangle of the establishment and increase its chance in competitive capacity. A field study was carried out to test the applicability of the proposed framework in business establishments.
He tried to illustrate how to take advantages of the ABC system and RCA in enhancing philosophy of Value Based Management (VBM) to demonstrate the impact on the parties to the value of the entity’s customers in the value triangle. He stated that the advantages of integration between the ABC system and RCA by applying proposed framework were represented in achieving a greater accuracy in the allocation of costs and thus more accurate management decisions, a larger capacity in the resources planning and thus the optimal exploitation of the resources of the establishment, a better management of excess capacity and improving the value for the parties dealing with the establishment ,shareholders, consumers, and labors.
Ali (2010) showed that his study aimed to try to access the scientific systematic framework, his study helped in rooting integration among the approaches of ABC system and TOC and then testing effectiveness and efficiency of this framework to achieve continuous development of the organization and the impact of this on the profitability planning in short and long run. The significance of the study stems from the dual role of the proposed framework in terms of rooting areas of consensus between the two tools, and matching between them. On the other hand, minimizing the differences between them, which makes the end of the study recommendation at the same time and underlines the fact of integration that can help in achievement of continuous improvement considerations in short and long run.
He indicated that the most critical results of the study may be discussed as follows:
1- Integration between the ABC system and TOC helps to achieve considerations of the continuing improvements of the organization, As ABC system contributes to eliminate the elements of waste and loss of inventory of indirect costs for various activities and then re-allocation on the products according to a reasonable cost driver to the nature of each activity and by the amount of use of each product of each activity. It also contributes to the improvement of product quality by accounting for the costs of quality activities and aids to provide reports on the profitability of customers, including possible focus on the most profitable customers. On the other side, the Theory of Constraints (TOC) contributes to optimize profitability through knowledge and identifying bottlenecks and constraints by a proper management and by focusing on three areas, which are the of increasing generated profit by all internal processes, reducing investment or stock and reducing operating expenses.
2- Integration between ABC system and TOC can lead to more comprehensive framework and accommodate the economic consequences of the decisions related to production.
3- The proposed mathematical model helps organization in achieving soundly profit planning in the short and the long runs, where the model focuses on maximizing profitability in the short term by maximizing throughput contribution for constraints resources (for packaging) by using the Theory of Constraints (TOC), it also focuses on maximizing profitability in the long term by rationalizing the costs by using the ABC system, where all costs are variable in the long term.
Samuel (2011) studied the impact of integration between the ABC system and TOC on profitability of establishment. She had concluded that the application of integration between the ABC system and TOC realizes a higher profit than the application of ABC system individually. The model of integration between the ABC system and TOC is considered an accurate model to calculate the estimated cost per unit, where the TOC contributes in determining the restricted resources, and helping the organization to increase its productive capacity in the future.
El Gibaly and Diab (2012) emphasize that the emergence of ACTIVITY BASED COST system with the BALANCED SOCRECARD approach, is an attempt to provide sufficient information to firms and a suggested model called ABS with an emphasis on the interaction between two concerned management means. The study attempts to reveal the ambiguity resulted from firms which adopt applying ABC and BSC while exhibiting better performance and higher business efficiency and firms which do not or tend to apply only a single management system and not the two mentioned systems. The framework was expected also to provide information which is helpful to organization in decision making, analysis and managing its strategy. Finally, it was proposed that the ABS is a powerful mean that aids a company with its process improvement efforts, leading to higher performance. Information were gathered through questionnaire responses from a random sample of manufacturing companies and service business units. The proposed integration framework was expected to benefit the organization across its different business stages, e.g. (Distribution, purchasing, customer service, etc.) and functions (Analysis, controlling, planning, etc.).The main research objective was to create an operational model (ABS model) in an attempt to improve the operational performance of the Egyptian companies and help them chase their strategies, and then support the claim of the kaizen. The sub objectives of the study were leading Egyptian organizations in achieving process improvement, finding a way to improve company performance, enhancing the Egyptian organizational performance and support their strategies, filling the gab of the information required by the organization, attempting to provide an integrative management and measurement system, and finally, paying more attention to tools which may affect strategy of the firm in an attempt to improve the firm’s strategy and as an outcome improving future performance.
Gamal et al. (2012) illustrated that improvement of a lean accounting system may have resolved the issues which are encountered by lean firms due to TC systems usage. They proposed a framework that integrates ABC in a lean environment in circumstances where shared resources are still existing. The objective of the framework was calculating accurate product unit costs in order to aid lean manufacturing system in improving the organizational competitive environment. Therefore, they conducted a study on one factory of multinational manufacturing company located in Egypt and has recently been using lean manufacturing. The suggested ABC framework was used to compute the factory products unit cost. They also pointed out that the outcomes of the study proposed positive implications of ABC system usage which shall assist the company’s studied factory to be a feared competitor.
Kousa (2012) pointed out that her research aimed to release the importance of achieving the integration among the updated cost management methods [ Activity Based Costing (ABC) and Target Cost (TC) and the Benchmarking (BM) methods] through the reciprocal relationship among them, and activating this integration using a continuous improvement strategy to achieve the overall objective of the establishment which are represented in achieving competitive advantages. She indicated that the research results stated the existence of a complementary relationship among those updated cost management methods, and among them and the standard cost method (as a TC method) with the exception of ABC method. She also illustrated that there are differences among the views of academics and opinions of professionals for integration of updated cost management methods with standard cost, and there are no differences among the views of the two chosen samples in each of the role of cost management methods in support of competitive advantage, and the integration among the updated cost management methods.
Sand (2012) indicated that the importance of his research is represented in demonstrating viability of integrated system usage inside the economic units and its ability in raising the economic competitiveness and continuity. That system is represented in the economic theory of modern manufacturing, JIT system, high technology systems, ABC system, Strategic Cost Management (SCM) and Total Quality Management (TQM).
He also showed that the objective of his study were as follows: a) Assisting the contemporary manufacturing establishments in measuring its outputs cost accurately and providing them with necessary information for controlling and performance evaluation in accordance with the standards of useful accounting information, b) Assisting the contemporary manufacturing establishments in reducing the cost and focusing attention on the cost of unutilized capacity individually not totally, c) Assisting the contemporary manufacturing establishments in achieving a continuing evolution in its performance to pursue the successive changes and maintain or maximize its competitive position.
He concluded that the evolution of modern environment and the interrelation relationship among its bases emphasize that there is a need to re-think in deducing an alternative system instead of Traditional System (TS) for allocating the indirect costs in order to accomplish an integrated system to work within Kaha Company in Egypt seeking to continue in competition.
Al-Qady (2013) investigated using integration process among Activity Based Costing (ABC) and some modern cost systems as follows:
1- Integration of ABC and Activity Analysis with Target Costing:
He illustrated that the power of Target Costing is its ability to provide ABC with a feed forward ability to estimate the drifting cost and Target Cost of a new product. ABC, thus, could be used proactively to estimate the costs of activities that will be performed, given the current and future production capabilities and alternative product designs. He suggested an integration model between ABC and Activity Analysis with Target Costing (Fig. 22).
Fig.22 :A model of integration of ABC and Activity Analysis with Target Costing.
2- Integration of ABC and Activity Analysis with Life Cycle Costing:
He stated that Life Cycle Costing should provide Target Costing with information about where cost savings at the whole product life cycle are possible. The ABC’s feed forward ability supports Life Cycle Costing in this issue. He suggested an integration model between ABC and Activity Analysis with LCC and the impact on TC (Fig.23).
Fig.23: A model of integration of ABC and Activity Analysis with LCC and the impact on TC.
3- Integration of ABC and Activity Analysis with Kaizen Costing:
He revealed that potential cost savings at the manufacturing stage should be estimated when determining the target cost, kaizen costing should provide the information about where further cost saving in the manufacturing stage is possible. ABC’s feed forward ability support kaizen costing in this issue. He suggested an integration model between ABC and Activity Analysis with Kaizen Costing and the impact on Target Costing (Fig.24).
Fig.24 : A model of integration of ABC and Activity Analysis with Kaizen Costing and the impact on Target Costing.
4- Integration of ABC and Activity Analysis with TOC:
He pointed out that the power of Theory of Constraints (TOC) stems from its ability to physically identify bottlenecks. Activity Based Costing (ABC) system assumes that a process is performed through activities and provides the cost of each activity. Integration of ABC system and TOC would provide basis to physically identify the bottleneck activity and determine its cost simultaneously. He suggested an integration model between ABC and Activity Analysis with TOC and the impact on Target Costing (Fig.25).
Fig.25: A model of integration of ABC and Activity Analysis with TOC and the impact on Target Costing.
Source: Al-Qady, 2013.
Finally, he reached the following conclusions:
1- Integration of ABC system with TC and LCC has led to improved decisions with regard to planning life-cycle product cost in the design stage.
2- Integration of ABC system with Kaizen Costing supports planning for cost savings in the manufacturing stage.
3- Integration of ABC system with TOC helps management capacity of activities in the manufacturing stage.
On the other hand, it may observe that, for determining the efficiency of the integrated model, he relied on measuring the manager trends of an Egyptian industrial firm for producing the half automatic washing machines in the private sector by using the opinion questionnaire method only, without relying on a quantitative analysis of actual data values of the company under study. This matter reduced the objectivity degree to arbitrate on the used model. He also has neglected the importance of determining the useful activities (value added activities) cost and its sever effect on cost planning of the firm. Therefore, there is an urgent necessity to carry out a quantitative study (Applied study) to fill the research gap which is represented in determining the integration impact among the Activity Based Costing (ABC) and modern systems for measuring the manufacturing costs. This is matter may contribute to maximize the profitability of the firm through the rationalization of the estimated costs to the level of production centers and units.
El-Fakharany (2014) pointed out that in light of recent developments in a row and the subsequent global industrial companies, which aim to gain new markets through the production of a product of high quality at minimum possible cost, it was vital to take advantage of methods that have been pursued by these companies to develop internal performance of local industrial companies to get rid of the dogging problems ,especially in the public sector, such as low-quality and high-cost. Hence the researcher’s interest was to propose an accounting approach which improves the quality of operations and reduces the cost of the product by using some modern managerial accounting methods which are represented in Target Cost (TC), Value Engineering (VE), Just In Time (JIT) and ABC and their integration with the BSC. The main objective of the research is represented in an attempt to strengthen and consolidate the efforts of reducing the cost and improving the processes quality inside the environment of the technologically advanced manufacturing firms, in order to maintain the survival, growth and continuity in highly competitive markets and attract the largest market share of the global competitive environment, through effective application of the modern accounting methods. In the context of the apparent importance for the research, it tried to develop the processes quality and decrease cost of the product to gain access to local and global competitive markets. This trend may be achieved through the following objectives: 1) The continuous reduction of the cost of each stage of production through the use of modern managerial accounting methods and improve the quality of performance in each stage of production. 2) Providing a product complies with the current and future customer desires and in the same time it has required and technical specifications reasonable price. 3) Providing methods to evaluate the performance and combine financial and non-financial metrics to get knowing extent of accomplishing the short and long term goals, with returns benefit of applying the integration among modern methods of managerial accounting which are used in the research with the Balanced Scorecard (BSC). The author illustrated that he have been formulated the research hypotheses as follows: 1) It can achieve an integration among modern managerial accounting techniques, which leads to reduce the cost and improve the processes quality. 2) It can achieve an integration between ABC method and BSC, which leads to accomplish continuous improvement of performance indicators in the firm under study. 3) It can achieve an integration relationship among the methods of Target Cost (TC), Value Engineering (VE), Just In Time (JIT), and methods of ABC and BSC which leads to continuous improvement of processes quality and reduction of product cost. 4) Application of integration among managerial accounting methods mentioned above with the Balanced Scorecard (BSC) represents an accounting approach which has a positive payoff during application process inside the firm under study in order to improving the processes quality and reducing cost. He also added that the theoretical aspect of the study showed several results which have been strengthened through the survey and applied study on the firm under study. He indicated that the most important results may be summarized as follows: 1) The Traditional Methods (TM) of management accounting has become inappropriate in light of the recent developments of manufacturing firms which have advanced technology and produce varied products. Therefore, there is an urgent need to use the methods of modern managerial accounting to keep up with these successive contemporary developments. 2) The statistical analysis proved the possibility of achieving an integration among the modern managerial accounting methods of Target Cost (TC), Value Engineering (VE), Just In Time (JIT), ABC and BSC reduce cost and improve processes quality, which represent the main objective of the research. 3) The statistical analysis of survey’s list proved the possibility of applying the proposed accounting approach inside the firm under study, in order to achieve objectives of the search. He also revealed that best methods which have positive effect on performance may be arranged as 1) Just In Time (JIT), 2) then Target Cost (TC), 3) then Value Engineering (VE) and in integration with ABC and BSC. Finally, researcher recommended to apply the following recommendations: 1) Viewing the behavior of workers and the degree of contact among them and management at all levels and try to guide this behavior through specific programs and training mechanisms to bring this behavior to the optimum situation, which improves the ability of workers to develop their performance, and contributes to accept the application of these modern methods and the proposed accounting approach. 2) Development of the firm’s information system and the mechanisms are leading to providing the needed data and information in a timely manner, and all the guarantees that ensure the validity of such data and information. 3) Explain the component of this proposed accounting approach before applying for workers, who have a connection, with a detailed explanation and allocating some mechanisms of motivation and excellence and in the case of understanding the proposed approach and successfully applied on all the firm’s products.
From the previous studies, it can be concluded that the application of integration process among modern costing methods ,generally, led to get rid of their disadvantages and improve the accounting performance efficiency and business environment inside the firm. Also, ABC method ,especially, has an important role for improving the accounting performance efficiency of the firm by applying the integration process with the other modern costing methods.
3.10.2. Components and application stages of proposed model:
a. Components of proposed model:
The present research proposed utilization of a developed model for measuring the manufacturing costs in Egyptian firms (Private and public sector) by adding Activity Based Costing (ABC) method to three important modern cost methods. This development will avoid neglect of useful activities cost effect on the planning cost of the firm. Also, it assists in isolating unuseful activities inside the firm. This model may be called tetra dimensional integrated model.
The model includes four management accounting methods of Activity Based Costing (ABC), Continuous Improvement (KAIZEN Costing), Theory of Constraints (TOC) and Resources Consumption Accounting (RCA) as shown in Fig.26 .
b. Appropriate applied stage of proposed model:
The researcher proposes to apply the present tetra dimensional model in stage of product manufacturing inside the firm.
Fig.26 : Proposal of tetra dimensional integrated model.
Source: Modified and prepared by the researcher (Own processing).
3.10.3. Philosophy and advantages of proposed model components:
a. Philosophy of components:
The Philosophy of tetra dimensional model components may be illustrated as follows:
First component: Activity Based Costing method:
ABC’s philosophy is based on its ability to convert the relationship of indirect costs to a direct relationship through segmentation process of allocating costs to products as the purpose of final cost to two phases by adopting multiple cost drivers of activities and thus achieve traceability of all cost elements on the products directly considering that the activities consume resources and not products.
According to the mentioned studies previously in the present study, the researcher indicates that the philosophy of ABC method may be summarized in the following points:
1) The basis of ABC’s philosophy is to focus on the costs associated with the activities. Thus the activities analysis into useful and unuseful activities is considered the foundation stone for establishing the ABC method inside the firm.
2) Analysis of the firm’s activities at the level of public functions and main departments, beside the study of the processes and procedures within each department is needed for the purpose of linking the cost.
3) Running a specialized accounting system designed to meet the management requirements through providing accurate necessary detailed information in order to create an appropriate environment which fits with the rapid developments , matched at the level of competition and getting wise decisions.
4) Accomplishing continuing improvements in both those activities related to the products or processes within flexible and philosophical principles can be applied from a firm to another in various formats.
Second component: Continuous Improvement (KAIZEN Costing):
In the decade of 1980, management methods concentrate on empowerment, and employee involvement by applying teamwork approach and interactive communications and on improving job design, but Japanese firms tended to implement such techniques much more efficiently than others. The business outcome of the 1980’s was that Japanese firms, in their search for global competitiveness, illustrated a greater commitment to the philosophy of continuous improvement than Western companies did. Kaizen was the name for such a philosophy used by Japanese.
According to the mentioned studies previously in the present study, the researcher reveals that the philosophy of Continuous Improvement (KAIZEN Costing) may be summarized in the following points:
1) Kaizen means improvement, continuous improvement involving staff in organization from top management, to managers, supervisors, and workers.
2) Kaizen is so deeply inclined of both managers and workers minds that they often do not even realize they are using a customer-driven strategy for improvement.
3) The two syllables “Kai” and “Zen” which mean to break apart and investigate and to improve upon existing situation is the combination for the Japanese philosophy Kaizen.
4) Kaizen method is considered as rigorous, scientific method using adaptive framework of organizational values, using statistical quality control and beliefs that keep workers and management focused on zero defects.
5) It is a philosophy of never being satisfied with what was achieved last week or year. Improvement starts with the admission that every organization has issues, which provide opportunities for change.
6) It is a widely acknowledged philosophy in manufacturing industries, more research work is required in this area.
7) Kaizen can also be applied in different fields like commerce, service, business, etc.
8) It requires team efforts involving every staff in organization to completely apply the system.
9) System Comprehension plays an important role among employees regarding various strategies that are included in Kaizen philosophy, different principles behind these strategies and use of them in different circumstances.
10) Success of Kaizen philosophy requires more effort in order to improve the awareness aspects, because these factors are greatly vital for this success in most of manufacturing industries across the globe.
Third component: Theory of Constraints (TOC):
According to the mentioned researches previously in the present study, the author illustrates that the philosophy of Theory of Constraints (TOC) may be summarized in the following points:
1) Finding a solution to the problem of determination of optimum productive mixture in the presence of relative scarce of resources, which represent constraints (bottleneck) challenge of the entire system capacity and thus works to minimize the profitability and performance as a whole. 2) Maximizing profitability by addressing those restrictions under the available resources without causing a significant change in the cost structure. 3) Care about the appropriateness extent of fixed costs, therefore, it is considered as an alternative method to the marginal profit approach which neglects this point and was used as a means to rationalize decisions regarding the optimum productive mixture in the short run. 4) Determining the difficult situations and try to get rid of them. These situations may be such as the situations of products for services in stage of partial production and is waiting for satisfying the customer’s need and bottlenecks areas which appear in various stages such as processing, packaging and cargo stages. 5) Working on an intuitive framework to manage the organization and this framework ensures the desire to reach performance of continuing improvement to put the process in case of continuous improvement, that is, it begins to identify clearly the goal of the firm and establishing measurements to determine the impact of any action or activity on the target. 6) Improving the firm’s performance through a process of continuing improvement, which focuses on the importance of identifying and understanding the overall objective of the firm as a prerequisite for success. 7) Increasing the contribution of the outputs, reducing investment and operating costs in addition to maximizing the operating profit when there are some rare resources and other non-rare. 8) Studying application of Theory of Constraints (TOC) requires a comparison between the quality and quantity of production before and after the application. 9) TOC considers that productive process inside the firm is an inter connected chain (successive processes) which tries to achieve the targets of the firm. 10) It also considers that every productive process is a ring in the chain which it must plays its required role effectively. 11) For applying Theory of Constraints (TOC) inside a firm, the following steps must be used:
1. Identify the weakest ring in the chain (Constraint of production process).
2. Do not download the chain of productive process with a productive capacity more than that capacity of weakest process because this process is considered the constraint affecting the productive capacity of chain.
3. Focus improvement endeavors on strengthening the weakest ring in the chain.
4. If power of this ring increased, the improvement in this case will be considered successful and this matter leads to achieve an efficient performance for chain.
Fourth component: Resource Consumption Accounting (RCA) method:
According to the mentioned researches previously in the present study, the author shows that the philosophy of Resource Consumption Accounting (RCA) method may be summarized as follows:
1) Resource Consumption Accounting (RCA) method considers resources are the main reason for the cost. These resources must be organized in homogeneous groups or resource groups. Each resources pool has a group of inputs which are used to produce other outputs used by other resource pools, or used for producing commodities and the final services to the customer. 2) Resource Consumption Accounting (RCA) method also focuses on the cost that occurred and controlled at resources level and not at activity’s level, and each capacity has the ability to create the value in addition to the interactive effect with all the other resources. 3) It also focuses on understanding the resources before purchasing or using these resources. This matter provides a high level of interest and analysis of control of future costs at the design stage. It also provides the firm with the fact that the processes design includes of 70-80% of the cost during the product life cycle in the same way that is carried out during the stage of product design and determining the permanent cost structure. 4) Besides it fundamentally focuses on the comprehensive outlook of resources and interrelationships among them and how are the resources outputs consumed in order to obtain detailed information about the processes. 5)It interprets the cost behavior according to the principle of causality. 6) It determines idle / excess capacity resources. 7) It also focuses on the exploitation of capacity rates at the level of resources and interest in allocate them to other operating activities to support and increase their productivity.
b. Advantages of components:
The Advantages of tetra dimensional model components may be indicated as follows:
First component: Activity Based Costing(ABC)method:
According to several studies which are mentioned previously in the present study, the researcher illustrates that advantages of Activity Based Costing (ABC) method may be outlined as follows:
1) More accurate information can be used to improve budgets and measures of department and division performance.
2) Managers can seize continuous improvement opportunities by concentrating on accurate cost information.
3) Management can use information provided by ABC to identify activities that are costly and then take steps to reduce their costs by changing the production process or outsourcing these activities.
4) Because more accurate costs are provided, management can use the information to negotiate price increases with customers or to discard unprofitable products.
5) A sophisticated ABC method should generate the most accurate product cost for day-to-day decision making.
6) ABC provides benefits relating to the control function of managers.
7) Determining the useful activities (Value added activities ) cost and unuseful activities (Non value added activities) cost.
8) Possibility of allocating cost center resources to business processes according to their actual utilization.
9) Improving product quality by accounting for the costs of quality activities.
10) Assisting to provide accurate reports on the profitability of customers, including possible focus on the most profitable customers.
Second component: Continuous Improvement (KAIZEN Costing):
According to many studies which are mentioned in the present study, the researcher indicates that advantages of Continuous Improvement (KAIZEN Costing) may be summarized as follows:
1) It is essential for future competitiveness.
2) It can lead to a more efficient organization.
3) It leads to higher quality of commodities and services.
4) It is a powerful tool that offers a great commercial deal.
5) It helps to eliminate losses.
6) The firm can manage its processes concerning long run objectives without meeting cost standards and research traditional cost control variances by focusing on the consistent connection with the overall budgeting and planning.
7) Manufacturing process and business environment are improved continuously.
Third component: Theory of Constraints (TOC):
According to several studies which are mentioned previously in the present study, the author reveals that advantages of Theory of Constraints (TOC) may be summarized as follows:
1) TOC is very simple to comprehend and implement, which is why it is ideal for shop floor teams.
2) It is very useful for kick starting improvement efforts for its immediate and very noticeable benefits.
3) It is a tool to evaluate and appraise the true value of modifications (using T, O, I), and utilize this to define the suitable options, and drive the right behavior/decisions.
4) It is potential approach for minimal changes to processes with enormous increases in productivity.
5) Fostering teamwork, awareness of the constraints (bottlenecks) and the necessity to deal with the constraints processes.
6) Increasing production capacity is one of its fine qualities.
7) It facilitates growth of turnover/productivity without the need for additional staff or space.
8) It leads to optimizing profitability: increasing generated profit by all internal processes, reducing investment or stock and reducing operating expenses.
Fourth component: Resource Consumption Accounting (RCA) method:
According to numerous researches which are mentioned previously in the present study, the author shows that advantages of Resource Consumption Accounting (RCA) method may be summarized as follows:
1) RCA enables us to execute reconciliation of request and supply of resource’s outputs in a driven manner.
2) A reflection of the resources base cost’s nature.
3) Decision’s aid for incremental investment decisions based on insights related to resource demand and resource cost pool’s nature in question.
4) Proper accounting of idle/excess capacity.
5) Accurate presentation of monetary equivalents for planning scenarios based on output and activities.
6) RCA model can capture complexity. When process insights are needed, they can be added. When they are not needed, relationships to and from involved resource pools can be traced and then these resource pools could be eliminated. This matter provides an effective measure for control and monitoring of process effectiveness.
3.11. Preliminary conclusions:
After studying applied stages of ABC method, factors of conformity and variance for ABC in comparison with the other modern accounting concepts and the results of applied field study, it may be concluded the following important points:
A) Applied stages of ABC method in Egyptian firms:
1- ABC method design process passes through the following five Steps:
– First step: Defines the activities where the activity is considered as the main unit in building the ABC method.
– Second step: Defines the activities cost which it may be defined as the value of the cost components.
– Third step: Defines the activities centers where the activity center is a collection of several activities which have homogeneity between them.
– Fourth step: Defines cost drivers for each activity where driver is defined as element which causes occurrence of cost. The selection of the cost driver is linked to several criterions which must be taken in consideration when selecting it such as its number, type and behavior effects and there is no optimum driver for each activity. The difficulty of designing ABC method is representing in achieving the economy of method operation without causing any deviation or distortion in the cost of the product. This matter occurs through determining the appropriate cost drivers.
– Fifth step: It represents loading the products with its share of the costs which have actually benefitted from them as the consequence of consuming the firm’s activities. So, the main concept of ABC method is illustrated through the idea of activities consume resources and products consume costs of these activities.
2- Process of implementing the ABC method inside the Egyptian firms is an organized process which is carried out through a group of successive steps to reach implementing this method. These steps do not vary in the practical implementation from one firm to another; but the specific details of each step vary from one firm to another. For example, the step for determining the activities step is one of the main steps for implementing the ABC method in the firms but the numbers of activities vary from one firm to another.
3- ABC method enables the availability of the activity drivers which are linked to the product unit , the production batch , the product-sustaining level (Production line) and facility-sustaining level (The firm as a whole).
4- ABC method is characterized of its logical allocation of the indirect costs through the collection of the product costs from the required various activities to produce it (Product design, production assisting activities, manufacturing, marketing and management). Then the appropriate cost drivers are determined through allocation of the costs of activities to the product. This matter leads to in determining the measure of the product cost more accurately.
5- ABC method gives the management staff the potential for identifying the unutilized capacities which are represented in idle activities resources and it works to benefit them either through the use of these capacities to obtain other incomes or reducing expenses of these resources and consequently the optimal utilization of the resources is occurred.
6- ABC method enables cost control, on the long run, costs in a more effective method through controlling the cost drivers instead of controlling the cost elements. Also, knowing the causative relationship between the cost elements and the causing activities, leads to achieve a better control of the cost elements at the level of activity which cost took place.
7- Despite many advantages of the ABC method, but it has several limitations such as difficulty in determining the cost drivers in terms of number or type, besides its cost may be high for some firms where this cost is represented in the cost of investing and measuring it.
B) Factors of conformity and variance between ABC concept and other modern accounting concepts:
1- ABC method produces the information while Activity Based Management (ABM) approach uses this information. ABC method determines cost pools and activity drivers and the causative relationship between them. While ABM framework, is showing the played role by the resulted information from ABC method where the management staff can study the possibility of performing the activities more efficiently through changing the processes or through performing the activities with different repetitions or through designing the product or changing the products assortments. Therefore, the ABC method is considered as an assisting factor for ABM method because it provides information about the unit cost and cost drivers while ABM uses this information in making the decisions related to the firm and maximizing the utilization of its resources.
2- ABC method is considered as an assisting factor for the continuous improvement process because ABC method provides detailed information about activities inside the firm in addition to the activities as activities of added value and activities of non added value and try to get rid of last type of activities and utilize their resources in other activities which add value.
3- All previous procedures are covered by ABC method, therefore, ABC method may be considered as an assisting factor for the application of the Total Quality in the firms because of its ability to provide appropriate information for the current business environment and assisting the managers in improving the processes results and determining the sustainable opportunities to improve the performance.
4- There is a difference and integration between the ABC method and Theory of Constraints (TOC). ABC method takes into consideration the long run analysis because the analysis includes all production costs while the TOC covers the short run approach to analyze the profitability. There is also an integration form between both methods where ABC method provides the total analysis for cost drivers in addition to accurate determination of the unit cost as a basis for the strategic decisions concerning the long-run pricing and the mixture of products. As for Theory of Constraints (TOC), it is useful method for improving the profitability, on long run , during manufacturing. This matter occurs through the modifications in the products mixture and by concentrating on the production constraints. Therefore, ABC method may be considered as an assisting factor for TOC where the ABC method provides TOC with the needed information about the external constraints, cost drivers and product cost.
5- Logical concept of Resource Consumption Accounting (RCA) depends, in a clearly form, on a principle of valuable accounting information (Outputs of RCA) generate from finding these information at level of resources. This matter occurs because of following up resource paths inside the activities in order to determine the level of required capacity for performing each activity. Also, this matter leads to achieve the main objective of RCA i.e. optimum utilization for activity capacities at the minimum level of costs.
6- Increasing the efficiency of RCA concept for rationalizing the method of overhead and idle capacities is closely related to firm’s ability to the sustainable development in investment of these two capacities in a better way. Also, in order to increase the efficiency of used accounting system inside the Egyptian and other firms, TOC concept must be utilized as an accounting – technical method related to increase the operational processes performance in concomitant certain constraints affecting the outputs of productive process inside the Egyptian firm.
7- Despite the recent increasing interest to ABC method, but the main philosophy behind its rise stops at ‘managing the activities concept ” which is considering a control factor in the consumption of resources. On the other hand, the philosophy of RCA method extends to include the concept of ‘managing the productive capability of the business”. This matter leads to an important result which is represented in the increase of the economical unit’s ability for managing in a better way. Also, it leads to a management which has more efficient cost way.
8- Concentration on both of raw materials and conversion cost which represent Services and Efforts Cost (SEC) of raw materials conversion to a final product. This cost may be calculated by using the following equation:
SEC = indirect labor cost + indirect manufacturing cost.
This property will be severely needed by future automated firm because its necessity for reclassifying the production costs. This is due to traditional classification will be ineffective to face requirements of modern technology inside the future firm.
9- Concentration on processes of raw materials and components flow and follow up and collect the operational costs at order, stage, productive department levels inside the future modern firm.
10- Allocation costs must be changed or modified to be compatible with requirements of new manufacturing environment. For example, production means consumption must be utilized in flexible manufacturing methods by using production method based on estimated operational hours of machine and follow up them in relation to each product inside the method. In the traditional method, depreciation is loaded on overhead costs by using fixed rate method and overhead costs are loaded on production lines by using one of loading rates such as direct labor.
11- FCAS should pay attention to predetermined estimations of cost because making decisions process will be ,basically, depended on fast response which does not wait for collection of actual cost data.
12- FCAS should focus on change drivers in processes and functions which do or do not add value to product. Also, it should be taken into consideration that costs of storage , setup, handling and inspection time present non added value costs. It should also try to determine change drivers of these functions which do not add any value to product.
13- An excellent FCAS must take into consideration three efficiency criterions as follows:
1) Technological criterion (Technical elements),
2) Economical criterion (Cost and profit elements) and
3) Environmental criterion (Circumstances surrounding the work environment).
This matter will lead to appear in a modern generation of FCAS which cares essentially for achieving the environmental requirements for purpose of improving a good performance quality inside modern manufacturing firms. These FCAS’s may be called Green Cost Accounting Systems (GCAS’s).
According to studying of various aspects of ABC method in Egyptian firms as an attempt to achieve objectives of the present research, it is also recommended to carry out an applied study on Egyptian manufacturing firms by using an integral cost model.
Chapter 4: PRESENTATION OF RESEARCH METHODOLOGY USED IN THE CASE STUDY
4.1. Main objectives and hypotheses of the research:
4.1.1. Purpose of application of proposed model:
By reviewing the summarized philosophy and advantages of ABC method, it can be concluded that this method has not the following three sets of advantages:
1) a) Improving the manufacturing process and increasing performance efficiency.
b) Continuous upgrading the business environment.
2) a) Getting rid of bottlenecks (constraints).
b) Providing a tool to appraise the true value of amendments (using T, O, I) and utilizing this trend to define the best options, and driving the proper behavior/decisions.
3) a) Determining interrelationships among resource pools.
b) Determining ingrained and changing nature of costs.
Therefore, the absence of these advantages may be compensated by applying the integration process among ABC and the following methods:
1) KAIZEN (For compensating the absence of the first set of advantages).
2) TOC (For compensating the absence of the second set of advantages).
3) RCA (For compensating the absence of the third set of advantages).
So, there is an urgent need to apply a developed integrated model for raising the contribution extent in expanding the ABC method and increasing efficiency of business environment inside manufacturing firms in Egypt.
4.1.2. Expected results and obstacles for applying the proposed model:
By applying the proposed model, the expected results and obstacles may be summarized as follows:
a) The expected results:
1- Contributing to maximize firm’s profitability through the rationalization of estimated costs to the level of production centers and units.
2- Obtaining a successful process of commercial deals.
3- Obtaining product output to be produced.
4- Obtaining the achievable cost reduction.
5- Improving the overall planning and budgeting processes.
6- Revising the desired return.
7- Revising investment in product.
8- Providing accurate information that assists top management for decision- making such as differentiation decision between production of a firm and other one.
b) The obstacles:
1- Low level of awareness of importance of scientific research.
2- Necessity for a set of detailed data, both for resources, activities or cost drivers as well as a large number of accounting processes.
3- Increasing the combination business in a single activity leads to decreasing the ability of cost driver to accurately tracking of consumed resources by the products.
4- Difficulty of identifying the number and type cost drivers which should reflect the behavior of costs within each activity and how it relates to the extent of product consumption from resources firm. But, it can overcome this difficulty through follow-up, observation, and by holding a discussion of engineers, technicians and workers.
5- Hesitation of top management to change Traditional Accounting method inside the firm.
6- High cost for applying the developed method (the model), which is represented into two elements.
a) Investment costs which are represented in model design cost, design team work cost, and workers training cost on utilization of the developed method.
b) Operational costs of developed method which are represented in data collection, data operation, reports preparation and analyzes.
7- Impairment of accounting cognition for some workers of Egyptian manufacturing firms for using some developed methods of cost accounting.
8- The applicable cost methods inside the Egyptian manufacturing firms are not keeping up with modern cost methods.
4.1.3. Testing hypotheses of application of proposed model:
For evaluating extent of result values accuracy of the present study, four hypotheses must be tested by using both “Wilcoxon Signed Ranks” and “Mann- Whitney Tests” as follows:
First hypothesis test:
For carrying out test of first hypothesis, two following steps must be followed:
a. Formulation of null hypothesis:
There are no statistical significant differences for production centers costs between current manufacturing costs method and proposed model.
b. Formulation of alternative hypothesis:
There are statistical significant differences for production centers costs between current manufacturing costs method and proposed model.
Table 56 (in appendix) shows statistical analysis outputs by using “Wilcoxon Signed Ranks” Test.
From Table 56 (in appendix), it may be observed that there are statistical noticeable costs differences between two firms which are covered by the present study between estimated cost values according to the current method and estimated values according to the proposed model which is prepared by the researcher at a significance level of 1%. This means rejecting alternative hypothesis and accepting the null hypothesis stating:
“There are statistical significant differences for production centers costs between the current manufacturing costs method and proposed model”.
These significant differences of production centers costs indicate that extent of application validity of proposed model inside two firms is greater than application validity of current manufacturing costs method.
Second hypothesis test:
For carrying out test of second hypothesis, two following steps must be followed:
a. Formulation of null hypothesis:
No statistical significant differences for products costs between current manufacturing costs method and proposed model.
b. Formulation of alternative hypothesis:
Statistical significant differences are remarked for products costs between current manufacturing costs method and proposed model.
Table 57 (in appendix) shows outputs of statistical analysis by using “Wilcoxon Signed Ranks” Test.
From Table 57 (in appendix), it may be observed that there are statistical significant differences for products costs of two firms which are covered by the present study between estimated cost values according to current method and estimated values according to proposed model which is prepared by the researcher at a significance level of 1%. This means the rejection of alternative hypothesis and accepting the null hypothesis stating:
“There are statistical significant differences for products costs between current manufacturing costs method and proposed model”.
These significant differences of values of products costs indicate that extent of application validity of proposed model inside two firms is greater than application validity of current manufacturing costs method.
Third hypothesis test:
For carrying out test of third hypothesis, two following steps must be followed:
a. Formulation of null hypothesis:
No statistical significant differences for products profitability between current manufacturing costs method and proposed model.
b. Formulation alternative hypothesis:
Statistical significant differences are noticed for products profitability between current manufacturing costs method and proposed model.
Table 58 (in appendix) shows outputs of statistical analysis by using “Wilcoxon Signed Ranks” Test.
From Table 58 (in appendix), it may be observed that there are statistical significant differences for products profitability of two firms which are covered by the present study between estimated profitability values according to current method and estimated values according to proposed model which is prepared by the researcher at a significance level of 1%. This means rejection of alternative hypothesis and accepting null hypothesis stating:
“There are statistical significant differences for products profitability between current manufacturing costs method and proposed model”.
These significant differences of product profitability values indicate that extent of application validity of proposed model inside two firms is greater than application validity of current manufacturing costs method.
Fourth hypothesis test:
For carrying out test of fourth hypothesis, two following steps must be followed:
a. Formulation of null hypothesis:
No statistical significant difference for product costs change between public sector firm (Metal casting firm) and private sector firm (Chemical products firm).
b. Formulation of alternative hypothesis:
There is a statistical significant difference for change of product costs between public sector firm (Metal casting firm) and private sector firm (Chemical products firm).
Table 59 (in appendix) shows outputs of statistical analysis by using ” Mann-Whitney ” Test.
From Table 59 (in appendix), it may be observed that there are statistical significant differences for change of product costs of two firms which are covered by the present study between estimated change values of product costs according to current method and estimated change values according to proposed model which is prepared by the researcher at a significance level of 1%. This means the rejection of alternative hypothesis and accepting null hypothesis stating:
‘There is a statistical significant difference for change values of product costs between public sector firm (Metal casting firm) and private sector firm (Chemical products firm)”.
These significant differences of product costs change values indicate that extent of application validity of proposed model inside public sector firm (Metal casting firm) is greater than application validity inside the private sector firm (Chemical products firm).
4.2. Description of methodology used in order to accomplish research objectives:
The researcher attempted to define the general framework of the applied study to test the study hypotheses through the statistical inferences processes, determining the scope of approval or rejection of the study hypotheses and stating the contribution of the proposed model in analyzing and explaining the business results in the firms covered by the study.
4.2.2. General perspective of the manufacturing sector in Egypt:
The industry in Egypt was originated since the ancient Egyptian civilization where the ancient Egyptians knew how to extract metals such as copper, silver and gold and they succeeded in melting and manufacturing them. They also knew the manufacturing of the agricultural tool and the military equipment, pottery industry, ship-building industry textile industry and oils pressing industry. They mastered the manufacture of the jewels inlaid with the precious stones. The antiquities presented in the historical museums shows the meticulously of the Egyptian manufacturers and the beauty of their processed works. In the modern era, Egypt witnessed an industrial boom during the 19th century headed by President “Mohamed Ali” where his era witnessed the establishment of a great industrial base which included the textile industry, sugar industry, oils pressing and the rice paddles. Also, the military industry boomed and an arsenal for manufacturing ships and factories for preparation of the chemical materials was established. Misr Bank was founded in Year 1920 by using Egyptian capitals. It led a boom campaign of the Egyptian industry. The bank also succeeded in setting up a developed Egyptian industry which included a series of firms and large factories. The Egyptians lifted the slogan of the Egyptian is for the Egyptian. This slogan succeeded in protecting the Egyptian industries. Then the July 1952 Revolution came to complete the path through setting up of pioneering heavy industries projects such as iron and steel, the metallic and petroleum industries, and chemical industries. This is in addition to the spinning and textiles industries, and food industries. But during the period of 1967 ‘ 1973, the liberation war of Sinai influenced, negatively, the industrial sector performance which re-boomed after the October 1973 victory and economic flourishing policy’s implementation. The development in field of industry continued until the Year 1974. Then the investment law was issued for the Arab and Foreign Capital to encourage the industrial investment in Egypt which is in addition to attracting the Egyptians savings from abroad. This action was followed by the policy of declaring the economic flourishing policy. The economic and politic stability of Egypt was achieved through peace. Egypt started a new stage through industrial development. The slogan of Made in Egypt became a national target. The industry sector attempted to develop the Egyptian product. With the implementation of the economical reform policy which started in the nineties of the past century, the private sector’s role speeded economical development. The industry sector had numerous advantages and the investments directed to the industrial activities have increased. With the beginnings of twenty – one century, Egypt started one stage of the stages of promoting the Egyptian industry after linking the industry with the foreign and internal trade under umbrella a single Ministry which took the task of achieving the qualitative transformation of the Egyptian economy and raising the competitive potential of the Egyptian product and modernization of the Egyptian industry in the frame of an integrated framework which contributes in increasing the exports to be included effectively into the international economy. This is in addition to providing the environment suitable for the industrial and commercial activity and encourage the private sector to play important role in achieving the economical development. The industry sector represents an advanced rank in terms of importance for the Egyptian National Economy where it comes in ahead of the economical sectors in terms of its contribution in the Total Local Product, its strong inter-relation with several production and service sectors, of its role in developing the foreign trade and improving the balance of payments. The contribution of the industrial sector in the Total Local Product was approximately 275.3 milliard L.E.* where the private sector contributed by approximately 223.9 milliard L.E. (81.3%) and the public sector contributed by 51.5 milliard L.E. (18.7%) **.
4.2.3. General framework for the applied study:
The cost centers try to allocate and manage the indirect costs in order to provide the firms with accurate information which rationalize the administration decisions and support the competitive advantage especially with the increase of ratio of these costs over the total costs. To achieve this target, it is based on schedules which are consistent in collecting the costs in Pools to be loaded over the final costs purposes. Hence, this section presents results of applying the proposed model test established on the idea of integration between costs according to the ABC method and strategic costs tools. Through this manner, the researcher attempts to confirm the positive influences for the proposed model submitted by the researcher through analyzing the cases of the firms covered by the study.
4.2.4. Study sample and population:
The study population is represented in all the manufacturing firms in Egypt. In the light of the research problem and study nature, two firms were selected for implementing the proposed model and to be the study sample according to the following considerations:
1) Variation in type of the ownership (Governmental / Non-Governmental).
2) Variation in the manufacturing field (Chemicals / Metal casting).
3) Variation in size of investments (Capital / Total assets).
In the light of the confidentiality considerations and the nature of competition, the firms covered by the study are expressed as follows:
1) The chemicals firm (Non-Governmental ownership).
2) The metal casting firm (Governmental ownership).
4.2.5. Proposed model variables and method of measuring:
The proposed samples for the study provide (average profitability) as a dependant variable which is influenced with a group of independent variables which are represented in costs, incomes and the exploited energies. These variables are detailed and their method of measurement is defined as shown in Table7.
Table 7: Proposed model variables and the method of measuring.
SymbolsVariableMethod of measurementSecondarySubsidiaryMainY1
Y2Rate of profitability.
Improvement in average profitability.Total Profit/Trade activity income.
Profitability according to proposed model ‘ Profitability according to firm costs system.X1Current activity return.Current activity return.X2Rate of improvement in current activity return.(Current activity return according to the proposed model ‘ Current activity returns according to firm costs system) / Current activity returns according to the firm costs system.
Costs of production support centers.
Production support centers No.1
Production support centers No.2
Production support centers No.3
Production support centers No.4
Production support centers No.5
Production support centers No.6
Production support centers No.7
Production support centers No.8
Production support centers No.9
Production support centers No.10Total costs of production support centers.
X4Rate of improvement in the Production support centers costs.(Costs of production support centers according to proposed model ‘ Costs of production support centers according to firm costs system) / Costs of production support centers according to the firm costs system.
Costs of production centers.
Production support centers No.1
Production support centers No.2
Production support centers No.3
Production support centers No.4
Production support centers No.5
Production support centers No.6
Production support centers No.7
Production support centers No.8Total costs of production centers.
Total production centers No.1
Total production centers No.2
Total production centers No.3
Total production centers No.4
Total production centers No.5
Total production centers No.6
Total production centers No.7
Total production centers No.8
Table 7: Continued.
SymbolsVariableMethod of measurementSecondarySubsidiaryMainX6Rate of improvements in costs of production centers.(Costs of production support centers according to proposed model ‘ Costs of production support centers according to firm costs system) / Costs of production support centers according to the firm costs system.
Costs of administration centers.
Costs of administration centers
Costs of security and guards
Costs of utilities
Costs of administration
Total administration centers costs
Total security and guards costs
Total utilities costs
Total administration costsX8Rate of improvements in administration centers costs.(Costs of administration centers according to proposed model ‘ Costs of administration centers according to firm costs system) / Costs of administration centers according to the firm costs system. X9
X10Costs of selling and marketing center.
Rate of improvement in costs of selling and marketing center.Total costs of selling and marketing center.
(Costs of selling and marketing center according to the proposed model ‘ Costs of selling and marketing center according to the firm costs system) / Selling and marketing center costs according to firm costs system.X11Costs of product No.1.Total costs of sold commodity / produced quantity in Mg (Tonne).X12Costs of product No.2.X13Costs of product No.3.X14Costs of product No.4.X15Costs of product No.5.X16Costs of product No.6.X17Costs of product No.7.X18Costs of product No.8.X19Costs of product No.9.X20Costs of product No.10.X21Costs of product No.11.X22Costs of product No.12.X23Costs of product No.13.X24Costs of product No.14.Table 7: Continued.
SymbolsVariableMethod of measurementSecondarySubsidiaryMainX25Costs of product No.15.X26Costs of product No.16.X27Costs of product No.17.X28Costs of product No.18.X29Costs of product No.19.X30Costs of product No.20.X31Costs of product No.21.X32Costs of product No.22.X33
Rate of exploitation of the production centre resources capacity.Exploited capacity / Available capacity.X331
X334Rate of exploitation of production centre resources capacity No.1.
Rate of exploitation of production centre resources capacity No.2.
Rate of exploitation of production centre resources capacity No.3.
Rate of exploitation of production centre resources capacity No.4.X335
Rate of exploitation of production centre resources capacity No.5.X336
Rate of exploitation of production centre resources capacity No.6.X337
Rate of exploitation of production centre resources capacity No.7.X338Rate of exploitation of production centre resources capacity No.8.Source: Prepared by Researcher based on the Year 2014 financial statements and interviews with the concerned managers.
4.2.6. Method of data collection:
The research data was collected from various primary and secondary sources. The secondary sources included:
1. The documentary survey: The study relied on the secondary information available in the financial reports and the yearly costs reports and the accounting records for the firms under the study.
2. The personal interview: This is done through the method of organized interview with managers in the research sample firms to identify problems and factors affecting performance of costs systems and profitability of these firms.
4.2.7. Used statistical tests:
The present study used in its hypotheses validity test, a group of statistical tests suitable for the nature of data where the study hypotheses available in the Statistical Packages for Social Sciences (SPSS) Programs through implementing the statistical tests for analyzing data related to research problem through use of the following methods:
1) Descriptive statistical methods:
These are the methods which give information concerning the properties of the information entering the analysis. Examples of these methods are: Repetitions, Arithmetic Mean and Standard Deviation.
2) Inferential statistical methods:
These methods give results of approval or rejection of the research hypotheses. This is in addition to defining both the significance levels of the test results. Both the Parametric and Non-Parametric Laboratory Test Methods will be used in the light of sample size and the population pattern of distribution.
Chapter 5: APPLIED STUDY ON EGYPTIAN MANUFACTURING FIRMS
Egypt is considered one of the most important countries in both developing and Arab countries from economical and political viewpoint.
a. Some interesting information about Egypt:
Table8 shows some interesting information about contemporary Egypt.
Table 8: Some interesting data about Egypt (January, 2014).
NameArab Republic of EgyptCapital Cairo.Area, km2
1001450 including Sinai only 6% (60087) of this area is cultivated and the rest (94%) is desert.Population, million 85.783 capita.Population density, capita / km2About 86 for the whole area, but about 1428 for cultivated area. Monetary unit Egyptian Pound (L.E. or EGP) divided into 100 piasters. One EUR= 8.25 L.E. Fuel prices, EUR/ Liter 0.315 and 0.758 for gasoline 92 and 95, respectively. 0.218 for diesel oil.Road networkFairly good in the inhabited regions.Time difference GMT+2 (There is no difference between Egypt and Romania timing).
Official nameArab Republic of EgyptLanguages Almost 98% of the population speaks modern standard Arabic and considered as the very popular and used language in the middle east besides English. Also, it worth mentioning that Egypt produces most of the Arab TV series, music and films.Gross Domestic Product (GDP), billion L.E. 2066.972 (2013).Religions, %
94 Muslim Sonny and 6 Christian (most of them Orthodox) and others. Source: Central Agency for Public Mobilization and Statistics (CAPMS), and Ministry of Planning and International Cooperation, Egypt in Figures, Egypt, 2014.
b. Economy, public sector and private sector:
Table 9 indicates a useful comparison of values of manufacturing production by several industries in 2011/2012 for public/ public business sector and 2011 for private sector in Egypt.
Also, Table 8 shows that, in 2011/2012, the values of total manufacturing production by industry in Egypt were 455.6284 and 112.2654 billion L.E. for private and public sectors, respectively. These values represent percentages of 80.23 and 19.77% of total production for both sectors, respectively. CAPMS (2014) reported that the total employees number of 9.3 million is working in private and public/ public business sectors. 8.3 million employees are working in private sector (89.25% of total number of employees in both sectors) and one million employees are working in public/ public business sector (10.75% of total number of employees in both sectors).
Table 9: Value of manufacturing production by industry in 2011/2012 for public/ public business sector and 2011 for private sector in Egypt.
Value: Million L.E.
Industrial activity Production by selling’s pricePrivate sector 2011Public/public business sector 2011/201201
Agriculture support and post harvest19.3437.606
22Extract of crude oil and natural gas
Mining ores metals
Mining and Quarrying
Service activities related to mining
Food production industry
Tobacco production industry
Leather industry and its products
Industry of wood, wooden products, cork except furniture and produced groups from straw
Industry of paper and its products
Print and copying of recorded multimedia
Industry of cool, petroleum products
Industry of chemical materials and products
Industry of pharmaceutics , chemical , medicine products and medical plants products
Industry of rubber and gums products194617.3
272.6Table 9: Continued.
Value: Million L.E.
Industrial activityProduction by selling’s pricePrivate sector 2011Public/public business sector 2011/201223
38Industry of metal products and non-metallic
Industry of basal metals (Iron, steel and cast iron)
Industry of formed metal products expect machines and equipment
Industry computers, electronic and visual products, its components and medical devices
Industry of electrical machines
Industry of machines and Equipment not classified in another place
Industry of vehicles of engines
Industry of other transport equipment
Industry of furniture and wooden products not classified in other place
Other manufacturing industries
Repair of equipment and devices
Collection, purification and distribution of water
Collection, treatment and recycling and waste breaches 26132.3
-Total production by selling price455 628.4112 265.4Source: Central Agency for Public Mobilization and Statistics (CAPMS), and Ministry of Planning and International Cooperation, Egypt in Figures, Egypt, 2014.
GDP in Egypt was worth 271.97 billion US dollars in 2013. Its value of Egypt represents 0.44% of world economy. Growth Domestic Product in Egypt averaged 58.84 USD Billion from 1960 until 2013. GDP of a high record of 271.97 USD Billion in 2013 and a low record of 4 USD Billion in 1962 were reported by the World Bank, 2014.
Egypt’s stable economy favored with average growth, averaging 4-5% in the past quarter century. The economy embarked on different development stages during which the private and public sectors played roles varying in relative importance. During the period of 1952-1966, the first program of industrialization was developed and led by the public sector in heavy industries such as chemical industries, iron and steel and heavy machinery. Nationalization decreased relative importance of private sector. Inter-war, 1967-1973 adversely influenced public sector role in import substitution and economy’s performance. During the period of 1974-1982, the economic policies were introduced to encourage private sector development by contributing local, foreign and Arab investments within liberalizing trade and payment and a series of incentives. In the period of 2012-present, Egypt is obligated to reinforce the economy to get out of the “informality trap”, exogenous shocks, competition, improve productivity, invest in human capital through social protection – based on approach to correct the market failures and build good faith in governance. Egyptian economy is still undergoing an intense downturn following the “2011 revolution” and government faces numerous obstacles as how to restore investor confidence, market and growth (Encyclopedia, 2015).
According to the history of Egypt, its economy was structured mostly on farming although the fact that more than 95% of the nation’s land is infertile desert. During the 19th century, Egypt started to specialize in cotton’s industry, which became a valuable cash crop. The government of Egypt has exerted wide-ranging efforts to direct the economy towards industrialization by establishing various industries between 1930 and 1960, after most of the industrial area came under state control. In the late 20th century, other industries have been involved in the economy’s growth such as oil production, tourism and remittances from the 3 million Egyptians working in the Gulf states (AmCham, 2003). USAID’s new strategy (Egypt, 2002) points out those public-private roles need to change to achieve sustainable growth, to attain economic and social progress and to raise living standard of the Egyptians. The public sector performs a fundamental role in the Egyptian economy by facilitating and regulating many areas in order to create a stable and possible environment for development. To amplify the level of synchronization between the private and public sectors, USAID has argued that opening dialogues between the two sectors would not only increase transparency in the decision-making process but also will augment long-term stability and growth. According to the USAID’s new strategy, the essential objective of implementing activities is to persuade increased public/private dialogue and partnerships, to take advantage of the strengths that can be offered by each sector (USAID, Egypt 2002). Salah (2013) illustrated that in 1952, the private sector had the largest share of investment in Egypt, amounting to 76%. But by 1960, the beginning of Five Year Plan (1960-1965) adopted by former president Nasser, the situation had completely changed, and the public sector controlled 94% of total investment. This situation continued until 1974 when former president Al-Sadat started to adopt his Open Door Policy, aiming to encourage a higher degree of private sector participation in Egypt’s economy By 1990, the public sector share had declined to 68%, leaving 32% for the private sector. The development in Egypt various sectors is highly required to accomplish the necessary GDP growth and provide sufficient job opportunities to absorb the annual new entrants into the labor which are estimated by 600000 annually (African Development Bank, 2009).
The privatization program in Egypt was initiated in the early 1990s through a formal commitment made by the government of Egypt. This program announced a plan for transferring 125 public enterprises over the following five years (IPR, Middle East, 2002). The government also decided to sell its shares in more than 250 public venture companies. Egypt’s privatization program has two major objectives; the first and most vital part is the divestment of public sector holdings in production and manufacturing firms by undertaking shares sales through the stock exchange and sales of strategic stakes to anchor investors through public auction. The second goal focuses on the motivate private sector investments in fields that are historically governed and operated by the public sector such as electricity, roads, oil and gas transmissions and airports. As a result, the GOE applied numerous privatization methods since the beginning of the program in 1991. The key to these methods is transformation of the Enterprise from Law 203 (Public Enterprise Law) to Law 159 (Private Enterprise Law). The Ministry of Public Enterprise successfully privatized 191 firms/units since the launching of its privatization program in 1992 up until June 30, 2002. The government is moving to privatize Egypt’s leading four state banks along with the insurance industry; this commitment began during 1997 in accordance with the 1996 agreement with the International Monetary Fund (IMF).
Basically, manufacturing is still dominated by the public sector, which controls virtually all heavy industries. This sector is characterized by low productivity, financial losses and depresses incomes. However, progress has been made on the privatization of the largest public sector enterprise; more than one third of the 314 public sector enterprises have been partially or fully privatized (Ministry of Public Enterprise, 2003). The Minister of Foreign Trade has confirmed that the private sector is extremely important. It carries out approximately 75% of the development investments. Its role is crucial in generating new job opportunities that contribute in turn to improving the standard of living and solving the unemployment problem (The Egyptian State Information Center, 2002). Furthermore, it argues that the privatization program in Egypt, if compared with other countries that are undergoing an identical phase of structural and economic reform has proved to be highly successful. Although there are several unreceptive practices in this stage, the Egyptian private sector has positively presented all technological developments that are necessary to achieve tremendous long-term results from the privatization programs.
d. A brief background about chemical industry and the cost system in Egypt:
Table 8 illustrates that, in 2011/2012, the values of manufacturing production by industry of chemical materials and products in Egypt are 25.7894 and 2.7898 billion L.E. 0.05 and 0.03% of total production of all industries on basis of selling price for private and public sectors, respectively. On the other hand, the previous values of manufacturing production by industry of chemical materials and products represent percentages of 90.24 and 9.76% of total production of the mentioned industry on basis of selling price for private and public sectors, respectively.
Elshahat (2006) indicated that the chemical industry is concerned with using chemical reactions to turn raw materials, such as oil, salt and coal into a variety of products. During 19th and 20th centuries, technological advances in the chemical industry dramatically changed the world’s economy. Chemical processes have created pharmaceuticals for the health care industry, pesticides and fertilizers for farmers, and soaps and beauty aids for cosmetics industry. He added that there are several activities concerning chemical industries in Egypt. These include; detergents, batteries, gas, insecticides, paints, rubber, pigments and varnish. Unfortunately, most companies in the world, including Egyptian companies, still rely on financial measurements for performance.
Triest and Elshahat (2007) carried out a survey of 40 Egyptian privately held companies in four sectors (Chemical, pharmaceutical, foodstuff, and packing and wrapping industries). They discovered that costing information sophisticated use in Egypt is limited. No advanced accounting methods seem to be applied. ABC concepts are widely unknown. They added that their survey is considered as one of a few management surveys accounting practices in Africa, and (to the best of one’s knowledge) the first in Egypt.
The chemicals balance is appeared to be improved, as the deficit fell by L.E.* 3.8 to L.E. 18.24 billion (US$ 0.5 to US$ 2.4 billion). This was the result of the following factors:
– Imports of chemicals (8.7 % to total imports) decreased to 9.2%, to L.E. 38 billion (from L.E. 41.8 billion) [US$ 5.0 billion (from US$ 5.5 billion)]. This was caused by the imports fall of detergents and artificial waxes; essential oils; pharmaceuticals; soap organic and inorganic chemicals and carbon; perfumers; fertilizers and toilet preparations; and
– Exports of this group (10.0 % of total exports) slightly retreated by L.E. 19.76 billion (US$ 2.6 billion), owing to the lower soap exports, organic and inorganic chemicals and carbon; detergents and artificial waxes; and fertilizers (Central Bank of Egypt, 2013).
e. A brief background about cast iron and steel industry and the cost system in Egypt:
Table 8 indicates that the values of manufacturing production by industry of basal metals (Iron, cast iron, steel) in Egypt are 43.9807 and 8.3449 billion L.E. (0.09 and 0.07 % of total producing of all industries on basis of selling price) for private and public sectors, respectively.
On the other hand, the previous values of manufacturing production by industry of basal metals represent percentages of 84.05 and 5.95% of total production of the mentioned industry on basis of selling price for private and public sectors, respectively.
Abd El-Latif (1996) indicated that, in general, developing countries inclusive Egypt suffer from the problem of raising the prices of local products in spite of decreasing its quality in comparison with similar products in the progressive countries. This phenomenon is clear in old industries such as cast iron industry which did not apply the modern methods for controlling production cost and quality.
Cast iron is defined as a complex alloy which has been heated until it liquefies and is then poured into a mould to solidify. It is usually made of pig iron. This complex consists of iron, carbon (2-4%), silicon (1-3%), manganese (0.2, 1.2%), very small ratios of phosphorus, sulphur as of nickel, chromium, molybdenum and copper (Chao et al., 1989).
The main reasons for cast iron longevity are its large range of physical and mechanical properties accompanied with its competitive price. The small and medium size metal sector in Egypt employs about 80 000 workers and produces 150 000 megagram (Tons) of Castings per year (Kandil, 1996). The economical progress of countries is stated through quota/person of iron. In the progressive-industrial countries the quota/person of iron is 750 kg/year but for the developing countries is 10 kg/year. In Egypt, average consumption of iron/person is 75 kg/year (2005). According to statistics of Egyptian Company for Iron and Steel (One of public business sector companies) in 2013, total production of cast iron was 165 gigagram (thousand tons) in December 2013 in comparison with the same period in 2012 the total production was 139 gigagram (Gg). This means that there was an increase of production of 18.71% for this kind of iron. While the total production of steel was 135 Gg in 2013 but it was 113 Gg in 2012. This means that cast iron production values in the firm represented 55.16 and 55.00% of total production of iron for 2012 and 2013, respectively.
According to statistics of El-Nasr Company for Castings in Egypt (One of public sector companies) in 1991, the fourth factory was built for producing high quality castings. The capacity of production was 10 000 megagram (Mg)/year according to Swiss and German Technologies. The total production of this firm was 75 000 Mg/year (Steel, cast iron, forged steel). This company produced 27141, 33903, 43348, 39723, 39356, 47356 and 43546 Mg of cast iron products in years of 2000, 2001, 2002, 2003, 2004, 2005 and 2006, respectively.
The income values in seven years were 97.220, 11.365, 156.285, 171.591, 180.851, 226.437 and 254.830 million L.E. for the same years which are mentioned above. The firm applied cost system of productive stages. This method consists of the following elements: 1) Guide of cost elements (Wages, intermediate goods and intermediate services). 2) Guide of cost centers (Productive centers, productive services centers, marketing centers and centers of managerial and financial services). 3) Books and records of costs. 4) Lists and reports of costs. 5) Cycle chargeback. This method is not efficient because it does not achieve for the company a net value of benefits more than cost values. This is due to the measurement of cost data in the light of usage of this method is not correct.
The merchandise balance of base metals and products improved, as the deficit narrowed by L.E. 5.32 to L.E. 22.8 billion (US$ 0.7, to US$ 3.0 billion), because of the following:
– Imports of this group (8.0 % of total imports) decreased 15.5%, to L.E. 34.96 billion (US$ 4.6 billion), because of lower imports of iron and steel products; iron ores; copper ore and its articles; tin ore and products; and lead ore and products.
– Exports of this group (6.1 % of total exports) decreased 7.0%, to L.E. 12.16 billion (US$ 1.6 billion). This decline resulted from the lower exports of copper ore and its articles; aluminum ore and its articles; and tin ore and products (Central Bank of Egypt, 2013).
Table 10: Egypt: Production of metal commodities.
Sr. No. Year
6486Total production10024969894001030010056Source: U.S. Geological Survey (USGS) Minerals Yearbook, 2011.
Table 10 shows that production of pig iron (cast iron) in Egypt was 1000,900,800,600 and 600 Gg in the years of 2007,2008,2009,2010 and 2011, respectively.
5.2. Application of modified tetra model inside two Egyptian manufacturing firms in public and private sectors:
In the present chapter, the researcher presents cases of two firms from the manufacturing sector. One of these firms is Government-Owned and other firm is Non-Government Owned. The submitted proposed framework by the researcher was applied to develop the manufacturing costing systems in these two firms and to define the potential of the proposed model in explaining the business results for both firms. This chapter consists of two sections, as follows:
5.2.1. Case study of chemical products firm:
A. Activity analysis and designing the cost pools:
Each center of the activity centers was divided into groups of homogenous activities called costs pools. This division is based on analyzing the various activities scopes and follows the production processes inside each center of the activities centers.
The process of dividing the activities in the cost pools must be achieved according to some important considerations to determine the possibility of considering a certain group of activities as a cost pool or not these considerations may be mentioned as follows:
a) The necessity for merging the partial activities in the activity level and using it for the same activity driver.
b) The necessity for homogeneity of all partial activities for the cost pool.
c) Ease of allocation of all partial elements which constitute the cost pool.
d) Possibility of defining inputs and outputs for each cost pool and the necessity to non-multiplicity of these inputs and outputs.
B. Cost pools in the production centers:
The production processes in the liquids activities center covers preparation, mixing, packaging and wrapping. These production processes are performed according to the most modern standards methods to match the technological advances and development and according to the International Drugs Policy Systems (GMP) and the drugs development actions based on ISO 2000-9001.
The pharmaceutical preparations which are produced in this center consist of a number of products. The lane of the production processes for each product inside the center is shown in Fig.27.
Fig.27 : Lane production processes of products.
Source: prepared by the researcher (Own processing).
Through the flow of the previous production lane, the activities may be determined inside the activity centers which represent costs pool. This activity consists of tasks and homogenous processes which are collected based on the previously-stated considerations to define the cost pools. The activities include the following types: 1- Preparation and mixing activity, 2- Packing activity and 3- Wrapping activity. These activities may be described as follows:
1) Preparation and mixing activity:
In this process the raw materials are mixed with limited ratios and quantities and with a scientific method according to the specifications. This is done in installments until finishing with all the specific quantity to the running. This is followed by agitating process of these materials which is followed by cooling and heating processes according to the products need. The mixing hours ranging from 6 to 12 hours for each running according to each variety.
2) Preparations packaging activity:
The packaging activity is done through using both mechanical method and the labor force in a limited or wide scope. This is done for preparing and operating the machine. The number of the technicians using this machine equals six workers. To complete filling the liquids, the following processes are done:
a) Preparing the machine and filling it with aluminum (Packing material) on pulleys consisting of four layers until becomes ready for packing.
b) The hopper at top of the machine is filled with the prepared materials as input to the preparation and mixing activities.
c) The appropriate temperature and pressure are fixed to prepare the bottles.
d) The appropriate mass is fixed for each refill.
e) The process number, date of validity and price are fixed. Also, all the previous actions must be printed on the bottles.
f) The mass of the bottles is controlled by the sensitive balance which exists in the department.
The process time for each refill ranges between 6 ‘ 8 hours per running according to each refill.
3) Wrapping activity:
At this stage, the product is prepared for its final form where it is handed over to the warehouseman to be prepared for delivery and distribution. Most of the wrappings activities are done manually because there is no modern equipment; therefore, the direct labor hours were calculated as a basis of loading of this activity.
C. Cost pools in the production support centers:
Activity center contains groups of homogenous activities where each group is called cost pool. But there are some activity centers which are not preferred to be divided on the basis that the activity center in its current form expresses the cost pool. Each production service activity center has the main production center which supervises the main activities centers through a group of pharmacists. The capacity activity center provides the electricity and illumination for various departments in the firm and consequently, the area (m2) is the appropriate activity driver for illumination and energy (kW.h, energy unit) for electricity without the need for further division.
1) Quality control activity center:
Main activity of this center is represented in the production control activity and in the research and development activity. This centers activities are divided into the following activities:
a) Raw materials inspection and analysis activity: This activity controls the raw materials, packaging materials and other production needs. Control process is carrying out through taking samples and analyzing them.
b) Complete and quasi-complete production inspection and analysis: This activity covers controlling the products through the various production stages which is performed by analyzing a group of samples during and after the completion of the production process.
2) Research and development activity:
The activity center performs research related to a new product and registering these products in addition to improving the existing products. Each activity of the previous activities has its space, equipment and own labor force. This matter eases allocation of resources on these direct activities.
3) Maintenance activity center:
As shown in the firm’s organizational structure, the maintenance departments follow the production department where the maintenance costs did not appear as an important factor in the firm. But, the researcher sees that with the use of the modern equipment, the end of life of others and the increase in the fixed assets, this department must be separate and treated as an independent administration. The reduction in the maintenance costs such as the activity of any other department in the firm necessitates defining and analyzing the total cost components from various cost factors.
The activities in this centre are divided into following activities:
1. Maintenance of production equipment activity.
2. Maintenance of buildings activity.
3. Supplying the dynamic forces.
4) Stores activity center:
This center preserves the materials in certain quantities where the production does not stop. The centers activities may be divided into the following activities:
1. Dispensing and handling activity.
2. Storage activity.
5) Massing and division activity:
Concerning the massing and division activity, there is an independent area inside the stores for massing and division. The job of the employees in this area is to ensure the right mass of materials dispensed to various departments.
Each activity of the previously-stated activities inside the various activity centers represents one of the cost pools. In General, the existing cost pools inside the main and secondary activity centers can be presented.
Table11: Shows cost pools inside the cost centers according to the center type.
Production centersProduction support centersLiquids lane center:
* Preparation and mixing cost center pool.
* Filling costing pool.
* Wrapping costing pool.
Quality control activity center:
*Inspection and analysis of raw materials costs.
*Inspection and analysis of perfect and materials costs
* Research and development costs.Maintenance activity center:
* Equipment maintenance costs.
* Buildings maintenance costs.
* Forces supply costs.Stores Activity Center:
*Dispensing and handling activity.
*Mass and division costs. Source: prepared by the researcher (Own processing).
D. Activities costs report:
In this stage, the process of allocating the resources over the various cost pools starts. There is no need for using the activity drivers for allocating the resources over the cost pools because the cost elements are allocated directly over these pools. But, the process of allocation needs performing amendments in the design of the documents for the purpose of linking the resources directly with the cost pools, not with the cost centers. Despite the activity cost report is carried out through the direct allocation of the resources over the cost pools, but using some activity drivers are considered as a necessity for allocation of some cost elements which can not be allocated directly over the cost pools. For example, the depreciation and maintenance of the buildings inside the activity center is allocated over the cost pools inside this center by using area factor, but the need for these drivers in this stage is limited due to the materials are allocated directly.
E. Allocating costs of activities to production support centers:
As stated before the multiplicity of the activity drivers which can be used in allocating the costs of each pool of the cost pools existing inside the secondary activity centers on the cost pools existing inside the main activity centers. This matter can be presented by using Table 12.
Table12: Activity drivers available to allocate costs over production support centers activities.
Cost pools in the secondary activity centersCost driversReason for defining the activity driverMain activity center for managing the production. – Direct labor hours.
-Equipment operational hours.
– Number of runnings.This center supervises the employees in the main activities centers and consequently the costs of this centre are influenced by the employees’ labor hours and their wages. The costs of this center are influenced by the number of running performed by the center.Activity center of controlling and quality.- Number of runnings.
– Number of inspections.This center inspects and controls the perfect production for each running which is produced from a certain product. The costs of this center are influenced by the number of the inspection times. Maintenance activity center.-Equipment operational hours.
-Number of maintenance hours.
-Maintenance hours.This center performs the maintenance services to the main centers activity and hence the costs of this center are influenced by number of times of maintenance which the center performs for the main activity centers. The costs of this center are also affected by equipment operational hours.-Stores activity center.
– Disbursement and handling cost pool.
– Storage cost pool.
– Mass and division cost pool.- Number of disbursement permissions.
– Number of operations.The dispensing and handling activity performs the raw materials dispensing processes of the main activities centers and consequently, its costs are affected by the number of dispensing permissions issued from the main activity centers.
The storage activity stores the materials where the quantity of the dispensed materials and its value which are dispensed to the main activity centers and hence the value of materials influence the storage costs where there are materials which need certain storage procedures.
As for the mass and division activity by massing the dispensed materials and hence its costs are influenced by the number of operations.Source: prepared by the researcher (Own processing).
The selection of the one of the activity drivers influences the costs which define the products. It is necessary to differentiate among these drivers to select the best activity driver for each pool of the cost pools. This matter guarantees the accurate definition of the products cost which must be achieved on a subjective basis depending on the statistical coefficient of correlation for the relationship among the cost elements inside the cost pool and every one of the previously stated activity drivers. This step will necessitate the availability of information concerning the following two items:
1. Cost elements for each cost pool inside the main activity centers through sufficient period of time.
2. Quantity of the activity drivers available for allocation of the cost elements in the cost pools inside the main activity centers over the products for the same period which the cost elements were found in the cost pools.
Therefore, when selecting the cost drivers, the following points should be considered:
1) Ease of obtaining information related to cost drivers.
2) Ability of the cost driver for measuring the consumption of the actual product for the activities. Ease of obtaining information represents the gist of ABC method where it might be difficult to get detailed information related to some cost drivers.
As the consequence of non-availability of information concerning previous years for the firm and it is difficult to get this information from other source, the researcher selected the cost driver based on the interviews with the centers heads and selecting a single driver for each activity on which the distribution is based. The researcher considered, when selecting the activity driver, the following matters:
1) The activity driver represents the larger size of activity of the centers cost.
2) The daily influence of this activity on the cost drivers.
3) The personal judge in addition to the experience of the heads of the activity centers. Distribution of employees inside the firm’s center may be summarized as shown in Table 13.
Table 13: Number of employees including managers and heads of departments.
Activity centerNumber of employeesProduction12Quality3Maintenance2Purchases and Stores2Administration services4Marketing services3Advertising representatives4Total:30Source: The firm’s organizational structure in addition to the interviews with the firm’s accountant.
Total number of employees as shown in Table 13 equals 30 employees including the sales and marketing representatives. The center of the administrative services center will be distributed based on number of employees in each center taking into consideration that the extent of supervision increases as the number of employees increases inside the departments.
F. Distribution of the firm’s resources over various activity centers according to main cost drivers:
1- Distribution of annually buildings depreciations:
Distribution of the annually depreciations of the buildings constructed on the firm’s land according to mentioned data in the Financial Statements where the researcher stated that these depreciations are distributed based on the utilization of each of the cost centers from these expenditures. Therefore, the area in square meters was selected as a suitable measure for distribution of these expenditures over the various activity centers. Total buildings depreciation value was 31996.28 L.E. and average distribution was 11 L.E. for the square meter (Table14).
Hence, the stores activity center was loaded by approximately 35% of Total Costs. This is followed by the administration and financial services center which equaled 31%. The costs were distributed over the other centers using the same method.
Table 14: Distribution of annually depreciations during year 2014.
Activity centerArea , m2Cost value, L.E.Liquids2002233.59Capsule2002233.59Ointment45502.56Tablets2002233.59Quality activity center2002233.59Maintenance activity center75837.6Stores activity center100011168Marketing and distribution activity center.65725.92Administration and financial services activity center.8809827.84Total :286531996.28Source: Profits and losses statements for year 2014 in addition to interviews with the maintenance manager.
2- Distribution of electricity and the dynamic power:
The firm’s consumption cost of illumination and dynamic power was 7567 L.E. for year 2014. Total consumption of all cost centers was approximately 54400 kW according to the firm’s invoice (Table15). The consumption was distributed over each of the illumination and the dynamic power for each cost center on the basis of operating the equipment, illumination and dynamic power for each cost center.
Table 15: Cost pools inside the mains and secondary activity centers.
Dynamic power, KW
Total, KWAnnually consumption cost value, L.E.Production center No.120008000100001390.9Production center No.220030050069.55Production center No.3200040006000834.55Production support center No.1200040006000834.55Production support center No.130040070097.36Production support center No.1200050007000973.63Production support center No.190050005900820.63Production support center No.130030003300459Administration and administrative services500010000150002086.50Total :1470039700544007566.90Source: Firm’s financial statements for year 2014 in addition to interviews with maintenance manager.
3- Distribution of salaries over the cost centers:
Annually, salaries were calculated and distributed over the main and secondary activity centers on the basis of the employees working in each activity center as a preliminary stage for counting the costs elements in each center. Total value of salaries was 83381 L.E. in year of 2014 (Table16).
Table 16: Distribution of salaries based on employees number in each department.
Cost centerNo.Value of salaries ,L.E.Production1243987Management425848Quality35416Maintenance24102Stores24028Total83381Source: Firm’s financial statements for year 2014 in addition to interviews with firm’s accountant.
4- Distribution of the firm’s consumption of equipment, instruments and furniture:
Through the clarifications of the firm’s general budget for year 2014, a comprehensive analysis of the consumption expenditures was obtained. The researcher separated all instruments and equipment and distributed them over the various activity centers based on existence location of each instrument and equipment. He also differentiates among equipment, instruments and furniture.
The depreciations of the firm’s equipment, instruments and furniture were distributed over the various activity centers based on their utilization by each activity center.
Table 17: Distribution of consumption costs of equipment, instruments and furniture.
Activity typeEquipment, L.E. Furniture and instruments, L.E.Management—1832774Quality control127987729525Liquids214415295000Ointment and creams6289640000Tablets and Capsules288932046636Maintenance55463—Total64317082043935Source: Financial statements appendixes in year 2014 in addition to interviewing maintenance manager.
Table 17 shows the distribution of the consumption expenditures according to their cost drivers and the utilization extent by various activity centers. They were not loaded directly over the production centers which in turn results in deformations in the cost centers and does not reflect the actual costs of the activity center.
5- Determining number of running’s and number of produced units in each lane of production lanes:
The total number of running’s were 146 for year of 2014 which were distributed over the various activity centers. The liquids lane controlled two-third of the firm production. This is an important indicator for studying this production lane. As for the ointment and cream lane, the number of the produced units and number of running’s represented only 5% of the firm’s production despite this product represent approximately 18% of total number of products produced by the firm. As for the tablets and capsules lane, its total production in the same year was approximately one-third of total production (Table 18).
Table 18:Number of running’s and number of produced units.
InformationNo. of running’s Number of produced unitsProduction center No.192582,796 Bottles.Production center No.2749,423 Tubes.Production center No.3478,343 Large packs, Capacity of 100 Blisters.Total 146Source: Information extracted from firm’s records in addition to interviews with quality controlling manager.
6- Distribution of all additional burdens on various activity centers:
Administration burdens represent a very high ratio of expenditures which necessitates distributing these burdens justifiably to enable the management to take appropriate decisions. This matter confirms that the general costs related to the other activity centers and which has no direct connection with final product unit, started to increase which necessitate studying them and allocating them justly. Table 19 shows distribution of all cost factors over cost centers.
Table 19: Distribution of all cost factors over cost centers.
ItemProduction, L.E.Quality, L.E.Maintenance, L.E.Stores, L.E.Management, L.E.Salaries43986925416124101634028382584762Administrative and commodity requirements.3318516————4172663Electricity and dynamic power.—-97363973682063208650Buildings depreciation.—-223359837601116800982784Furniture and instruments.—-29525——–1832774Equipment. —-127987755463——–Total 7717208217173655912216017019781633Source: Firm’s financial statements in year 2014 in addition to interviews with firm’s accountant and maintenance manager.
Total operational costs were 92859 L.E. whereas, re-allocation of costs based on scope of utilization of each activity center from the costs, total costs of production center was 77172 L.E. Also, in case of cost calculations of management activity center, the financial statements showed 72990 L.E. compared with 97816 L.E. after re-allocation of costs.
Cost drivers in case of liquids lane were described through the follow-up of the production process. The mixing ratio in the liquids department represented 61% whereas the mixing ratio in the tablets and capsules department was 35% of total number of mixing hours compared with the mixing ratio for ointments and creams which represented approximately 5% only.
As for the packing hours and equipment operational hours, the same ratio was obtained approximately. But for the direct labor hours, the ratio in the liquids lane reached 70% of total direct labor hours. The ratio of direct labor hours in tablets and capsules lane was approximately 25% whereas in ointments and creams, its ratio ranged between 3 and 4%.
This variation in number of mixing, packing and wrapping hours is reflected on the equipment operational hours which have the same variation. Table 20 reflects the variation extent of effect the number of mixing, packing and wrapping hours on equipment operational hours.
Table 20: Number of mixing, packing and wrapping hours and equipment operational hours.
ItemMixing hoursPacking hoursWrapping hoursEquipment operational hoursProduction center No.14976951158.501192Production center No.2284320386.5460Production center No.33555.54990.5Total8161070.5015941886.5Source: Interviews with production manager.
7- Determining cost drivers in quality and stores centers:
According the obtained data from quality department, the total number of inspections in the quality assurance activity center during year 2014 was 486 inspections (Table21). These inspections included raw materials, production requirements, quasi- complete materials (under-manufacturing materials) and complete materials ready for selling.
Mixing ratio for product No.1 represented approximately 62% of total number of inspections; whereas the mixing ratio for product No.2 was 33%; and for product number No.3 did not exceed 5% as was calculated by the Quality Control Manager.
As for the number of dispensing permissions, the number of running was used as a basis where the running is the main causative for costs and consequently, the number of dispensing permissions were (146) during the year 2014.
Table 21: Number of inspections and dispensing permissions.
ItemInspectionsDispensing permissionsProduction center No.130592Production center No.216347Production center No.3187Total:486146Source: Interviews with quality controlling and stores managers.
8- Determining costs of main activities centers:
A. Distribution of management activity center over the other centers.
Table 22: Distribution of the management expenditures on basis of number of employees in each activity center.
ItemProduction, L.E.Quality, L.E.Maintenance, L.E.Stores, L.E.Basis of DistributionCosts of activities.771720821717365591221601701Share of activity centers from management activity.46146001128650752435752435Number of employees.Total cost of activity centers.12331808330038713115572354136 Source: prepared by the researcher (Own processing).
Number of firm’s employees and workers was thirty. The costs value of the management activity center was 9781633 L.E. These costs were distributed over all cost centers including marketing and advertising centers. Since the study did not cover the selling and distribution expenditures, the researcher presented only data concerning the activities required for maintenance, quality and stores.
The researcher relied, in distribution of the management activity center costs, on the number of employees where the supervision area by the management and accounting department and what it needs in terms of salaries and supplies for various departments, is directly proportional with the number of employees in each activity center.
B. Distribution of main production activity center on the production lanes:
Table 23: Distribution of production expenditures on basis of main production centers based on number of running’s.
ItemProduction, L.E.Production Centre (1), L.E.Production Centre (2), L.E.Production Centre (3), L.E.Basis of DistributionCost of activity centers.12231830848628983700032484306Share of activity centers from main production center.(12231808)770770155864573937637No. of running’s.Total costs of activity centers.(0)12570613956466421943Source: Financial statements and their appendices for year of 2014 in addition to interviews with the firm’s accountant.
Table 23 shows the number of running’s inside the firm during year of 2014 which reached 146 running. The researcher sees that this is the effective driver which production activity center is distributed. The first product ratio over 63% of total production whereas the ratio of the second product was 32% and the third product lane, its performance was very poor i.e. did not exceed 5%.
It is not justice to load the ointment and creams activity center which resembles with other activities and consequently was loaded by magnitude of it utilization from various activities according to cost drivers.
C. Allocation of cost of main activities on the cost units:
The multiplicity of the activity drivers which can be used to allocate costs of each pool existing inside the main activity centers but the researcher took into consideration the main cost drivers which are the main cause of costs.
The activity drivers which can be used for allocating costs of each cost pool existing inside the main activity centers where these can be presented in Table24.
Table 24: Cost pools and drivers inside main activity centers.
Cost pools in main activity centersCost driversReason for defining the activity driverCost pool of preparation and mixing for liquids product.- Equipment operational hours.In this activity, the raw materials are mixed. The inputs and outputs of this activity are expressed by the utilized hours in mixing these raw materials.Packing cost pool.
– Quantity of production in units.
– Equipment operational hours.In this activity, the previously mixed raw materials are packed in bottles. The used operational hours in packing the bottles can be considered as a measure to calculate the costs of this activity.Wrapping cost pool.
– Direct labor hours.
– Quantity of production in units.In this manual activity, the liquid bottles are wrapped and placed in a special box of carton or in nylon envelopes. This activity may be expressed in human work hours used in wrapping the packs. Source: prepared by the researcher (Own processing).
Human work hours were separated where the paid wages and salaries were the basis of the distribution process. It reached 43987 L.E… As for the remaining expenditure concerning the liquids department, they represent the equipment operational hours which is considered additional burdens other than the human work hours. The equipment operational hours are the basis for loading. This expenditures value of maintenance was 81719 L.E. (Table 25).
The total number of inspection for all products was 486. The share of the liquids Lane was 305 times distributed over the products as shown in Table 25. It was the basis of distributing the expenditures of quality assurance department.
The number of the dispensing permissions was 146. The share of the liquids lane was 92 permission which represented approximately 61% of total volume of production. The dispensing permissions were the basis of cost distribution inside the stores department.
Table 25: Distribution of indirect costs over the liquids lane units according to the activities costs system.
No. of Units
Direct costs of resources, L.E.
Mixing activity, L.E.
Packaging activity, L.E.
Wrapping activity, L.E.
Maintenance activity, L.E.
Quality activity, L.E.
Total Indirect costs, L.E.
Total costs, L.E.
1-Calculation of unit cost by applying the current method (Tradition method) (For product A as an example):
Calculation of unit cost by applying current method for product A depends on determining direct materials costs in addition to the indirect manufacturing costs at the same loading rate for all products and based on the number of running’s (Table 26).
Table 26: Calculation of unit cost using current method (Tradition method) for product A.
Sr. No.Cost factorValue1Direct materials cost, L.E.131262Indirect manufacturing costs, L.E.104943Total costs, L.E.23620Number of produced units57070Unit cost, L.E.0.41Source: prepared by the researcher (Own processing).
‘ Direct Materials cost means the number of produced units during the year which is 57070 units multiplied by the unit share of the direct materials which equals 0.23 L.E…
‘ Indirect manufacturing costs are the number of running’s multiplied by rate of one running where the number of running’s for the first product A is 6 running’s.
2- Calculation of unit cost by applying proposed method (Model) for product A as an example:
Table 27 shows calculation of unit cost value by using proposed method for product A as an example.
Table 27: Calculation of unit cost value by using proposed method (Model) for product A.
Sr. No.Activity centerValue1Direct materials costs, L.E. 13126102Mixing activity based on equipment operational hours cost, L.E.1039633Packing activity based on equipment operational hours cost, L.E.2057604Wrapping activity cost on basis of direct labor hours, L.E. 2523845Maintenance activity cost on basis of Operational hours, L.E.497096Controlling and quality activity cost based on number of performed inspections, L.E.1290247Stores and handling activity cost, L.E.96745Total costs for product A, L.E. 2150195Number of produced units57070Unit cost, L.E.0.38Source: prepared by the researcher (Own processing).
For the calculations of various types costs activities may be indicated as follows:
a) For mixing activity, mixing cost (Mc) for product A may be calculated by using the following equation:
Mc = [(hmp) tc]/th…………………………………………………………………………………………..4
Mc = mixing cost, L.E.;
hmp = number of used hours in mixing process, h;
tc = total cost for product A (liquids lane), L.E. and
th= total hours for all production lanes, h.
Mixing activity cost= [(24)8171921]/188650=103963 L.E……………………………….5
b) For packing activity, the same manner was used for calculating the process cost.
c) For wrapping activity, wrapping cost (Wc) for product A can be estimated by using the following relation:
Wc = [(hdw) ts]/ht…………………………………………………………………………………………….6
wc = wrapping cost, L.E.;
hdw = direct labor hours, h;
ts = total salaries, L.E. and
ht = total used direct hours for all products, h.
Wrapping activity cost=[(91)4398692]/1586=252384 L.E………………………………..7
d) For maintenance activity, cost value of maintenance activity (Cma) was used as a whole figure from maintenance lists of maintenance center inside the chemical products firm.
e) For controlling and quality activity, controlling and quality cost (Cqc) for product A may be determined by using the following formulae:
Cqc = [(dc) it]/tit………………………………………………………………………………………………8
Cqc = controlling and quality cost, L.E.;
dc = department cost, L.E.;
it = number of inspection times for product A and
tit = total number of inspection times for all products.
f) For storage and handling activity, storage and handling cost (Shc) for product A may be calculated by using the following equation:
Shc = [(cta) rn]/tnr……………………………………………………………………………………………9
Shc = storage and handling cost, L.E.;
cta = total cost of activity, L.E.;
rn = number of running’s for product A and
tnr = total number of running’s for all products.
D. Comparison among product prices in cases of application of current method (Traditional method) and proposed method (Modified model).
The researcher classified the results into the following three groups of products:
1. Products whose prices vary slightly.
2. Products whose prices vary moderately.
3. Products whose prices vary mightily.
During the classification the researcher took into consideration the relative importance for these differences and consulting the firm to get benefit from the competing prices during the previous year. The differences were classified as follows:
1- For products whose prices vary slightly, the differences ranged from 0.01 to 0.10 L.E.
2- For products whose prices vary moderately, the differences ranged from 0.11 to 0.20 L.E.
3- For products whose prices vary mightily, the differences > 0.20 L.E.
First: Prices of products which differ very slightly:
Table 28: Prices of products which differ very slightly.
Product symbolNumber of produced unitsUnit cost according to current method, L.E.Unit cost according to proposed method, L.E.Coefficient of Variation (CV)A570700.410.38+ 0.03B56120.660.60+ 0.06C408230.660.68- 0.02D1685810.540.45 0.00H464600.590.56+ 0.03G159260.590.52- 0.07M109460.860.78+ 0.08N1255210.440.47- 0.03P149201.040.99+ 0.05Q100080.400.42- 0.02U129430.420.45- 0.03W98230.410.43- 0.02 Source: prepared by the researcher (Own processing).
Table 28 shows the following remarks:
1) Approximately 50% of the products have convergent prices. There are five products their prices increased by applying current method than that prices by applying proposed model. On the other hand, there are six products their prices decreased by applying current method in comparison with prices by applying proposed model. But, the increase and decrease values were not significant and it ranged between 0.01 to 0.10 L.E…
2) There is an inversely proportion between (number of produced units and number of running’s) and indirect ratios by applying current method.
Second: Prices of Products which differ moderately.
Table 29: Prices of Products which differ moderately.
Product symbolNumber of produced unitsUnit cost according to current method, L.E.Unit cost according to proposed method, L.E.Coefficient of Variation (CV)F174572.6542.16+0.49I49420.920.56+ 0.36K107230.590.44+ 0.15L57481.241.11+ 0.13O88190.660.80- 0.14S39451.290.91+0.38V72150.610.49+ 0.12 Source: prepared by the researcher (Own processing).
Table 29 indicates that, some product costs increased by applying the proposed method and costs of other products decrease in comparison by applying current method. This variation is due to difference of cost allocation method. Also, Table 29 shows the following remarks:
1) Approximately 36% of the number of the products in the liquids Lane (product A) differs in their prices either as an increase or decrease.
2) There are six products out of seven whose costs were reduced according to the proposed activity cost method. This diversity in the prices confirms that some products are priced higher than their actual prices. This result indicates that there is a possibility of loss a part of the firm’s share because of the rise of these prices. As for products which were priced at prices less than they should be, this matter will lead to reduce the firm’s profits because of the unsuitable low pricing.
Third: Prices of products which differ mightily.
Table 30: Prices of Products which differ mightily.
Product symbolNumber of produced unitsUnit cost according to current method, L.E.Unit cost according to proposed method, L.E.Coefficient of Variation (CV)J26681.650.80+ 0.85R17106.294.32+ 1.97T9516.054.22+ 1.83 Source: prepared by the researcher (Own processing).
Table 30 shows that 14% of the total number of products differs significantly where the value of variation exceeds by half Egyptian Pound (L.E.). This trend affects the firm’s sales and its competitive potential as shown in the quantity of produced units during year of 2014.
5.2.2. Case study of metal casting firm:
Metal casting firm consists of ten production support centers in which the distribution costs process occurs according to the following steps:
A. Determination of cost rate of capacity unit:
The cost rate of capacity unit (Crc) was determined according to the following equation: Crc = Ct / Ea………………………………………………………………………………………………………….10
Crc = cost rate of capacity unit, L.E., h;
Ct = total cost, L.E. and
Ea = available capacity for each center, h.
Concerning the cost rates unit the production support centers, it is necessary to confirm the following points:
3. Most of the production support centers contain a mixture of non-homogenous resources in terms of their costs and the activities which consume their capacities. Consequently, the resources must be classified according to the activities located to them. Since the human factor controls these centers activities, therefore, this classification was based on activities type which are carried out by the labor force. So, the costs and capacities of the non-specialized labor force for the activity inside the supporting activity sources pool were separated. The costs of this pool included the salaries and wages related to this labor force whereas the remaining costs were considered as costs related to the main activity. The resources capacities were measured based on the available time to the worker because of the correlation among the equipment and the non-human resources capacities with the labor force capacities.
4. Cost rate of capacity unit is variable and needs a continuous amendment according to the purposes determination where the initial rates are determined for purpose of measuring the idle capacities. Then, these rates are amended to perform the exchangeable distribution for the used capacity costs. Also, the final distribution process for the costs of the production support centers necessitates a third amendment, taking into consideration the comprehensiveness of the costs.
Cost rate of capacity unit is calculated by estimating the available capacities related to the resource and costs of the resources followed by determining the rates value as follows:
1) Determination of available resources capacities:
The production support centers depend, essentially, on the labor force in performing their activities. These labor forces are classified as a) main labor force which are expressed as essential activity resources and the activity cannot be performed without it, and b) supportive labor force for performing the activity. Table 31 shows the energies related to each type of these resources:
Table 31: Available resources of the production support center (Minutes).
Resources typeCentersLaboratoryMechanical maintenanceElectrical maintenanceManufacturing workshopsMovementEquipmentIndustrial securityAssisting unitsHealth unitStoresMain activity resources.
1442100Supportive activity resources.
—-Source: Prepared by researcher based on the financial statements of year 2014 and the interviews with concerned managers based on general report for metals and casting firm for year of 2014.
The available capacity to the main and supportive resources were calculated and expressed in time unit (Minute) by using some equations as follows:
a- Calculation of available capacity (Ca):
Ca = Nw (Cal)…………………………………………………………………………………………………………………..11
Ca = available capacity, min. ;
Nw = number of laborers in each cost center and
Cal = annually available capacity for one laborer, min.
b- Calculation of annual available capacity for a laborer (Cal):
Cal = Nwa (twd)…………………………………………………………………………………………………………………12
Nwa = number of annual working days and
twd = daily working time, min.
c- Calculation of number of annual working days (Nwa):
Nwa = [Naw (Nwd)] – 30………………………………………………………………………………………………………13
Naw = number of annually weeks;
Nwd = number of weekly working days and
30 = 30 days for holidays time.
Nwa = 52 (5) – 30 = 230 working day………………………………………………………………..14
d- Calculation of daily working time (twd):
twd = tws – tr………………………………………………………………………………………………………………………15
tws = time of work shift, min. and
tr = time of rest, min.
twd = [6 (60)] – 30 = 330 min……………………………………………………………………………16
So, Annually available capacity for a laborer (Ca) = 230 (330) = 75900 min…………………………..17
2) Determination of costs of cost centers resources:
Determination of rates of capacity unit requires determining the costs related to each resource. The costs of the main activity resources include all the costs of the cost center except the costs of non-specialized labor force which are separated for the purpose of determining the cost of the capacity unit of supportive activity resources. Referring to the costs report of the casting firm for year 2014 and details of salaries and financial rewards of laborers, the costs related to each source was determined as shown in Table 32.
Table 32: Cost values of main and supportive activity resources for the production support center, L.E..
Resources typeCentersLaboratoryMechanical maintenanceElectrical maintenanceManufacturing workshopsMovementEquipmentIndustrial securityAssisting unitsHealth unitStoresMain activity resources.
52072731.36Supportive activity resources.
—–Source: Prepared by researcher in the light of financial statements for year 2014 and interviews with the concerned managers based on the general report for costs, records and laborers salaries for year of 2014.
After determining the capacities and costs of the main and supportive activity resources for each center, calculation of cost rates of capacity unit was easy by dividing costs on capacity for each resource. Consequently, the following points were recorded:
a- Increasing the cost rates of capacity unit of the main activity resources compared with cost rates of capacity unit of the supportive activity resources for all centers because of increasing the wages of non-specialized labor force and adding other costs to the costs of the main activity resources (Table 33).
b- Increasing the cost rates of capacity unit of laboratory and assisting units because of linking the cost of resources and other uses with the human factor capacities which was determined by using the daily shift element as the result of non-availability of sufficient information about available capacities for these resources and how they are consumed (Table 33).
Table 33:Cost rates of resources capacity unit for production support center.
Resources typeCentersLaboratoryMechanical maintenanceElectrical maintenanceManufacturing workshopsMovementEquipmentIndustrial securityAssisting unitsHealth unitStoresMain activity resources.72.2932.2952.1264.6941.9922.834.18125.6534.1436.11Supportive activity resources8.6817.9423.6614.1420.4414.9324.84—-15.58—-Source: Prepared by researcher in the light of financial statements for year of 2014 and interviews with related managers.
B. Determination of exploited capacities and their costs:
The costs concept based on oriented point by time is an access to capacity cost calculation i.e. the allocation process necessitates determining the consumed capacities by the costs factors which are expressed in this stage by production, administrative and marketing centers. This is in addition to the capacities which are consumed in a relatively fixed form and the drivers of their consumption cannot be linked for a certain purpose. Determination of exploited capacities is calculated according to the following steps:
1) Constructing the time rates:
The capacity is expressed using the time unit (Minute). The consumption value is identified based on the time rates. Estimating these rates necessitate an accurate description of main and supportive activities and time required to perform each activity.
2) Determination of cost of exploited capacities:
After describing the firm activities and constructing the time rates required to determine the demand for the resources capacities and cost of resource capacity unit, the exploited capacities (useful capacities) and their costs are measured and determined before distributing these costs over the various costs centers. The costs of the unexploited capacities (un-useful capacities) are eliminated and they are treated as a cost period in the income statement.
Table 34: Values of quantity and ratio of exploited capacity cost of exploited capacity and cost rates of capacity unit for production support center according to activity resource type.
ItemCentersLaboratoryMechanical maintenanceElectrical maintenanceManufacturing workshopsMovementEquipmentIndustrial securityAssisting unitsHealth unitStores
Main activity resourcesQuantity of exploited capacity
464908.15Cost rate of capacity unit , L.E.
36.11Costs of exploited capacity, L.E.
16787349Ratio of exploited capacity,
Supportive activity resourcesQuantity of exploited capacity
—Cost rate of capacity unit , L.E.
—Costs of exploited capacity, L.E.
—Ratio of exploited capacity, %
—Source: Prepared by researcher in the light of financial statements for year of 2014 and interviews with the concerned managers.
Table 34 shows low levels of exploiting available resources capacities in general and supportive activity resources in particular. The movement department is considered as the best exploited costs center for the main activity resources at rate of 81.54%. While the equipment department posses idle capacities reaching 81.31% and the manufacturing workshop record does not exceed 29.75% representing the highest rates of exploitation of the supportive activity resources capacities. On the other hand, the industrial security department was not able to exploit more than 1.93% (minimum value).
Estimating the idle capacities and isolating their costs during the allocation stages, is considered as the main difference between cost concept on the basis of oriented activity by time compared to other concepts of traditional cost and the cost concept on the basis of the activity. This step showed idle cost ratio of 52.4% for the production support centers which can not be distributed over the cost purposes and distribution will be only for sum of 364.438.596 L.E. which is linked to the costs of exploited capacities (Table 35).
Table 35:Cost of exploited and idle capacities for production support center according to activity resource type.
ItemCentersLaboratory, L.E.Mechanical maintenance, L.E.Electrical maintenance, L.E.Manufacturing workshops, L.E.Movement, L.E.Equipment, L.E.Industrial security, L.E.Assisting units, L.E.Health unit, L.E.Stores, L.E.Total
Main activity resourcesCosts of exploited capacities
353807248Costs of idle capacities
Supportive activity resourcesCosts of exploited capacities
10631348Costs of idle capacities
73359937Source: Prepared by researcher in the light of financial statements for year of 2014 and interviews with concerned managers.
3) Determine distributable costs:
The production support centers consume part of their resources capacities in serving each other. Because of the variation in cost rates of the capacity unit to each center, the exchanged costs between these centers must be determined before allocating them over the production, management and marketing centers. This exchanging allocation process of the supporting centers require amending cost rates of the capacity unit for the main and supportive resources to accommodate the costs of the capacities which cannot be determined directly. The exchanged costs among the various support centers may be determined as follows:
a) Determination of general rates of cost of exploited capacity unit:
The general rate of cost of exploited capacity unit (Cgr) may be calculated by using the following equation:
Cgr = Cte – Ctd………………………………………………………………………………………………………………….18
Cgr = general rate of cost of exploited capacity unit, L.E. ;
Cte = total cost of exploited capacities, L.E. and
Ctd = total exploited capacities which are directly allocated.
Table 36: General rate values of cost of exploited capacity unit for production support center according to activity resource type.
ItemCentersLaboratoryMechanical maintenanceElectrical maintenanceManufacturing workshopsMovementEquipmentIndustrial securityAssisting unitsHealth unitStores
Main activity resourcesCosts of exploited capacity, L.E.
16787349Size of exploited capacity which can be directly allocated.
230698.15General rate of cost of exploited capacity Unit, L.E.
Supportive activity resourcesQuantity of exploited capacity
—-Size of capacities which can be directly allocated
—-General rate of cost of exploited capacity Unit, L.E.
—-Source: Prepared by researcher in the light of financial statement for year of 2014 and interviews with the concerned managers.
General rate values of cost of exploited capacity unit for production support centers were determined by using the previous equation and presented in Table 36.
b) Determination of exchangeable cost values among the production support centers:
Determination of exchangeable costs among the production support centers depends on size of capacities which are consumed by these centers from each other and general rates of cost of exploited capacities. Exchangeable allocation values of main activity resources costs for production support centers were determined and presented in Table 37.
Table 37: Exchangeable allocation values of main activity resources costs for production support center.
CenterTotal costs of exploited capacities, L.E.
Total allocated costs
—–Source: Prepared by researcher in the light of financial statements for year of 2014 and interviews with the concerned managers.
Exchangeable allocation values of supportive activity resources costs for production support centers were determined and explained in Table 38.
Table 38: Exchangeable allocation values of supportive activity resources costs for production support center.
CenterTotal costs of exploited capacities, L.E.
Total allocated costsLaboratory1134897———————————–6926———-6926Mechanical maintenance303401549——————————967001———-967050Electrical maintenance2871865120991——————————268704———-407510Manufacturing workshops957807647————————-647———-12942588Movement113476614684815770211964954398—–32690326901262892170870742762716Equipment9222384860—————315080—–132845346291631427372913Industrial security————————————————————Assisting units————————————————————Health unit43155011184148861348335461231430708705419368—–14946127507Stores————————————————————(1)1048813811348973034015287186595780711347766922238———-431550———-(2)—–2845791752588133132757593273946339853675139363424624118427—–(3)—–692696705040755102588762716372913———-127507———-(4)—–141255022395532597487103097869944461272353675139634328667118427—–Source: Prepared by researcher in the light of financial statements for year of 2014 and interviews with the concerned managers.
c) Determination of cost rates of distributable capacity unit:
The process of allocating the costs of the production support centers over the capacities which were consumed by production, administration and marketing centers was carried out according to the time rates of the support centers activities. Hence, this allocation needs only for amending the general rates of exploited capacity unit cost because these rates are affected by the exchangeable capacity values among the production support centers. The cost rates of the distributable capacity unit are estimated by dividing the distributable support centers costs over the capacities values which can be allocated directly and consumed in serving the production, administrative and marketing costs considering that the costs of distributable – supportive activities resources for the industrial security centers and the assisting units and stores, will be added to the costs of the main distributable activity resources when calculating rates of the distributable capacity unit for these centers. Table 39 shows the cost rate values of the distributable capacity unit of the main and supportive activity resources and inside production support centers.
Table 39: Cost rate values of distributable capacity unit for production support center according to activity resource type.
ItemCentersLaboratoryMechanical maintenanceElectrical maintenanceManufacturing workshopsMovementEquipmentIndustrial securityAssisting unitsHealth unitStores
Main activity resourcesTotal allocable costs, L.E.
17032117Consumed capacities in serving the production, administrative and marketing centers
164268.15Cost rate of allocable capacity unit
Supportive activity resourcesTotal allocable costs, L.E.
—–Consumed capacities in serving the production, administrative and marketing centers
—–Cost rate of allocable capacity unit
—-Source: Prepared by researcher in the light of financial statements for year of 2014 and interviews with the concerned managers.
d) Determination of share of production, marketing and administrative centers of the distributable costs:
This process is considered the last step in the first stage of indirect costs allocation stages. The capacities consumed by production, marketing and administrative centers are estimated and their costs by using of rates of the distributable capacity unit cost for the main and supportive resources in each production support center.
The costs of the production support centers are considered as an element of the indirect fixed costs for the production centers which can be classified according to the nature of resources inside these centers. As for the administrative and marketing centers, they are dealt with as costs of main activity resources. The second stage shows how to deal with indirect costs in the production centers according to the cost schedule based on the activity oriented by time.
Shares of cost rate values of distributable capacity unit costs for production; marketing and administrative centers were determined and presented in Table 40.
Table 40: Cost rate values of distributable capacity unit costs for production, marketing and administrative center.
Production support centerItemProduction centersSelling and MarketingAdministrative centersTotalMetal castingCrusher 1Additions crusherGypsum crusherRaw material millerOvenRaw material millerWrappingServicesGuardsUtilities and ResidentialAdministrationLaboratoryMain activity resources costs, L.E.4667573870772——–133084631007480812843628714358——————–42479603Supportive activity resources costs, L.E.156305——–48953501261252451317440136141——————–1412550Total, L.E.
Mechanical maintenance.Main activity resources costs, L.E.—-91796016331583295730364735692510505177895637832430——————–65669100Supportive activity resources costs, L.E.—-330795163573113103235326628753262690505313——————–2239553Total, L.E.—-95103966495156307040667088952573380480522538337743——————–67908653Electrical maintenanceMain activity resources costs, L.E.1940138590991656228464307638941749613943170953636710153605—-1421048—-20478211747114766047191Supportive activity resources costs, L.E.57896247231265225153346319209521845409182461602—-112662—-33642—-2597487Total, L.E.1998034615714758880714460984 973670514465015994554910615207—-1533710—-20814631747114768644678
Manufacturing workshopsMain activity resources costs, L.E.11788604418870316370118648103618251291456535910281481206—-30111—-95983551889723740134Supportive activity resources costs, L.E.1743619482516753411825914327612205015767987178—-758—-758212261030978Total, L.E.11962966413965333123519830693761527303661537487071568384—-30869—-960593
24771112MovementMain activity resources costs, L.E.6629628565430015019114219770118982473942038943728284551195009883048—-1373232223750100Supportive activity resources costs, L.E.23233487374202546135063304022139106956675123134930514—-356356699444Total, L.E.6861959052730757021660233176122286476155940013288959671226358913562—-1408867624449544EquipmentMain activity resources costs, L.E.3165948148641—-30051103213————20911158271158187—-6305244928385Supportive activity resources costs, L.E.21375720237—-63248492————697478492526200—-183040612723Total, L.E.3379705168878—-36375111705————27885866763684387—-81350645541108Health unit
Main activity resources costs, L.E.701317147539152087409271304300452723342729564932220762335528850023238796961085868172Supportive activity resources costs, L.E.3462873308889324468118242651946227003105315671461282241150467328667Total, L.E.7359451548691609764417113724184769883621915919352312924922393113034629074657561958539Industrial securityTotal, L.E.
269699199995025574938943782769840687419995011392515228773237953254998743602579Assisting unitsTotal, L.E.
7363562058426262163460346819134613670967712358871449188710438021318514 101145813StoresTotal, L.E.
65414827410614344801500553385478550691513475922342242212637446121311127978217032117Source: Prepared by researcher in the light of financial statements for year of 2014 and interviews with the concerned managers.
e) Allocating the final products with production centers costs:
The indirect costs for final indirect products were determined according to the costs methodology based on oriented activity by time, cost rate of capacity unit and quantity of consumed capacity by these products inside the various production centers. The rates and estimation of the consumed capacities inside the firm covered by the present study were determined as follows:
f) Determination of cost rates of capacity unit:
Cost rate of capacity unit is affected by the size and costs of resources capacities. Consequently, determining this rate requires only performing two steps i.e. 1) determining the available resources capacities and 2) determining the costs related to these capacities. The following stages explain how to perform these two steps:
1) Determination of available resources capacities:
The production centers include a mixture of resources which are varied in their natures, quantity of consuming the processes and activities for the capacities and how to consume them. These capacities may be classified into two sets according to homogeneous consumption and size of capacities. These capacities are classified as follows: a) main and supportive human resources capacities which are measured by using time units (annually labor hours) and b) equipment resource capacities which absolutely available except during the periodical or protective periods of maintenance. Then, available capacities of production centers are determined as follows:
1- Human resource capacities:
By using the previous equations of 12, 15, 17; capacities of main and supportive human resources may be calculated as follows:
Annually available capacity for a laborer = (52”5)-30 = 230 days.
Daily working time = 480* – 30** = 450 min.
Annually available capacity of a laborer = 450(230) = 103500 min.
Then human resource capacities for each center are determined by knowing the number of laborers in the center.
2- Equipment resource capacities:
Capacities of equipment resources vary according to variations in the production centers whereas the equipment in some centers function permanently and continuously without any stoppage except that related to periodical maintenance. But the other departments’ equipment functions under continuous and organized stoppages. Therefore and on this basis, the available capacities of equipment resources can be determined as follows:
1- Capacities of equipment resources for mills and packaging and wrapping center: These capacities were determined by taking in consideration they have scheduled and organized stoppages for their equipment. This equipment in these centers operate in three work shifts daily with one hour rest between each shift, except on Thursday in which work is done in two shifts only and the third shift is stoppage to cover the preventative maintenance. On this basis, the available capacities of the equipment resources for the crushers and for packaging and wrapping center can be calculated by using the following equations:
CEae = Nas (tws)………………………………………………………………………………………………………………..19
CEae = Annually available capacity for mills, oven, and packing and wrapping machines, min;
Nas = number of annually shifts and
tws = time of work shift (7h)* , min.
Nas = Naw (Nws)………………………………………………………………………………………………………………..20
Nws = number of weekly shifts.
Nas = 48 (20) = 960 shifts.
tws = 7 (60) = 420 min.
Annually available capacity for equipment (CEaa) = 960 (420) = 403200 min.
2- Capacities of equipment resources for both mills and oven: Raw materials and metal casting mills and oven without stoppage work except four weeks annually for scheduled periodical maintenance. Consequently, the capacities of equipment resources for these centers can be calculated by using the following:
Camo = (Nwd) (24) (60)……………………………………………………………………………………………………..21
Camo = Annually available capacity for mills and oven, min.
Annually available capacity for mills and oven inside metal casting firm = (335) (24) 60 = 482400 min.
Table 41 indicates available capacities value of production centers resources for metal casting firm.
Table 41: Available capacities value of production centers resources inside metal casting firm (Min.).
1Crusher of additionsCrusher
Mill 2Packing and wrappingEquipment resources——–403200403200403200403200403200403200403200Main activity resources3963300062100041400041400001242000403650017595002380500Supportive human activity resources
1552500Source: Prepared by researcher in the light of financial statements for Year of 2014 and interviews with concerned managers and based on general report of metal casting firm for year of 2014.
2) Determination of production centers resources costs:
The metal casting industry is considered one of the completely automated industries. The role of laborers in operational process is limited. Therefore, their role is only represented in achieving guidance, follow up, supervision and performing other support works such as cleaning and removal of clogging and deposited materials in the production center lanes. Automation process leads to the cost elements will be static and direct costs will be only determined by materials element. Considering that the wages are paid regardless of size of production and the fuel is considered among the variable indirect costs because their costs are correlated to the production capacity which is expressed by the size of production. Consequently, costs of the production center resources will be determined by using indirect costs which include the following cost types:
a- All costs including salaries, wages and even the temporary labor costs should be in correlation with the work days. These costs are listed in the salaries and wages calculations (Ac. /31).
b- Costs of the commodity requirements (Ac. /32) after discarding the raw materials costs (Ac. /321), costs of fuel, water and energy (Ac./322) and costs of wrapping materials (Ac./325).
c- Costs of services requirements (Ac. /33) and costs of current transformational costs (Ac. /35) and costs of allocated expenditures (Ac./36).
d- Share of the production centers in the costs of the production support centers which will be treated according to their nature where costs of two centers of movement and health unit are treated as human resources costs and are divided among the main and supportive resources according to number of laborers. The remaining costs of the production support centers are added to costs of equipment.
Salaries and wages costs and cost share of the production centers of the movement and health unit centers are classified as human resources costs. The other costs are linked, clearly, to the equipment resources and are treated as equipment resources costs. According to the previous classification the costs of the production centers resources can be determined and tabulated as shown in Table 42.
Table 42:Cost values of production centers resources inside metal casting firm.
1Crusher of additionsCrusher
mill 2Packing and wrappingEquipment Resources, L.E.—–79094301.832163767.327743526.3280449740462618648392648221588459951Main activity resources, L.E.
34761402.31Supportive human activity resources, L.E.
18443391.56Source: Prepared by researcher based on financial statements for year of 2014 and interviews with concerned managers based on general report for metal casting firm for year 2014.
Having determined the capacities and costs of the production centers resources, the cost rates of capacity unit are calculated by dividing the costs of each resource over its available capacity. Table 43 shows cost rate values of the production centers resources capacity unit. It can be observed that there is a rise in cost rate values of equipment resources capacity unit compared with that of the human resources which are resulted from on the metal casting industry reliance on this high cost resource of limited capacities. The role of the human resources, which have higher capacities and less costs, depends mainly on operational process control and controlling other supportive activities.
Table 43: Cost rate values of resources capacity unit of production centers resources inside metal casting firm.
1Crusher of additionsCrusher
mill 1OvenRaw mill
2Packing and wrappingEquipment Resources, L.E.—-196.1779.7768.81581.36958.99813.951459.47Main activity resources, L.E.32.0411.2526.5624.4529.0119.1726.5514.6Supportive human activity resources, L.E.
11.88Source: Prepared by researcher in the financial statements for year of 2014 and interviews with concerned managers inside the firm.
g) Determination of exploited capacities and their costs inside metal casting firm:
The capacities of the production centers are consumed, constantly and variably, in the production of firm products. Determining these capacities according to the proposed method (Model) to calculate the costs on the basis of oriented activity by time need a group of steps which may be explained as follows:
1) Determining time rates:
The production centers include several main and supportive activities on which determining time rates and their accuracy depends on good describing them and the extent of their details accuracy.
2) Determining costs of exploited capacities:
Determining costs of exploited capacities for the production centers resources depends on the cost rates of the resources capacity units and quantities of consumed capacities which are determined by using time rates as shown in Table 44.
Table 44: Quantity, costs and ratios of exploited capacity, and cost rates of resources capacity unit for the production centers resources inside metal casting firm.
1Crusher of additionsCrusher
mill 1OvenRaw mill 2Packing and wrapping
Equipment resourcesQuantity of exploited capacity
127864.34Cost rate of capacity Unit, L.E.
1459.47Costs of exploited capacity, L.E.
186614690Ratio of exploited capacity, %
Main activities resourcesQuantity of exploited capacity
1360831.05Cost rate of capacity Unit, L.E.
14.6Costs of exploited capacity, L.E.
19471621.7Ratio of exploited capacity, %
Table 44: Continued.
1Crusher of additionsCrusher
mill 1OvenRaw mill 2Packing and wrapping
Supportive activities resourcesQuantity of exploited capacity
695369.25Cost rate of capacity Unit, L.E.
11.88Costs of exploited capacity, L.E.
8260848.54Ratio of exploited capacity, %
45Source: Prepared by researcher in the light of financial statements for Year of 2014 and the interviews with concerned managers inside the firm.
By examining Table 44, it may be concluded the following important points:
1. Except the oven, raw materials mills and metal casting centers which recorded capacity rates of 88, 79 and 76% respectively, it may be noticed low rates of exploiting equipment resources capacities. This may due to carrying out the future planning of new design of firm in order to the stone quarry administrations, and packing and wrapping administrations to be enable to assimilation an additional production lane. This matter led to loading the products with costs of large unexploited capacities especially in these centers.
2. Low levels of exploiting human activity resources capacity, in general, and supportive resources, in particular, where capacity rates utilization did not exceed, in the best cost centers for exploiting capacities, 57% concerning the main resources and 45% for the supportive resources.
3. Having determination of costs of exploited capacities, the idle capacities are determined and isolated and treated as period costs.
Table 45: Cost values of exploited and idle capacity for production centers resources inside metal casting firm.
1Crusher of additionsCrusher
mill 1OvenRaw mill 2Packing and wrapping
Equipment resourcesExploited capacity costs, L.E.
1150965048Idle capacity costs, L.E.
Main activity resourcesExploited capacity costs, L.E.
131989342Idle capacity costs, L.E.
resourcesExploited capacity costs, L.E.
17968854.42Idle capacity costs, L.E.
44723611.2Total, L.E.———–6008850.041217127.2———–9112225.5816616285.8811294585.361843391.5662692466Total exploited capacity costs, L.E.35807647.323839391.26810958.2718281303.62422703704408023393183637752147471611300923245Total idle capacity costs, L.E.90216834.968250211.137564467019585133.783322290.6115809643132287533426917584973953697.3Source: Prepared by researcher in the light of financial statements for year of 2014 and interviews with concerned managers.
Therefore, it appears the importance of the proposed model in isolating the idle costs of capacities when allocating fixed indirect costs to products where the use of the present model led to exclusion the sum of 973953697.3 L.E. which formed 42.81% of total fixed indirect production costs.
h) Determination of products share of exploited capacities:
Size of time drivers are considered as the basis on which the proposed model is based in determining the cost shares of exploited capacities. The selection of the relationship among the time drivers and cost purposes in some production centers in the firm covered by the present study makes it necessary to average quantity of production in allocation of exploited capacities in a relative fixed form (Table 46).
Table 46 shows allocation cost values of exploited capacities to products of metal casting firm.
Table 46: Allocation of cost values of exploited capacities to products of metal casting firm.
1Crusher of additionsCrusher
mill 1OvenRaw mill 2Packing and wrapping
Equipment resources, L.E.Ordinary castings——–77283.5612776.94187234.84316066.2356295.5316970107105.19Resistant castings——–18494.811062.862460.1666879.768516.951477.320759.15
Main activity resources, L.E.Ordinary castings901705.1261637.3131200158450507172.361253321.7471531.41146658.9Resistant castings215787.962612.75060027257119474.24295984.9109018.2214172.1Supportive human activity resources, L.E.Ordinary castings——–155994.33549.17——–68481252007.8144816603296.43Resistant castings——–37331.23073.03——–14490.64846223182.892073.27Source: Prepared by researcher in the light of financial statements for year of 2014 and interviews with concerned managers inside the firm.
i) Determination of products share of exploited production centers costs:
Products share of the fixed indirect exploited costs inside the production centers are determined according to their share of the capacities of these centers depending on cost rates of the resources capacity unit (Table 47).
Share of ordinary and resistant castings of indirect costs for production centers inside the metal casting firm are determined and tabulated as shown in Table 47.
Table 47: Share of ordinary and resistant castings of indirect costs for production centers inside the metal casting firm.
1Crusher of additionsCrusher
mill 1OvenRaw mill 2Packing and wrappingTotalEquipment resources, L.E.Ordinary castings——–15160439.51019232.4512883320.21837469344341685204257996904156317249968844693Resistant castings——–3628058.8882498.158773633888089.665707287.84189981430297441.4182153355Main activity resources, L.E.Ordinary castings28893190.529433504.093484257.13874451.214713182.324025352.1812517490.7816744160.1107195588Resistant castings6914456.71704413.091347095.6666469.183465974.135673835.742894047.63127461.724793753.7Supportive human activity resources, L.E.Ordinary castings——–1132060.8241737.11——–1205824.773112176.622633875.487167036.6215292711.4Resistant castings——–270914.9536137.86——–255152.88598482.68421642.691093811.922676142.92Table 47: Continued.
1Crusher of additionsCrusher
mill 1OvenRaw mill 2Packing and wrappingTotal
10912999936914456.74603386.82265731.6152383.2145602018.671979606.34515504.234518715209623252Source: Prepared by researcher in the light of financial statements for year of 2014 and interviews with concerned managers inside the metal casting firm.
3) Determination of exploited capacities and their costs inside administrative and marketing centers and the products share of them:
In this stage, the exploited capacities for the administrative, marketing and costs related to these capacities are determined before loading them over the firm producers. This determination depends on the following scheduled steps of the proposed model for the costs method on the basis of the oriented activity by time.
a. Determination of cost rates of capacity unit:
All administrative and marketing centers rely primarily on the human resources in performing their activities which conform in terms of their capacities and activities which they perform. Hence, all resources and their costs are collected in one pool for each cost center, except the services and projects cost center. Also, a unique cost rate of the capacity for each cost center was determined. The following two points are considered as an explanation of steps for determining this rate for all administrative and marketing centers inside metal casting firm.
1- Determination of available capacities for resources:
Capacities of cost centers resources are determining by available time periods for the labor force in these centers and which are restricted to six hours daily except the security, guard, utilities, housing and main activity resources for the services cost center in which the daily work hours stretch for eight hours. Consequently, the capacity resources inside metal casting firm can be calculated by using equation of 11 mentioned previously and equation of 22 as follows:
Rye = Nw (Cal)………………………………………………………………………………………………………………….22
Rye = Annually available resources, min.
– Daily working time for the security, guard, utilities, housing centers and the main activity resources for the services cost center = 380 ‘ 30 = 450 min.
– Daily working time for other centers = 360 ‘ 30 = 330 min.
5. Annually available capacity for a laborer in the security, guard, utilities, housing and main activity resources for the services and projects costs center = (45) 230 = 103500 min.
6. Annually available capacity for a laborer inside the remaining centers = 330 (230) = 75900 min.
2- Determination of administrative and marketing centers costs:
Costs of each costs center include the costs of salaries, wages, commodities and services requirements and allocated expenditures and share of administrative and marketing centers of costs of supportive centers with separating the supportive resources costs for the services and projects centers which are represented in salaries, wages of labor force and activities of these resources and treating all other costs as costs related to the main activity (Table 48).
Table 48 indicates capacities and cost values of administrative and marketing centers resources and cost rate of capacity unit for metal casting firm.
Table 48: Capacities and cost values of administrative and marketing centers resources and cost rate of capacity unit for metal casting firm.
Security and guardServices and projectsUtilities and housing
ManagementMarketing costs center
Resources capacities cost, L.E.Main activity resources7250001345500742500101706001897500Supportive activity resources-303600—
Resources costs, L.E.Main activity resources96553226.7829844541.36672246484549255186546486691.56Supportive activity resources-656693—
Cost rate of capacity unit, L.E.Main activity resources13.3322.1892.79447.2924.5Supportive activity resources-21.63—Source: Prepared by researcher in the light of financial statements for financial year of 2014 and interviews with managers and depending the general report and costs report for year of 2014.
b. Determination of exploited capacities and their costs for administrative and marketing centers:
Determination of exploited capacities cost requires an estimation of the exploited capacities and treated at cost rate of capacity unit. This estimation depend, according to the proposed model, on time rate which it need to reach an accurate description of main and supportive activities for each cost center. Therefore, size of time drivers must be determined in order to estimate exploited capacities. This matter may be carried out by following up the next steps:
1) Determining time rates for administrative and marketing centers:
Determining time rates and their role in estimating the exploited capacities accurately, depends on the level of detailing the supportive activities for each cost center. The administrative and marketing centers include five costs centers which include numerous main and supportive activities.
2) Determining costs of exploited capacities for administrative and marketing centers:
Exploited capacities are measured by using previous time rates, while costs of these capacities may be determined by estimating cost ratio values of resources capacity unit.
Maximum value of capacity exploitation percentage of 67% was recorded at services and projects costs center. But this percentage did not exceed 14% at management cost center as a consequence of random employment policies which are applied by the management for satisfying some important persons (VIP) in the area where the firm is located. These unjustified administrative appointments led to the idle capacities costs exceeded the sum of 4077299858.26 L.E. which equals 85.32% of total administrative and marketing costs which will be treated as unutilized cost and it will be deducted from gross profit without loading them on the costs of sold commodity. Table 49 indicates values of quantity and cost of exploited capacity and their ratios , and cost rates of capacity unit for administrative and marketing cost centers.
Table 49: Values of quantity and cost of exploited capacity and their ratios, and cost rates of capacity unit for administrative and marketing cost centers.
Marketing costs center
Security and guardServices and projects
Utilities and housing
ManagementMain activity resourcesSupportive activity resourcesQuantity exploited capacity2403675900185.5881942222401453827822200Cost rate of capacity unit, L.E.13.3322.1821.6392.79447.2924.5Costs of exploited capacity, L.E.32033482.0419980327.11907498.4620621125.98650289070.321143008.06Ratio of capacity consumption, %
43Source: Prepared by researcher in the light of financial statements for year of 2014 and interviews with concerned managers.
Table 50 shows cost values of exploited and idle capacities for administrative and marketing centers resources.
Table 50: Costs of exploited and idle capacities for administrative and marketing centers resources.
Marketing costs center
Security and guardServices and projects
Utilities and housing
Total administrative centersMain activity resourcesSupportive activity resourcesCosts of exploited capacities, L.E.
20143008.06Costs of idle capacity, L.E.64519744.749864214.264658895.324663522.023898966115.81405095617526343683.5Total, L.E.96553226.7829844541.366566393.8767224684549255185.5479593068746486691.59Source: Prepared by researcher in the light of financial statements for year of 2014 and interviews with concerned managers.
c. Allocating exploited costs of administrative and marketing on the final products:
Allocating the administrative costs depends on the production size due to non-existence of variations in the capacity exploitation among the firm’s producers. This variation represents philosophy base of Activity Based Costing (ABC) method which is oriented by time.
As for marketing costs, allocation will be carried out according to the consumed capacities by products. Exploited capacities, in static mode by calculating cost rates of capacity according to the following equation:
Crcum = Cetc / CAec……………………………………………………………………………………………………………23
Crcum = cost rate of capacity unit for distributable marketing resources, L.E./min ;
Cetc = total cost of exploited capacity, L.E. and
CAec = distributable exploited capacitates, min.
Cost rate of capacity unit for distributable marketing resources center (Crcum) = 20143008.06 / 597500 = 33.712 L.E. / min.
So, according to the previous allocation bases of administrative and marketing costs, administrative cost share of the ordinary casting products equals 64087496.6 L.E. and reached 15962027.54 L.E. for marketing costs. While administrative cost share of the resistant casting products reached sum of 104097015.3 L.E. and reached 4180980.52 L.E. for marketing costs.
d. Determining costs of sales:
Determining cost of sales requires usage of cost values statement according to Activity Based Costing (ABC) method which is oriented by time. Determining cost sales leads to determining value of sold product unit. The following two steps are considered an explanation for determining cost of sales:
1. Preparing costs statement:
The firm prepares the costs statement according to the method of total cost and the costs are sequenced according to the production stages. This is the prevailing method in the Egyptian Public Manufacturing Sector Firms, without a clear separation of the costs factors. Products costs are determined by elimination and addition from cost of main product. Despite the high level of details in presenting the statement items, but it lacks to the information which the interest owners need and are linked to the costs firm. It also lacks to classifying these items according to their relation to the final product. The comprehensive allocation method is no longer acceptable in the philosophy of the modern costs concepts which concentrate on the accurate determination of levels and costs of unexploited capacities. Consequently, by using the proposed model which is considered a modified comprehensive allocation method of costs, costs statement may be presented through separating direct costs which are represented in raw materials from those indirect costs which are classified as variable costs and include the fuel, oils, energy, water and exploited costs which inside and all other previously-specified costs which were defined in previous stages and whose items can be defined as follows:
a) Materials costs:
Specifying share of firm’s products of materials cost depends on the mixture of materials used in the production. Since “Pozlana” material is considered as a specific material to the ordinary metal casting, but iron and sandy rocks are added to the resistant metal casting. The remaining materials are mixed by two raw mills and metal casting in limited and equal percentages to the products. Consequently, the costs of Pozlana are treated as ordinary metal castings costs and costs of iron and sandy rocks as costs of resistant metal castings. The share of these two types of products remaining costs of materials are determined according to the annually production size of the metal castings mill as it is considered as a determinant of the final product size of the two types of products.
b) Variable indirect manufacturing costs:
These costs type includes all costs of fuel, energy and water related to production centers and which are merged in account of 324. Therefore, determining share of two products of costs will be determined according to production levels cost.
c) Exploited indirect manufacturing costs:
These industrial costs are represented the form of all production centers costs such as salaries, wages, service requirements and other detailed accounts for the commodity needs except calculation of packaging and wrapping materials, allocated expenditures , current and transformational expenditures and the share of production centers of costs of the production support center. These costs were tackled and determined according to the proposed model in the previous stages.
d) Packaging & Wrapping Costs:
Packaging and wrapping costs include a direct part which are represented in packaging and wrapping materials (Ac. /325) and another exploited indirect part which was specified according to the proposed model usage in the second stage of implementing, previously, explained model.
e) Exploited administrative and marketing costs:
Administrative and marketing costs are considered as indirect costs. Their exploited part was determined in the third stage of the implementation of the proposed model.
f) Changes in the Stores:
Share of the inventory of primary materials is determined by using traditional cost method by dividing total costs of primary materials by its quantity. Knowing the quantity of inventory in end of period, the costs of inventory is determined. Inventory cost of full products is determined by dividing total products costs on the production size. While, the share of inventory at end of the period is considered as the inventory stock of the beginning of next year.
Cost values of ordinary and resistant casting products by applying proposed model were determined and tabulated as shown in Table 51.
Table 51: Cost values of ordinary and resistant casting products during period of: 1/1/2014 until 1/12/2014 by applying proposed model.
Cost factorTotal value, L.E.Ordinary casting product, L.E.Resistant casting product, L.E.a- Materials:
Raw material 1
Raw material 2
Raw material 3
Raw material 4
Raw material 5
(+/-) Changes in resources inventory
Total materials costs:
(147240.69)224891732.36190358040.3964533690.97To be added:
* Variable indirect costs
* Independent indirect costs
*Total production costs
* (+/-) Change in full production inventory
*Total cost of sold commodity
1126366534.54To be added:
c-Packaging and wrapping costs:
* Packaging and wrapping materials
* Costs of indirect and exploited packaging and wrapping materials
* Cost of sold commodities (Packaged and Wrapped).
To be added:
* Exploited administrative costs
* Independent marketing costs
* Total sales costs
4180980.528937782235.357604328110.261333454125.09Source: Prepared by the researcher (Own processing).
2. Determination of sold product unit:
By investigating costs statement, cost unit of the sold product may be determined by dividing total sales cost on the quantities of sold product considering determining share of loose product sales of administrative costs. Table 52 shows cost values of sold products unit of ordinary and resistant metal casting.
Table 52: Cost values of sold products unit of ordinary and resistant metal casting.
UnitOrdinary casting productsResistant casting productsUnit cost, L.E.QuantityTotal cost, L.E.Unit cost, L.E.QuantityTotal cost, L.E.Cost of sold commodityMg (Ton)1355.83467812.346339716936.3214419.40778114.621126366534.54Administration costsMg (Ton)1369.954467812.34640877496.61332.61978114.62112633534.54Total sales costsMg (Ton)14921.781467812.346980594432.9215752.02678114.621230463549To be added:
Packages and wrapping costsMg (Ton)
98809594.73Marketing costsMg (Ton)36.777434024.4815962027.5464.04265284.844180980.52To be deducted:
Costs of sold productionMg (Ton)
202059028.1Costs of wrapped salesMg (Ton)817.68386832697100158367.16866.1951306125113135906.99Source: Prepared by researcher in the light of financial statement for year of 2014 and interviews with concerned managers.
Results of statistical testing for proposed model:
Proving the effectiveness of ABC method oriented by time (proposed model) in maximizing profits, requires an analysis of effect of implementing the proposed model on the components of the gross accounting profits for the period covered by the implementation before ensuring this effectiveness for the study years through testing the study hypotheses. The following two indicators (profitability and income) provide details of the analysis and testing steps:
a- Analyzing effect of proposed model application on profitability of metal casting firm:
Cost calculation method affects profitability of business organizations through providing information to decision-makers. These decisions are related to costs, how to reduce them and opportunities for improving incomes by indicating capacity exploitation levels. It is possible to clarify the role which is played by Activity Based Costing (ABC) method which oriented by time in maximizing profit of the metal casting firm according to the following points:
1- Role of proposed model for reducing costs:
Effect of Activity Based Costing (ABC) method which oriented by time (proposed model) in reducing costs is clarified by carrying out a comparison among implementing this results of implementing this method with reports data of firm’s costs. Application of this method led to reducing the sales cost from 13754438384 L.E. to 8937782235.35 L.E. i.e. 35.02% of total costs of by applying the factory current costs method (Traditional method) inside the firm. This reduction value can be detailed as follows:
a. Costs of production support centers:
Costs value of the production centers was 765086900.7 L.E.. These costs were distributed completely on the production, marketing and administrative centers according to current cost method (Traditional method). While application of proposed model revealed some idle capacity costs which are valued 400649303.5 L.E.. These idle capacity cost must be separated when determining production costs and allocated to the period income. Determination and elimination these costs led to achieving a reduction ratio of cost of production support centers of 52%. Also, costs reduction was concentrated inside equipment, industrial security centers, health units and stores in which the cost reduction ratio exceeded 60%.
b. Costs of production centers:
By applying proposed model, the production centers achieved a cost reduction of 1422324692 L.E. i.e. cost reduction ratio of 52%. This reduction is concentrated in metal casting, crushers, packaging and Wrapping centers. Cost reduction ratio exceeded 60%. Despite this value of reduction, the reduction ratios inside other centers cannot be ignored. Especially production centers often have high costs. These ratios value were not less than 35% inside the oven center which is considered as the most production for exploiting available capacities. Table 53 shows a comparison of cost values and cost reduction ratios between proposed model and current method application inside metal casting firm.
c. Administration costs:
The proposed model of Activity Based Costing (ABC) method which is oriented by time, revealed wide possibilities for reducing the administrative costs in the firm. Implementing this model led to administrative cost reduction of 4070063289.27 L.E. i.e. reduction ratio of 84.5% of total administrative costs. This reduction is, mainly, due to high sum and ratio high of reduction of administrative costs which were reduced by more than 86% (Table 53).
d. Marketing costs:
By applying current method, idle costs of marketing value were 46486691.59 L.E. which represents 31% of total firm’s costs. But, when applying proposed model these costs were reduced and reached 26343683.5 L.E. which represent 57% of total firm’s costs.
e. Cost unit of sold product:
Firm sells two products of ordinary and resistant metal castings in forms of loose and wrapped products. By implementing proposed model, the firm achieved reduction ratios of cost unit of sold product ranged between 33.2 and 37% (Table 53).
Table 53: Comparison of cost values and cost reduction ratios between proposed model and current method (Traditional method) application inside metal casting firm.
ItemCost by applying current method, L.E.Cost by applying proposed model, L.E.
Cost reduction, L.E.Ratio of cost reduction ,%First: Production support centers:
c- Electrical maintenance
68Total Production support centers765086900.7364437597.6400649303.552Second: Production centers:
Crusher of additions
Mill raw 1
Mill raw 2
Packing and wrapping
70Total production centers27232479371300923245142232469252Third: Administration centers costs:
Security and guards
Services and projects
ItemCost by applying current method, L.E.Cost by applying proposed model, L.E.Cost reduction, L.E.Ratio of cost reduction ,% Utilities and housing
86Total cost of administration centers 4815037801.17744974511.904070063289.2784.5Fourth: Costs of selling and marketing centers 526312215.402143008.0632488207.3461.7Fifth: Sales cost137544383848937782235.354816656148.6535Sixth: Costs of sold product
Mg (Ton) of product number 1
Mg (Ton) of product number 2
Mg (Ton) of product number 3
Mg (Ton) of product number 4
33.2Source: Prepared by researcher in the light of financial statements for year of 2014 and interviews with concerned managers.
2- Role of proposed model in determining exploited capacities:
Current costs method inside the firm depends on total allocation of costs in which the capacity exploitation affair does not represent any importance factor. Allocation process is carried out assuming full exploitation of the resources. General report of firm provides rates of capacity exploitation for crushers, mills and oven as they are the quarry units (mining units) and the main production lane which defines the firm’s productivity in the form productive indicators in one hour. These indicators are insufficient to specify the unexploited costs or support opportunities for improving the incomes. Also, by applying current method (Traditional method), all resources are collected in a single pool which is expressed by firm’s productivity of equipment in one hour.
Table 54: Comparison of values and ratios of exploited and idle capacities for various production centers by applying proposed model and current cost method inside metal casting firm.
Production centersCurrent method (Traditional method)Proposed modelDifferenceRatio of exploited capacity, %Ratio of idle capacity, %Ratio of exploited capacity, %Ratio of idle capacity, %Difference of exploitation ratio, %Difference ratio, %Mining* 100028727272Crusher 184.8415.16247660.8471.71Crusher of additions67.2132.7969421.2191.07Crusher 2663450501624.24Mill raw 187.4712.5379218.479.68Oven95.474.5388127.477.82Mill raw 285.5514.4576249.5511.16Packing and wrapping100032686868Source: Prepared by researcher in the light of financial statements for year of 2014 and interviews with concerned managers.
Table 54 shows there is a reduction in ratio of exploited capacity by applying proposed model compared with calculated ratios by applying current method (according to firm’s financial reports) based on the hourly productivity. This reduction becomes clear in quarry units (mining units) and packing and wrapping centers where the crusher of additions recorded a reduction in ratio exploited capacity which exceeded 91.07% and with relatively low ratio for the general lane units which did not exceed 11.16% for the raw mills.
These differences are mainly due to variation of current methodology which is approved in the financial report, whereas the firm’s reports calculations depend on the total production size in determining exploited capacities by dividing the production size on the operational hours to reach hourly productivity which is compared with the standard hourly productivity. While, proposed model depends, in its calculation of required times for production and estimating the exploited capacities starting from estimating the available total annual capacity until determining the required time for the production size which by dividing it on total capacity, ratio of capacity exploitation may be determined.
Therefore, the measure which depends on the production time is considered more accurate and useful than that measure based on the production size because it takes into consideration the standard time for actual production when estimating ratios of capacity exploitation. Consequently, extent of efficiency of exploiting resources and ways of improving their productivities can be determined, accurately.
3- Role of proposed model in improving incomes:
ABC is oriented time method plays a distinct role in improving the incomes of business organizations as shown in chapter four in the present study. This matter is achieved through the information which it provides about ratios of resources capacity exploitation, how to improve them through maximizing their added value , quantity of idle capacities and the various alternatives for investing them. This matter is achieved by following a group of steps. These steps may be studied by implementing them on the firm covered by the present study as follows:
a) Determination of constraint resource:
Constraint resource which governs capacities and productivity of other resources and specifies required amounts of them is always considered one of the production centers resources which is more related to the activity. Constraint resource for metal casting firm is represented in equipment resources for the oven cost center because of the low standard productivity for one hour. This productivity does not exceed 70.73 Mg/h (Ton/hour) and with available capacities equal those available capacities for two casting raw mills. This trend is confirmed by the high ratios of exploitation of the equipment resources in this center which reached 88% compared with the other center’s resources.
b) Determination of productivity of idle capacities for constraint resource:
The productivity of idle capacities for constraint resource is determined by dividing these capacities on the required time for producing on megagram (Ton) of raw which is considered as the quasi-final raw material for the castings. Idle capacities value of oven reached 57587.6 min. and which is able to produce 67886.18 Mg of raw which is converted after adding other materials in casting mill into value of 75874.37 Mg of castings.
Table 55 shows values and ratios of change for product unit cost by applying proposed method and current method (Traditional method) inside business sector firm (Metal casting firm) and private sector firm (Chemical products firm).
Table 55: Comparison among values and ratios of change for product unit cost by applying proposed method and current method (Traditional method) inside business sector firm (Metal casting firm) and private sector firm (Chemical products firm).
ItemCost by applying current method (Traditional)Cost by applying proposed methodChange value, L.E.Change ratio, %Business sector firm ( Metal casting firm)Mg (Ton) of product No.123681.46214921.7838759.67937Mg (Ton) of product No.224403.90915752.0268651.88335.5Mg (Ton) of product No.31259.733817.683442.0535.1Mg (Ton) of product No.41295.855866.195429.6633.2Private sector firm (Chemical products firm)Unit of product A0.410.380.037.317073171Unit of product B0.660.60.069.090909091Unit of product C0.660.68-0.02-3.03030303Unit of product D0.540.4500Unit of product H0.590.560.035.084745763Unit of product G0.590.52-0.07-11.86440678Unit of product M0.860.780.089.302325581Unit of product N0.440.47-0.03-6.818181818Unit of product P1.040.990.054.807692308Unit of product Q0.40.42-0.02- 5Unit of product U0.420.45-0.03-7.142857143Unit of product W0.410.43-0.02-4.87804878
ItemCost by applying current method (Traditional)Cost by applying proposed methodChange value, L.E.Change ratio, %Unit of product F2.6542.160.4918.46269781Unit of product I0.920.560.3639.13043478Unit of product K0.590.440.1525.42372881Unit of product L18.104.22.1680.48387097Unit of product O0.660.8-0.14-21.21212121Unit of product S1.290.910.3829.45736434Unit of product V0.610.490.1219.67213115Unit of product J1.650.80.8551.51515152Unit of product R6.294.321.9731.31955485Unit of product T6.054.221.8330.24793388Source: prepared by the researcher (Own processing).
From Table 55, the following conclusions may be stated:
1- There is, in general, a significant variance among unit cost values by applying the proposed method (Model) for both public sector firm (Metal casting firm) and private sector firm (Chemical products firm).
2- Applying the proposed method (Model) inside public sector firm (Metal casting firm) led to achieving a significant reduction of cost for producing one megagram (Ton) of products while there is a variance of cost for producing a unit of products inside private sector firm (Chemical products firm) where the biggest part of product unit costs inside the chemical products firm decreased while the other part of product unit costs increased. This trend is due to the following reasons: a)Current method of product cost calculation which are applied inside Egyptian public sector firms are static (not dynamic), b) Cost calculation inside Egyptian public sector firms is determined according to unified accounting system which it does not take into consideration the variance among the nature of industries and c) There is a variance among cost frames between the two firms mentioned above where in metal casting industry, indirect cost values are considerable but in chemical products industry these values are low.
Chapter 6: GENERAL CONCLUSIONS, APPLIED RECOMMENDATIONS AND FUTURE RESEARCHES
6.1. General conclusions:
1) The Traditional Costing (TC) methods became un-able to provide accurate information required by the economical units especially in the light of increasing competition with other units where they use illogical basis to allocate the additional costs such as the direct work whose value was reduced with the automation process. Hence, the costing information obtained from these methods became inaccurate and distorted.
2) The Activities Based Costing (ABC) method then appeared to face the aspects of deficiencies and criticisms surrounding the Traditional Costing (TC) methods as an attempt to overcome the random allocation of additional costs and then reaching costs information which are characterized of a great deal of accuracy.
3) Applying ABC in services or industrial sector depends largely on the results of analyzing the costs related to the method compared with the benefits achieved from applying this method.
4) There is no common trend for determining specific steps to design and implement the Activities Based Costing (ABC) methods. But the general framework revolves around the following steps:
d) Collecting the economical unit works in activities.
e) Allocating the resources to activities by using the costing drivers.
f) Allocating the activities on the costing targets according to how much to benefit from them.
5) There is a great necessity of availability of some requirements for the success of applying the Activities Based Costing (ABC) methods in the economical units. The most important of these requirements are supporting the management and convincing them of the necessity to change the Traditional Costing (TC) methods and providing the financial support to modern costing systems usage, develop and maintain the database related to the system and using training programs for the team.
6) There is a great necessity of availability of some requirements for the success of applying the Activities Based Costing (ABC) methods in the economical units. The most important of these requirements are supporting the management and convincing them of the necessity to change the Traditional Costing (TC) methods and providing the financial support to modern costing systems usage, develop and maintain the database related to the system and using training programs for the team.
7) Concerning the planning and decisions-making, the Activities Based Costing (ABC) method is considered a tool capable of long-term strategic planning and then making the long-term decisions.
8) The success of applying ABC at industrial firms around the world and Egypt does not only rely on presence of an accountant who is completely aware of costs suffered by the firm, but it also needs the presence of a highly experienced work team and a wide knowledge of the activities practiced in the departments in the this firm and able to link between the activity and the service. It is easy provide this cadre because it already exists but need a little guidance and training on using modern technologies such as computer programs, data base to create new rationalization ways for transform the useful activities (Un utilized activities) to useful activities (Utilized activities) in order to improve the performance efficiency and increase the profitability in the firm, particularly in the Egyptian firms. This matter supplies the person who applies this system with correct information which makes him explain accurately the relationship between the costing and the activity and between the activity and the cost. Also, the firm must has available information systems which can provide the work team with any other information which may be needed.
9) Ability of ABC method in reducing costs without affecting the quality by using re-engineering the operations as the consequence of analysis of the activities. Introducing a flowchart which shows the mechanism of work to provide the services to the customers quicker through merging some activities with each other or even cancelling some useless activities which is ABC method’s main objective. This matter leads to utilize the optimal use of rare material and humanitarian resources to achieve their operational objectives efficiently and effectively.
10) The effective controlling of costs in the firm departments must be applied as the consequence of analyzing the activities and linking them with their own costs and knowing the deficient points and working to avoid them and promoting the strong points.
11) Despite the Activity Based Costing (ABC) method achieves many benefits, but there are factors which deter implementing it such as high cost of implementing, practical and economical difficulties concerning analysis of the activities and difficulty of studying and analysis of some activities costs.
12) The Activity Based Costing (ABC) method can be implemented its advantages both in private sector (industrial and services) and public sector such as Ministries and governmental Institutions….etc.
13) The ABC method is not developed to issue immediate decisions, but to provide more accurate information about the provided industrial services and consequently, increasing the efficiency and effectiveness of performance by calculating the cost of industrial service at any time and aiding the managerial team in providing a database which helps the top management in the process of making the decisions.
14) Pricing process by using costs data is useful for both the firm’s management and the Ministry of Industry and those dealing with them in increasing the costing awareness which is reflected on the economical use and operation of available resources used in the firms to achieve the desired objectives.
15) The current cost systems weakness applied in many industrial firms to provide necessary information for managerial team and rational decision-making, especially in fields of determining and pricing the productive mix.
16) The results of research revealed that the most of cost mangers in Egyptian manufacturing firms which have a high level of modern technology are interested to classify cost structure to direct and indirect costs is more than variable and fixed costs in light of firm usage of ABC method.
17) ABC method enables the availability of the activity drivers which are linked to the product unit , the production batch , the product-sustaining level (Production line) and facility-sustaining level (The firm as a whole).
18) ABC method gives the management staff the potential for identifying the unutilized capacities which are represented in idle activities resources and it works to benefit them either through the use of these capacities to obtain other incomes or reducing expenses of these resources and consequently the optimal utilization of the resources is occurred.
19) ABC method enables cost control, on the long run, costs in a more effective method through controlling the cost drivers instead of controlling the cost elements. Also, knowing the causative relationship between the cost elements and the causing activities, leads to achieve a better control of the cost elements at the level of activity which cost took place.
20) ABC method is considered as an assisting factor for the continuous improvement process because ABC method provides detailed information about activities inside the firm in addition to the activities as activities of added value and activities of non added value and tries to get rid of last type of activities and utilize their resources in other activities which add value.
21) There is a difference and integration between the ABC method and Theory of Constraints (TOC). ABC method takes into consideration the long run analysis because the analysis includes all production costs while the TOC covers the short run approach to analyze the profitability. There is also an integration form between both methods where ABC method provides the total analysis for cost drivers in addition to accurate determination of the unit cost as a basis for the strategic decisions concerning the long-run pricing and the mixture of products. As for Theory of Constraints (TOC), it is useful method for improving the profitability, on long run, during manufacturing. This matter occurs through the modifications in the products mixture and by concentrating on the production constraints. Therefore, ABC method may be considered as an assisting factor for TOC where the ABC method provides TOC with the needed information about the external constraints, cost drivers and product cost.
22) Despite the recent increasing interest to ABC method, but the main philosophy behind its rise stops at ‘managing the activities concept ” which is considering a control factor in the consumption of resources. On the other hand, the philosophy of RCA method extends to include the concept of ‘managing the productive capability of the business”. This matter leads to an important result which is represented in the increase of the economical units’ ability for managing in a better way. Also, it lends to a management which has more efficient cost way.
23) Allocation costs must be changed or modified to be compatible with requirements of new manufacturing environment. For example, production means consumption must be utilized in flexible manufacturing methods by using production method based on estimated operational hours of machine and follow up them in relation to each product inside the method. In the traditional method, depreciation is loaded on overhead costs by using fixed rate method and overhead costs are loaded on production lines by using one of loading rates such as direct labor.
24) FCAS should pay attention to predetermined estimations of cost because making decisions process will be, basically, depended on fast response which does not wait for collection of actual cost data.
25) For Egyptian chemical products firm, the following conclusions may be stated as follows:
a) Approximately 50% of the products have convergent prices. There are five products their prices increased by applying current method than that prices by applying proposed model. On the other hand, there are six products their prices decreased by applying current method in comparison with prices by applying proposed model. But, the increase and decrease values were not significant and it ranged between 0.01 to 0.10 L.E.
b) There is an inversely proportion between (number of produced units and number of running’s) and indirect ratios by applying current method.
c) Approximately 36% of the number of the products in the liquids Lane (product A) differs in their prices either as an increase or decrease.
d) There are six products out of seven whose costs were reduced according to the proposed activity cost method. This diversity in the prices confirms that some products are priced higher than their actual prices. This result indicates that there is a possibility of loss a part of the firm’s share because of the rise of these prices. As for products which were priced at prices less than they should be, this matter will lead to reduce the firm’s profits because of the unsuitable low pricing.
e) 14% of the total number of products differs significantly where the value of variation exceeds by half Egyptian Pound (L.E.). This trend affects the firm’s sales and its competitive potential.
f) Maximizing profitability, incomes and rationalization of estimated costs at level of production centers and units in the firm may be achieved by using proposed model.
26) For Egyptian metal casting firm, the following conclusions may be stated as follows:
a) Reducing sales costs by 35.35% of total costs in comparison with application of current cost method (Traditional method).
b) Accurate determination of idle capacities cost.
c) Possibility of eliminating idle capacities cost. This elimination process led to reduce cost of production support centers by 52%.
d) Proposed model application inside production centers recorded cost reduction percentage of 52% of total costs.
e) Proposed model application inside administrative centers recorded cost reduction percentage of 84.5% of total costs.
f) Implementation of proposed model inside marketing centers achieved cost reduction percentage of 31% of total costs.
g) Implementing proposed model inside the metal casting firm recorded reduction percentage of cost unit of sold units ranged from 33.2 to 37% of total costs.
h) Maximizing profitability, incomes and rationalization of estimated costs at level of production centers and units in the firm may be achieved by using proposed model.
27) For statistical analysis:
a) Statistical analysis of results values of the present study revealed that there are significant differences by applying proposed model and current method for following indicators: a) costs of production centers, b) product costs, c) products profitability and d) change of product costs for both two Egyptian firms.
b) Also, these significant differences indicated that extent of application validity of proposed model inside two Egyptian firms is greater than application validity of current manufacturing costs method.
c) These significant differences also stated that extent of application validity of proposed model inside public sector firm (Metal casting firm) is greater than application validity inside private sector firm (Chemical products firm).
Generally, application of proposed integrated model which is designed , basically, on utilization of Activity Based Costing (ABC) method and some other modern methods, led to increase the efficiency of business environment inside two Egyptian manufacturing firms.
6.2. Applied recommendations:
1) Due to the inability of the cost system currently used in some governmental and private industrial firms in Egypt, especially, in providing highly accurate information about costs of industrial services provided in the firm, then the firm must implement the Activity Based Costing (ABC) method because of its ability to provide highly efficient information about industrial services cost which aids in planning the yearly plans subjectively.
2) The necessity to use computer programs and the data base technology in habilitating the accounting cadre in the firm, according to the design and implementation requirements of the Activity Based Costing (ABC) method to reduce the system cost to the minimum level with guarantee the accuracy of information by utilizing the computer system in the firm to design a cost accounting system in order to contribute in the ease of applying the system in the departments of the firm and at any administrative level. Also, it is vital matter to introduce and develop the computer processing of information and exploiting the potentials of the computer during operating the Activity Based Costing (ABC) method because it depends on huge amount of mathematical equations which are sometimes difficult to be performed manually.
3) The necessity for good planning of the ABC method implementing process in the Egyptian governmental firms by getting experience from experts, qualified consultants who have sufficient experience in the scope of applying the developed system.
4) The necessity to monitor the sufficient allocations in the firms budget in order to convening specialized training sessions to the decision-makers in the management of firms, in addition to employees about the importance of costing systems, in general, and the Activity Based Costing (ABC) method, in particular, in terms of the mechanisms of application, advantages and disadvantages…etc. also its ability to provide more accurate information compared with other Traditional Cost (TC) methods.
5) Re-Structuring the Governmental Institutions to match with the developed administration systems, especially, the ABC to facilitate process of distributing indirect costs on the submitted services.
6) If some industrial firms wanted to implement the Activity Based Costing (ABC) method and making them one of their accounting system elements, these firms have to introduce the required changes in their accounting and information systems so that these systems becomes able to provide the information required to apply the Activity Based Costing (ABC) method.
7) Studying and analyzing the flow in Governmental and Private industrial firm departments and performing the required changes in these departments to guarantee improving the type of service with a less costs.
8) Attention given by the commerce, economics and management faculties in the Egyptian Universities in developing their schedules and concentrating in the subject of cost accounting and the managerial accounting on the modern tool in making decisions which include Activity Based Costing (ABC) method.
9) Utilizing the data base which exists in the firm and using it to design Costs Accounting Program (CAP).
10) In the light of the contemporary developments, there is a need to start developing the currently applied accounting systems to enable the provision of more accurate information to be used in making the managerial decisions for top management team. This development must be continuous so that no gap can occur among the costs systems and the occurring fast developments. By this way, the system gains flexibility which matches the development.
11) When applying the Activity Based Costing (ABC) method, all administrative and technical levels should contribute in searching for cost drivers and reviewing them to get the best possible cost drivers which can be used in the operational control accompanying the cost measure.
12) There is a severe necessity to define how to utilize ABC method in setup budgets and evaluating performance.
13) The firms have to apply ABC method not only to deal with distribution of indirect costs, but also to benefit by the non-financial information which they provides in defining the undesirable performance locations and determining the activities which do not add value.
14) The researcher also recommends studying two important dimensions (Reducing the costs and increasing the measurement accuracy) on profitability as a vital efficiency indicator during applying Activity Based Costing (ABC) method inside Egyptian manufacturing firms.
15) Modern manufacturing business environment requires a different model of accounting costs ensures the achievement of modern manufacturing firm objectives, especially, in the field product cost determination because of clearly deficit during applying recent Traditional Cost (TC) methods. This is due to they have no accuracy in determining the product costs which lead to making distorted and defective decisions for cost data.
16) It is recommended that the model designer of Future Cost Accounting Systems (FCAS’s) takes in consideration the environmental criterion for obtaining an efficient model (i.e. GCAS) for purpose of realizing an excellent performance quality inside an Egyptian manufacturing firm.
17) It is highly recommended, in the near future, to search for an effective model for expanding the use of ABC method to increase business environment efficiency in Egyptian manufacturing firms.
18) It is also recommended to conduct a trial for deducing a new model includes ABC method and Continuous Improvement (Kaizen Costing) concept by using integration process in order to upgrading the performance efficiency, decreasing costs and increasing profit of Egyptian manufacturing firms.
6.3. Future researches:
1) Applying the Activity Based Costing (ABC) method merged with the quantitative analysis tools and studying influence of this merging on the cost of product and whether it is possible to achieve this type of merging.
2) Setting up modern technologies such as database, information systems, and computer and training programs for implementing ABC method inside Egyptian firms.
3) Study the role of applying ABC method in re-engineering processes in the industrial services sector.
4) ABC method’s role in influencing behavior of strategic decision-makers.
5) Efficiency of ABC method in specifying added or non added value activities.
6) The role of ABC method in evaluating economic units.
7) Economic return of information provided by ABC method and its influence on behavior of decision makers in the non-profitable institutes.
8) Contribution of ABC as a green cost method ( A friendly environment method) in improving business environment in Romania and Egypt.
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Table 56: Outputs of Wilcoxon Signed Test for first hypothesis (Ranks and test statistics).
Table 57: Outputs of Wilcoxon Signed Test for second hypothesis (Ranks and test statistics).
Table 58: Outputs of Wilcoxon Signed Test for third hypothesis (Ranks and test statistics).
Table 59: Outputs of Mann-Whitney Test for fourth hypothesis (Ranks and test statistics).
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