UNIT 5. THE ACTIVITY-BASED COSTING SYSTEM
1.Evolution of the manufacturing environment
The ABC appeared in the 80’s as a method to improve the Assignment of costs to the products because of several changes in the manufacturing environment:
1) The automatization Of the productive processes reduced the relevance of the direct labour costs in The production costs.
(2) The Increase in the importance of the support functions
(3) The Variety of products and markets manufactured by the company
(4) The introduction Of Just In Time and Lean Manufacturing
(5) Increased competence, that makes pricing decisions critical for the survival of The company.
2.The Limitations of the centers of analysis Model:
The 2 stage allocation models that we have Been studying have limitations: the Assignment of costs to products and the relevance of information they provide.
2.1: Departmental cost-control and accounting models
The centers Of analysis allow either to allocate indirect costs to the departments in the Production function to improve the accuracy of the assignment of the cost to The products or to allocate the production costs to control the cost of the Departments.
Hongren Proposed that management accounting is not only a matter of ledger. Using Accounting reports apart from the ledger, substituting departmental Control-accounts has more advantages than using the ledger for departmental Cost-control.
So, 2 methods are possible for the accounting Entries for direct costs that we summarize:
a) Direct Materials consumption: Theoretical: Control of departmental costs for Accountability (to control inventories) and control of work in progress (to Control of departmental costs for accountability. Practical: Control of work in Progress (to control inventories).
B) direct Labour applied: LO MISMO PERO EN VEZ DE INVENTORIES PONGO STAFF COSTS.
2.2:The center of analysis and cost control
The Delegation of responsibilities supposes the capacity for managing the necessary Resources, and an accounting control over the people responsible for that Section of the company. Dearden proposes the following classification of centers for the financial control of Responsibilities:
a)cost Centers: The person in charge is responsible for the resources consumed. The Financial control of operating centers is possible by applying the techniques Of cost accounting(allocation of cost to sections, to products and standard Costing).
b)Profit Centers: The person in charge is responsible for the variables related to cost And performance, so the profit of the center is under her control.
c)Investment Centers: The person in charge is responsible for the variables related to the Performance obtained from the assets.
2.3: Lack of homogeneity of the costs allocated To sections
Traditional Systems usually define the management accounting centers thinking in terms of Functions. The result is that a center includes a variety of costs with Different behaviors. The center of analysis system splits the sections in Several homogeneous sections that are cost-pools with the same cost-behavior, In order to improve the correlation between the activity-unit and the cost Levels.
The ABC Systems changes the focus from cost-centres to activities , and from activities To cost-dirvers:
An activity is defined as a group of operations or tasks Necessary to produce its outputs. An activity should have variables that Measure the units of output and performance. The concept of center of analysis As a mere cost pool, is replaced by the concept of activity, that requires the Participation of several sections or departments to be completed.
A cost driver measures the output of an activity and it is Also the cost-assignment unit. It allows the assignment of the activity cost to A cost object as a function of the amount of the driver. Causality should be The criterion for the selection of the cost-driver making the costs traceable.