ABC METHOD – EVOLUTION OR REVOLUTION IN THE CALCULATION OF COSTS
ABC METHOD – EVOLUTION OR REVOLUTION IN THE
CALCULATION OF COSTS
University of Craiova, Faculty of Economics and Business Administration, Str. Calea Bucureşti, Bl. M9,
Sc. B, Ap.6, Craiova, Dolj, email@example.com, 0722430000
University of Craiova, Faculty of Economics and Business Administration, Str. 1 decembrie 1918,
Nr.24, Bl. F8, Sc. 2, Ap.24, Craiova, Dolj, firstname.lastname@example.org, 0744937007
Summary. The accounting systems of traditional administration have lost their credibility, in the sense in
which the accounting information that they produce is lesser and lesser adequate to the action and the
control of the modern enterprise, based on the diversity of the production and the multiplication of the
combinations of goods and services for the satisfaction of the demand of a more and more differentiated
custom. As a reaction to the limits of the classical methods of administration accounting, in the 1980s there
was developed and implemented the ABC method, which is based on two complementary orientations: one
concerning the calculation and the analysis of the costs and another that aims for it as an instrument of
measuring the performances of the enterprise. It represents more of an evolution than a real revolution in
the field of the administration accounting.
Key words: ABC method, cost inductor, pertinent cost, activity.
1. The premises of the organization of the calculation of costs through the ABC
The economical environment most enterprises are part of knew important mutations in the last decades.
They can be synthesized in three major evolutions:
− the development of globalisation phenomena and the increase of competition’
− disfunctionalities that can appear in industry and services;
− the acceleration of the technological innovation.
In this context the administration accountancy must answer to the following problems:
a) the variation of the production and the multiplication of the combinations of goods and
services for the satisfaction of the demand of a more and more differentiated custom. On the
hand, the enterprise must administrate from now on, at the same time, the two components of
the profit: the value, which is fixed by the client, and the conversion value and, on the other
hand, the production of an enterprise can be represented through a continuous good-service,
in a diversity of combinations products-services, going from the pure physical good to the
pure service (the informational sector constitutes an excellent example of this evolution).
b) the development of the support activities. The production function loses from its importance
in the economy of the last decades in favour of the activities downstream and upstream.
Beside the sold product, there also generates value for client the complex of services
associated to it, offered through these support activities (delivery, installation, formation,
service, etc.), and in this context the classical systems of administration accountancy must
answer to the following question: how is determined the cost of the resources consumed by
the customers if the administration accountancy system is organized on the fundamental
principle that the resources are consumed by products?
c) The structure of the costs of the enterprise has radically changed in numerous industrial
sectors. The automation of the industrial production processes led to the modification of the
structure of costs. Thus, it arrived, from a structure of costs in which the raw materials
represented 40-50% from the total cost of production, while the materials, which represent
29% to 70% from costs, constitute indirect expenses (for example, the electronic industry).
In this new structure of costs, in which there increased the weight of the indirect expenses of production,
the adequate distribution of indirect expenses between products becomes preponderant and the use of the
division key hour-worker or our-machine, used in the classical accounting systems, is no longer adequate.
On the other hand, in the last 20 years, in many enterprises, the part represented by the conversion values
have constantly diminished in the global cost of the enterprise (approximately 40% from total cost of the
enterprise) and has increased the weight of the activities of marketing and/or research (approximately the
In such a context the performance of the enterprise doesn’t depend on a single factor of production, direct
labour, which, in these cases doesn’t represent but a minimum part of the total cost. So, the performance of
the enterprise results from a combination of factors as: the minimum price, the maximum quality, the
respect of the delivery terms, etc.
d) the functional control of the resources.
The instability and the uncertainty that characterize more and more the environment in numerous
enterprises put in difficulty the possibility of the assurance of the coordination of different activities of the
enterprise through the budget and, also, lets the different responsibility centre take decisions of local
optimization without taking into consideration the impact that they have (their decisions) on the other
structural units of the enterprise.
The informational accounting systems must be built in such manner that they generate pertinent
information for the processes in the enterprise.
e) the pertinence of the production volume as unique inductor of the cost.
The passage from an economy of offer to one of demand and the multiplication of products that result have
modified the causality structure of the costs of the enterprise. Beside the production volume that
constitutes, undoubtedly, the predominant cost inductor of the enterprise and other cost indicators like: the
diversity of the production and the complexity of the processes of production, get a certain importance to
explain the causality of the structure of costs. The increase of the number of cost inductors makes that the
adequate representation of the consumption of resources of the enterprise be complex.
In conclusion, it is asked the question: how much pertinent can be accounting systems based on a taylorian
representation of the enterprise for the orientation of the administration and the assurance of the control of
the enterprise, permanently confronted with the change and the complexity? The answer is that the
administration accountancy systems, which inspire from the taylorian vision of the organization of the
production, have lost their credibility, in the sense in which the accounting information that they produce is
less and less adequate to the action and the control of the enterprise.
2. The general presentation of the ABC method
To remove the limits of the classical administration accountancy systems, which have at their basis the
taylorian organization of the enterprise, some American enterprises began to develop, in 1980s,
administration accountancy system based on the representation of the enterprise going from its activities. A
close analysis of this accounting systems show that, in fact, it’s rather about more of an evolution of the
classical systems than a real revolution in the conception of the administration accountancy systems.
Synthetically, two major changes distinguish the accountancy systems on the basis of classical systems
− – an other modality of division the indirect expenses on the bearers of costs, through centres
of accounting regrouping based on activities and not through functional centres of
− – it is resorted to a bigger diversity of the basis of division for the allocation of the cost of the
analysis centres at the bearers of costs.
Through the brought innovations, the ABC method produces a more pertinent cost, because there is a
relation cause-effect between the activity and the product that consumes the activity. From the point of
view of the construction of a system of administration accountancy, the activity becomes the centres of
representation and modelling of the enterprise. The activity serves as an interface between the consumed
resources and the bearers of costs the cost of which we want to measure. It allows a new vision in the
cutting up of enterprise, the transversal vision, which replace the vertical one, respectively the cutting up
on functions. In this way there is obtained a more real cost, on the basis of which there can be taken
strategically decisions, through the non-creative activities of value and the division of expenses, using as
basis the activity that generates them.
The ABC method has at basis two fundamental principles, and namely:
− the activities consume the resources of the enterprise;
− the products consume the activities.
Within the ABC method, the treatment of the direct expenses is alike the one in the classical systems,
respectively direct allocation on the bearers of costs. The indirect expenses make the object of a different
treatment, the procedure of their allocation on the bearers of costs, supposing two stages:
− the division of the indirect expenses between the centre of accounting regrouping established
on the basis of the activities;
− the allocation of the cost of the activities on the bearers of costs according to the
consummation of the activities.
The ABC method has at basis two complementary orientations: one concerning the calculation and the
analysis of costs and other that aims it as a measurement instrument of the performances of the enterprise,
which will be followingly presented;
3. The calculation of costs through the ABC method
The organization of the calculation of costs through the ABC method supposes the going over of the next
− the identification of the activities and of the due costs;
− the establishment of the cost inductors of the activity;
− the regrouping of the activities in homogenous centres;
− the allocation of the costs of the activities at the calculation objects.
a) The identification of the activities and of the due costs. The analysis of the activities in the
first stage in the construction of an ABC systems and presents a big importance, because
according to this initial stage is determined the nature of the administration information
produced in future by the ABC system, on long term. The knowledge of the finalities of the
accountancy system on the basis of activities will direct the labour of the identification of the
activities and the degree of detailation of the analysis. The calculation of cost needs, in most
cases, the identification of 30 up to 40 big activities; following, a measure of the profound
analysis and of the reconfiguration of the processes demands a much more detailed analysis
which allow the identification of various activities in an enterprise. In this essential to be
determined for each activity the responsibility centre of which it is attached to identify the
person that can take the administration decisions relative to the activity. Without this
connection with the structure of responsibilities it is not possible the control of the cost of the
activities. The regrouping of the activities in administration processes allows to be
determined, through the aggregation of the cost of activities, the cost of the process. Some
authors have introduced a distinction between the activities creating of value and those that
don’t create value, with the purpose to concentrate the efforts of reducing the costs on the
non-creative activities of tax-added, without diminishing the offered value to the final client.
After the activities were identified, it is proceeded to the determination of the costs of the
resources consumed by the activities. Although certain consumptions of resources are indirect
in comparison with the products, they are still direct towards the activities, which makes that
the resources consumed by the support activities not be divided in the cost of the products in
comparison to the arbitrary division bases. Actually, one of the basis principles of the ABC
method relies precisely in the more realistic division of the indirect expenses on the products,
in comparison with the classical methods of calculation of costs.
b) The establishment of the cost inductors of the activities. The cost inductors represent the
innovating part of the ABC method, but are, at the same time, the more expensive aspect.
The cost inductor constitutes a causality factor of the cost of the object of calculation and, particularly, of
the activity. The knowledge of the inductors of cost of the activities is essential for an administration of the
activities in view of the reduction of their cost.
The cost inductors allow the allocation of the cost of the activities on the calculation objects, they serving
as measurement instrument of the volume of the provided prestations.
In the context of the administration of the activities, the choice of a cost inductor can be oriented in view of
the attaining of two different objectives:
− the representation of the consumption of resources in activities by the objects of calculation;
− the orientation of the employees’ behaviour, choosing as cost inductors those that determine
the members of the enterprise to take decisions referring to the consumption of the activities
allow the realization of the strategically objectives of the enterprise.
c) The regrouping of activities in homogenous centres. The activities that have the same cost
inductors will be grouped in a single centre of accounting regrouping on the basis of
activities, without being affected the quality of the allocation of activities on the objects of
calculation. Generally, in a enterprise there can be identified 200 up to 300 different
activities. The making of 200 up to 300 centres of accounting regrouping of indirect expenses
can lead to an accounting system that is extremely voluminous and that is why the
management must realize a compromise between the simplicity of the model of accounting
representation of the enterprise (reduced number of activities and cost inductors) and the
precision of the provided accounting information (the detailed ensemble of the activities and
of the cost inductors). That’s why it is imposed the regrouping of the activities, it must be
done in comparison with the factors of causality (the cost inductors) so that the distortion
risks, in the calculation of the cost of the objects of calculation be minimum.
d) The allocation of the cost of the activities on the objects of calculation. For the determination
of the complete cost of the objects of calculation, the next stage relies in the division of the
indirect expenses on the objects of calculation, between the analysis centres on the basis of
activities. This primary division of the indirect expenses between the analysis centres on the
basis of activities, can be done after two ways that correspond to two types of indirect
− the indirect expenses that are directly attachable to a centre of activities. In this case, the
indirect expenses are directly affected, as also in the case of the direct expenses of the
− the indirect expenses both towards the objects of calculation, and towards the analysis centres
on the basis activities. They can not be directly imputed and must make the object of a
division between the different analysis centres on the basis of activities, using a division key,
more or less arbitrary, which can lead to distortions in the calculation of the cost. In the
conception of the ABC method, the cost of the objects of calculation (products, technological
installations, customers, etc.) is formed by the direct expenses at which it is added the cost of
the consumed activities, the latter being obtained through the weight of the unitary cost of
every inductor with the volume of the inductors used for the obtaining of every calculation
The adoption of the ABC system for the calculation of the complete costs of the products has a bigger
impact on the effective level of cost and, so, of the profit margins, when there are accomplished two
− the part of indirect expenses due to the support activities for the production increases in the
structure of the total costs of the enterprise;
− the diversity of the products or the services offered to clients is increasing.
We appreciate that the introduction of the ABC method, as a reaction to the limits of the classical methods
of administration accountancy, generates a series of mutations in the administration of the enterprise, and
− the administration through activities allows continuous improvement of the performance
through the identification of the ensemble of activities, cost and relations of cause-effect
between the activities. On other hand, the map of the activities allows the heading of the
managers’ attention towards:
− the activities that represent the most important cost for the enterprise and, so, the most
important potential of the reduction of costs;
− the non-creative activities of value the elimination of which would allow the diminishing
of the costs of the enterprise, without a reduction of the value of the product offered to
− the comparison between various entities of the enterprise (factories, sections,
workshops, etc) in what concerns the performance level attained in the realization of an
activity. The most performing entity, in the putting into practice of the activity, becomes
thus the reference for the realization of this activity in the ensemble of the group and
indicates ways of continuous improvement of the performance. The comparison can also
be made through the comparison to a reference point external to the enterprise, as it is,
for example, the enterprise considered the most performing in the sector.
− it shows the impact of a decision taken concerning an activity on other activities
structurally comprised in another function of the enterprise. A concrete example is
represented by the choice of the solution in view of the conception of the product because
80% up to 90% from the value of the product is definitely fixed in the moment of the
conception phase. All the actions of reduction of the value, which is limited to the production
operations, won’t lead but to minimum results.
− identifies the causes of costs better than the classical methods, which leads to the increase of
accuracy and pertinence of the obtained costs, and also to the use of the information about the
cost in different purposes within the enterprise.
This thing is realized through ABM (Activity-Based Management), as it will be presented in a separate
article. The improvement of the quality of the accounting information about costs allows the taking of the
best decisions in what concerns the politics of the product, the externalisation or the fabrication by the
enterprise of some products or components, the orientation to the client.
With all these advantages, the ABC method represents more of an evolution than a real revolution in the
field of the administration accountancy. The ensemble of the concepts and the fundamental principles that
stay at the basis of the classical administration accountancy systems are found put into practice by
accountancy through activities.
The two mains changes brought by the ABC systems refer, actually, to the application of the fundamental
principles. On the one hand, the criterion of the regrouping of the indirect expenses in analysis centres is
done on the basis of the attachment of resources to the activities that consume them, and not on the basis of
the belonging to a responsibility centre. The regrouping way doesn’t put into discussion the principle of
treatment of the indirect expenses in the calculation of the complete cost. On the other hand, the
introduction of the cost inductors for the division of the expenses in the analysis centres on the objects of
calculation is an application of another calculation principle of the complete cost, respectively the division
of the indirect expenses on the basis of some division keys. From a strictly accounting point of view, the
contribution of accountancy through activities is limitation itself, through, to a reactualization of the
classical model of the administration accountancy, to adapt it to an economical and technological
environment that has evolved in terms of complexity of the processes of production and of diversity
of products, to satisfy a demand of a more and more exacting custom, whose satisfaction determines
the performance of the enterprise.
The vision of the enterprise as an ensemble of activities and processes before becoming an ensemble of
responsibility and functions centres imposes it self more and more in different science domains of the
administration. The most interesting contribution of the ABC system is, undoubtedly, that it articulate
the existent administration system with the representation through activities and provides
information to those with decisional power to letter administrate the activities. The analysis through
activities has the big merit to place in the centre of the accounting preoccupations the care to generate
information that is pertinent for the taking of the decisions in the enterprise. It undoubtedly allows to be
better redefined the role that the administration accountancy can have in the taking of the operational and
strategically decision in the enterprise.
1. Budugan Dorina and collective (2007) – Contabilitate de gestiune, Ed. CECCAR, Bucureşti;
2. Epuran Mihail and collective (1999) – Contabilitate şi control de gestiune, Ed. Economică,
3. Iacob ConstanŃa, Ionescu Ion, Goagără Daniel (2007) – Contabilitate de gestiune conformă cu
practica internaŃională, Ed. Universitaria, Craiova.
|Academic Level||College (3-4 years: Junior, Senior)|
|Number of Pages||1 Page(s)/550 words|