Studencki Przegląd Ekonomiczno-Społeczny
Finanse przedsiębiorstw
objects made the ABC approach a suitable costing system for the tertiary sector of the economy, while the traditional costing systems still reflected the domination of manufacturing industries in the business world. While there are similarities in methodology, the crucial difference that distinguishes the ABC system from its predecessors lays, according to Kennedy and Bull7, in the starting point and the direction of the models. The traditional model starts with resources and seeks to allocate their costs to products in accordance with a financial accountant's desire to fully account for all costs. In contrast, the ABC model starts with an enterprise's products and services and then it seeks to identify the activities required to produce or deliver them and, subsequently, the resources required to carry out those activities. This reverse route reflects the change that has taken place in the management of the companies. While the traditional costing system is usually a resource-based model (typical for the industry era), the ABC approach is appropriate for the highly competitive global market strategies that dominate the business world of today. As a result, the popularity of the ABC systems and its advantages lie not only in greater accuracy, although these benefits should not be undermined. The major change in the way of thinking about product costing lead to developing new managerial techniques based on the information provided by the ABC systems. The traditional costing systems were criticised in the late 1980s, mainly because they did not provide the managers with measures to form accurate strategic decisions. The implementation of the ABC approach offered detailed information that could be applied on all levels of cost management creating additional benefits. A more precise tracing of the cost centres and the multiple cost drivers allow for a more accurate pricing and product mix policy. Abandoning the solely volume-oriented allocation bases meant that product lines where the non-volume related overheads were significant became more expensive, while the high-volume products that used common parts to a greater extent became increasingly profitable. Thus, the management received accurate information on which products or services should be pursued and which should be abandoned. The ABC systems allow focus to be place on cost reduction and process improvement as they give detailed analysis of the areas where the costs are incurred. The traditional costing methods provided too general information concerning the overhead cost allocation. Breaking the costs according to various activities allowed to build exact cost-maps and focus on particular cost pools and their causes. Moreover, the detailed description of the costs changed the way of treating overhead costs. While the conventional approaches considered these costs as fixed, the ABC system views them as variable in the long term. Thus, the management can than decide which processes would improve production efficiency or minimise costs. Additionally, since the system is flexible enough to analyse costs by cost objects other than products and services (such as processes or customers), the model provides a basis for customer profitability analysis and other measurements of business performance. Lastly, a significant number of companies implementing ABC systems use this model to measure and assess the performance of the business through flexible budgets. As the model classifies costs of various activities into cost hierarchy dividing them into output-unit level, batch level, product sustaining and facility sustaining8 the flexible budgeting enables insight into why actual activity costs differ from those 7
Bull R., Kennedy T., The Great Debate, “Management Accounting: Magazine for Chartered Management Accountants”, Vol. 78, Issue 5, 2000, p. 32. 8 Output-unit level costs are resources sacrificed on activities performed on each individual unit of product; batch level costs are resources used in activities related to a group of products; product sustaining costs apply to activities that are performed to support a particular product line, while facility sustaining costs are incurred to support the organisation as a whole. Horngren C.T., op. cit., p. 348.
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