1 Journal of Modern Accounting and Auditing, ISSN June 2014, Vol. 10, No. 6, D DAVID PUBLISHING Modern Cost Management in the Transport Company Through the Activity-Based Costing (ABC) Method Viera Šukalová, Pavel Ceniga University of Žilina, Žilina, Slovakia Road transport is a flexible mode of transport and its importance in era of globalization increases. Management of road transport companies is, in this turbulent environment, exposed to many technical, legislative, and economic problems. Especially, the growing economic pressure leads to an urgent requirement of the manager and control system improvement. Activity-based costing (ABC) method is a very powerful tool to improve products, services, processes, and market strategies. ABC allows company management to understand what causes costs and how to manage them. Company under this scheme may get a glimpse of how efficiently a company converts the source value. The main objective of our research was to assess the possibility of application of the ABC method in a transport undertaking. ABC method as a fundamentally different view on the cost in the transport business helps to find the reasons of cost and thereby influences their levels to make better use of resources. New managerial accounting methods aim to show management what information is needed, how and where this information can be obtained, and how they can be useful for the management of the company s proper planning, decision-making, and control. Information provided by management accounting is often a key factor in the analysis of alternative ways of solving problems. This article focuses on the transport enterprise management and helps to decide on the use of this method in business practice. Keywords: management, transport company, costs, activity-based costing (ABC) method Introduction Enterprises provide the implementation of their performances in internally differentiated organizational units: production, supply, marketing, and secretarial and other economic centers. Farm costs need to be transformed from the enterprise level (the financial accounting) through an intra-organizational unit (unit costing). Internal bookkeeping and calculations used the breakdown of direct costs and overhead. Not all direct costs, however, can be assigned to individual performance. Transparent reporting of costs and the related accounting of their cost drivers present a significant factor for the successful management of material flows and the related activities in the company. In the 21st century, companies compete in a complex and busy context of globalization, new knowledge, and technological development. Demands on the quality of the information provided by the cost systems have a constantly upward trend. Management accounting aims to show management what information is needed, how This article was created as an output of the project solution: Model Activity-Based Costing (ABC) in Logistics System of Company, VEGA 1/0995/11. Viera Šukalová, Ph.D., Faculty PEDaS, Department of Economy, University of Žilina. Pavel Ceniga, Ph.D., Faculty PEDaS, Department of Economy, University of Žilina.
2 668 MODERN COST MANAGEMENT IN THE TRANSPORT COMPANY and where this information may be collected, and how the company management may be useful for the proper planning, decision-making, and control. Information provided by managerial accounting is often a key factor for the analysis of alternative modes of addressing problems. In the global competition, costs are becoming a key factor of a firm s success and existence. The need for a new approach to the identification of costs has been associated with the development of automation, extension, and supply products with related growth of the share of indirect costs. The traditional method of accounting seems to be insufficient and often leads to incorrect conclusions and decisions. Management practices and methods are changing especially in the last years. Organizations have been managed more horizontal. Horizontal view focuses mainly on the examination of processes performed at different levels of the company. New approach to management of companies includes new managerial techniques, compositions, and methods for measuring performance, cost control, and improvement of customer service. One of the basic ideas that affect the development of accounting is to recognize how one s business process should be differentiated according to the users of accounting information and what role the decision is pending. Modern financial management is subject to the unification and comparability of information and new accounting methods and tools should conform to these requirements. More detailed structure of management accounting is based on information and their relation to the stages of decision-making process (Ceniga & Šukalová, 2011; 2012). New techniques and methods in particular are as follows: (1) Activity-based costing (ABC); (2) Activity-based management (ABM); (3) Benchmarking; (4) Process improvement; (5) Process reengineering; (6) Total quality management (TQM); (7) Balanced scorecard (BSC); (8) Six sigma. ABC is one of the new cost methods that remove the traditional cost system. This method was based on Robin Cooper, Robert Caplan, and H. Thomas Johnson. Main idea of this method is that the reason of the cost is the activity instead of the individual performance. Thus, addressing the ABC costing method therefore requires knowledge and information on the substance during specific activities, procedures, and processes within the company. In general, the organization viewed ABC as a system of processes, activities, and operations to be carried out to fulfill the mission of the organization. ABC method seeks to describe all the processes in a structured, ongoing activities and operations in the company of their relationship. Decomposing the fundamental processes receives more detailed views of the organization; management focuses on the level of activities. For completeness, it should be noted that the level of activity is the lowest level of decomposition, since the very activities can be further analyzed in terms of the activities carried out within the individual activities. Addressing the ABC method therefore requires knowledge and information on the substance during specific activities, procedures, and processes within the company (Cokins, 2001). The ABC method can be considered as one of the most modern methods of accounting. It is the result of research that was carried out by American top economists in the 80s of the last century. Later, this method was
3 MODERN COST MANAGEMENT IN THE TRANSPORT COMPANY 669 implemented by the world s most successful companies (e.g., Chrysler, Intel, ABB, Boing, Hilton Hotel Chain, etc.), as well as smaller companies developing dynamically. In Slovakia, this method was used, for example, by telecommunications operator, banking, or food production (e.g., Heineken). Main idea of this method is that the reason of the cost is the activity instead of the individual performance. The ABC method therefore requires knowledge and skills in all specific actions, procedures, and processes within the company. Role of the ABC Method in Enterprise Management A right use of the ABC method provides an important competitive advantage, but it needs a new perspective that sees the organization as a system and as a set of processes and activities that shall meet the needs of the customers. This modern method can be applied also in terms of transport enterprises, dominated by the classical method. Full absorption costing prevents disclosure of all factors of their origin. Transportation has a key role in era of globalization, and the road transport has in the transport system the priority position for passengers and also freight transport. Road transport is a flexible mode of transport, but it is connected with many negative aspects: emissions, congestion, accidents, wear and tear of infrastructure, and demand for energy resources. These problems should be solved, because the importance of road transport market increases. Management of road transport is, in the current turbulent environment, exposed to many technical, legislative, and economic problems. Especially, the growing economic pressure leads to an urgent requirement of the manager and control system improvement. An important element in assessing the effectiveness is the costs of certain activities, and reduction of such costs is often regarded as the most important factor in increasing competitiveness. Changes in recent decades have shown that focusing on local optimization in the enterprise does not lead to progress and approach coupled with information and communications technology (ICT) should be applied in the management systems. This approach requires a comprehensive approach of thinking, formulating problems, their solutions, and interpretation. System approach to management is characterized by understanding the structure of the company with its internal and external interactions. This reality requires new approaches by management and in terms of expertise, information security, organizational conditions, and the use and combination of available modern management methods and instruments. One way to achieve efficiency represents the management of costs and benefits geared to their relationship to operations, activities, and processes. The concept in this context is the ABC method viewed as a management technique for costing and process and value of modern business management. ABC method as a fundamentally different view on the cost in the transport business helps to find the reasons of cost and thereby influences their levels to make better use of resources. The ABC method ultimately contributes significantly to improving performance by reducing material movements and eliminating activities that do not add value. ABC Method: A New Tool for Cost Management The ABC method is described as a managerial technique in cost calculations. According to Cooper and Kaplan (1988; 1998), the ABC method is simple, because everything from business activity exists only to promote the production and provision of goods and services. All business costs are separable and divisible and can be assigned to individual products or product groups. These costs include: logistics, manufacturing, marketing and sales, distribution, utility services, technology, manufacturing, financial administration,
4 670 MODERN COST MANAGEMENT IN THE TRANSPORT COMPANY information resources, and general administration. An effective system for measuring costs must identify and provide accurate product costs in all its complexity. Thus, the ABC method actually becomes a tool of corporate strategy rather than the usual formal accounting system. Decisions on pricing, marketing, and product creation are among the most important management decisions (Kaplan & Cooper, 1998). The ABC method allows managers to have more strategic views of their business and to understand the economic sustainability of products and customers. The ABC method assigns the cost of resources (personnel, equipment) on the activities and processes rather than on specific products, services, or customers. The costs of all resources used in products, services, and customers (including sources outside the company) are included in the strategic costs of products and customers. Strategic costs help the managers to understand the profitability by the disaggregation of different levels of products, services, customers, business units, and the corporate hierarchy. Anderson simply confirmed the description and characterization methods. The ABC method is an accounting system which focuses on activities by the manufacturing of products. Activities are becoming accumulation points of the costs. Costs are assigned to actions and activities are assigned to products (Cooper & Kaplan, 1988). The ABC method identifies most of the activities in the manufacturing process and these activities are aggregated into activity centre and accumulate costs in the activity centre which assigns product activities and operations costs. Drury (1992) said that the ABC method allows a better understanding of the behaviour of overheads and to identify what causes overhead costs and how these are related to the products. The ABC method shows how the cost units shall be allocated. It focuses on individual activities for development of each product. Products consume activities in different amounts (followed by cost carriers) and activities consume disposable resources also in different quantities (followed by media sources). Basic Principles of the ABC Method Characteristics of the presented ABC method in transport company can be summarized as follows: (1) The product for our costumer causes costs; (2) These costs are the result of certain activities for a particular customer, not all and not all the same; (3) The activities are causing consumption of certain specific sources; (4) The organization has the resources for its activities; (5) Consumption of these resources causes costs of the activities; (6) For the operation of specific consumers are consumed various activities; (7) Consumption of these activities causes the costs for a particular customer. The ABC method can be used also in the opposite direction when the flow of information from products to resources can significantly refine the budget and financial plans. This use is called activity-based budgeting (ABB), which represents an advanced technique of using ABC model. Classification of Costs in the ABC Method The ABC method looks at the direct cost in the same way as traditional costing systems. Short-Term Variable Costs These costs vary in relation to the volume of production and are also classified as variable costs in traditional costing systems. A typical example of such costs may be the cost of carrying capacity. Change in the
5 MODERN COST MANAGEMENT IN THE TRANSPORT COMPANY 671 volume of production is expressed by machine hours, hours of direct labour, direct material consumption, or otherwise, and these indicators are used as carriers of costs. ABC method calls them determinants (carrier) of costs, which are changing with the volume (volume-based drivers). Long-Term Variable Costs These overhead costs do not change with the volume of production, but they vary with different levels of activity, but not immediately. For example, the costs of support activities, such as sales, production scheduling order of tasks, adjusting machines, and so on, are fixed in the short term, but they vary in the long term in accordance with the scope and complexity of products being produced. The ABC method takes these assigning costs to outputs using transaction cost carriers (transaction-based cost drivers). They are defined as activities or transactions that significantly affect costs. Traditional costing systems classify these costs as relatively fixed. Fixed Costs These are costs that do not vary over a given period of time, and as with any other indicators. For example, Cooper and Kaplan s (1998) research shows that these costs are a relatively small proportion of the total costs. Application of the ABC Method in the Transport Company For the application of the ABC method in the transport company, we can recommend to deal with the basic elements by the creation of the model. Basic Elements of the ABC Method Activity. Activity is job performance, a procedure consisting of activities. Often, it is the linking of activities immediately following each other or activities of a similar nature. The hierarchical activity is the activity of the company. Activity represents work done in the company. Each activity consumes resources of the company. All resources needed to carry out certain activities must be associated with it regardless of the internal organizational structure of the company. This connection then allows the company to determine the total resources needed to carry out certain activities. Process. Process is a group of activities, which are interconnected to achieve a specific objective. Process is hierarchically superior to activities. It is a set of interdependent activities. Processes support the core functions and mission of the organization and identifiable outputs. Their activities are customers and consumers of other activities. Thus, there is a chain of activities generating mutual customer ties. The results of each activity can be input from other activities (Turney, 1991). Cost driver source driver. It is the cause of cost and therefore anything that causes a change in the cost of operations. Determination of cost carriers and resources is the most important part of modelling in the ABC method. This stems from a good knowledge of company operations and largely depends on the creation of the ABC model. For these terms, the following may be used alternatively: determinants of costs, determinant of resources, reference base of distribution, key base of distribution, cost driver, and costs initiator. Ideal metrics must meet the following requirements: (1) Clear comprehension; (2) Accountability; (3) Rapid acquisition of computer systems; (4) Proportionality to the output. Units are expressed frequently as a percentage.
6 672 MODERN COST MANAGEMENT IN THE TRANSPORT COMPANY Resources. It is a broader view of the concept of cost. Resources are consumed by the implementation of the actions and activities. Management of resources is important for the analysis of the activity and the intensity of resource consumption. The sources are human labour, materials, electricity, etc.. These resources are consumed by carrying out activities. Resources can be seen as factors of production. Resources are economic elements existing in the company, and their existence and consumption by activities cause the costs. Cost element. It is the element which incurs costs. Activity centre. It is a business segment for which the management has decided to monitor the total costs of activities. It is a grouping of activities. Activity centre is based on certain criteria. It may be the organizational structure, the technological process of production, or any other key selected by the management. Activities in activity centre are not limited; one activity of activity centre may have different determinants of cost allocation for the second stage. Each activity can be assigned to more activity centres. Activity centre can be a certain production department or any chosen activity for which the company decided to calculate costs. It expresses a branch organization unit, activities organization. Cost pool. It expresses a grouping of cost elements associated with the activity. It is actually a summary of the costs associated with the activity. It assumes the function of economic or cost centre. Cost funds are homogeneous and absorb only one predefined action; costs in each cost pool are variable (proportional) in relation to activities. Cost object. It may be a customer, product, service, contract, project, or any other work unit for which there is independent evidence of the cost. The traditional costing system, the traditional monitoring of costs, and the traditional costing approach. These labels are now used for any calculation system and method for assigning costs to outputs (but typically, the calculation of overhead rates). Performance measures. They are indicators of the work done and results in the field of business process or organizational unit. They describe the work that has been developed and the results that have been achieved by some actions. They show how well the activity is performed. Performance measures express how activity meets the needs of internal or external customers. They include measurement techniques of activity force, time required for completion of the activity, and quality of the work (Tóth, 2004). Specification of the Procedures for Implementation of the ABC Method in the Transport Company According to the special aspects of the transport output, we can recommend, by applying the ABC method in the transport company, the following steps: (1) Identification of processes, activities, and actions and determination of activity centres; (2) Identifying business outcomes (the main performances) and products; (3) Establishment of cost centres for each major activity: the identification of cost accounting cost centre for activities centre; (4) Finding the causes of costs: identification media for processes; (5) Cost allocation of resources to activities; (6) Allocation of costs to processes; (7) Activity costs allocation to outputs: allocation of costs from processes to products. By the ABC method, it is necessary to identify all of the outputs connected with costs. It is also necessary to find the reasons for carrying out all activities.
7 MODERN COST MANAGEMENT IN THE TRANSPORT COMPANY 673 Contribution of this method for the transport company is mainly better targeted absorption costing, identifying the real nature of costs and determining the relationship between business activities and costs, the possibility of optimizing operations and providing more accurate information for management decision-making and planning. It should be noted also some negative aspects of the ABC method: higher cost of labour intensity with the introduction of the method, the administrative processing of the amount of new information and data, the monitoring, accounting and control, as well as new software and staff training. The ABC method brings many advantages in management of transport organization, but the application is complicated because of the fact that it is the field of services. From this point of view: (1) The output is harder to define; (2) The determining activities and cost drivers can be not straightforward; (3) The activities can sometimes be hard to predict; (4) It can be a problem to win needed data and provide measurement. These differences show that activities and output of the processes of the transport company cannot be represented as easily as in manufacturing enterprises. The true costs of the transportation services are not so easily determined at a first view. Many costs remain buried in overheads and managers cannot have the right visibility and control over them. Conclusions Management of road transport represents a complex universally valid model, approaches, methods, and techniques used in evaluating resources and achieving business-oriented entity, to produce the service. Transport management is aimed at creating conditions of business and providing quality transportation services in a competitive environment. Even in the management of road transport company, both theoretical knowledge and practical applications must be developed at the same time. Globalization brings with it the ever-increasing competition, supported by information technology. The competitive battle requires new rules, new thinking, and new insights on business. When considering the existing conditions of competitiveness, it is necessary to mention the impact of the global financial crisis, which led to the economic crisis. The main global risks we include are as follows: (1) Geopolitical risks: Associated with the failure of global governance; (2) Environmental risks: Increasing greenhouse gas emissions; (3) Chronic fiscal imbalances: Economic factors; (4) Technological factors: Critical system errors; (5) Social risks: Unsustainable population growth. Growing importance of political and economic factors shall be accepted also in the field of transport business. As a result of the growing social inequality and the related political instability, there are also growing adverse consequences of climate change and sustainability challenges to technological development. The road transport business is affected by the situation in Slovakia in terms of competitiveness. The Slovak Republic ranked the 71st place of 144 countries in the competitiveness ranking list, according to the Global Competitiveness Report In era of customer economy, when companies focus attention on meeting the needs of customers, it is necessary to examine ways to achieve greater efficiency and effectiveness and to create the conditions not only
8 674 MODERN COST MANAGEMENT IN THE TRANSPORT COMPANY for the present but also for its future competitiveness. Costs are an important economic category, which significantly affects the business and thus, this category should be analysed, evaluated, and optimised. We shall accent the importance of integration as one of the issues for better effectiveness. It means integration within the company and between the company and their customers and vendors. Effectiveness requires that each relevant element of the organization do its part. In addition to internal integration, we must bring together and work with the external players. Integration with customers is very important in transport service. We and everyone in our company must work to satisfy our customers. Using the ABC method is profitable not only for the company s effectiveness, but also for customers wishes. The ABC method helps firms across the world to become more efficient and more effective. Decomposing the fundamental processes receives more detailed views of the organization; management focuses on the level of activities. For completeness, it should be noted that the level of activity is the lowest level of decomposition, since the very activities can be further analyzed in terms of the activities carried out within the individual activities. The ABC method can provide a clear picture of resources and costs. References Ceniga, P., & Šukalová, V. (2011). Management accounting in business logistics. Logistyka: Príloha Logistyka, 6, Ceniga, P., & Šukalová, V. (2012). Logistics in company management. EDIS, Žilina: Žilinská Univerzita. Cokins, G. (2001). Activity-based cost management: An executive s guide. New York, NY: John Wiley & Sons, Inc.. Cooper, R., & Kaplan, R. S. (1988). Measure costs right: Make the right decisions. Harvard Business Review, 66(5), Cooper, R., & Kaplan, R. S. (1998). The promise- and peril- of integrated costs systems. Harvard Business Review, 76(4), Drury, C. (1992). Management and cost accounting. London: Chapman and Hall. Kaplan, R. S., & Cooper, R. (1998). Cost and effect: Using integrated cost system to drive profitability and performance. Boston: Harvard Business School Press. Tóth, M. (2004). Costing by sub-activities (Activity based costing method). Bratislava: Ekonóm. Turney, P. B. (1991). Common cents: The ABC performance breakthrough: How to succeed with activity-based costing. Hillsboro: Cost Technology.