Subject:

Costs II

Theme Name

Analytical summary of ABC costs

Presented by:

Laura Mercedes Morales Serrato ID: 684130

Yeimmy Natalia Vargas Vargas

Luz Diney Cárdenas Valencia

Presented to:

Diego Fernando Cabezas Rodríguez

25565

University Cooperation Minute of God - UNIMINUTO

School of Administrative Sciences

Ibagué Tolima

March 2021
Introduction

This document presents an analytical summary on cost-based systems.

In ABC activities, the importance of identifying activities in order to assign the...

resources and determine the associated costs, the cost calculation model in a company is

of utmost importance, as it determines the viability of the business, and measures the degree of

productivity and efficiency in the use of resources and helps us to specify the costs of

the products, sales, and customers since the traditional system focuses on the allocation of the

indirect costs to the different activities, and then to the cost objects.

We also clearly and concisely summarize the following basic topics and concepts with

relationship to cost based on activity criteria according to the value creation chain,

Accounting and financial information versus managerial information, steps that must be followed in the

implementation of an ABC cost system, the classification of activities, definition of the

cost objects, determination of resources, cost drivers or cost managers,

allocation of resources to activities, calculation of unit costs through ABC and by

lastly, activity-based management (ABM).

Analytical Summary 'ABC Costs'

The ABC cost system is based on the fact that a company requires to perform in order to produce.

activities that consume resources. Based on this premise, the activities are costed and

then the cost of these is assigned to the different cost objects (products, services,

etc.) that these activities demand, with this a greater precision in the determination is achieved.

of costs and profitability. Understanding a cost system as a model

mathematician who seeks to simulate resource consumption in a transformation process, with the

purpose of knowing its cost.

The main characteristics of the ABC cost method are that tasks are carried out by

an individual or group of individuals. Managing production means controlling activities

more than the resources. Try to meet the internal customers' needs as much as possible and

external. Activities must be analyzed as part of a business process and not as

isolated form. Eliminate activities that do not add any value to the organization. Maintains

a continuous improvement goal in the development of activities. It is a system

of 'integral' management, where information on financial and non-financial measures can be obtained.

financial tools that enable optimal cost structure management. It allows understanding the flow

from the activities, in such a way that each one can be evaluated separately and valued the

need for their incorporation into the process, with a comprehensive view. Provide

objective valuation tools for cost allocation. And finally, we find those that

they are a managerial model and not an accounting one.

The activities in ABC costs: They are the first task of any company when implementing the

ABC system is to identify the activities that are carried out in the company, as we have ...

As mentioned before, these will be the ones that consume resources and are classified as follows:

1. Main activities: These are the ones that are directly related to the purpose of

the company. It cannot be proposed to eliminate its direct control.

2. Secondary activities: They are the ones that generate added value from the point of view of

client. however, they represent too many costs for the company to bear, so

that may be subcontracted.

One of the most important advantages derived from an activity management system is that it does not

it directly affects the organizational structure of the functional type as the ABC manages the

activities and these are arranged horizontally across the organization. It is precisely this

the advantage that changes in the organization are not reflected in the system. It helps to

understanding the behavior of the organization's costs and on the other hand it is a tool

management that allows for financial projections since it simply needs to inform

of the increase or decrease in activity levels. The ABC perspective gives us

provides information on the causes that generate the activity and the analysis of how it

they carry out the tasks. An exact understanding of the origin of the cost allows us to address it from its

roots. It allows us to have a real vision (horizontally) of what is happening in the company.

Without a horizontal vision (without knowing the participation of other departments in the process that

we actually lose sight of the need for our work for the client to whom

we must justify the price we charge. This new management system will allow us to know

non-financial measures that are very useful for decision making.

It also has some disadvantages where there is a clear acceptance by everyone.

experts that the ABC consumes a significant part of resources in the design phases and

implementation. Another aspect to consider that can make it difficult to

the implementation of ABC is the determination of the scope of action and level of detail in the

definition of the activity. A third aspect is that, if it can be made difficult for us to define

of the activities, where we are really going to have a greater number of problems is in the

definition of the "inducers" or factors that trigger activity. To determine the

We must use the cause-effect method in order to analyze the causes.

immediate until obtaining the true cause that triggers the accumulation of activities. By

Finally, it is true that any change in a system is always accompanied in the early

phases of an adaptation process and to prevent the newly implemented system from becoming

complex in use and should not entail a traumatic process, users must be educated that

they maintain the information and the people who use it for decision-making.

ABC cost calculation is a tool that allows for cost calculations.

more accurate than traditional models and also helps to analyze the processes that allow

improvement, this system is based on the fact that products consume activities and the

activities the resources (costs).

Value creation chain

It begins with the recognition that eachcompanyor unit ofbusinessIt is a series of

activities carried out to design, produce, market, deliver, and support

your product". By analyzing each value activity separately, managers can

judge the value of each activity in order to find a sustainable competitive advantage
for the company, which allows identifying how all its creative activities are composed

of added value, the value chain is mainly composed of three basic elements of

activities

1. Main or primary activities: these are the ones directly involved in development.

product where it is distinguished by five activities, the internal logistics where it includes

the operations of reception, marketing, storage, and distribution of the

raw materials, the production of operations is the processing of the materials

elements for the transformation of the final product and after-sales services.

2. Support or auxiliary activities to primary activities: they manage the information of

the human resources of technological developments, purchase of goods and services, and the

business structure.

3. The margin is the difference between the total value and the costs incurred in development.

value-generating activities.

On the other hand, we also find that there are essential types of activities in the

value chain, are the direct activities that are directly involved in the

creation of offered value and depend on the type of the company. Next, they follow the

indirect activities that enable the functioning of activities

direct and are related to maintenance, accounting. Finally, follow the

quality assurance in the development of all the activities of the company such as

It indicates that those that provide the feasibility of establishing the company in a way

impeccable.
Accounting and financial information versus managerial information

Both rely on the same accounting information system and have the same database.

That accounting presents the general situation of the entire company. Financial information is

more formal and have a strict presentation format for external shareholders. While

The management reports are more informal as they are used within the company itself. But

Even with these differences, both methods allow the reader to draw a conclusion about the

business health.

Accounting is presented as an information system that reports on facts.

economic - financial aspects of an organization over a period of time; it also informs about

the use and application of resources, which are reflected in the accounting reports that go

to be used by the different users in order to make their decisions. In the specific case of the

Cost accounting can be said to encompass the procedures for determining

how much it costs to produce; that is, what is the unit cost of a product or service. The

cost accounting encompasses three elements, namely: direct materials, direct labor and

the indirect manufacturing costs (IMC). Direct costs are measurable; however, the

Given its heterogeneity, in traditional cost systems, they are allocated based on

a predetermined rate, for example, machine hours. The apportionment methods

they can be: distribution of CIF among the production and services departments; distribution

of the costs of service departments among those of production.

Implementation of the ABC cost system

The following steps must be taken into account:

 Determination of the resource

2. Identification of activities

3. Identification of the elements of the costs of the activities

4. Determination of cost drivers

5. Cost allocation to activities

6. Assignment of costs to activities, materials, and the product

7. Assignment of direct costs to the product

Classification of activities

According to their performance regarding the product:

By product

Per batch

By product line

By company

According to the frequency

Repetitive

No repetitive

According to the ability to add value to the product

That add value to the product

● They do not add value to the product

Definition of cost objects

They are groupings of the costs incurred by companies for the production of a product, the

the most commonly used cost elements are:

 1. Materials and raw materials: includes the materials directly incorporated into the

product

2. Direct labor: direct labor assigned to the production of the product

3. Indirect labor: expenses incurred in the production of the product during the

period or like human resources but it is not direct labor.

4. Third-party services: expenses paid for services or advice provided by individuals

or companies outside the organization.

Buildings and facilities: infrastructure expenses.

6. Equipment: expenses on equipment necessary for the production of the product.

7. Advertising and selling expenses: expenses related to advertising campaigns

Determination of resources

The costs relate to the product as they assume each element of the product where it is consumed.

the resources in proportion to the volume produced, therefore, in the volume attributes of

product, are like the number of hours of direct labor, machine hours,

amount invested in materials, are used as allocators to assign costs

indirect.

Cost drivers or handlers

The addressers is a causal relationship that exists when it can be demonstrated that a factor of

production is consumed directly by an activity. The key aspect to establish a

causal relationship is to define a measure of activity, in criteria of application or distribution of

costs are determined by how the workload or the company's resources are distributed to the

activities and cost objects that can directly or indirectly influence the cost.

the levels of the drivers are determined in three causal relationships

important:

Primary allocator: it is the one that represents a criterion for the application or distribution of the

costs or resources for each of the activities.

2. Secondary driver: consists of a distribution or application criterion of the

total costs of each of the activities of the different processes or services.

3. Third-level addressers: Third-level addressers are those that assign

the total costs of each of the activities to the cost objects.

Assignment of resources to activities

For the completion of this assignment, the resources used during the period must be reviewed.

and to make a definition of each expense so that it can be assigned to various activities for

after performing a grouping.

Expenses allocated to the activities:

1. Remunerations

2. Uncollectible accounts

3. Monthly costs of accounts receivable

4. Monthly inventory costs for raw materials

5. Monthly inventory costs for finished goods

6. Monthly costs of machinery, equipment, and buildings

Calculation of unit costs using ABC

The total manufacturing cost will be determined by adding the direct and indirect costs.

1. Understand the allocation of direct material expenses and labor.

direct.

2. Understand the distribution of indirect costs allocated to main activities

through the cost drivers.

Activity-Based Management (ABM)

It is a management information system that allows for the identification of activities and

processes that create value for customers that facilitate strategies for the acceptance of a

product on the market.

Price Fixing

2. Credit policies

3. Discount for early payment and volumes

4. Increase in added value without affecting profitability

ABM allows activities related to customers such as order processing,

shipping, batch preparation, inventory coverage, and stock rotation can

to be applied to various customer groups and products in order to determine their actual costs.

The main characteristics of the ABM Activity Management Model can be summarized as:

Control activities more than resources.

Try to fully meet the needs of internal and external customers.

● Activities must be analyzed as integral parts of a business process and

not in isolation.

Eliminate activities that do not add value to the organization, instead of improving them.

what is really suppressible.

The activities must be framed within a global action plan.

● Backing, committing, and seeking the consensus of those who are directly

involved in the execution of the activities.

Maintain a permanent improvement objective in the development of activities.

Conclusion

in the previous work we can determine that activity-based cost systems

ABC is of great importance in identifying activities in order to allocate resources.

determine the associated costs, the cost calculation model in a company is additive

importance, as it determines the viability of the business, and measures the degree of productivity and

efficiency in the use of resources and helps us to specify the costs of the products,

sales and customers since the traditional system focuses on the allocation of costs

indirect costs to the different activities, and then to the cost objects.

We also clearly and concisely summarize the following topics and basic concepts with

relationship to cost based on activity criteria according to the value creation chain,

Accounting and financial information versus managerial information, steps that must be followed in

implementation of an ABC cost system, the classification of activities, definition of the

cost objects, determination of resources, cost drivers or cost managers,

assignment of resources to activities, calculation of unit costs using ABC and by

lastly, activity-based management (ABM).

Bibliographic References

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● Guide text. Gómez, O. (2005). Chapter 5 of Cost Accounting. Bogotá: McGraw-

Cost Accounting: A

managerial approach (14th ed.). Mexico City: Pearson.

J. Bautista, ensayo club.com, (2013), definition and differences of accounting

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Financial/627730.html

Acuarelita Guerrero, Academia.edu, (2019), PDF document ABC cost that are the

cost drivers or handlers. Retrieved from:

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● Manuel Fortún, Economipedia.com, (2020), allocation of cost resources.

Recovered from:

Resource allocation refers to the process of distributing available resources among different projects or business units based on specific priorities and objectives. This process is critical for achieving efficiency and maximizing the use of resources, whether they be financial, human, or technological resources.

● Carlos Eduardo Ojeda Ruiz, Monografias.com, (2013), ABC cost systems.

Recovered from:

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● Marvin Solano Morales, Gestiopolis.com, (2003), The ABC costing system. Retrieved

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