When Using Activity-Based Costing Becomes a Necessity

Activity-Based Costing was developed in the United States in the mid-1980s to eliminate the lack of accurate and realistic determination of the costs of products/services produced, especially in traditional cost accounting. This is later discussed in evolution (Bromwich and Bhimani, 1989) and revolution (Johnson and Kaplan, 1987). It has emerged as a cost management technique that has added value to management accounting literature and practices. This system requires monitoring general production and indirect costs on cost objects such as products, services, customers, and projects from the pool of budget resources. While doing this provides a healthier performance measure by using process maps and activity analysis techniques.

Today, after the general production costs gradually turn into logistics (such as material handling and production systems) and information exchange operations (such as products and processes, quality, accounting, and security), the activities that reveal the costs have become the focal point (Miller and Volkmann, 1985).). In this technique, the costs incurred are not monitored in the products or services but in the activities that reveal the product or service. Thus, by providing a precise and accurate distribution of general production costs, it is possible to obtain accurate data rather than distorted data on both the Costing of products and services close to the truth and the efficiency and productivity of the activities that occur during production (Gunasegaram and Sarahi, 1998). In addition, it increases the competitive advantage of enterprises in terms of cost and profitability in changing environmental conditions by providing detailed information about the cost data and business processes that managers need during the planning and control phase, which traditional cost accounting cannot provide.

The role of Activity-Based Operations in anticipating quality-related activities (Shank and Govidarajan, 1993) is of particular importance. In quality-related activities, activity-based Costing focuses directly on the primary cost drivers within an organization. For quality improvement opportunities to become profitable, activities that add value to the customer must be prioritized. The activity-based costing system provides information about value-added and non-value-added activities and their determinants in business processes. At this point, Cooper et al. l. (1992) stated that continuous improvement teams would help focus on which activities by grading all activities in the business to add value to the customer in quality improvement activities.

 Application Stages of Activity-Based Cost Method

Activity-based Costing, which constitutes the cost perspective of Activity-Based Cost Management, is a two-stage process. Tracking costs from budget sources to activities through resource cost determinants and then to cost objects through activity cost determinants, with a different perspective from traditional product costing, is the process (Cokins, 1996, p.79)?

 In the first stage, to monitor the costs from the department’s budget in the resulting activities, you should determine the processes of the business and the activities within this process. And the tasks to be done to realize these activities.) information is obtained through extensive discussions with department managers, supervisors, and key workers. Collecting information about activities makes it easier to understand the activities performed and the costs incurred to perform these activities. The activity analysis to be done for this, besides ensuring the determination of each activity and cost determinants,

In the second stage, activity costs are monitored in cost objects such as product/service, project, and customer by using activity cost determinants such as production and sales volume number of setups, which measure the frequency and severity of an activity.

Thanks to the fact that activity-based Costing, which constitutes the cost perspective of Activity-Based Cost Management, provides information about the “cost of activities performed,” the actual costs of both the resulting activities and cost objects in the organization processes are determined (Cokins, 1996, p.55, 60, 75).

Benefits of Activity-Based Costing

Activity-Based Costing is a costing system developed for strategic purposes. It provides accurate data to managers for strategic decisions on customer profitability analysis, product profitability analysis, product/service pricing, internal performance measurement, and cost management (Christensen and Sharp, 1993). Thus, the data obtained because of the application of this system enables the business to give up on customers or products with no profitability and direct them to customers and product groups with high profitability.

Here are some of the benefits of the data obtained with Activity Based Costing as follows (Brandt et al., 1999)

• It provides a more accurate quantitative measurement of product and service costs.
• Provides an understanding of the reasons for general production costs.
• It helps to determine the reasons for the emergence of costs.
• It helps to explain what the cost drivers are.
• It ensures the improvement of the efficiency and effectiveness of the processes within the organization.
• The analysis ensures that the activities that cause cost but do not add value in the process are eliminated.
• Provides accurate and timely cost information on budgeting, continuous improvement programs, and customer and vendor relations.
• Provides specific improvements in processes by managing activities that cause costs.
• It enables effective decisions to be taken in the product line, market segments, and customer relations.
• It ensures that the value obtained by the customers from the products/services they consume is increased.
• It supports quality improvement efforts by enabling organizations to measure quality-related costs (Ittner, 1999).