1. 1 Activity based costing  Activity based costing – ABC –Created as an answer to criticism of traditional costing (1987 - Cooper R., Kaplan R. S., How Cost Accounting Systematically Distorts Product Costs)  Disadvantages of traditional costing –An assignment of product costs based on the size of production (unit-based cost system, volume-based cost system)  Calculation is more exact when more costs can be accounted for directly  Typical costs drivers include quantities connected to production size –A grouping of costs according to functions based on organizational structure of the enterprise  General productions costs are settled proportionally to the sum of direct costs and department costs

2. 2 Activity based approach of the enterprise Disadvantages of traditional costing:  Lack of customer-orientation  Rigid organizational structure, hierarchy  Non-continuous flows  Excessive supervision and coordination systems  Too much documentation  More possibilities to make mistakes  Higher costs Person e l Develop ment Marketing Sales Production Order Fulfillment Product Development Customer Service Enterprise Person el Develop ment Market ing/Sales Production

3. 3 Process flows in the organizational structure  An employee completes his/her part of the process. Who controls the whole process?

4. 4 From functions to activities  Department centered thinking...  Multi-level hierarchy…  Too-detailed division of labour…  Excessive asset-orientation… ....thinking about the whole system, beyond departments ....flat organizational structures ....increased scope of activities and responsibilities ....result-oriented Functional-based costing Activity-based costing

5. 5 Key word: process (1)  „A process is a collection of activities demanded at an input entry phase and producing a valuable to the client result at the end ” /M. Hammer, J. Champy/  „A process describes the flow and transformation of materials, information, operations and decisions” /T. H. Davenport/  A business process is a flow of sequenced activities, having a beginning and an end, and precisely and clearly defined input and output, leading to a particular effect that has a value to the client purchasesaletransportinvoice Market Information

6. 6 Key word: process (2) Przygotować zlecenie Zlecenie gotowe Zapotrzebo- wanie wystąpiło Dokumentacja techniczna Dane produktu Zlecenie przyjęto Dane klienta Przedsta- wiciel handlowy Opracować zlecenie Zrealizowano dostawę Przekazano do produkcji Zaopatrzenie Dane materiałowe Dane dostawców Realizować zamówienie Produkt wytworzony Odlewnia Produkt wytworzyć Dane produktu Zbyt Produkt przesłać Dane klienta Towar przyjęty Towar przyjąć Towar nadesłano Zrealizowano zamówienie Przygotować transport KLIENT PRZEDSIĘBIORSTWO DOSTAWCA Opracowanie zlecenia LEGENDA Dane Funkcje Jednostki organizacyjne Zasoby Zbyt Wytwarzanie Zaopatrzenie

7. 7 Process levels Inventory /Stock / Supply Purchase of raw materials  Analysis of the supplier market  Questions to offerers  Analysis of the offers  Negotiating conditions  Agree on the schedule and conditions of freight  Signing an agreement  Order confirmation  Order delivery  Quality inspection of deliveries  Storeroom documentation prepared  Invoice control/ inspection  Documentation of operations  Settlement of payables Level of the mail processes:Level of the partial processes: Choice of supplierInvoicepayment Transportreceipt Purchaseorder Level of activities: Poziom czynności:

8. 8 Changing concepts in organisations  BPR – Business Process Reengineering (1900s) –„Business Process Reengineering is a fundamental rethinking and radical reengineering of processes in an enterprise, leading in a dramatic way to breakthrough improvements according to modern, critical measures such as cost, quality, service, and speed ” /M. Hammer, J. Champy, 1993/  BPO - Business Process Orientation (currently) –a concept of changes leading to systemic organization, analysis, and assessment of economic processes in order to obtain improvements in measures of these processes such as time, cost and quality  BPM - Business Process Management (currently) –a systemic approach to analysis and continuous improvement of activities in an enterprise. The important elements of a concept are: actual documentation of processes, organizational structure process-oriented, processes' aims and measures, information systems about processes, motivation system”

9. 9 Process- approach in management  Processes are starting point for: –Internal changes in an organization –Defining the value chain inside the organization –Defining the value chain among organizations –Implementing IMS –Obtaining ISO 9000:2000 certificate –E- business –Use of activity based costing (ABC) –Activity based management –Implementation of Customer Relationship Management and Knowledge Management concepts

10. 10 Activity based costing - process approach Amortization Labour Materials Social insurance Energy Employee benefits Foreign services Taxes, charges and fees MaterialsEmployeesEquipment Space Activity 1 Activity 1 Activity 3 Activity 3 Activity 2 Activity 2 Activity N Activity N... Product A Product A Product D Product D Product C Product C Product B Product B Product Z Product Z... Costs incurred Resources required Need to do activities

11. 11 ABC's definition  Activity Based Costing – ABC –A method of measuring costs and an effectiveness of activities, resources, products, and clients as well as other cost objects, consisting of relating resources to activities and activities to other cost objects based on the degree of use of an activity and also understanding of the casual relations among cost-raising variables and activities /Cooper R., Kaplan R. S./ –Resources of an enterprise are used by activities (processes), not by products or organizational units –The main part of general and overhead costs does not depend on the product volume, but rather changes with the intensity of conducted activities

12. 12 Model calculation in ABC Amortization Labour Materials Social insurance Energy Employee benefits Foreign services Taxes, charges and fees MaterialsEmployeesEquipmentSpace Activity 1 Activity 1 Activity 3 Activity 3 Activity 2 Activity 2 Activity N Activity N... Product A Product A Product D Product D Product C Product C Product B Product B Product Z Product Z... Assigning simple costs to compound costs Resource cost drivers Activity cost drivers

13. 13 Concept of resources in ABC Compound resources MaterialsEmployeesEquipmentSpace Simple resources  Purchase price  Taxes, charges, and fees  Transport  Insurance  Loading, unloading  Control  Storing  Compensation  Social insurance  Equipping the work area  Tools/Equipment  Trainings  Food and drinks  Clothing  Safety measures (BPH)  Medical care  Amortization  Electricity/Gas/ Water  Supplies link to usage  Tooling of the machine  Computer programs  Maintenance  Insurance  Amortization  Equipping the area  Tooling  Electricity/Gas/ Water  Installations  Upkeep  Security  Taxes, charges, and fees  Renovations/fixing  Insurance

14. 14 Concept of cost driver  Cost driver –The main cost-creating variable used as a settlement driver (a key) of cost object on other objects –Shows an origin of the costs  Resource cost driver –A variable measuring the usage of a resource in an activity  Activity cost driver –Describes the main origin of the costs in an activity –Presents a casual relation between activities and other objects –Main types of activity cost drivers:  Time  Transaction  Intensity

15. 15 Examples of activity cost drivers ActivityActivity cost driver Technical preparation of production  Time spent for technical preparation of production Production planning  Number of production orders Setting/Adjustment of equipment  Time spent  Number of production rounds Production  Time spend (labour-hours LH)  Number of production rounds Storeroom management  Number of components  Weight of the components Internal transport  Time spent  Number of moves  Weight of the components/materials transported Quality control  Time spent  Number of tests Changing the technical conditions of production  Time needed to prepare the changes  Number of changes Production steered by a computer  Number of production rounds

16. 16 Calculating costs under ABC  Phases of calculating costs under ABC: –Where do costs originate - an analysis of activities and variables –Defining the costs of activities based on resource costs –Choice of the cost driver and calculation of cost per cost driver unit –Assigning activity costs to products Cost per driver Rate of the process costs Activity cost driver Number of offers of orders Number of lines Number of In the invoice invoices Part of the proce ss Delivery Order materials Prepare an offer Accounting Check the invoice Make payment Cost per offer per order Cost per Cost line in the invoice per invoice Main process