THE ABC COSTING METHOD VS. TRADITIONAL COSTING IN LOGISTICS SYSTEMS.
Logistics systems in many organizations, generally speaking, used the traditional method of cost. This method considers the basic concepts of costs, such as total cost, variable cost, fixed cost, and the corresponding unit costs (average cost, unit variable cost and fixed cost per unit). It also takes into account the marginal costs and other cost items such as sunk costs, direct costs, indirect costs and mixed costs. This traditional costing, generally speaking, is governed by the norms and standards of cost accounting.
Despite the utility of this traditional system, some analysts have found that this method of costing has some inconsistencies that could lead to wrong decisions. The traditional costing determines the direct costs (labor and raw materials), as the quantities used and unit costs of each of these elements. Indirect costs are allocated primarily by the volume of units produced. The latter has been found inconvenient.
Therefore, it has been proposed for several years a new system called “Costing ABC – Activity Based Costing”. This is a management system, and it is based on the allocation of indirect costs to activities related to the units produced. Direct costs are calculated in the same way, since there is no difficulty for their calculation. The ABC Costing includes these elements: Resources needed, such as direct labor, machinery, equipment and energy, among others; the Activities such as production management, operation of machinery and the recruitment of the machinery; and Products (product 1, product 2, and so on).
Therefore, the ABC Costing broadly includes the following phases:
1. Analyze, systematically, all activities required to produce a product or service.
2. Decide how to group them in Activity Centers.
3. The third step in the design of an ABC costing system is the association of costs with activity centers.
4. The fourth step in the design of a costing system ABC is the selection of inductors cost, also called drivers, since they are generating costs.
An important advantage of ABC Costing is that let determine the unnecessary activities, which can be eliminated without affecting the structure of the enterprise, leading to a rationalization of costs. Another significant advantage is that the allocation of indirect costs is more suited to the different units produced, which facilitates cost analysis and decision making. The debate on this issue would be to discern and review the advantages and disadvantages of each of the two sets of costs, based on the issues presented herein and the knowledge and experience of the bloggers.