THE ROLE OF COST CALCULATION METHOD FOR THE MINING COMPANIES IN ORDER TO IMPROVE THE PERFORMANCE OF THEIR ACTIVITY ILEANA SORINA (RAKOS) BOCA

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1 THE ROLE OF COST CALCULATION METHOD FOR THE MINING COMPANIES IN ORDER TO IMPROVE THE PERFORMANCE OF THEIR ACTIVITY ILEANA SORINA (RAKOS) BOCA Economic domain specialization: accountancy Postdoctoral student at the Institute for World Economy ROMANIA Abstract: By this paper, the author aim to highlight the importance of redefining the way the administration accounting is organized for the mining companies, especially those specialized in coal mining, using a transversal organization. Starting from the state of the art in the literature regarding the adaptation and implementation of the ABC method to the specifics of the coal mining companies, and the realizations up to date of different specialists, the author demonstrate the usefulness of a transversal organization of the national mining companies, in order to determine some real costs and to obtain performance. The objective of this research is to show that the redefinition of the way management accounting is organized in the sense of changing the cost calculation method can lead to the obtaining of performance by the coal mining industry enterprises. The research in the field and the documentation that substantiated the realization of the applicative and comparative study between the organization of the administrative accounting applied at present and the transversal organization proposed can prove the viability of the organization of the accounting of the coal mining companies in such a way as to increase their performances. The paper ends with the author conclusions regarding the transversal organization of the coal mining companies on a national level. Keywords: coal, production cost, calculation method, transversal organization, performances, coal industry 100

2 1 Introduction In point of the research methodology applied, for the relevance of the study, the research methods used were: interviews with the staff of the economic entities of the coal mining industry, the study and analysis of the accounting statements of the economic entities (by collecting and analyzing their data, by analyzing the expenses on the level of the cost centres using the various registers) and the examination of their internal documents. The design of the research relied on the consideration of the theoreticalmethodological consequences of the information determined by means of the questions launched at the beginning of the study. Thus, the study relies on a sample of 7 such industrial entities of Romania (the complex data provided by one of them constituting the grounds of the case), exploitations whose economic activity has a significant impact on the power industry of Romania. In order for the coal mining companies to obtain performance, a special importance goes to the redefinition of their way of organization. Thus, the authors consider that in order to accomplish this strategic goal, the adaptation to a flexible type of organization, like the transversal one, specific to the ABC method is the best way, providing the necessary framework for the realization of this fact. In the coal mining industry, the ABC method introduces new notions, such as: responsibility, process, transversality, allowing the visualization of all the activities participating in the realization of the production - as a factor determining the global performance of the coal mining companies. At present, these coal mining companies in Romania rely on the use of a traditional method for the determination of the production cost, which has more disadvantages than advantages. The production costs are very important, because they have a direct impact on the budget of each mining company. Consequently, revising the cost-related approach of the companies is important, because an incorrect cost-related approach may have a negative impact on the budget or may even encourage an incorrect decision from the company management, which may have negative consequences in a very long run. 2 Literature review In time, the coal mining industry has been studied by specialists, both foreign and national, who have tried to adapt the different methods used to determine the coal production costs. In the underground coal mining area, we can notice the exceptional contribution in the sense of the comparison of some cost calculation methods by some foreign authors (Falconer, 1989; Lind, 1999). In Romania, there have been contributions of some great specialists and academics in the domain of managerial accounting, such as Man (2000, 2008) and Calin (2002) whose works have helped develop and apply several concepts related to the mining activity. Both internationally and nationally, all these attempts to improve the administrative accounting in the mining companies relied on several action directions, such as: the study of the organizational factors of the managerial accounting, the study of the application principles specific to the different cost calculation methods, such as: Target Costing, Standard Cost Accounting etc., the study of the adaptation of the account plan to the specifics of the mining industry etc. The traditional cost calculation system applied at present by the economic 101

3 entities of the coal mining industry is oriented towards actual production sectors, and the indirect expenses are distributed on the cost bearers based on random repartition keys. This repartition of the indirect expenses, which is not in agreement with the causality principle (based on conventional measurements), can lead to totally erroneous decisions. The implementation of the ABC method and the organization of the management accounting depending on it, the activities analysis is an essential stage in our approach, because the main idea is that activities consume resources and generate costs. Consequently, we have reflected in the management accounting the accounting records relying on the case study realized at the Coal Mine of Lupeni. The aim of the actions undertaken was to highlight the advantages of applying the cost calculation method on activities instead of the traditional (global) method applied at present by the economic entities of the coal mining industry. The organization of the respective entities on responsibility centers, their diagnosis and the communication with the personnel included in the value chain creates premises of success for this method. Studying the Romanian and international literature, we have noticed that the ABC cost calculation method is dealt with independently from the other calculation methods, its implementation being the object of some case studies in companies operating since long ago, where the classical cost calculation method has been applied, a method with major informational and calculation deficiencies. Given what has been presented regarding the indirect costs, which represent a large part of the production cost, and the cost indicators, which are in relation not just to the production volume, but also to other factors, the ABC method makes it possible to directly allot the costs on the production, unlike the traditional cost calculation concepts. Considering the relation between an activity and a product (client), by means of the activity-based accounting system, the indirect costs can be allocated much more correctly on the product or the clients and for a finer analysis, this system allows one to know what one needs to obtain a product, before determining how much it costs. 3 Research topic Starting from questions such as: What do we want to achieve?, Why? ; Who is going to use what we are achieving?, in this study we will compare the existing situation with the proposed one, in order to define and take some correct actions, classified according to the order of their priorities, using logic and cooperation in the description of the actions undertaken. The answer to the first question is related to the goals that mining company should set for itself, and to the resources needed (financial, human, material etc.) in order to accomplish them. The answer to the next two questions concerns the existence of some needs, sales markets and beneficiaries. At the same time, the implementation of the ABC method stimulates the company under analysis to become competitive and to react to the demands of the internal and external beneficiaries, penetrating on strategic market segments that rely on very well-grounded decisions. At the same time, in our approach we also had in view the fact that the adoption of the new, transversal way of organization might be looked at, during a first stage, with some circumspection by the personnel from different departments and/or even by the managerial team. After an analysis of the opportunities provided by the new, transversal way of 102

4 organization, we will move on, during the subsequent stage, to the determination of the activities to be realized. We need to mention the fact that the coal mining companies will need to know the changes foreseen and to permanently intervene, in the sense of total involvement in order to reach the transversal organization. So, correct actions will need to take place, classified according to the order of their priorities. Practically, the implementation of the transversal way of organization requires a permanent progress and a collective learning, uniting in ideas the personnel from the departments of the horizontal level, to the personnel from higher hierarchic levels, as in a big family forming the company itself. The rapidity of the evolution of everything in our epoch makes us permanently look for the best practical/organizational solutions, not just to survive on the market, but also to develop and be competitive as companies on the European and international market. The obtaining of performances on the level of the department is the responsibility of the personnel/employees who are and must always be involved in their realization. In the transversal organization of a mining company we will rely on the mapping of the activities in point of their contents and the interaction between them Proposition for a transversal organization of the coal mining companies According to the literature and considering the specifics of the coal mining companies, we consider that in order to apply a transversal organization, they need to go through the following stages: 1) the conceiving of a transversal way of organization; 2) the realization of a comparison between the transversal and the hierarchic-functional organization; 3) measures proposed for the improvement of the type of organizational structure of the economic entity; 4) setting and communicating the goals; 5)setting the activities and the operations; 6) setting the responsibilities The conceiving of the transversal way of organization supposes the taking into account of the following aspects: actions to be carried out by the enterprise in case; levels of application of the transversal organization; optimal chaining of the processes and activities. In the coal mining companies, the following have been identified: main processes, grouped into main activities and secondary processes grouped into secondary activities, according to the Organizational Chart in Figure 1. Starting from the organizational chart of the coal mining companies, the author of this article consider it opportune that a restructuring should occur, based on the following levels: Level 1: Management Board and Level 2: Branching of the Management Board into Production Board, Electromechanics Board, Labor Health and Security Board, Financial- Accounting and Taxation Office, Human Resources Office, Civil Protection Department, Environmental Protection Department, Legal Charges Department. In the subordination of the Production Board, the author of this article have identified the following offices: Topo-Geo- Technical Office; Supervisors Department; Production Sector 2, Production Sector 3; Production Sector 4. In the subordination of the Electromechanics Board I have identified the following offices: Mechano-Power-Supply-Transport, Transport Sector, Electromechanics 103

5 Sector. In the subordination of the Labor Health and Security Board we have identified the following offices: Labor Health and Security Office; Mining Airing and Security Office. Fig.1: Transversal organization of the Mining Company of Lupeni Source: Author In the financial-accounting and taxation area, I have identified the following offices: Accounting, Financial and Taxation, Pay-Desk. In the Human Resources area operates the offices: Personnel, Norming and Remuneration, Record Office, Archives, Secretariat, Calculation Office. Ideally, an attempt is made to determine the organization in processes and activities allowing the most adequate answer to the specifics of each strategic segment. The traditional methods use few and random repartition keys for the distribution of the indirect expenses, which has led to the decrease of their dependability, giving birth to expenses that are too big for some products and too small for other products. In order to extend the services provided to their clients and to also be competitive at the same time, many mining companies use a segmentation on cost centres. The absence of an identification of the production centres that consumed the company resources heterogeneously, did not allow the manager to perceive the real profitability of each cost centre. Thus, this will permit an improvement of the informational system, by means of the ABC method approach, allowing the manager to have a fast reaction, to opt for revising the sales prices before launching the production in a production centre. Consequently, when meeting certain orders, the administrative office may be much more important for one strategic segment than for another. An analysis of the activities-based expenses made inside a production centre allows the setting of a much more correct determination and allocation manner, and, at the same time, the obtaining of profitability on the level of each cost centre. For an adaptation to the clients demands, the coal mining companies are tempted to differentiate their commercial approaches according to certain specific goals. In other words, a company guides itself on the competition-based market depending on the goal it has set for itself. Under these circumstances, the commercial office of the respective company may have in view larger or smaller client segments. The commercial costs related to the approach of these two client categories are very different and are reflected in the costs determination and in the tariffs set for the offer of services. These arguments militate for giving up on the 104

6 repartition of the indirect expenses pertaining to the transport service, depending on the turnover, an arbitrary criterion, often used in the traditional cost calculation methods. The results of the two client segments rely on the debiting of a share of the transport expenses. In the case of the traditional methods, this debiting has nothing to do with the real consumption related to the services, as it uses a randomly criterion in their repartition. On the contrary, in the case of the ABC method, a more correct allocation is recorded, as the allocation criterion used is a well-chosen one and, at the same time, an accurate identification of the clients is also considered. The ABC method allows the accurate analysis of the activities impact on the true profitability, according to a specific purpose, and also the very precise identification of the costs, of the effects produced by the new activities and by their way of allocation on the clients. As it is well known, the production cost represents the departure basis in the setting of the sales prices. However, numerous companies calculate a sales price determined based on an accumulation of costs coming mostly from the increase of the remuneration tariffs, of the materials costs or based on a multiplying coefficient, applied on them, and which are determined by the type of service, product or client. For example, the equipment repairs are assured in the case of the traditional methods by specialized companies or by people specially trained for equipment repairs, while in the case of the ABC (Activity-Based Costing) method, these repairs are carried out by the workers who operate and maintain the respective equipment, which makes room for the concept of multi-qualified workers (workers trained to carry out an extended number of work tasks). The approach proposed by the ABC (Activity- Based Costing) method constitutes the means of reconfiguring the setting of the sales price and the solution for improving the profitability of the traditional cost calculation methods. The ABC method allows the company to operate either based on a method by which it sells the production costs recorded, or it sells the services for which the sales price is exhibited and transparent and/or the risk of the fall of the service cost is no longer borne by the client but by the service provider. This new sales price determination method has been elaborated having in view two main directions: identification of the services ruled out per client and calculation of the production cost starting from activities Realization of a comparison between the transversal and the hierarchic-functional organization The ABC method supposes the delimitation of the processes and activities into principal and secondary ones. According to the researches undertaken, in the coal mining entity under analysis we have identified the following principal processes: the production process and the administrative process. Within the principal processes we have identified the following principal and secondary activities, according to Figure 2. After a very detailed analysis of all these, it was established that the production process includes main processes (identified on production centre) and secondary processes (identified on ground and underground sectors). The traditional cost determination systems attribute the indirect (general) costs directly to products (in the sense that the products cause the costs) and not to the activities, namely to the units of products. The traditional cost calculation systems refer to 105

7 the determination of the costs needed for the manufacture of certain products and the costs repartition on them. Figure2. Main and secondary activities pertaining to the production process Production process Main activities Secondary activities Mining Bank Coal Preparations Preparations in sterile Mining Maintenance Transport flow Complex Mechanized Frontal Mining Assembling, Disassembling, Complex Mechanized Service Flow Supply Dosing Operation and Maintenance Mechanics at Water Evacuation Well Maintenance, repairs Silos Opening Maintenance Flow Supply Explosives Store SpecialistsDosing Operation and MaintenanceMechanics at Water Evacuation Well Source: Author In the classic system all the costs are allocated on a single product or on several products, which often triggers crossed cost subvention, just one cost inductor being used, based on volume. This is the main reason why the classic cost determination system misrepresents the products costs. By making an analogy between the production cost obtained by the ABC method and the production cost obtained through the use of a traditional cost calculation method, in Table no. 1 one can notice that the production cost via the ABC method is much lower and reflects a real cost through a correct allocation of the activitiesrelated expenses on the final product (coal). Table 1. Comparison between the production costs calculated respectively using the traditional and the ABC method Production cost according to the traditional Production cost according to the ABC method method Explanations Sum Explanations Sum Direct Expenses Direct Expenses 01. Expenses for raw matter 51, Expenses for raw matter 861, Expenses for explosives Expenses for power and water 113, Expenses for armatures, clamps 32, Expenses for depreciation 733, Expenses for netting Expenses for inventory objects, packages 540, Expenses for arch bricks 3, Expenses for materials transport 38, Expenses for sand, gravel Expenses for salaries 2,290, Expenses for consumables 10, Expenses for accessories to salaries 1,124, Expenses for different materials 364,974 Total Direct Expenses 5,701, Expenses for fuel 11, Auxiliary Expenses 10. Expenses for spare parts 99, Expenses for different materials 23, Expenses for power 110, Expenses for power and water 744, Expenses for water 2, Expenses for water 29, Expenses for depreciation Expenses for depreciation 29, Expenses for inventory objects 4, Expenses for salaries 952, Expenses for GFR 536, Expenses for accessories to salaries 267,

8 Production cost according to the traditional Production cost according to the ABC method method Explanations Sum Explanations Sum 16. Expenses for packages Total Auxiliary Expenses 2,045, Expenses for materials transport 38, Indirect Production Expenses 18. Expenses for salaries 2,290, Expenses for different materials 3, Expenses for accessories to 1,124, Expenses for power and water 195, salaries Total Direct Expenses 5,701, Expenses for water 47, Expenses per activities 04. Expenses for depreciation Expenses for different materials 3, Expenses for salaries 1,233, Expenses for fuel 3, Expenses for accessories to salaries 614, Expenses for spare parts 19, Total Indirect Production Expenses 2,094, Expenses for power 939,404.8 Direct Administrative Expenses Expenses for thermal power Depreciation of accessories of general interest 543, Expenses for depreciation 76, Expenses for maintenance and 736, management, depreciation of accessories of general interest 07. Expenses for materials transport Expenses for materials maintenance, 3, cleaning of the buildings 08. Expenses for equipment repairs 29, Expenses for power used for lighting and 790, motor force 09. Expenses for services performed 551,189.8 Total Indirect Administrative Expenses 2,074, by third parties Expenses for antidote liquid Total Indirect Expenses 6,214, Expenses for salaries 2,185,500 Total production cost 11,916, Expenses for accessories to 881,286 salaries 13. Depreciation of accessories of general interest 154, Expenses for insurance premiums 15. Expenses for taxes on author s 7,251.5 certificate delivery 16. Expenses for stamp tax Expenses for exploitation tax 136, Expenses for bank commission 1, Expenses for materials used for 148 maintenance and cleaning of buildings 20. Expenses for power used for 5,458 lighting and motor force 21. Expenses for PTTR (Post, Television, Telephone, Radio) 22. Motilities and transfers in the 2, country 23. Expenses for guardianship and civil defence 110, Coal allocations 33, Difference of price for power 269, Expenses for food 235, Expenses for protection 25, equipment 28. Managerial training 3,

9 Production cost according to the traditional Production cost according to the ABC method method Explanations Sum Explanations Sum 29. Expenses for medical 27, dispensaries 30. Expenses for transport to and 73, from work 31. Disease benefits 1, Death benefits 7,108 Total Expenses on Activities 5,818, Total production cost 11,519, Source: Author calculation In Table 2, the author present the way the production cost has been calculated, on the left side by means of the traditional method, and on the right side by means of the ABC method. According to the classic cost-calculation method, the production cost is calculated as follows: PC = DE + EA + IPE + IAE Table 2. Determination of the production cost Determination of the production cost The production cost (PC) expressed per ton of coal, determined according to the ABC method is calculated as follows: PC = DE + EA, where: DE = Direct Expenses; EA = Indirect Expenses for Auxiliary Activities; IPE = Indirect Production Expenses; IAE = Indirect Administrative Expenses. where: DE = Direct Expenses; EA = Expenses for Activities The cost per unit obtained for the annual coal The cost per unit obtained for the annual coal production is: 12,508, : tons = production is: 11,519, : tons = lei/ton RON/ton Source: Author calculation 4 Conclusion This study shows that the ABC method focuses on the real nature of the costs behavior, thus helping one identify the non-value-added activities. What we have presented and defended by this article may constitute, in time, a departure point for the specialists and the enterprises, in the understanding and the application of the transversal organization in the coal mining companies. At the same time, the advantages offered by this method constitute an ace for the specialists reflection in view of practicing an efficient management, considering the possibilities of determining some real costs, especially in the present conditions, in which the business environment is marked by an increasingly strong competition. The replacement of the organization of the (global) cost calculation method, which presents erroneous data to the decision-makers from the coal mining companies, by the ABC method could be the viable solution, the companies having the chance of surviving in an environment based on competition. Following the comparison between the traditional production cost calculation methods and the ABC (Activity-Based Costing) method, one can clearly distinguish the latter s informational advantages. One of the most important contributions of the ABC 108

10 method is the fact that it provides a remedy for the weaknesses of the traditional approaches of the production cost calculation and so they represent the guarantee of the obtaining of real costs for the coal mining companies in Romania. The advantage of this method consists in the fact that it highlights the relation between activities and objectives, taking into account the time factor, and the disadvantage consists in the fact that the identification of the processes becomes much more difficult. Following the comparison realized, the following observations have been made: the transversal organizational structure is flexible and can be segmented into processes, activities, clients, products etc., the distance between the top and the basis of the organizational pyramid is low and is made up both of operational and functional departments, the branching of the departments from the perspective of the organizational chart is great horizontally, by comparison to the hierarchic-functional organization where the organizational structure is rigid and stable, the segmentation being inflexible, realized only on functional departments and offices, the distance between the top and the basis of the organizational pyramid is significant, being made up of a small number of operational departments, the branching of the departments from the viewpoint of the organizational chart is significant vertically, and the hierarchic-functional structure presents a few operational problems worth mentioning: the documentations and tariffs are not reciprocally coherent; the tariffs are imposed; the National Coal Company of Petrosani sells the coal for an disadvantageous price the price of the coal of Valea Jiului is in fact the main cause of the financial problems of the Mining Company; the price per coal ton should be correlated to the cost of the extraction of a ton of coal. 109

11 References: [1.] Dumitrana M., Caraiani C., Control de gestiune, Editura Universitara, Bucuresti, 2008, pp ; [2.]Buchanan D.J. and Woodley A.F.G. Colliery analysis: Functional costing as a planning tool, The Mining Engineer, March 1991, pp ; [3.] Calin O., Contabilitatea de gestiune and calculatia costurilor, Editura Genicod, Bucuresti, 2002; [4.] Cokins G., Capusneanu S., Cost drivers.evolution and benefits, Theoretical and Applied Economics, no.8, 2010, p.9; [5.] Falconer K.W., A Review and Cost Comparison of the Three Main Mining Methods of Underground Coal Mining in South Africa, M.Sc. dissertation, University of the Witwatersrand, Johannesburg, 1989; [6.] Lind G.H. Activity Based Costing: Challenging the way we cost underground coal mining systems, The Journal of The South African Institute of Mining and Metallurgy, 2001, pp [7.] Lind G.H. The Development of a Costing Framework to Compare Two Types of Underground Coal Mining Methods in a Typical South African Coal Mine for Use in Decision Making, M.Sc. project report dissertation, University of the Witwatersrand, Johannesburg, 1999; [8.] Man M., Streamlining of Management Accounting, Arves Publishing House, Economic Science Collection, Craiova, 2008; [9.]Marx C. An Activity Based Costing Approach to Fall of Mine Accidents in a South African Gold Mine, M.B.A.project report, Potchefstroom University, Potchefstroom, 1996 Acknowledgements This paper has been financially supported within the project entitled Horizon 2020 and Doctoral and Postdoctoral Studies: Promoting the National Interest through Excellence, Competitiveness and Responsibility in the Field of Romanian Fundamental and Applied Economic Research, contract number POSDRU/159/1.5/S/ This project is cofinanced by European Social Fund throuh Sectoral Operational Programme for Human Resources Development Investing in people! 110