CAM-I Model with a Quantitative Framework Approach for the Strategic Management of Costs

Transcription

1 CAM-I Model with a Quantitative Framework Approach for the Strategic Management of Costs Ali Khozein, Department of Accounting, Islamic Azad University, Aliabad Katoul Branch, Iran. khozain@yahoo.com Abstract This paper discusses the management structure and the strategic decisions using the received information elicited from framework of CAM-I via the quantitative method. This research raises the question which services the information framework of CAM-I provides in light of setting the organizational strategy, improving costing systems and the applied decisions and what capabilities it offers. The findings of the research which done in a historical manner and applied the scientific and pervious researches, show that today different activities are the main cores of modern information systems that are at the heart of reporting process costs and continuous improvement of the functions and quality. The application of the gained information out of CAM-I cross lead to more attention to uses of resources and the costs of various processes of production and services. Cost drivers show simply the consumption of expenses, but it does not necessarily mean that it can be used to reduce the expenses. Instead, this purpose is achieved by the modification of the production methods and the process of responding customers and the strategies. The significance of the allocation of the production expenses to the processes should be understood before dealing with the continuous improvement plans and total quality management because the organization managers without the relevant and accurate data in hand, cannot predict and measure the effects of the endeavors to improvement nor can they use the improvement opportunities. Key words: strategic management; activity-based costing; activity-based management; value creating; CAM-I. 1

2 1. Introduction Some accountants believe traditional methods of accounting in some cases for products and services costing are sufficient. They believe that if the following conditions are met, allocation of cost according to the volume is reasonable and lead to properly costing (Cokins, 2001): - The volume of products was small and very similar. - Overhead costs are very low - Conversion and manufacturing processes are homogeneous - Customers, customer demand and distribution channels are homogeneous - Cost of sales, distribution and administration expenses are limited - Contribution margin of product and services was extremely high How many companies that actually have these features? Perhaps unlike in the past, today there is not a company that has these features. Thus the use of information systems which provide and support data based on volume don t lead to correct decision making (Rahnamayroodposhti, 2009). Since the early 1980s, with revolutionizing the management, the use of systematic thinking and based on the process and activity increased, so today's accounting activities has become a common system. Since that time, companies that have used such a system were able to take advantage of its benefits. Now application of analysis of value creation processes is enhancing and management systems are required to operate a stable and repeatable. These days, managers are facing with decision making about to pricing, cost and resources consumed and different methods for producing. Basically, managers must decide about how to obtain and use resources for their economic goals. If they can not predict about the level of income and expenses to take action, their decisions will lead to poor results or catastrophic. Therefore, in order to survive in the competitive environment and the developed world, many information systems for product and service costing, budgeting, cost reduction, continuous improvement, and ultimately, increasing in value and performance evaluation, is presented (Fullerton and Wempe, 2009). The common factor in the development of such systems is the design of information technology. One of the new methods, activity based costing and management system that has recently has been develop by the cross CAM-I. In traditional costing systems, there is a weak awareness about manageable cost and by more powerful and accurate costing systems such as ABC / M, companies can do on time and more accurate decisions and evaluations. Managers and other end users of information systems based on activity should know what these systems can do with these data, what kinds of decisions could be made, What types of assessments can be done and what are the expectations from these system. What kind of the costing information can be provided and used about operational and strategic objectives. It is advisable that users should be aware of the benefits of progressive planning and composition 2

3 of resources and costs of the product or service is performed. The main difference between traditional and ABC Costing System is that ABC costing systems aren't used in a single volume-based driver for allocating overhead costs to products and services. From a practical point of view, ABC system highlights the causal relationships between costs and activities which involve in value added process (Horngren, 2005). Traditional systems costing use only single overhead absorption rate, such as machine hours, labor hours, number of assembled units, number of units built, purchased materials and etc. The use of each rates leads to different results. Managers know that in the ABC costing of overhead costs associated with each of the cost objects is more complicated. The activity based costing approach believes that the products consume activities and activities consume resources and thereby this system provide more accurate information value-generating activities and leads to the identification of non-value activities (Wickramsinghe and Alawattage 2007) ABC can be used to identify resources in the organization's activities so costs could be allocated to the proper way to cost objectives. ABC has established a network of resource allocation and turnover costs so let the cost of activities to reallocation of costs to outputs based on the amount of activity and this is what makes the difference between traditional costing systems and ABC. CAM-I cross of ABC determines that the activities are located in the center of the cross and report not only the cost of process but also the cost of objects. In this paper the new approach has been studied about Activity Based Costing Models and CAM-I cross and the many advantages it has. 2. Research Methodology This study is based on a philosophical approach and the historical method. By using the scientific principles and research literature we want to study and improve the activity based costing systems by using data from the CAM-I information system. In fact, according to this approach research plans to explain the information system of CAM-I. In other words, philosophically researchers attempt to explain the nature of the new information system and respond to the questions raised about it. In this study librarian theoretical foundations and data is used. The inductive approach is applied in terms of logic and it can be classified in extension research in terms of qualitative research. Promotions and qualitative research can be done in less-developed information and knowledge on the subject is and researchers look for discover a unified theory about the phenomenon to be studied. Qualitative research is based on an understanding of the interpretative philosophical perspectives and its attention is paid to how to interpret, understand, and experience to the creation of the social world. Therefore, this study sought to answer the questions that follow: How the CAM-I leads to improved costing systems? 3

4 Proceedings of the Third Asia-Pacific Conference on Global Business, Economics, Finance What kinds of services are provided in line of corporate strategy by CAM-I information system? How Information taken from CAM-I information systems can lead to more effective decision-making? 3. Theoretical and Research Literature 3.1 History of CAM-I Information System Evolution of management accounting in the two periods before and after 1950 can be classified. Before the 1950s, chronologically management accounting techniques was used as a tool to calculate the cost, performance management, staff productivity and determining product profitability analysis, performance evaluation of employees and customers as long-term annual earnings. After 1950, also, for each decade innovations can be introduced that most of them were in the past two decades. Innovations of the 1950s included discounted cash flows, total quality management, transfer pricing and cusum charts. 1960s innovations included computer technology, the opportunity cost budgeting, zero-based budgeting, decision trees, critical path scheduling, management is based target and 1970 innovations included information economics, agency theory, just in time producing, strategic business units, experience curve, portfolio management, material resource planning, diversification, organization's product positioning matrix. Activity Based Costing, target costing, value management, theory of constraints, vertical integration and benchmarking techniques were raised during 1980s and business process reengineering, quality function deployment, outsourcing, profit sharing, merit-oriented, timebased competition and the learning organization Also were from 1990s (Rahnamayrodpooshti, 2009). In 1990, a plan was to introduce a management framework for activity-based costing to benefit member companies of the not for profit consortium for advanced manufacturers international (CAM-I). Within CAM-I, the cost management systems program has provided a forum for leading thinkers in industry, academia, and government to collectively challenge and improve cost management systems. As shown in figure 1, the diagram is commonly referred to as the CAM-I cross. 3.2 CAM-I Theoretical Framework in Activity Based Management /Costing In the CAM-I cross project, activities are the confluence of reporting processes costs and cost of cost object (figure 1). 4

5 Figure 1: Multiple Cost Views Product View (ABC) Resource What Thing Cost Process View (ABM) Process $ $ Resource Cost Activitie s Activity cost assignment $ $ Resource Drivers Performance Measures Activity cost drivers -Cost reduction -Process reengineering -Cost of quality -Continuous improvement -Waste elimination -Benchmarking Cost objects Things Cost -Product costing -Quotations/target costing -Profitability analysis -design for manufacturability - Mae versus buy Better Decision Making G. Cokins: Activity Based Cost Management: an Executive's Guide, John Wiley & Sons, Inc., USA. P55, (2001). Activities are not only the result of productions, but customers and suppliers are likely to cause many activities. Activities costs object are individuals or things which benefit from imposing cost of activities. The costs object is the final cause of doing works and the ultimate place where assigned costs are collected. The costs object includes assembled parts of products, products, projects and even customers. The vertical part of figure indicates the way costs are assigned in an activity-based costing system and says which resources and costs can affect cost of product, namely cost object views. The horizontal part, namely processes view, indicates why resources are valuable and what reasons would cause costs; this is also called activity- based management. The vertical view points to the cost sensitivity against variety and differences between products, distribution channels and customers. The vertical view, also called cost assignment view, is a cost-consumption chain. Accordingly, each cost is related to a special cost object and is tracked using an accurate cost driver. In this view, the distinction between products and customers is characterized in terms of resource consumption. Also, the cost of each activity is determined and gathered, and then the cost of each activity is assigned to activities or any other issues according to the amount and way of taking actions by products. Instead, horizontal view depicts business activities and since each activity is defined as a hierarchy or network of two or more activities trying to achieve a goal, managers have to take a particular 5

6 attention to the costs of various production and service processes. The process view in the activity-based management proposes non-financial-operational information including information about activities, strengths and activities, limitations and abilities. ABM process view is also known as supply value chain since it suggests large information about process value analysis to be used for explanation and decision-making (Cokins, 1996; Resource means raw materials, payroll, equipment and general costs consumed by activities). In an ABC/M system, the total costs of resources are related to processes costs and cost of cost object. Such system is more accurate and tries to calculate the cost of products and services by measuring activities doubly and multiply. Once traditional systems and ledger balances starts costing, in the activity based costing system, costing or the activities performed in each process will begin. Such cases change ABC to a more economically technologic tool. The misconception about current cost drivers reveals that reduction in cost drivers can decrease total costs. It is noteworthy that cost drivers easily indicates cost consumption rate but it does not necessarily mean that costs can be reduced through them. Costs are reduced through modifying production methods, processes of responding to customers and strategies. Those cost drivers hidden in the traditional systems are used in ABC but it is important to know that reduction in costs through reducing cost driver is against meeting the demands of customers. 3.3 The Strategic Management System in CAM-I Cross Two other critical elements should be considered in CAM-I cross. Financial information plays the role of central nervous system for organization. Cash and money are the common language in business. Today, there are millions of enterprises and organizations having a few common bases that can be applied to all of them. An organization in which resource consumption is more than cash production, for example, is predicted to collapse. Therefore, one can come to this conclusion that each organization requires strategy and performance evaluation system. Figure 2 shows that CAM-I pattern is a framework defining strategies and performance evaluation. Strategies cause organizations gradually go beyond their current status and manage to achieve their goals in the future unless they face an unpleasant situation. This figure also indicates how an organization works as a comprehensive system. This cyclic system is based on cash flow. From one view, models or customers are started and ended to them and eventually, explain how wealth structure is created and renovated through organizational attempts. In the center of model, ABC/M is presented as a criterion for understanding cost management. The goal of the model is to help organizations continually increase stakeholders wealth. An appropriate strategy is a key factor in organization s success. Strategy needs short- and long-term goals for leading employees. It is believed that goals should be well defined or identified to recognize strategy and its benefits. Two inputs to 6

7 a strategy are customers and Methodology of strategy definition. Strategy should pay attention to customers values, preferences and needs, try to satisfy them and convert their satisfaction and loyalty to wealth for stakeholders. To define and explain organizational strategy, on the other hand, a revolution has been occurred in strategy methodology. To define and select a strategy, various models and methods including Strong, Weakness, Thereat and Opportunity matrix, Cats, Dogs and Stars matrix, The Four Forces Model, Low-Cost Versus High-Differentiation, Strategic position and Action Evaluation Matrix, Internal-External Matrix and Grand Strategy Matrix can be enjoyed. Strong leadership and management need these tools for long-term success to be able to define unified strategies for organization as a whole. Strategy should highlight how customers needs and organizations resources are met. Generally speaking, demand strategy appears first and then supply strategy is appeared to be consistent with it. Therefore, vacant capacity is at its lowest level and consequently, stakeholders wealth and values are maximized (Cokins, 2001). Also, management accounting system creates value for organization through adapting managers decisions on production rate and its type, price structure and its rate (Rahnamayroodposhti, 2009). Figure 2: Strategic management system Costumers, strategies and objects ABC Resource Business plan Suppliers, Cost drivers Activities Process & output Cost objects Performance Product and Services Production, Services and Costumers Performance Report Customer satisfaction and royalty G. Cokins: Activity Based Cost Management: an Executive's Guide, John Wiley & Sons, Inc., USA. P199, (2001). To achieve organization goals, value-based management can be used to maximize return on cash flow and economic income. The inputs to VBM are tools and criteria related to executive performance and organizational operations. Some of these tolls include - Productivity Improvement, Benchmarking, Yield and Efficiencies Management and Throughput Velocity. These are called lean or agile process management. Thus, one can consider how much customers expectations and demands, goods and services quality and values are met (Cokins, 2001). 7

8 3.4 CAM-I Cross-Based Decision Making In the activity-based systems, it is not important to say how costs are combined and flowed but it is necessary to know how it is possible to strengthen management s decision-making power or using this system. Figure 3, presenting CAM-I cross in greater detail, emphasizes that costing and activity-based management are instruments for making better decisions, evaluating and analyzing. The data of these systems are effective when they are employed by decision makers, analysts, managers or modern automatic instruments. Presenting the data of activity-based systems to final users is the same as turning on light in a dark room and it is useful when opportunities for improving performance are considered. ABM and ABC systems indicate the elements and contents of work in the way grammatical elements of literature (verb, object and noun) are shown and also illustrate costs of business processes throughout the organization. However, one of the major goals of these systems is reorganizing operations and renovating production process. Of course, offering wider scheme and new approach is not the whole thing, but ABM and ABC systems cause organizations improve their abilities. Figure 3: Fact-Based Decision Making Flowing costs simply provides data. The decisions made with the data bring life to ABC/ABM Flow of costs to cost objects Cost data Actual Estimated Predictiv To what? Or For Whom? Resources Indirect work activities Projects, support Customers/ Orders Suppliers Direct material & labor Direct activities Product Processes Why? Mix of objects of work Activity Based Costing Trend analysis performance measures, process New product design Product mix rationalization Profitabilit y analysis Decision capability Fact Based Decision Capabilities Activity Analysis Process value analysis, benchmarking, cost of quality Concurrent engineering Supplier certification Cost driver analysis tradeoffs Forward planning/predicti ve Modeling Business process reengineering Target costing Make vs. buy Pricing quoting Investment Justification and Prioritization activity based budgeting, life cycle cost Cokins, Gary. "Activity Based Cost Management ".Mc Graw-Hill Companies,Inc., p.62,

9 Experiences have revealed that those firms manage to use the output of ABM and ABC systems constantly communicate with each other through telephone or hold meetings to communicate their findings. On the other hand, these firms may use new outputs to control spending and now take advantage of such systems to analyze deviations and standard costing. Nevertheless, these systems are the best instruments for future planning, not ones for historical and controlling reporting. Executive managers employ ABM and ABC systems in the three following sections for diagnosis and decision making (Cokins, 1996). 1. Activity-based costing easily and frankly (resulted from shortcomings of traditional system and unnecessary burden costs) talks about the value of production and service. In this new approach, profitability of products are remarkably changed. Organizations use ABC but applying it in making strategic decisions as well as identifying and releasing products and using new outputs are considered not profitable. ABC also calculates the cost of process outputs such as cost of order process. ABC increases costing accuracy through converting indirect costing to direct one and tracing. 2. Analyzing activities has led executive managers to improve constantly and focus on diagnostic and technical issues. In managerial analysis, a great attention is paid to causes and stimuli of cost, and the amount of cost has drawn less attention. Activity analysis and ABM are synonyms. One of the common applications of ABM outputs is to score or grade activities and processes with respect to value creation and effectiveness level. Managers try to recognize activities lacking value added or those with low value added and remove them to save a lot of money. ABM information is usually used for making decisions and prioritizing various alternatives in investment, timing, feasibility and return of capital (note that activity analyses and ABM are synonyms and point to the analysis of value creation of the processes. 3. The outputs of the activity and process based systems are mostly used for future planning and prophetic models. ABC can simulate a model for spending cost in all levels of enterprise. For example, activity cost drivers rate model can reliably predict rate of consuming costs within a specified time range. Predicting cost factors, these rates enable firm to predict future costs in various situation to estimate necessary costs for making decisions such as buy or build, orders acceptance and investment. ABM and ABC systems are actual instruments for modeling resources consumption. 4. Figure 3 also indicates how executive managers, analysts and final decision makers utilize the cost of each cost issue. Since costs are directed from resources to related activities and then to final goods and services, various decisions can be made with respect to this cost current. Before tracing costs of activities to products and services, organizations can analyze, evaluate, improve and reengineer processes without knowing the accurate cost of products and services. This information explains why reducing production cycle time and TQM innovations 9

10 are now common. These systems indicate that production costs reduce due to improvement in production time and quality. It is noteworthy that ABM and ABC simultaneously consider three factors in survival triangle, i.e. time, quality and cost through which can reduce production costs. On the other hand, the importance of assigning production costs to processes should be understood before talking about plans for continuous improvement and comprehensive quality management since without having accurate outputs, one cannot predict and calculate the effects of their attempts for improving organization or take advantage of the improvement opportunities at their best. Some of the characteristics of the business processes are as follow: Inputs, outputs, limitations, users and original ownership of the processes have to be identified and defined, and at least one customer has to be existed for each output. acceptable limits. Sufficient control and monitoring is required to detect deviations from Business processes should effectively do appropriate things. Necessary efficiency is required to do appropriate things correctly. Business processes should be flexible enough to be able to react swiftly and appropriately towards unexpected changes. Managers and staffs are always trying to keep processes stable and consistent. However, unexpected cases disturb the balance of business systems. Quick and preventive reactions against sudden changes are referred to as disturbance activities causing unexpected burden cost in business activities. Take a look at downward flow of cost in figure 3. The direct and indirect cost of production is related to production cycles, products and services and most of the decisions made based on these data are limited to the way of designing products, services and production line. Quality Function Deployment is a technique for part of target costing employed by development engineers to adapt the characteristics of their products and services to their customers needs and demands. QFD pays attention not only to products designs but to aspects, critical characteristics of the products and services including performance, price, timely delivery, after-sale services and etc. These factors should be prepared and improved as production process is designed and services are provided. QFD emphasizes that products and services design and process should be more efficient than activities. Of course, ABC systems have not created QFD, target costing and other engineering techniques. However, costing information derived from ABC is used in simulations used by above mentioned techniques and is effective and important in decisions made by design engineers since engineers and designers always make attempt to make a balance among quality factors such as products design, performance, costs, price, timely delivery, after-sale services and etc. 10

11 As mentioned in the costing section of figure 3, some costs of indirect activities are strongly related to the behavior of suppliers of raw materials. Prices offered by suppliers in their invoices are not the final price or cost of the firms purchased goods. Type of delivery, place of delivery and even quality of product can affect firm s costs. Enterprises are looking for establishing appropriate relationship with competent suppliers to ensure achieving high quality raw materials through long term contracts. Moreover, some costs of indirect activity, as can be seen in figure 3, are closely related to the customers behavior. For example, some customers expectations about delivery way are beyond normal. Although, customers are likely to purchase the same goods, the distinction in the delivery way of their goods can cause a difference in the sales cost of the firm. Cost tracking provide good information on raw materials suppliers and customers. Customers and suppliers can create activities whose costs affect cost of products and services. Customers can be divided into two groups: profitable and non-profitable. The order of profitable customers is due to standard products with high profit margin and in large volume. These ask for less discount and support do not change their orders and their demands are predictable and are timely with their payments. However, non-profitable customers behave differently. These behaviors are finally evaluated using activity costs and cost drivers of final activities. To achieve and maintain long-term competitive advantage, It is necessary for organization to know which customer, supplier, market or distribution network is profitable and why. Costs resulted from suppliers, customers and resource consumer s activity is different from product costs. Product costs depend on product design, operation design, business systems and product combination. Nevertheless, costs resulted from suppliers of raw materials and customers depend on competitive policies and determining the characteristics of acceptable services. For example, less variety in customers orders may lead to low cost in production and vice versa. Considering benefit-cost factor, the 21 st - century costing systems try to track the flow of such costs and open new horizons. High details and accuracy of costing data must cover risk of lacking such data. In designing ABM and ABC, a balance should be made among data volume, their details and accuracy. Service and support costs are necessary for organizations to do their activities. However, such costs are not directly related to customers and products. Historically speaking, these costs are called fixed costs and any methods used to allocate support and service costs to products, services, customers or suppliers is optional. Since these costs are out of control of processes responsible (they are trying for customer satisfaction), they are reported separately (as course costs affect tax). 11

12 4. Conclusion Proceedings of the Third Asia-Pacific Conference on Global Business, Economics, Finance With revolutionizing the management, the use of systematic thinking and based on the process and activity such as CAM-I increased, so today's accounting activities has become a common system. It says that costs are reduced through modifying production methods, processes of responding to customers and strategies. Strategies cause organizations gradually go beyond their current status and manage to achieve their goals in the future unless they face an unpleasant situation. ABC/M is presented as a criterion for understanding cost management. The goal of the model is to help organizations continually increase stakeholders wealth. Strategy needs short- and long-term goals for leading employees. It is believed that goals should be well defined or identified to recognize strategy and its benefits. Strategy should highlight how customers needs and organizations resources are met. To achieve organization goals, value-based management can be used to maximize return on cash flow and economic income. In the activity-based systems, it is not important to say how costs are combined and flowed but it is necessary to know how it is possible to strengthen management s decision-making power or using this system. The data of CAM-I systems are effective when they are employed by decision makers, analysts, managers or modern automatic instruments. One of the major goals of CAM-I systems is reorganizing operations and renovating production process. The application of the gained information out of CAM-I cross lead to more attention to uses of resources and the costs of various processes of production and services. The process analysis by the managers, particularly in activity-based management, provides a lot of nonfinancial information including operational information on activities, input, output, limitations, abilities, strengthens and weaknesses. Such points make the activity-based systems go beyond the reporting instrument to be a more economic engineering technology that is measurable. It should also be noted that in most cases, the reduction of cost drivers not necessarily lead to the reduction of expenses. Cost drivers show simply the consumption of expenses, but it does not necessarily mean that it can be used to reduce the expenses. Instead, this purpose is achieved by the modification of the production methods and the process of responding customers and the strategies. Considering activitybased management and costing as instruments to better decision making, CAM-I cross contributes to more efficiency of the activity-based systems. The significance of the allocation of the production expenses to the processes should be understood before dealing with the continuous improvement plans and total quality management because the organization managers without the relevant and accurate data in hand, cannot predict and measure the effects of the endeavors to improvement nor can they use the improvement opportunities. 12

13 Reference Proceedings of the Third Asia-Pacific Conference on Global Business, Economics, Finance Cokins, G. Activity Based Cost Management: an Executive's Guide, John Wiley & Sons, Inc., USA Cokins, G. "Activity Based Cost Management ".Mc Graw-Hill Companies, Inc., Developing Comprehensive Performance Indicators, Exhibit 2, pp , The Society of Management Accounting of Canada, Fullerton, R.R., and W. F. Wempe. ''Lean manufacturing, non-financial performance measures, and financial performance''. International Journal of Production Management 29(3); Horngren, C.T., et al. ''Cost Accounting A Managerial Emphasis'', New Jersey, 12th edition, Pearson Education, Upper Saddle River, Jones, T.C. & Dugdale, D., ''The ABC Bandwagon and the Juggernaut of Modernity''. Accounting Organizations and Society, 27: , Rahnamaroodposhti, Fereydoon, (2009). Management accounting and organizational value creation, the philosophical and scientific approach, Journal of Management Accounting, International Accounting Conference Special Issue, pp Rahnamaroodposhti, Fereydoon, (2008). Fundamentals of Management Accounting - a new approach, Science and Research Branch, Islamic Azad University Press, 326. Wickramsinghe D. and Alawattage C., ''Management Accounting Change: approaches and Perspectives'', Rowtledge