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Competing globally with cost accounting:

a case study
Maria Isabel Pedro #1, João Cancio Martins *2, José António Filipe*3
#
CEG-IST Instituto Superior Técnico, Universidade de Lisboa, Portugal
1
[email protected]
#
Instituto Superior Técnico, Universidade de Lisboa, Portugal
2
[email protected]
* Lisbon University Institute ISCTE-IUL, BRU-IUL, ISTAR-IUL
Portugal
3
[email protected]

Abstract - In recent years, information has played a a detailed study of the main methods and cost
key role in business competitiveness, allowing not only systems, in particular the traditional costing systems,
to inform managers about external contexts, but also to activity based costing and time-driven activity-based
internal problems. Thus, cost accounting has relevant costing. Afterwards, based on the analysis and the
tools, with the ability to provide information about how
advantages and disadvantages of the methods and
the resources of a company are used, making it possible
systems costs, it is adopted the methodology in order
to evaluate and improve their performance. The main
goal of this research is to develop a different costing
to apply to a real case study. Then, it is presented the
system model to a company, in order to provide distinct case study, the description of the company's
information on the costs of production processes, to help production processes, the resources used and the
managers make better operational and strategic explanation of how costs were allocated.
decisions. This company business is processing and Furthermore, the model result is presented and is
packaging fruit and vegetables, in particular they are made the interpretation of model outputs. Finally,
organized by three main sectors: fruit, potatoes and 4th there are presented possible improvements related to
range products. Those cost allocation methodologies
strategic and operations aspects, as well as the main
could be identified, on one hand, the profitability of
limitations and difficulties during the development
each product, helping to define the best medium-term
strategy and, on the other hand, some operational
of the model.
faults. Basically, this work aims to prove the importance
of costing models to improve the performance and the
competitiveness in a real context. 2. Literature Review
Keywords - Cost accounting, Traditional costing The literature review of this article concerns three
systems, Activity-based costing, Time-driven activity-based main topics that follow a chronological order. The
costing. first refers to traditional costing systems, in
particular to absorption, rational and variable
methodologies, that are used since the beginning of
the twenty century. The second method addressed, it
1. Introduction is the Activity- based costing, which was developed
Information has played a key role in the during the mid-eighties by Cooper and Kaplan and it
development and evolution of the companies, is known as an alternative to the methods referred
making them more competitive. Those behind. The last is Time-driven activity-based
improvements are the result of the application of costing system, that it is an improvement of the
new operations and financial strategies, allowing a ABC.
better perception of internal problems and external
threats. The main goal of this paper is to introduce
the importance of costing systems to recall 2.1 Traditional costing systems
information, to empower managers to take better Traditional costing systems are originated in USA
decisions for their companies. This work begins with and they were built for the first time in a textile
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Int. J Latest Trends Fin. Eco. Sc. Vol-8 No. 2 December, 2018

manufacture company (Johnson, 1981; Hutchinson, costing systems simpler and less effective (Johnson
2007), because, at that point, some managers started & Kaplan, 1987).
to develop tools to control inventories and
production costs, to gain competitive advantages
regarding their opponents. In fact, the design of 2.2 Activity-based costing
those methods made it possible to determine the cost
Given the limitation of traditional costing
of a product, using only two parameters: variable
systems, in the mid-eighties Cooper and Kaplan
costs and fixed costs. On one hand, variable costs are
developed the activity-based costing as an
defined as proportional to the quantities that are
alternative. The ABC method aims to determine the
produced, such as row material and direct labour. On
cost of products or services, based on the allocation
the other hand, fixed costs do not depend on the
of direct and indirect costs. On one hand, direct costs
quantities, because they are always present, an
are easily allocated, since it is unique costs of a
example can be the rent of an installation (Cooper &
particular object costing. On the other hand, indirect
Kaplan, 1992; Wickramashinghe & Alawattage,
costs belong to various objects of costing, making
2007; Karuppuchamy, 2005). Then a question arises:
the way it should be allocated. Basically, ABC lets
Which types of costs should be quantified as a cost
you allocate overhead costs accurately and rigorous
of a product? The absorption costing system defends
(Kee & Schmidt, 2000; Hutchinson, 2007), offering
that all the costs in a company should be quantified
relevant information to managers, such as the price
as cost of the product, because all the resources work
to be applied to a product, the real profit of each
together to guaranty that the product is produced,
product, the used production capacity and which
independently if are fixed or variable costs (Gupta &
resources are being consumed (Boyd & Cox, 2002).
Parmar, 2001).
In the ABC perspective, consumption of the
The variable costing system is a philosophy
resources should not be allocated to product, but to
totally opposite to that mentioned above, as it
the activities that give rise to products (Franco, et al.,
advocates that just the variable cost should be
2005). So, there are two main steps to build ABC
counted for the cost of the product (Gupta & Parmar,
system. The first is analyse all the procedures of
2001). This perspective contributes with significant
process and identify each relevant activity. Then, it
information to managers, in particular to short term
is needed to find resources and activities cost
decision (Nawaz, 2013). In fact, this methodology
drivers, which by definition means, the measuring
exposes the direct relationship between the
unit to transform the resource and the activity in
quantities produced and the costs, allowing
costs (Franco, et al., 2005; Ferreira, et al., 2014).
the observation of changes in inventories (Drury &
Tayles, 1997). Finally, the rational costing system The ABC, it is considered an excellent method of
requires an analysis of the costs that actually cost accounting, for its ability to properly allocate
contribute directly for the production and only they overhead costs (Major & Vieira, 2009; Barros &
are inputted in the model as costs of products. Ferreira, 2014), providing information to analyse
Usually are considered all variable costs and it is external factors to the organization (Dalci, et al.,
attributed a percentage for the fixed costs (Franco et 2010) and to identify internal flaws (Cooper &
al., 2005). Kaplan, 1992). So, in this point, it provides a
rigorous costs control and a deep understanding of
The traditional costing systems were built and
costs causes (Innes & Mitchell, 2000).
developed in time when companies produced little
diversity products, with simple procedures and they Nonetheless, it presents some disadvantages such
gain competitive advantage by the quantities. In this as high investment, it is demanding to implement
context, traditional costing systems help managers and involves many people (Stratton, et al., 2009;
set production strategies (Hutchinson, 2007), such Barros & Ferreira, 2014). Furthermore, there are
define which products in order to increase profit some problems with data collection (Kaplan &
(Zimmerman, 2003). However, with the introduction Anderson, 2004; Demeere, et al., 2009), as, in a lot
of technology and more diversity products, they of cases employees distort, inadvertently, their
meant that the production processes become to be performance in the interviews, contributing for less
more complex and flexible, making traditional precise models (Oker & Adiguzel, 2010; Kaplan &
Anderson, 2007a; Kaplan & Anderson, 2007b).
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2.3 Time-driven activity-based costing 3. Methodology

Time-driven activity-based costing is also a After literature review, it is possible to conclude
methodology to account and allocate correctly the that the most flexible and simple methodology to
indirect costs of organizations (Barros & Ferreira, implement is the time-driven activity-based costing.
2014) and it was developed in 2004 by Kaplan and It is a versatile model, since it can be applied for
Anderson. This method was designed to be more services, industries and logistics. That is why it was
simple and applicable in business context because it decided to build a TDABC model and apply it to the
is less needed the information asked to employers, context of this case study.
reducing the error of the model.
Thus, for implement this cost system successfully
The main differences comparing to activity-based will start to the mapping and description of
costing are the ways that cost drivers are calculated. production processes. Then, it will be important to
In ABC it is necessary to define a cost driver for identify the activities of each process and the
each resource, which meant that each cost driver had resources consumed by them. Afterwards, begins the
a distinct unit. In the case of TDABC there is only more detailed data collection phase, in which
one unit, time (Ferreira, et al., 2014; Kaplan & performs the data collection for each resource cost,
Anderson, 2004). the processing times and the calculation of the two
The process to apply this methodology starts by parameters mentioned before.
understanding production processes. Then, managers With all the conditions to develop the model, it is
need to identify the activities and the resources supposed one can determine the cost of each product
consumed in each activity (Ferreira, et al., 2014). and evaluate which of them are profitable. To
Later, it required to calculate two different complete the results study, it was decided to perform
parameters: the unit cost of supplying capacity and two separate analyses: the breakeven point for sales
the time required to perform a transaction or an prices and the breakeven point for production
activity (Kaplan & Anderson, 2004). The first results quantities.
in the division between the total cost of the resource
As conclusion, we will present some limitations of
in the activity provided by the capacity of the time
the study and improvement proposals both strategic
(Reddy, et al., 2012), the second is calculated by
and operational.
time equation, which is an algebraic sum of the
minimum time to carry out this activity and the
estimated time multiplication ratio of incremental
activity (Kaplan & Anderson, 2004).
4. Case study

After that, the multiplication of these two

4.1 Introduction
parameters results in the cost of the activity for each
product. This case study is about a company that
transforms, prepare and package agricultural food
TDABC has aimed to be a simple, easy to
products and sells to large food distributors, such as
implement and to reduce maintenance costs (Tse &
Pingo Doce, Jumbo and Continente. This
Gong, 2009; Reddy, et al., 2012). In other point of
organization has about 140 employees and 14 senior
view, this methodology can be applied in complex
technicians working in three distinct areas: fruit,
cases, as the extent of the problem only causes a
potato and 4th range salads and soups.
linear increase of time equations (Kaplan &
Anderson, 2007a; Everaert, et al., 2008a; Barros &
Ferreira, 2014).
4.2 Process description
However, because the TDABC is a recent
To be able to describe production processes it is
methodology, there are few practical studies to prove
essential to spend time in company’s facilities,
some of its advantages presented above (Barros &
observing the flow of goods and people's
Ferreira, 2014).
movements. In this case study it was decided to
present the processes for the three areas.
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4.2.1 Fruit are placed in the transformation zone to be

processed. After this processing the goods are sent to
Products selected to look for this business are the
the exit bay.
Rocha pear and apples, in particular Starking,
Golden, Fuji, Gala, Granny and other species. The number of activities identified for the potato
process are three. The first one is the quality control
The fruit process begins with the entry of food in
which involves a senior technician. The second is the
the entry bay, which occurs in large quantities in the
processing activity that includes the water for the
months of September and October, because it is the
tanks, electricity to the production line, the
high season of pear and apples. After the arrival, the
packaging material and few workers. Lastly, the
products are subjected to a quality control, defined
movement that transports final product to the exit
for each order. If the quality criteria required are
bay.
confirmed by a senior technician, the food is moved
to the cold storage warehouses, where they are
stored. When there is an order, the products are
4.2.3 4th range salads and soups
removed from the warehouses and are moved to the
processing zone. In this area, the products are placed As stated above, the products referred as 4th range
in a tank with water, to be washed, and after a while, products are ready-to-eat, in 5 particular salads and
they are automatically introduced in a conveyor soup. The transformation process for those products
belt to be calibrated and separated to the respective are the most demanding and complex in the
packaging lines. Finally, end, the end products are company, because raw materials are more
moved to the exit bay and transported to customers. perishable, quality control is very strict and there are
a huge variety of products.
To build the model it is needed to identify the
activities and the resources for each activity. So, Just like the other processes, 4th range salad and
after the description above, it is possible to soup process starts with a quality control activity to
determine that there are six distinct activities. The check the vegetables and it is done by senior
first is quality control which essentially needs a technicians. When there is confirmation that the
senior technician. Then there are three transport products meet the predefined requests they are
activities, termed “movement 1”, “movement 2” and transported to processing zone. The first phase of
“movement 3”. The first movement concerns the process is cutting that can be manual for salads, or
transport of raw materials for the cold storages. The automatic, for soups. Then, the previously cut
second movement refers to the transport of raw products are introduced into the processing lines,
materials for the transformation zone. The last one is where they are washed, centrifuged (just for salads),
the transport of the finished product to the exit bay. separated and packaged. Afterwards, the products
All of the movements involve the worker driving a are moved to exit bay to be distributed by clients.
forklift and the diesel consumption. The activities for this business sector are quality
Finally, the processing activity is the processing control, whose main resources are the senior
of the products, which as mentioned above, carried technicians allocated to this area. Furthermore, there
out a wash product, its calibration and packaging. are two movements: “movement 1” and “movement
This process involves the consumption of water in 2” that refers to entry and exit the processing line
the tanks, electricity to the electric motors of the and in those activities it must be accounted the diesel
line, the packaging material and the cost of the consumption and employees salary. As it concerns to
labour involved in processing. the cutting activity it should be accounted the
salaries of the employees and, in the case of soup,
the consumption of electricity. Finally, in processing
4.2.2 Potato zone it should be quantified the costs of water,
labour, electricity and packaging material.
Potato transformation process is very simple
compared to other products, due to partnerships with
producers that deliver the products already selected
5. Model
by species and size. So, when products reach the
facilities it is made a quality control to check if the
company's requirements are met and then products 5.1 Resources
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This section is intended to expose how impact of costs. Those models are named breakeven
information about the resources was obtained. The point for prices and breakeven point for quantities.
main resources used by the production processes are
The breakeven point for sales presents the
the raw materials, employees, senior technical
relations of the real price of sale and the price that
employees, water, diesel, packaging material,
guarantees the absence of losses. So comparing
electricity, transportation and rent. First of all, it was
those relationships between the products it allows
made a survey of the number of employees operating
managers to understand the risk of profit so helping
in each business area, both for workers and for the
them to define better strategies. On The breakeven
senior technicians. Then, together with company’s
point for quantities helps them to realize the impact
managers, data was collected to be able to determine
of variable and fixed costs in each product,
the cost drivers and unit drivers for the other
identifying possible problems in production
resources. However, for packaging material, water
processes.
and transportation, it was not possible to determine
them, as the company did not have accurate After the application of those tools, to analyze
information. So, it was decided, together with the results, it was possible to observe different results
company to estimate values according to the for the three business areas. Fruit sector got losses
percentage of use of each resource in the respective throughout the year, essentially the pear. However,
business area. Thus, it were designed time equations the main concern is the growth of losses due to
and were made up questions to workers about the increased electricity costs used in cold storage that
time spent in each activity. contributes to even greater losses at the end of the
year.
In the potato business area, the results were
5.2 Allocation profitable in every month of the year given a
Taking into account some information gaps for reasonable contribution margin, due to the reduced
some resources, they were made some adaptations to purchase price secured from suppliers, and the high
allocate costs to each product. sales volume. Nevertheless, there are some risks,
especially related to high competition that could
With regard to employees and senior technical
adversely affect the results in other years. As regards
works, it was done a direct allocation that is the
to operational costs, it was noticed that they are
account of the salary of each employee in their
lower in comparison with those of other business
business sector. For the allocation of diesel and
areas processes.
employees that work with the forklifts it was used
time-driven activity-based costing, because it was Finally, the 4th range salads and soups sector
simple to know the time of the activity obtained extraordinary results, being the most profit
“movements”. In the cases of packaging material, business area. The reason for success was the high
water and transportation it was decided to use a contribution margin that, in the case of salads, can
percentage of utilization to allocate those costs, reach 7 times the cost of purchase of raw materials.
which means that the estimated value was multiplied Furthermore, in spite of the high costs of transport
by the total costs of the resource and distributed by and production, the selling and buying prices have
each business area. Finally, rent was considered as a reduced fluctuations, which means that the risk
fixed cost, so that cost was allocated by square affixed in this sector decreases considerably.
meters of utilization for each processing zone and
for the warehousing in the case of fruit.
7. Improvement proposals
This section aims to present possible measures to
6. Results mitigate operational problems identified during the
To present the results it was decided to study. First, it was necessary to standardize the
demonstrate the evolution of profit throughout the manual cutting processes used in salads production
year, in order to realize the performance of each process because it could improve cutting times,
product. Consequently, it were made two distinct reduce waste and increase flexibility. To reduce
models to understand the sources of profitability and inventory warehouses costs there are two solutions.
The first one aims to study ways to optimize the
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