Int. j. econ. manag. soc. sci., Vol(3), No (10), October, 2014. pp.

617-621

TI Journals

International Journal of Economy, Management and Social Sciences

www.tijournals.com

ISSN:
2306-7276

Copyright 2014. All rights reserved for TI Journals.

The Improvement of Competitiveness of Activity Based Costing System

(Case Study: Samfar Co.)
Ebrahim Doostzadeh *
MA in industrial management, Shahrood Science and Research Branch, Islamic Azad University, Shahrood, Iran

Mohamadreza Abdoli
Department of accounting, Shahrood Branch, Islamic Azad University, Shahrood, Iran

Seyedkazem Ebrahimi
Department of Accounting, Semnan University, Semnan, Iran
*Corresponding author: doostzadeh@samfar.ir

Keywords

Abstract

ABC
AHP
ABM
EAD
APD

Activity based costing system (ABC) is, indeed, among the powerful and useful tools to achieve companies goals
in maintaining competitiveness.
The main aim of the present study is The Improvement of Competitiveness of Samfar Company Using Activity
Based Costing System. Due to such items as high proportion of overhead, complexity of production, diversity of
production, variation in production volume, and complexity of the primary materials in Samfar Company, the
results of this research can be taken into consideration and used by the senior management of this organization,
leading to strengthening and enhancement of the companys competitiveness. The statistical population of the
current research includes 26 products of Samfar Co.
The researcher has concluded that in technological, technical knowledge, and/or customer standards matters, some
of Samfars products are more complex, taking engineering and R&D department a great deal of time. Moreover,
due to the resting of great proportion of organizations overhead upon engineering and R&D department, a greater
amount of overhead goes to this group of products in that the findings of the present study have made a significant
difference in computational cost of Samfars products, especially RD02, RD107, and RD120.
In conclusion, the results of the present study are analyzed, using AHP method, and consistency of the judgments
are proven.

1.

Introduction

Today, in most industries, competition among companies has become globalized. The companies competing in this market are involved in an
intense and head-to-head quality competition, where technical innovation is the key for them to surpass others. Regarding the pivotal role of
technical innovations in such competition, competing firms are facing with another difficult issue namely competitive cost, as they have to
provide customers with products of better quality in more reasonable prices, employing technical innovation.
Therefore, for the purpose of survival companies should set the prices in a way that not only are competitive in todays market but also guarantee
the desired profit margin. As the prices are increasingly set by competitive market, the costs should be decreased.
Steady reduction of costs has become manufacturers nightmare and customers dream. However, decrease of costs means higher level of social
life. Hence, todays companies are returning to a fundamental philosophy maintaining low cost production of high quality product.
A cost driver, like direct wage or output size, is essentially used in conventional accounting for allocating overhead costs. Systematic deviations
in modern production and environmental services costs are significant part of overhead costs in production cost, and modification of production
costs data can lead to poor decisions.

2.

Research Background

There is a variety of definitions for activity based costing in accounting literature.

Hilton states that activity based costing is a method in which costs are allocated from a cost pool to different products in proportion to the
amount of the activities consumed by each product.
Maher and Deakin believe that, ABC is the costing method that obtains costs of products using the sum of activity costs which lead to
production of each product.
According to Chutchian and Ferranti, ABC is a costing method that identifies cost pools or activity centers in an organization, and assigns costs
to products and services based on the number of events or transaction involved in the process of providing a product or service.
2.1 Definition of Activity-based Management (ABM)
ABM is a management approach employed to ensure that the activities required for the provision of products and services are creating added
value.
Such value evaluation is done through implementation of activity based costing techniques such as income data, understanding the customer,
quality criteria, and market factors.

Ebrahim Doostzadeh *, Mohamadreza Abdoli, Seyedkazem Ebrahimi

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International Journal of Economy, Management and Social Sciences Vol(3), No (10), October, 2014.

2.2 The Relationship between ABC and ABM

The relationship between ABC and ABM is justified from the fact that the first stage is analysis of the activity consumed for connecting data and
outputs. Data are measured as activities which are costly and the reason for using ABC. In activity costing process, the range of outputs related
activities, with or without added value, is assessed. There may be a number of activities without added value. Such measurements of incurred
costs and realized gains are among the factors that enable the activities management to optimize the obtained results.
ABC method focuses mostly on how to optimize overhead sharing. In addition, the amount of activity and energy, including all resources such
as human resources, consumed for each product is the most principal factor in determining overhead cost share of each product. Activity based
costing method is one of relatively new costing techniques highly referred in literature and employed by several companies. This method is also
among the financial audit checklist requirements of Sapco (one of the Samfars customers). It is going to be implemented in Samfar for the first
time.

3.

Procedure

3.1 Research Method

For the purpose of this research, an applied case study is performed. Hence, the researcher has studied the subject on a specific site such as
Samfar, based on the research model.
3.2 Data Collection Instruments and Methods
Library and field data collection methods are used, in turn, on theoretical topics and in investigating research variables and hypothesis.
The employed data collection instruments include:
a) Direct observation, interview, talking with companys managers, experts, and reviewing organizations documents.
b) Library investigation and utilization of the databases existing in the country.
3.3 Research Model Description
Regarding diversity of the products, complexity of the activities and type of costing activities and centers of Samfar Company, following model
is chosen to allocate overhead costs to the products appropriately and based on integration of companys resources with organizations
processes:

The first step includes forming different cost categories and determining cost driver

The second step maintains identification of companys main processes

The third step encompasses decomposition of processes to their constituent activities

The forth step is identification of the main activities or formation of activity centers

The fifth step is creation of expense-activity-dependence (EAD) matrix and connection of main activities with relevant cost categories

The sixth step is placement of EAD matrixs signs with percentage values.

The seventh step considers calculation of activities in Rials using rates or percentage values and cost categories values

The eighth step is formation of activity product dependence (APD) matrix to determine dependency of activities to the products

The ninth step is replacement of APD matrixs signs with numerical percentage values of the connection between activities and products

The tenth step deals with calculation (in Rial) of overhead costs of each product.

4.

Data Analysis

4.1 Introduction
Before designing and developing a costing evaluation model based on activity-based costing technique and comparing it with conventional
method in Samfar Company, it is better to investigate the costing system employed by the firm and the way overhead has been absorbed during
recent years.
4.2 The Current Costing System Utilized in Samfar Company

Due to huge amount of products, similar models in each product group, and same production processes in each group and product,
this company is dominantly employing following costing system.
4.2.1 Primary material costs
4.2.2 Direct wage
4.2.3 Contractors wage
4.2.4 Molds and machineries depreciation costs
4.2.5 Overhead costs
A.

Material costs

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The Improvement of Competitiveness of Activity Based Costing System(Case Study: Samfar Co)
International Journal of Economy, Management and Social Sciences Vol(3), No (10), October, 2014.

B.

Direct wage

C.

Contractors wage

D.

Mold and machineries depreciation costs

E.

Annual sale rate

N.

Total number of products

Overhead Share Percentage of each Product =

ABC Implementation Stages

4.3 Identification of Cost Categories and Determination of Cost Drivers
Determination of cost categories existing in the company and the amount and cost of each category is performed based on actual information of
financial books. The cost of each category existing in Samfar Company are the basis for this research, while the patterns used in other ABC
related studies have also been taken into consideration. Overhead cost categories and the related cost drivers are presented in Table 3-1.
Table 4-1Cost categories and their related cost drivers (in Rials)
Cost categories
Resources cost drivers
Indirect salary, wage, and benefits of
Person/hour
production and service centers personnel
Employers insurance contribution
Person/hour
Auxiliary and indirect materials consumed in
Production rate
production
Service and Maintenance cost of fixed assets
Number of requests
Depreciation of equipment, facilities, and
Rial consumption of resources
furniture, expect the molds and machineries
Norooz and other bonuses
Person/hour
Prior service redemption
Person/hour
assignment
consumption of resources
Food and transportation
Number of personnel
Personnels clothing
Number of personnel
Training and research
Number of projects
Requirements and tools used in production
Production rate
Water, electricity, gas, and telephone costs
Area (square meter)
Safety, health, and treatment
Number of personnel
Fixed assets insurance coverage
The cost of resources consumed by activities
Other overhead costs of production and service
In an equal ratio
centers
Financial costs
Number of projects
Total overhead costs

Cost of each resource (Rials)

10843331460
916735339
35000000
78337788
883580943
539114839
455416443
878681848
314629203
160000000
8269063
23878694
159453707
29259822
7094154
811284869
9000000000
25144068172

4.4 Identification of Main Activities Causing Overhead Costs

Table 4-2The main activities causing overhead costs are presented, based on a survey of five experts.
Activities
Activity drivers
Product engineering
Number of projects
Equipment designing
Number of projects
Electronics
Number of projects
Quality assurance
Internal and external audits
Development of system documents
Number of products/engineering changes
Quality control
Products control points
Laboratory
Number of product delivery
Logistic
Number of delivery/reception
Warehouse
Dimensions or type of the product
Supplies
Diversity of required parts
molding
Number of projects
Commerce
Number of product related projects
Sale
Model or type of the product
IT
Number of PC users
Service and Maintenance
Number of service requests

Ebrahim Doostzadeh *, Mohamadreza Abdoli, Seyedkazem Ebrahimi

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International Journal of Economy, Management and Social Sciences Vol(3), No (10), October, 2014.

4.5 Formation of EAD Matrix and Recognition of Connection Between Cost and Activity Categories
4.6 Extraction of actual information and replacement of corresponding signs with them
4.7 Cost calculation of each activity by applying the costs to the values in percent
4.8 Formation of APD matrix and connecting activities with cost issues
4.9 Extraction of the values and replacement of the signs with them
4.10 Calculation of Products overhead breakdown
4.11 Set the products cost price table in ABC method
4.12 Implementation of analytic hierarchy process (AHP)
First step: Modeling

Figure 3.1 decision making hierarchy model

Second step: Preferential Judgment

Geometric mean of paired comparison matrices derived from five experts comments
Third step: the relative weight calculations and normalization
Step four: integration of the relative weight and choosing the best option
Table 4.3
Choosing the best option
Conventional method
ABC method

Total score
0.3124
0.6876

4.13 Investigating Consistency of the Judgments

Step1. Calculation of weighted sum vector (WSV): multiplication of the paired comparison matrix by column vector of relative weights
Step2. Calculation of consistency vector (CV): division of the elements of the weighted sum vector by relative priority vector
Step3. Obtaining max
Step4. Calculation of the consistency index (CI)
Step5. Calculation of consistency ratio
Indices
Price accuracy
Calculation rate
Convenience of
calculation
Competitiveness
Confidence
Calculation cost

Price
accuracy
1
0.230
0.309

Calculation
rate
4.345
1
1.091

0.402
0.509
0.676

1.259
1.483
1.686

Table 4.4
Convenience of
Competitiveness
calculation
3.231
2.488
0.916
0.794
1
0.861
1.161
1.335
1.519

1
1.027
1.171

1.963
0.674
0.749

Calculation
cost
1.479
0.593
0.658

0.973
1
1.114

0.854
0.897
1

Confidence

Weight mean
0.3308
0.0977
0.1102
0.1356
0.1505
0.1752

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The Improvement of Competitiveness of Activity Based Costing System(Case Study: Samfar Co)
International Journal of Economy, Management and Social Sciences Vol(3), No (10), October, 2014.

WSV
2.0033
0.5877
0.6638
0.8156
0.9073
1.0574

CV
6.0569
6.0171
6.0211
6.0152
6.0282
6.0349

Table 4.5
Lambda Max
6.0289

CI
0.0058

CR
0.0047

Based on the calculated score (Table 4.3), the ABC method achieved higher rank in calculation of the Samfars products cost price. In addition,
as CR value has been calculated less than 0.1 (Table 4.5), all of the judgments are consistent.

5.

Conclusion

Regarding that seven relatively (overhead) cost organizations such as product engineering, equipment design, electronics, system documents
provision, molding, IT, and service and maintenance units, presented in Table 4.2, are subdivisions of the research and development deputy, they
have accounted for 67% of the overhead costs, based on the same Table.
Therefore, by taking another look at Samfars structure one would find out the allocation of the majority of overhead to research and
development deputy is due to its activities in three areas, namely designing and manufacturing production and laboratory equipment, designing,
manufacturing, and forming new products, support and optimization of production line. In addition, these costs are justifiable for the
shareholders, since they otherwise have to spend several times more for purchasing production and test equipment and technical knowledge from
other countries.
According to the above description and conducted analyses, it can be concluded that each product with such factors as more stringent factory or
national standards, or more complex technical knowledge consumes more energy from research and development deputy, and obviously
accounts for a greater amount of overhead.
In this research, it has clearly been shown that the most important reason for difference between overhead allocated to a product, using
conventional and ABC techniques, was the amount of human and non-human resources consumed by the subdivisions of research and
development deputy, which has not been addressed well in conventional method leading to inappropriate overhead sharing. The products such as
RD107 and RD120, for which overhead shares in conventional method were less compared with ABC method, are salient examples for such
claim. Indeed, these parts have had false acceptable income and it seems that due to the same reason and despite the simplicity of them no other
domestic supplier tends to produce them with such sale price. In contrast, RD02 have had bigger overhead share in conventional method leading
to set unreasonable sale price paving the ground for domestic competitors to produce it. Therefore, a part of the market, previously owned by
Samfar Company, for this product has now been captured by other companies. Consequently, it seems that this research has achieved to open a
new window to the managers of this organization.

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