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When traditional calculation methods are applied, the following questions may often arise:

• Is the calculated prime cost fair?
• Are the budgeting results connected with the business processes of the company and with determining the efficiency thereof?

The Activity Based Costing procedure implemented in the IТ-Enterprise system allows getting those questions answered (cost analysis by the activities, or a process oriented cost management).

The detailed information regarding the product price allows making correct strategic solutions related to:

• fixing products prices
• combination of products
• the choice whether to produce or to purchase some products
• investing funds into research and development, process automation, promotion etc.

A more accurate assessment of the cost of business processes allows:

• paying more attention to management functions, such as improving efficiency of costly operations
• determining and reducing the volume of business that does not make products more valuable
• determining wrong distribution of resources by operations etc.

Activity based costing (АВС) concept is, in fact, the operation based costing.

The ABC method is based on a suggestion that “the activity consumes resources and products consume activity”.

The traditional cost allocation in case of absorption costing provides allocating direct costs pro rata with one of the basic factors (e.g. direct labor input).

Cost allocation in case of operation based method provides an economically feasible allocation of indirect costs in connection with the business processes; this shall be completed in several steps:

• allocation of overhead costs (business expenditures expressed in monetary form) onto resources (support of specific functions, i.e. “which complete the operations” and “who complete the operations”: production equipment, personnel, production areas etc.) together with a costs driver generated
• primary transfer of resources value onto the operations (actions taken to create or maintain cost objects: company management, raw materials purchase, production operations) together with a resources driver generated
• re-allocation of cost of service operations onto the resources they service
• allocation of cost of control operations onto the main and service operations
• transfer of cost of the main operations onto cost objects

Transition from standard to operation based costing methods is required for the companies that provide a variety of products, a relatively high share of relative overhead costs, a substantial difference between the sales volumes of various types of products.

The “ABC Process based cost management” module of IT-Enterprise system provides an open model for cost allocation: implementing a real schedule of costs re-allocation inside the company between the procedures, orders, resources, cost centers etc.; the source data may be located both, inside and outside the IT-Enterprise system.

The model of cost analysis allows performing actual and predictive cost analysis, following the information from resulting values to the primary document (drill-down technology).

АВС-costing in the IT-Enterprise system goes through the following steps

Generating reference data for calculation

The procedure similar to the one applied in financial planning shall be used to classify costs: using up to 5 directories of items together (e.g. elements, items, attributes), arranging the directory based on alternative sources, using general directories for planning and accounting, or converting them through the compliance table. The classification of resources, operations, costing objects shall be completed in the unified system classifier; both, single items (conditional rent operation, quality operation, enterprise as a whole etc.) and group production facilities shall be classified thereat (equipment model, occupation, process operation etc.). The connection to the other system classifiers shall be provided.

Calculation sources assignment

The following shall be considered as calculation sources: rationing (standards for use of raw materials, materials, semi-finished products, recyclable waste, time and wage norms, equipment utilization rates, specialized norms), price tags, plans (production plans in the context of semi-finished products and process operations, schedules of available equipment operation time in the context of time attributes, preventive maintenance plans, etc.), document flow (application campaign, documents of actual resource consumption, etc.)

Reports and results

As a result of cost allocation, information becomes available for monitoring and analysis in the following modes: cost allocation control at each level, calculation of driver costs, generating cost estimates for the whole nomenclature, completely knocked down assembly method of costing, costing for new items, costing with deviations by alternatives, OLAP-analysis of data, including cost cube, driver cube, time attributes cube etc.

Specific features of automation in the unified IТ-Enterprise system:

• Flexibility: when correcting the source data or distribution procedure, it is possible to quickly recalculate the calculation results; the system stores the initial data, procedures and calculation results for different periods; this allows analyzing the dynamics of changes in the value of objects and implementing the already created distribution procedures
• Scalability: the possibility to expand the list of values in the task directories, as well as to support an unlimited set of calculation algorithms
• Connection with other applications and system contours, a unified information space, exchange and simultaneous use of data by tasks for calculating and managing costs, planning, management accounting, budgeting, etc.