Activity-based costing aplications in the Czech Republic

• Author: Boris Popesko/Petr Novak
• Position: Tomas Bata University in Zlin Faculty of Management and Economics/Tomas Bata University in Zlin Faculty of Management and Economics
• Pages: 69-75

Page 69

1. Introduction

In the last several years we can see a dramatically growing importance of the high quality information for the company management decision. The area of the cost management systems used for costing and budgeting is one of the most important areas of company financial management. According to growing competition on the globalized markets, companies need the information about the profitability of a product, customers or markets, about costs consumed by different activities and other different areas where the costs have the important role. If the company wants to keep in touch with the strongest competitors, its costing system has to implement the ability to react to changes in product and activities structure and feature these changes in the product costing. If the costing system does not change and does not conform with process, activities and product structure dynamics, than the costing system will become obsolete and will produce the incorrect information about the company cost.

Modern, process and activity based costing systems has been developed in early 1980´s and are mostly used by US companies and the European top companies. The level of utilization in the central European companies is not very high. Companies often deal with problems and obstacles in application and useful utilization of these systems. Authors have participated on several ABC implementation projects an interviewed a lot of companies which showed the discontent with present quality of their costing system. Most of them showed an interest in the area but was unsure if the ABC system is practically able to solve most important problems with the costs.

Page 70

Traditionalism and inflexibility in adoption of modern management tools is also the one of the problem in the extension of process costing systems. This article describes the approach of Czech companies to the problems of cost management in today's business environment and seeks the obstacles in adoption of modern costing systems.

2. Introduction of the activity-based cost management system

In the beginning of 1980´s companies started to seek for new costing methods and started to deal with activity-based methods, consequently with development of process management, which has been developed in the same period. The Activity- Based Costing (ABC) as the type of the costing method was constructed in that time. ABC involved the important quality improvement in the area of cost calculations and solved the basic shortages of traditional absorption costing systems, by the seeking of the true causes of the overhead costs consumption.

Major problems of traditional costing methods: mixing of all types of costs together in the few company overheads; arbitrary allocation of that overheads; and "averagization" of the overhead costs allocated, can be effectively eliminated by the process view on the allocation process. Usually used absorption costing method allocates the proportionally same volume of overhead costs to each product, according to the volume of the direct costs. In present enterprises could be this method very often misguiding. The effect that plays its role in wrong overhead cost allocation could be described as the "averagization". This term means the effect, when to all cost objects, will be allocated proportionally average volume of costs of any type.

Problem of the...