The costs calculation model is very important in every company because it is the one that determines the business viability and the efficacy level of all the production processes. How are the resources managed and the budget distributed? Keep reading and discover more about The ABC System.
In this article we will talk about the principal characteristics of the ABC costs system, some of its goals, the difference between the traditional costs system and the ABC system, as well, we will explain some pros and cons about this new method in terms of the agricultural sector.
Costs System Definition (Based on activities)
It is a system which accumulates indirect costs from each one of the activities performed inside an organization in the first place, and after that, it assigns the costs to the activities to the products, services, or other objects that caused the activity.
ABC Costs Method Characteristics
The ABC costs system is based on the approach that says that every activity is a cost generator and that the products consume activities.
"Products generate activities, and activities consume costs"
Additionally, we must understand that when we refer to "activities", we are talking about those tasks that generate costs and that are necessary to satisfy the needs of internal and external clients.
The goals of the ABC method are:
Add to the products and/or services only the costs and budget that increase the value of the production process, distribution, and administration. The emphasis on the management area is focused on the processes responsible for the increase of the indirect costs from the activities that add no value to the process.
Nowadays, the ABC costs system, offers an easier and faster way to reduce costs, because we are able to recollect enough information to understand the true costs inductors to be able to create action plans. By doing so, we work with a rational process, eliminating the original causes which originate higher costs.
Traditional Costs System vs the ABC Costs System
The traditional costs system is based on the produced unities to calculate the expenses assignation. On the other hand, the ABC costs system implements different approaches according to the activities related to the indirect costs.
The traditional costs system only takes into consideration the product's costs, and on the other side, the ABC costs system concentrates on the activities that generate those resources.
In the traditional costs system, the indirect expenses assignation is performed in two stages: First, the official budget is assigned to the departments involved and then to the products. In the ABC costs system, the costs assignation is first applied to the activities and then to the products.
Benefits of the ABC System:
The principal benefits of using the ABC model in agricultural industries are focused in three aspects:
- Control- The more information you have, the better you plan.
- Management- It improves because this system provides a better information flow regarding the financial processes and data, providing a better structure to the costs plan.
- Costs saving.- It allows us to assign budget and expenses more precisely, by being able to establish a cause and effect relationship.
I hope that this article was interesting to you and don't forget to read my following blog where I will talk about the steps to implement the ABC costs system: