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الرحيم الرحمن الله بسمغزة – اإلسالمية الجامعة
التجارة كليةالمحاسبة قسم
Islamic University – GazaFaculty of CommerceDepartment of Accounting
Activity- Based Costing System and its role in decision making in Al-Siksik
Company
A Graduation Project Presented to the
Faculty of CommerceThe Islamic University of Gaza
By
Lina A. Eid Caroline A. Abu kwaik
220091977 220092008
Supervisor's name
Mr. Salah Shubair
Date
August 2012
1
Dedication
To our lovely country Palestine.
To our brave prisoners, who sacrifice their lives for freedom
and dignity of the Palestinian people.
To our distinctive university, which is the pride for Students.
To our professors and lecturers who gave us a helping hand
and assistance at any time.
To our parent, who scarified everything in their life for us and
always we thank them for pushing up to success
To our brothers and sisters, who are always blessed to our
success.
To our friends, who support us all the time.
2
Abstract
This study aims to analyze and reinforce the effectiveness and the efficiency of
Activity-Based Costing system and its role in decision-making in Al-Siksik company.
The company is a private limited company, which supply plumbing and infrastructure
materials for governmental, nongovernmental institutes and contracting companies in
Palestine.
The objective of this study can be achieved through collecting data through reviewing
the literature and previous studies, these resources can shape the theoretical side, but
for the practical side the data is collected from the company itself and also through
distributing a questionnaire to get primary data in order to test research hypothesis,
answer research questions, and achieve research objectives.
The SPSS has been used for data analysis, where as a number of statistical test have
been made, such as frequencies.
The study comes to many results, the most important of which that Activity-Based
costing(ABC) is one of the modern cost accounting systems that assign indirect cost
to the cost objects and provides more accurate and detailed information. And also,
ABC system pervades all managerial functions starting from planning the activities
till staffing the workers and making the final decisions.
This study has resulted in making a number of recommendation. The most important
will be the need to use Activity-based costing(ABC) system in all complex
manufacturing firms in Gaza strip because this will facilities the works of the
companies and lead to accurate information and easier decision making process.
And also, there is a need to the support senior management in companies to the
3
sections and accounting departments and to provide them competencies and
expertise necessary to implement the cost accounting system and making decisions.
ContentsDedication.............................................................................................................................2
Abstract....................................................................................................................................3
Chapter one..............................................................................................................................8
General frame work of the research.........................................................................................8
1.1 Introduction....................................................................................................................9
Activity based costing system...........................................................................................9
About Al-Siksik company................................................................................................10
1.2 Statement of the problem............................................................................................10
Are there elements of the application of ABC system are available in Al-Siksik Company?............................................................................................................................................11
1.3 Hypothesis....................................................................................................................11
1.4 Objectives.....................................................................................................................11
1.4.1 Main objective:......................................................................................................11
1.4.2 Specific objective:.................................................................................................11
1.5 Significance of the project............................................................................................12
1.6 Scope and limitation.....................................................................................................12
1.7 Methodology................................................................................................................13
1.7.1 Overview of the current state of the art................................................................13
1.7.2 related work:..........................................................................................................14
Chapter two............................................................................................................................18
Activity-based costing (ABC) system.......................................................................................18
2.1 Cost...............................................................................................................................19
2.2Cost system....................................................................................................................19
2.2.1 The need of cost system........................................................................................21
2.3 Types of cost system.....................................................................................................22
1. Absorption costing......................................................................................................25
4
2. Variable costing...........................................................................................................26
2.4 The introduction of ABC................................................................................................27
2.4.1 Activity Based Costing............................................................................................29
2.5 The need for ABC system..............................................................................................30
2.6 Significance of activity-based costing system...............................................................31
2.7 When Is Activity-Based Costing Appropriate?...............................................................32
2.8 ABC in Service and Merchandise companies................................................................33
2.9 Costs and benefits.........................................................................................................34
2.11 How costs are treated under activity based costing?.................................................36
2.11.1 Non-manufacturing costs and activity-based costing..........................................36
2.11.2 Manufacturing costs and activity- based costing.................................................36
2.11.3 The costs of idle capacity in activity-based costing..............................................36
2.11.4 Activity- based costing and external reports........................................................37
2.12 limitations and criticisms of the activity-based costing system...............................38
2.13 Activity based management (ABM)............................................................................39
2.13.1 Activity Based Management – Implementation...................................................41
Chapter 3................................................................................................................................43
Bashir Al-Siksik Company for Sanitary ware and plumbing.....................................................43
3.1 Introduction..................................................................................................................44
3.2 Origin and definition.....................................................................................................44
3.3 Mission..........................................................................................................................45
3.4 Vision............................................................................................................................45
3.5 Objectives.....................................................................................................................45
3.6 Factory structure..........................................................................................................45
3.7Factory location.............................................................................................................46
3.8 Production lines in the factory......................................................................................46
3.9 Production method.......................................................................................................47
3.10 Many agencies............................................................................................................47
3.11 Company products:.....................................................................................................48
3.12 Implementing Activity-based costing (ABC) system....................................................51
3.13 Choosing cost driver...................................................................................................51
3.14 Computing a Cost Rate per Cost Driver.......................................................................52
3.15Assigning costs to products.........................................................................................52
CHAPTER 4..............................................................................................................................53
5
DECISION MAKING LITERATURE.............................................................................................53
4.1 Introduction..................................................................................................................54
4.2 Definition of decision-making.......................................................................................56
3.4 Significance of decision making....................................................................................57
4.4 Characteristics of Decision Making...............................................................................59
4.5Steps Involved In Decision Making Process...................................................................60
Define the problem.........................................................................................................61
Analyzing the Problem....................................................................................................62
Collecting Relevant Data.................................................................................................62
Develop potential alternatives........................................................................................63
Analyze the alternatives.................................................................................................64
Select the best alternative..............................................................................................65
Implement the decision..................................................................................................65
Establish a control and evaluation system......................................................................65
4.6Good decision making....................................................................................................67
4.7 Types of decision..........................................................................................................67
First classification............................................................................................................67
The second classification................................................................................................67
The third classification....................................................................................................68
4.8ABC and decision making...............................................................................................69
Chapter 5................................................................................................................................71
Research methodology...........................................................................................................71
5.1 Introduction..................................................................................................................72
5.2 Research design............................................................................................................72
5.3 Research methodology.................................................................................................72
5.3.1 Data Collection Methodology................................................................................72
5.3.2 Data Analysis Methodology...................................................................................73
5.4 population and Sample size..........................................................................................73
Section 1: General Information.......................................................................................73
Section 2 Cost systems....................................................................................................79
Section 3 Respondent information.................................................................................83
5.5 Questionnaire content..................................................................................................85
5.5.1 Pilot Study..............................................................................................................86
5.6 Validity of the Research................................................................................................86
6
5.7 Content Validity of the Questionnaire..........................................................................86
5.8 Statistical Validity of the Questionnaire........................................................................87
5.9 Criterion- Related Validity:............................................................................................87
5.9.1 Internal consistency:..............................................................................................87
5.10 Reliability of the Research..........................................................................................90
5.10.1 Half Split Method.................................................................................................90
5.10.2Cronbach’s Coefficient Alpha................................................................................91
5.11 Data Analysis and Discussion......................................................................................92
Chapter six..............................................................................................................................97
Results and recommendations...............................................................................................97
6.1 Results..........................................................................................................................98
6.2 Recommendations........................................................................................................99
Reference..........................................................................................................................101
Bibliography.........................................................................................................................102
Appendix...............................................................................................................................106
7
Chapter one
General frame work of the research
1.1 Introduction1.2 Statement of the Problem1.3 Hypothesis1.4 Objectives
1.4.1 Main Objective1.4.2 Specific Objectives
1.5 Significance of the Project1.6 Scope and limitations of the Project1.7 Methodology
8
1.7.1 Current State of the Art1.7.2 Related Work
1.1 Introduction
Activity based costing systemAccounting is one of the oldest systems of information known to the organizations,
the accounting systems has a great importance in the identification of financial and
economic reality of the organization and the Organization's financial relations with
the surrounding environment (Qasim, 2004).
The accounting system one of the main systems producing accounting information
that contribute to rationalize and support the economic decisions making that will
affect on the resources and wealth of the communities and thus on the well-being of
its members (Saloof and Joseph, 1997). where the system is linked through close
relationship to the managerial functions, this will contribute to the rationalization of
decisions and makes the administrative process more effective in meeting the needs of
the organization's requirement, and improve the performance to achieve the goals.
Manufacturing firms face ever-increasing competition in today’s global marketplace.
Companies must react quickly and manufacture high quality, low cost product to be
successful in this new environment. To make proper decision, managers must have
accurate and up-to-date costing information. Traditional costing systems based on
volume-based allocation of overhead costs have lost relevance in manufacturing
environment that has seen a sharp increase in overhead costs and subsequent decline
in direct labor. These traditional costing systems tend to distort product costs and lead
to poor strategic decision making.
9
The traditional costing system, with its one-size-fits-all approach, were designed
around 1870 - 1920 and in those days industry was labor intensive, there was no
automation, the product variety was small and the overhead costs in companies were
generally very low compared to today . So, the traditional costing systems are not
adequate for today’s business situation. Not only is the traditional costing method
unable to supply the tools for measuring costs, it cannot provide managers with the
information needed to run manufacturing operations profitably(Horngren.et.al 2006).
One innovative costing method designed to deal with the deficiencies of traditional
costing systems through creating Activity Based Costing (ABC). ABC, pioneered by
Robin Cooper, Robert Kaplan and H. Thomas Johnson, is a costing methodology used
to trace overhead costs directly to cost objects, i.e., product, processes, service, or
customers and help managers to make the right decisions regarding product mix and
competitive strategies(Horngren.et.al 2006).
About Al-Siksik companyIt is a Palestinian private limited company, established in 1976 by Mr. Bashir Al-
Siksik, and started its work as a supplier for plumbing and infrastructure materials.
Its supply plumbing and infrastructure materials for governmental, nongovernmental
institutes and contracting companies in Palestine
It's an ancient name for the Palestinian company was built through a long march of
struggle and tender in the field of construction and infrastructure at the hands of Mr.
Bashir Al-Siksik.
Al-Siksik Co. has become a national monument proudly that seek to settle its product
and produced it locally since 38 years of effort, excellence and giving.
Its consider the first and largest company of its kind in Palestine, which one of the
leading companies in pipes industry with various diameters and types, which
characterized by the technological development of devices, equipment and
manufactured production lines with the latest international standards.
1.2 Statement of the problem
10
The research discusses the deficiencies of product costing information which support
the rationale decision making for management that helps the decision makers in
defining the product mix, marketing plans, pricing policies, this lack of rationale
decision making revealed as a result of deficiency of traditional costing system which
helps in define accurate product costs, the Activity Based Costing System is superior
tool that provides a good information for rationale decision making.
And its include the following question:
What is the relationship between the cost systems and the quality of the
accounting information?
What are the effects of the cost systems on the managerial performance and its
role in making a good decision?
Can the application of ABC system lead to the allocation of costs more
accurately?
Are there elements of the application of ABC system are available in Al-Siksik Company?
1.3 Hypothesis
Hypothesis 1: Al-Siksik Company does not implement Activity Based costing
system.
Hypothesis2:There is no relation between the cost systems and the quality of the
accounting information
Hypothesis 3:The costing systems in Al-Siksik Company does not provide
competent tool for rational decision making.
Hypothesis 4: There is no relation between the cost systems and the quality of the
managerial decisions.
1.4 Objectives
1.4.1 Main objective:To examine the implementation of Activity Based Cost System in Bashir Al-Siksik
company for rationale decision making.
11
1.4.2 Specific objective:1- To give the reasons why Activity Based Costing System in demand by today's
managers.
2- To explain the major difference between Activity Based Costing system and
the traditional costing systems
3- To explain how Activity Based Costing Systems are used in Activity Based
Management.
4- To evaluate cost and benefit of implementation of Activity Based Costing
System.
5- To explain the effect of use Activity Based Costing on Decision making.
1.5 Significance of the project
This study will explore the Implantation of ABC in Al-Siksik Company, as well as the
role of the ABC in rationale decision making for decision makers.
It is expected that this study will shed light on the weighting of those variables and of
their relative importance thus modifying the current theory of ABC system. In
addition, this study is expected to make important contributions with both practical
and theoretical implications for ABC in Gaza Strip and to fill the gaps caused by the
failure of the existing theory to account for the difference between countries in the
region, because it is unclear whether the success/failure of implementation of ABC is
attributable to culture or merely the stage of economic development.
It is also intended that this study will improve the chances of successful
implementation of this and perhaps other management innovations by deepening
knowledge about the company which inhibit or facilitate implementation, and will
lead to better informed management and, hence, more efficient and competitive firm
with enhanced economic and social benefits. This could be very important in Gaza
Strip.
1.6 Scope and limitation
12
There are some limitations that face the research environment and the researcher have
to minimize it as much as possible and adapt with these limitations in order to achieve
research objective and answer research question:
First, Getting the information is not easily available, so the researchers have to
exert their efforts to get the information through the books, previous studies and
searching the websites
Second, Time restriction that the researcher will face, this study must be
completed through one and half month, which means the researches have to work
hard to collect the required data, analyze these data and reach the targeted
objective within short period.
Third, this study will study the implementing of Activity Based Costing system in
Al-Siksik company, so this will hinder the research from collecting broader
information about Activity Based Costing system from large number
manufacturing firms.
Fourth, The researcher will use questioner as research methodology so the
researcher may face a lack of response from the sample which will be the
employees of Al-Siksik company to answer the research questions that will hinder
the researcher to collect sufficient data, which may mislead the research.
1.7 Methodology
The researchers chose the research to be applied on Al-Siksik company so this will
be case study research. Also the researchers choose to follow a descriptive analytical
approach to conduct this study.
Source of information:
Secondary : Books, Article, website, references, other study.
Primary: through questioner that will be prepared and distributed to the
population under consideration.
13
1.7.1 Overview of the current state of the artActivity Based Costing system, is a costing system which relates all costs in the
organization. Did not consider the first costs system, but appeared as a result of the
inability of former traditional systems for fulfilling the needs of the institutions.
Activity Based Costing system is applied in all types of the organizationBut through
varying degrees. So the implementation it in manufacturing companies be more
important than in service companies, and certainly with increasing the evolution and
complexity of the work of companies, we find that the need for a system of cost
increases day over day.
Continuous development in cost systems can lead to more accurate cost and
accounting information, and finally will lead to perfect cost of the product unit.
1.7.2 related work:First: Arabic studies:
1. Ahmed, Basam (2006): The role of accounting information systems in the
rationalization of decision-making.
This study aimed to explain and analyze the role of the accounting information system
in producing an efficient and effective accounting information system to meet the
request administrative needs to rationalize the administrative decisions of
corporations in Gaza strip.
The study observed that there is some indications like:
The existence of some decrease in setting the accounting manuals to identify the ways
of verification and treatment of the operations. In addition to lack of the requested
interest to develop the staff skills in accounting field which require the necessity that
administration takes care of provided the needed component to operate the accounting
system efficiently and effectively.
That there is a low level in analyzing the environmental factors, which influence the
typed of decisions that might be taken. This highlights the necessity to take care of the
factors that surround the company at stage of preparing and developing the accounting
information system to secure the effectiveness and the efficiency of those systems.
14
The study recommended a number of recommendations, the most important of these
recommendations:
The necessary of attention in promoting the workers in the field of accounting to
improve their technical and academic level and keep up with technical developments
and professional and thus develop their skills, through training courses, etc., and also
focus on the employment of people who have the qualifications of a scientific and
practical in accounting, in proportion with the size and the level of the tasks that are
required of them.
paying attention to the administration that the decision is made after analyzing the
surrounding environment of the company, and don’t not make decisions based on
personal experiences only.
2. Maher, Dorgam(2005):The implementation of ABC in public hospitals in
Gaza strip(case study).
This study aimed to review an Activity-Based Costing(ABC) system in all its aspects
as compared with the traditional system and the possibility of application of ABC
system in public hospitals environments that are operating in Gaza Strip and the
availability of the necessary ingredients for the application of this system from
another side.
The study concluded the need for basic information for the application of ABC
system in the public hospitals in the Gaza Strip and therefore, all the proposed
ingredients (orientations of senior management, the diversity and complexity of
treatment services, provide accounting systems, the increasing competition and
diversity of activities) in the search form is the truth and do exist in practice, which
represents an infrastructure to implement an ABC system in the public hospitals.
Based on the results of the study, the researcher recommended the following:
1. Create independent departments for cost accounting in the public hospitals and
strengthen it by providing the hospital with a group of specialist people.
15
2. Adoption of ABC system Because it provides more precise information and help in
planning, control and decision making sound.
Second: Foreign studies:
Reyhanoglu, Metin (2003): Activity based costing system 'advantageous and
disadvantageous'.
This study talked about Activity based costing(ABC) as it is one of the costing
system, when it appears and clarifying the main reasons for appearing ABCafter the
traditional system which related to the inefficiencythese traditional systemsthrough.
This study proved that the disadvantageous of the traditional system with allocating
the fixed overhead and the necessity to the accurate cost information, were the main
reasons for adopting the Activity based costing system .
Improving the quality, customer profitability, workforce utilization, distribution
channels and reducing the costs and cycle time can be taken in to consideration
through ABC system by extending it in to Activity Based management(ABM).
The study reach to the most important advantageous of using ABC system which lead
to more accurately and making product mix decision and pricing decision. Ta the
same tine an Activity based coating system involve some problems such as difficult
implementing, costly, and difficult gathering information.
16
17
Chapter two
Activity-based costing (ABC) system
2.1 Cost2.2 Cost system2.3Types of cost system 2.4 The introduction of ABC
2.4.1 ABC system 2.5 The need for ABC2.6 The significance of ABC 2.7 When ABC is appropriate?2.8 ABC in service and merchandise Companies2.9 Costs and benefits2.10 Designing an activity-based costing (ABC) system2.11 How costs are treated under activity based costing?2.11.1 Non-manufacturing costs and activity-based costing2.11.2 Manufacturing costs and activity- based costing 2.11.3 The costs of idle capacity in activity-based costing2.11.4 Activity- based costing and external reports2.12 limitations and criticisms of activity- based costing2.13 Activity based management (ABM)
2.13.1 Activity Based Management – Implementation
18
Activity based cost system
2.1 Cost
Every day, we buy many things: clothing, food, books, music and so on. When we
buy one thing, we give up(sacrifice) the ability to use these resources (typically cash
or a line of credit) to buy something else. The price of each items measure sacrifice
we make to acquire it. Whether we buy cash or use another assets, whether we buy
now or later( by using a credit card), the cost of item acquired is represented by what
we forgo as a result (Michael, 2004).
So, The cost is a sacrifice of resources. Is a type of accounting process that aims to
capture a company's costs of production by assessing the input costs of each step of
production as well as fixed costs such as depreciation of capital equipment. Cost
accounting will first measure and record these costs individually, then compare input
results to output or actual results to aid company management in measuring financial
performance(Michael, 2004).
2.2Cost system
Product's price consists of costs, which are direct labor, direct material, and
overheads. There is no problem with direct labor and direct material costs because of
their involving directly to product costs. The problem with overheads is which
overheads put in the right product. Complexity of structure nowadays companies
decrease their direct material and labor, however their common costs increase instead
(Karlof 1993,P :34). A cost system's one of the objectives is that to identify and
eliminate non-value- added costs.
The organizations and managers are most of the times interested in and worried for
the costs. The control of the costs of the past, present and future is part of the job of
all the managers in a company. In the companies that try to have profits, the control of
costs affects directly to them. Knowing the costs of the products is essential for
decision-making regarding price and mix assignation of products and services.
19
The cost accounting systems can be important sources of information for the
managers of a company. For this reason, the managers understand the forces and
weaknesses of the cost accounting systems, and participate in the evaluation and
evolution of the cost measurement and administration systems. Unlike the accounting
systems that help in the preparation of financial reports periodically, the cost
accounting systems and reports are not subject to rules and standards like the
Generally Accepted Accounting Principles(GAAP). As a result, there is a wide
variety in the cost accounting systems of the different companies and sometimes even
in different parts of the same company or organization(Michael, 2004).
Costing systems are components of a broader accounting system used by a given
company or organization. The main function of the costing system is to keep a
focused eye on expenditures made by the company. While the data that is collected
and generated by the costing system is also integrated into the overall accounting
system, the costing approach allows for easy extraction of the data for reports to upper
management.(What is a costing system?)http://www.wisegeek.com/what-is-a-costing-
system.htm .
The information that typically is gathered by a costing system allows owners and
managers to quickly identify the current status of two key factors that are relevant to
the success of the company. First, Operational costs which are often the foundation of
the data collected by a costing system(Drake,1999). Here, management is able to get a
snapshot of all expenditures that are directly connected with the general operation of
the organization, especially in terms of production costs.
A second important bloc of information that is retrieved with the use of a costing
system is performance cost. Here, management is able to view any and all
expenditures that are related to helping the company remain profitable, less the direct
cost of operations. Expenses associated with marketing, public relations, and sales
efforts are examples of the type of expenditures that are captured in the performance
cost module(Drake,1999)
The objective of a cost system or costing system is accumulate the costs of goods or
services. The information on the cost of a product or service is used by managers to
set the prices of the product, control operations, and develop financial statements.
20
Also, the cost system improves control by providing information on the costs incurred
by each department or manufacturing process.
The following are different cost accounting approaches:
standardized or standard cost accounting.
lean accounting.
activity-based costing.
resource consumption accounting.
throughput accounting.
marginal costing/cost-volume-profit analysis(CVP).
(Activity Based costing)http://www.loscostos.info/cost-accounting/abc-costing.html.
2.2.1 The need of cost system Companies need cost systems to perform a number of different functions. They
include:
1) Allocating cost between cost of goods sold and inventories for periodic internal
and external profit reporting.
2) Providing relevant cost information to manage the cost and mix of existing
activities, product, service, location and customer.
3) Providing economic feedback to managers to manage costs and improve the
efficiency and effectiveness of existing operation.
4)Providing relevant information to manage the cost and mix of future activities.
The first three functions relate to generating information relating to existing activities.
Inventory valuation normally is not an issue for many non-manufacturing
organization.
Thus, a costing system to perform the first function is not required by many
organizations.
The second function is concerned with ensuring that only profitable activities are
undertaken. The costing system plays a crucial role here in generating information for
periodic profitability analysis for distinguishing between profitable and unprofitable
21
activities. When unprofitable activities are identified cost reduction alternative, such
as outsourcing or redesign, are considered. If cost reduction or actions taken to
generate additional revenues cannot make these activities profitable, and there are no
other strategic reasons ( such as maintaining a full product line ) for continuing the
activities, they are likely to be subjected to discontinuation. In some situations cost
information extracted from the costing system also plays a crucial role in determining
selling price, particularly in thin markets where customized product are provided that
do not have readily available market prices.
The third function relates to operational cost control and includes traditional
responsibility accounting, standard costing and variance analysis.
Whereas the first three functions are mainly feedback oriented. The fourth function
relies on feed forward techniques. Here the focus is on managing future activities to
ensure that only forward new products or services are lunches. The existing costing
database is unlikely to be directly appropriate for this function. Instead, the emphasis
is on providing estimates of future costs of new activities using techniques such as
target costing, life cycle costing and value engineering. Where the introduction of new
activities require initial investment outlays they are likely to be subject to capital
investment appraisal using discounted cash flow techniques (Tayles& Drury, 2003).
2.3 Types of cost system
There are many types of costing systems available for businesses to use; most of these
costing systems are designed to assign costs to products. Activity-based costing
(ABC) on the other hand is designed to assign costs to activities as it relates to the cause and outcome connection which link costs and activities that drive
costs,. ABC has become popular due to the fact that as businesses grow in
complexity, so does their need to assign increasingly large indirect costs to the
appropriate area or activity
Generally, we can divide the cost systems in to two types:
First: traditional costing systems.
Second: activity Based Costing system.
22
The traditional cost-accounting system often allocate costs based on single-volume
measures such as direct-labor hours, direct-labor costs, or machine hours. While using
a single volume measure as an overall cost driver seldom meets the cause-and effect
criterion desired in cost allocation, it provides a relatively cheap and convenient
means of complying with financial reporting requirements. In contrast to traditional
cost-accounting systems, ABC systems are not inherently constrained by the tenets of
financial reporting requirements. Rather ABC systems have the inherent flexibility to
provide special reports to facilitate management decisions regarding the costs of
activities undertaken to design, produce, sell, and deliver a company’s products or
services. At the heart of this flexibility is the fact that ABC systems focus on
accumulating costs via several key activities, whereas traditional cost allocation
focuses on accumulating costs via organizational units. By focusing on specific
activities, Even so, traditional cost-accounting systems will continue to be used to
satisfy conventional financial reporting requirements. ABC systems will continue to
supplement, rather than replace, traditional cost-accounting systems(Horngren and
Foster,2000).
The traditional approach to cost-allocation consists of three basic steps: accumulate
costs within a production or nonproduction department; allocate nonproduction
department costs to production departments; and allocate the resulting (revised)
production department costs to various products, services, or
customers(Horngren.et.al 2007).
Traditional cost accounting methods suffer from several defects that can result in
distorted cost for decision making purpose. All manufacturing costs_ even those that
are not caused by any specific product_ are allocated to products. And non-
manufacturing cost that are caused by products are not assigned to products( Garrison
et. al. 2007, P:264).
Costs derived from this traditional allocation approach suffer from several defects that
can result in distorted costs for decision-making purposes. Traditional methods
allocate the cost of idle capacity to products. In effects, products are charged for
resources that they don’t use( Garrison et. al. 2007, P:265).And traditional methods
tend to place too much reliance on unit-level allocation bases such as direct labor and
machine hours. This results in overcosting high volume products and undercosting
low volume products and can lead to mistakes when making decisions. Seeking to
23
remedy such distortions, many companies have adopted a different cost-allocation
approach called activity-based costing (ABC)(John, 2001).
In traditional cost accounting systems, the objective is to value inventories and cost
of goods sold for external financial reports in accordance with the generally accepted
accounting principles (GAAP). In activity based costing (ABC) system the objective
is to understand overhead and the profitability of products and customers and to
manage overhead. As a consequence of these differences in objectives, "best
practice" activity based costing system differs in a number of ways from traditional
cost accounting ( Garrison et. al. 2007,P: 263).
In activity based costing:
1. Non-manufacturing as well as manufacturing costs may be assigned to
products.
2. Some manufacturing costs may be excluded from product costs.
3. A number of overhead cost pools are used, each of which is allocated to
products and other costing objects using its own unique measure of activity.
4. The allocation bases often differ from those used in traditional costing
system.
5. The overhead rates or activity rates may be based on the level of activity at
capacity rather than on the budgeted level of activity.
These differences from traditional cost accounting systems can dramatically impact
the apparent costs of products and the profitability of products and customers.
(Definition and explanation of Activity-Based
costing)http://www.accounting4management.com/
definition_explanation_activity_based_costing.htm
Generally, according to Charles et. al(2006) we can summarize the difference
between the Traditional systems and Activity Based Cost system in this table:
Traditional systems Activity Based Cost system
24
One or few indirect cost pools for each
department.
Many indirect cost pools because of
many activity area.
Indirect cost application bases may be
cost drivers
Indirect cost application bases are more
likely to be cost driver.
Indirect cost application bases are often
financial, such as direct labor costs or
direct material costs.
Indirect cost application bases are often
nonfinancial variable, such as number of
parts in product or hours of test time.
For the Traditional cost accounting systems we have more than one type like:
1. Absorption costingThe absorption costing treats all costs of production as product costs, regardless of
whether they are variable or fixed, The cost of a unit of product under the absorption
costing method therefore consists of direct material, direct labor, and both variable
and fixed overhead. Thus, absorption costing allocates a portion of fixed
manufacturing overhead cost to each unit of product, along with the variable
manufacturing costs. Because absorption costing includes all costs of production as
product costs, its frequently referred to as the full cost method(Garrison et. al. 2007,
P183).
We can summarize the pros and cons of a Absorption Costing as follows:
Advantages
This method is always used to prepare financial accounts;
When production remains constant but sales fluctuate, absorption costing
will show less fluctuation in net profit and unlike marginal costing.
Disadvantages
25
As absorption costing emphasized on total cost namely both variable and
fixed, it is not so useful for management to use to make decision, planning and
control.
as the manager’s emphasis is on total cost, the cost volume profit(CVP)
relationship is ignored. The manager needs to use his intuition to make
the decision.
(Advantages and disadvantages of apsorbtion costing
system)http://www.accounting4management.com/
advantages_and_disadvantages_of_absorption_costing.htm
2. Variable costingUnder variable costing, only those costs of production that vary with output are
treated as product costs. This would generally include direct material, direct labor and
variable portion of manufacturing overhead, Rather fixed manufacturing overhead is
treated as period cost and, like selling and administrative expenses, its charged off in
entirety against revenue each period. Consequently, the cost of a unit of product in
stock or in cost of goods sold under the variable costing methods contains no elements
of fixed overhead cost(Garrison et. al. 2007, P:186).
Variable costing is sometimes referred to as direct costing or managerial costing.
The term direct costing was popular for many years, but is slowly disappearing from
day-to-day use. The term variable costing is more descriptive of the way in which
product costs are computed when a contribution profit and loss account is
prepared(Garrison et. al. 2007, P:186).
Advantages
The data that are required for cost volume profit (CVP) analysis can be taken
directly from a variable costing format income statement. These data are not
available on a conventional income statement based on absorption costing.
Under variable costing, the profit for a period is not affected by changes in
inventories. Other things remaining the same (i.e. selling prices, costs, sales
mix, etc.), profits move in the same direction as sales when variable costing is
in use.
26
Managers often assume that unit product costs are variable costs. This is a
problem under absorption costing, since unit product costs are a combination
of both fixed and variable costs. Under variable costing, unit product costs do
not contain fixed costs.
Variable costing data make it easier to estimate the profitability of products,
customers, and other segments of the business. With absorption costing,
profitability is obscured by arbitrary allocations of fixed costs.
(Advantages of variable
costing)http://www.accounting4management.com/
advantages_of_variable_costing.htm
Garrison et.al. P190,(2007) classify the costs under both absorption and variable
costing in this table
Cost classification absorption costing Variable costing
Product costs 1. Direct material.
2. Direct labor.
3. Variable
manufacturing
overhead.
4. Fixed manufacturing
overhead.
1. Direct material.
2. Direct labor.
3. Variable manufacturing
overhead.
Period costs Selling and
administrative expenses
1. Fixed manufacturing
overhead.
2. Selling and administrative
expenses
2.4 The introduction of ABC
Increasing domestic and foreign competition, automation and changing cost structure
is forcing manufactures to look for a better understanding of their accounting system
and to need real time information system. Years ago, typical manufacturer have
27
produced a small number of products. Labor was the dominant element of the cost
structure. Nowadays, products are more numerous and labor are becoming a small
component of the total production costs(Reyhanoglu, M, 2003).
Over three decades. Competition has forced corporations to have incessant
development in all aspects of business, including performance measurement and cost
management. In the past, increasing capital intensity, because of automation, had
changed the relationship between indirect cost and direct labor cost in a number of
industries. The proportion of direct labor cost (variable costs) had contracted
considerably, on the other hand; fixed cost had grown (Mills and Cave 1990; Raffish
1991). Therefore, using direct labor, a small proportion of total manufacturing costs,
to allocate indirect costs in traditional cost systems was considered to be incorrect
(Cooper & Kaplan 1988).
For these reasons,, the companies must take an attention at their traditional costing
and consider new system.
ABC system is become widely used by companies in the beginning of 1980s because
of usefulness correct product mix decision, control overhead and so on. Harvard
Business School Professor Robert S. Kaplan was an early advocate of the ABC
system. While mainly used for private businesses, ABC has recently been used in
public forums, such as those that measure government efficiency.
The ABC system has been extended to cover non-production costs, which are not
related to production or which emerge from operation, such as distributing and selling
costs (Innes and Mitchell 1995)
'…ABC entirely ranks as one of the two or three most important management
accounting innovations of the twentieth century' .
Nevertheless, Kaplan (1988) and Johnson and Kaplan (1991) point out that using a
single cost system is not sufficient for companies in the competitive environment. The
cost systems has three essential and different functions: inventory valuation for
financial and tax statements, operational control; and product- cost measurement
(Kaplan 1988). The financial reporting system is beneficial for external reporting but
it does not provide the performance measurement and product cost information for
managers. Although the traditional standard cost system arranges information with
28
respect to inventory valuation and operational control, it cannot report accurate
product cost information. An ABC system can provide information on both product
costs and customer profitability analysis, but the information on actual expenses for
periodic financial statement (Kaplan 1990 ).
2.4.1 Activity Based Costing
Activity-based costing system (ABC) is a type of costing systems that assign cost first
to individual activities and then assign cost to the cost objects such as products and
services on the basis of the mix of activities needed to produce each product or
services(Horngren et. al. P:170, 2007)An activity is an event, task, or unit of work
with a specified purpose for example, designing products, quality testing, product
engineering, setting up machines, and distributing products(Tuney 1998).
ABC can be defined also as a costing method that is designed to provide managers
with cost information for strategic and other decisions that potentially affect capacity
and therefore "fixed cost"( Michael,2004)
This model assigns more indirect costs (overhead) into direct costs compared to
conventional costing models. Activity- Based costing also used as an element of
Activity- Based Management, an approach to management that focuses on
activities(Garrison et. al. 2007). However, application of an activity based recording
may be applied as an addition to activity based accounting, not as a replacement of
any costing model, but to transform concurrent process accounting into a more
authentic approach.
In general, ABC provides more detailed cost information, enabling managers to make
more informed decision(Michael,2004).
In other words, ABC systems first accumulate overhead costs for each organizational
activity, and then assign the costs of the activities to the products, services, or
customers (cost objects) causing that activity. As one might expect, the most critical
aspect of ABC is activity analysis, Activity analysis is the processes of identifying
appropriate, output measures of activities and resources (cost drivers) and their effects
on the costs of making a product or providing a service(Michel, 2004).
29
It does not change any cost , it provides detailed information about how costs are
consumed.
Activity-based costing estimates the cost of the resources consumed by cost objects
such as products and customers. The approach taken in activity-based costing assume
that cost objects generate activities that in turn consume costly resources. Activities
from the link between cost and cost objects. Activity-based costing is concerned with
overhead-both manufacturing overhead and selling, general and administrative
overhead. The accounting for direct labor and direct material is usually unaffected.
An ABC system is designed to eliminate boundaries among departments (Marrow
1992) and to create more exact cost information or disclose 'the hidden profits and
the hidden losses' (Argyris and Kaplan 1994).
Activity based costing system is used to determine product costs for special
management reports. This system is ordinarily used as a supplement to the company's
usual costing system. Most organizations that use ABC system have two costing
systems--the official costing system that is used for preparing external financial
reports and the activity based costing system that is used for internal decision making
and for managing activities(Harper,et.al.1994)
In practice, there are many "flavors" of Activity-based costing. Consultants emphasize
different aspects of Activity-based costing, and companies interpret Activity-based
costing differently( Garrison et. al. 2007).
in this way, the ABC method enables a business to decide which products, services,
and resources are increasing their profitability, and which are contributing to losses.
Managers are then able to generate data to create a better budget and gain a greater
overall understanding of the expenses that are required to keep the company running
smoothly. Generally, activity-based costing is most effective when used over a long
period of time, as opposed to shorter-term solutions such as the theory of constraints
(TOC) (Verguawen and Kerckhoffs, 2005)
2.5 The need for ABC system
30
During 1980 many managers became dismissed with their cost accounting
system(Horngren and Foster,2000, P:151) some companies began to adopt ABC
system because of dissatisfaction with their existing cost accounting system. there are
several reasons why managers demand it.
First reason is that disadvantage with the method allocates fixed overhead, including
labor, are often arbitrary, not necessarily related and directly associated to production
(Polimeni et al 1991, P: 567 ). Using single pools of indirect cost and overhead
application bases such as direct labor hour are no longer considered good enough. In
the current manufacturing environment, resources are often unrelated to direct labor
such misallocation can lead management effort to place the wrong products.
If the companies want to maximize their profit, they have two options. One option is
cutting cost and this will lead to low quality so cutting cost is not a solution
(BlaxilandHout 1991; 93 ). Another solution is to correct their product price. This
second reason lead to management toward the ABC.
Another factor in the move toward ABC system is related to the information
requirement. Cost accounting system exist to provide information to help executives
in performing their management cost duties. If managers improve and redesign
manufacturing process, they want their accounting systems to be tailored to the new
process. If the activities are managed well, cost will fall and the resulting products
will be more competitive. Companies felt that is existing system was oriented too
much outward financial accounting and provided little information in determining
product costs, making product mix decision and evaluating plant performance
(Polimeni et al 1991,pp. 1119). Developments in the information gathering
technology have made practical the gathering and processing of more detailed
information demand by ABC system (Hilton 1994, P: 209). With these reasons,
companies moving to ABC costs can be better managed and product more accurately
costed (Roohm et.al. 1992: 59 ).
Some indicators can signal the need for a new costing system (Hilton 1994,P:214 ):
Managers don’t trust the product costs reported.
Product line have variety.
Product costs are very high, and increasing.
31
Company has a small percentage of direct labor.
Sales are increasing while profit are declining.
2.6 Significance of activity-based costing system
ABC has become popular due to the fact that as businesses grow in complexity, so
does their need to assign increasingly large indirect costs to the appropriate area or
activity.
An activity based-costing is considered more accurate costing of products/services,
customers, and distribution channels than traditional costing systems because they
provide a more precise breakdown of indirect costs. It can provide better
understanding overhead through utilizing unit cost rather than just total cost. An ABC
system can integrates well with Six Sigma and other continuous improvement
programs(Joyce, 1999).
The activity based-costing can provides information to make better decisions. But this
benefit must be weighed against the measurement and implementation costs of an
ABC system.
By using an activity based costing system the company can recognize elevated
operating costs by their individual unit and ways can be found to decrease these costs.
In relation to identifying the activity responsible for the elevated costs, it can then be
conveyed to the users only when the product makes use of the activity. So, an activity
based costing system can aid in future product planning, such as if the company were
to introduce a new product. In this sense, activity based costing can determine all
activity costs associated with the new product, and before launching the product
pricing can be determined, as well as other associated expenses (Managers-Net,
2009).
The major benefit ABC system is that they don’t allocate the costs of unused capacity
to products. Instead, these systems highlight the amount of unused capacity as a
separate line item. Highlighting unused capacity signals to managers an opportunity
for reducing cost. Managers will seek to reduce unused capacity -for example, by
redeploying labor to other uses or by laying off workers.( Maher, et.al. 2004 ).
32
2.7 When Is Activity-Based Costing Appropriate?
(Bradford, 2008)http://suite101.com/article/activitybased-costing-abc-a52148
Activity-based costing can theoretically be used in almost any industry, because it can
be adapted to determine costs at so many different levels. However, ABC is used most
effectively in complex companies that are not entirely service-based. Complex
companies may see the most benefit from this type of costing because it is most
helpful when the costing information is difficult to understand or evaluate. Service
industries may not benefit as much from activity-based costing as other industries
because their costs can be difficult to assign as they may not have an identifiable
cause and effect relationship.
Companies considering using ABC should also keep in mind that while it can be a
very powerful management tool, it can be very expensive to start and it does not
always conform to generally accepted accounting principles (GAAP) so if using an
ABC system a company may have to keep a separate system to track costs in a
manner that does conform to GAAP.
2.8 ABC in Service and Merchandise companies
The widespread use of ABC system in service and merchandising companies
reinforced the idea that ABC system is used by managers for strategic decision rather
than for inventory valuation. (Inventory valuation is straightforward in merchandising
companies and not needed in service companies.) Service companies, in particular,
find great value from ABC because a vast majority of their cost structure comprises
indirect costs. As we have seen, a major benefit of ABC is its ability to assign indirect
costs to cost objects by identifying activities and cost drivers. A result, ABC system
provide greater insight than traditional systems in to management of these indirect
costs. The general approach to ABC in service and merchandising companies is
similar to ABC approach in manufacturing (Chellasamy and Ligy, 1998).
Conditions that impact the usefulness of ABC in manufacturing sector may not hold
in other sectors of the economy, however . Roohm et.al. (1992) suggests that service
enterprise possess several distinctive characteristics. Output, which consists of service
benefits, is harder to define. Activities in response to service requests may be more
33
diverse and thus less predictable. Service, also cannot be inventoried, so unused
capacity represent unavoidable costs.
Udpa (1990) argues, however, that ABC system could provide manufacturing with a
structured approach to understand the impact activates, costing services, reducing
cost, and improving quality.
In manufacturing sector, Ittner (1994) notes that the quality- related process
improvements create both direct productivity gains through reduce scrap and rework
and indirect gains through production process improvement and reduced factory
confusion.
2.9 Costs and benefits
While ABC system is complex and costly to implement, Charles T. Horngren, Gary L
Sundem, and William O. Stratton suggest that many.companies, in both
manufacturing and nonmanufacturing industries, are adopting ABC systems for a
variety of reasons:
Margin accuracy for individual products and services, as well as customer
classifications, is becoming increasingly difficult to achieve given that direct
labor is rapidly being replaced with automated equipment. Accordingly, a
company’s shared costs (i.e., indirect costs) are becoming the most significant
portion of total costs.
Since the rapid pace of technological change continues to reduce product life
cycles, companies do not have time to make price or cost adjustments once
costing errors are detected.
Companies with inaccurate cost measurements tend to lose bids due to over-
costed products, incur hidden losses due to under costed products, and fail to
detect activities that are not cost-effective.
Since computer technology costs are decreasing, the price of developing and
operating ABC systems also has decreased
In 2004 John Karolefski cited the following benefits realized by foodservice
distributors and restaurants that have converted to activity-based costing practices
Understanding the true costs and productivity of capital equipment.
34
Understanding which products are most profitable and where to focus sales
efforts.
More accurate pricing and determination of minimum order size.
Less time, money, and effort spent on the wrong products Implementation
costs are an obstacle to some who feel that ABC is just a fad or will show little
benefit.
According to Verguawen and Kerckhoffs(2005) “ABC works better if it’s kept
simple”. Nevertheless, when implemented properly ABC yields benefits to the
company, its business partners, and to consumers.
2. 10 Designing an activity-based costing (ABC) system
For designing an activity-based costing Garrison et. al. P:266 (2007), stated in this
books that the experts agree on several essential characteristics of any successful
implementation of activity-based costing. First, The initiative to implement activity-
based costing must be strongly supported by top management. Second, the design and
the implementation of activity-based costing system should be the responsibility of
cross-functional team rather than of the accounting department. The team should
include representative from each area that will use the data provided by the ABC
system. Ordinarily, this would include representative from marketing, production,
engineering and top management as well as technically trained accounting staff.
sometimes an outside consultant who specialized in activity-based costing acts as an
advisor to the team.
The reason for insisting on strong top management support and a multifunction team
approach is rooted in the fact that is difficult to implement changes in organization
unless those changes have the full support of those who are affected.
Activity-based cost changes "the rule of the game" since it changes some of the key
measures that managers use for their decision making and for evaluation individuals'
performance. Unless the managers who are directly affected by the changes in the rule
have a say, there will inevitably be resistance. In addition, designing a good ABC
system requires intimate knowledge of many parts of the organization' overall
operations. This knowledge can only come from the people who are familiar with
those operations
35
Top managers must support the initiative for two reasons. First, without leadership
from top management, some managers may not see any reasons to change. Second, if
top managers don’t support the ABC system and continue to play the game by the old
rules, their subordinates will quickly get the message and abandon the ABC system.
Time after time. When accountants have attempted to implement an ABC system on
their own without top management support and active cooperation from other
managers, the results have been ignored.
2.11 How costs are treated under activity based costing?
2.11.1 Non-manufacturing costs and activity-based costingIn traditional cost accounting, only manufacturing costs are assigned to products.
Selling, general and administrative expenses are treats as period expenses and are not
assigned to products, however, many of these non-manufacturing costs are also part of
the costs of producing, selling, distributing and services products ( Garrison et. al.
2007, P:264). For example, commissions paid to sales person, shipping costs and
warranty repair costs can easily be traced to individual products. To determine the
profitability of the products and services, such non-manufacturing costs are assigned
to products in activity- based costing.
The term overhead is usually used to refer non-manufacturing costs as well as indirect
manufacturing costs under an ABC system. In activity based costing, products are
assigned all of the costs-manufacturing as well as non-manufacturing-that they can
reasonably be supposed to have caused. The entire cost of the product is determined
rather than just its manufacturing cost.(Treatment of non-manufacturing Costs Under
Activity Based Costing (ABC) System:)http://www.accounting4management.com/acti
vity_based_costing.htm
2.11.2 Manufacturing costs and activity- based costing In traditional cost accounting, all manufacturing costs are assigned to products even
manufacturing costs that are caused by the products (Garrison et. al. 2007). For
example, a portion of the factory security guard's wages would be allocated to each
product even though the guards are totally un affected by which product are made or
not made during the period.
36
In activity-based costing, a cost is assigned to a product only if there is good reason to
believe that the costs would be affected by decisions concerning the product(Garrison
et. al. 2007, P:264).
2.11.3 The costs of idle capacity in activity-based costingIn the traditional cost accounting, predetermined overhead rate are computed by
dividing budget overhead cost by a measure of activities such as budgeted direct labor
hour. This practice results in applying the costs of unused or idle capacity to products,
and its results in unstable unit product costs. If budgeted activity falls, the overhead
rate increase because the fixed components of overheads are spread over a smaller
base, resulting in increased unit product costs.
In contrast to traditional cost accounting, activity-based costing means that products
are charged for the capacity they use _ not for the cost of capacity they don’t use. In
other words, the costs of idle capacity are not charged to products. This results in
more stable unit costs and it is consistent with the objective of assigning only those
costs to products that are actually caused by the products( Garrison et. al. 2007,
P:265).
2.11.4 Activity- based costing and external reportsGarrison et. al.( 2007), talked about the relationship between ABC system and
external reports by clarifying the following, since activity- based costing are generally
provide more accurate product costs rather than the traditional costing methods, why
isn’t it used for external reports? Some companies do use activity- based costing in
their external reports, but most don’t.
There are a number of reasons for this. First, external reports are less detailed than
internal reports prepaid for decision making. On the external reports, individual
product cost are not reported. Cost of goods sold and inventory valuations are
disclosed, but there is no breakdown of these accounts by products. If some product
are undercosted and some are overcosted, the error tend to cancel each other when the
product costs are added together.
Second, it is often very difficult to make changes in the company's system. The
official cost accounting system in most large companies are usually embedded in
complex computer programs that have been modified in-house over the course of
37
many years. It is extremely difficult to make changes in such computer programs
without numerous bugs.
Third, an ABC system does not conform to generally accepted accounting principle
(GAAP). Product cost computed for external report must include all of the
manufacturing and only manufacturing costs; But in ABC system product costs
exclude some manufacturing cost and include some non-manufacturing costs. It's
possible to adjust the ABC data at the end of the period to conform to GAAP, but that
requires more work.
Fourth, auditors are likely to be uncomfortable with the allocation that are based on
interviews with the companies personnel. Such subjective data can easily manipulated
by management to make earning and other key variables look more favorable.
For all of these reasons, most companies confine their ABC effort to special studies
for management, and they don’t attempt to integrate ABC in to their formal cost
accounting system.
2.12 limitations and criticisms of the activity-based costing systemABC proponents argue that the system produces accurate product costs data for
decision making. So, despite the advantages of ABC system which is characterized by
accuracy and assist management in making its decisions, planning and control costs,
but there are some limitations and disadvantages of the system.
Daour states in his PhD thesis that there is a trade-off between the benefits obtained
from increasing cost drivers and costs associated with cost drivers.
Increasing the number of the cost drivers give more discretion to the managers who
are being evaluated by the cost system so reducing the ability of the system to monitor
their behavior.
difficulty in executing the system seems to be a crucial disadvantage because the
efficient use of system's activities depend mainly on the proper choice of the cost
driver and this is not easy and takes a lot of effort but it also necessary to determine
the best cost driver of the cost object and study the behavioral effects of it so this can
become troublesome(Hilton, 1998).
38
The implementation of the system requires high cost, consuming time, and effort and
this is what makes many industrial plants hesitate to use.
ABC system require management to estimate cost of activity pools and to identify and
measure cost drivers for these pools to serve as cost-allocation bases. Even basic ABC
system require many calculation to determine costs of products and services. These
measurements are costly. Activity cost rates need to be updated regularly(Hilton,
1998).
ABC system get very detailed and more cost pools are created, more allocations are
necessary to calculate activity costs for each cost pool. This increase the chance of
misidentifying the cost of different activity cost pools. So, if this costing system is
used for all activities within the company then it can become very time consuming
(Managers-Net, 2009).
Finally, ABC in not a perfect cost control or prediction model. It is not inevitable that
more refined costing systems such as will always lead to more accurate product costs
in all circumstances.
2.13 Activity based management (ABM)
In order to manage costs, a manager should focus on the activities that give rise to
such costs. Accordingly, given the activity focus of ABC, managers should
implement ABC systems in order to facilitate cost management. Using ABC systems
to improve financial management is called activity-based management(ABM).
ABC has also been extended in to ABM(Kilough 1992: 881; Babad and balachad
1993; 563 ) to include other considerations, such as customer profitability, workforce
utilization, distribution channels, and other management issues. So activity based
management( ABM ) means a method of management decision-making that use
activity-based costing information to improve customer satisfaction, profitability, and
maximize the value adding activities while minimizing or eliminating non value
added activities(Hilton, 1998). ABM is more than an accounting tool; it’s a system for
continuous improvement. It's not a signal answer but merely one of the many tools
that can used to enhance organizational performance management( Cima, 2001).
39
The acronym itself evolved from ABC to ABCM( activity based costing
management) to ABM, and the application of ABC evolved from a manufacturing
products costing orientation to management philosophy of activity management
applied in industries and organization other than manufacturing( Cima, 2001).
ABM include decisions about pricing, product mix, how to reduce costs, how to
improve processes, and decisions relating to product design.
So the key to ABM success is distinguishing between value-added costs and non-
value-added costs. A value-added cost is the cost of an activity that cannot be
eliminated without affecting a product’s value to the customer. In contrast, a non-
value-added cost is the cost of an activity that can be eliminated without diminishing
value. Some value-added costs are always necessary, as long as the activity that drives
such costs is performed efficiently. However, non-value-added costs should always be
minimized because they are assumed to be unnecessary.
The overall objective of ABM is to improve efficiencies and effectiveness of an
organization in securing its markets. It draws on activity based-costing (ABC) as its
major source of information and focuses on (1) reducing costs, (2) creating
performance measures, (3) improving cash flow and quality and, (4) producing
enhanced value producrs(What is activity-based
management(ABM)?).http://www.businessdictionary.com/definition/activity-based-
management-ABM.html
Thus ABC is the information system that displays the cost and profitability structure
of the products in an organization, while ABM describes the actions to improve
quality and reduce costs and cycle time(wiley and sons,1999).
The terms " ABC" and "ABM" should not be used interchangeably. ABC is only a
tool for determining the costs of activities and the output that those activities produce.
ABC, by itself, is not enough for continuous improvement of the company. On the
other hand, ABM is a management philosophy focuses on the planning, execution
and measurement of activities and helps companies to survive in the competitive
world of business. ABM uses the information obtained through ABC to reduce or
eliminate non-value added activities, and ad a result, improve the overall process
Cooper et. al. (1990), explain this important difference as follows:
40
ABC information, by itself, does not invoke actions and decision leading to improve
profit and operation performance. Management must institute a continuous process of
organizational change and implementation if the organization is to receive benefits
from the improved insights resulting from an ABC analysis.
Reducing costs in one process can increase costs in another process. Also,
management should not reduce costs at the expenses of the flexibility and customer
satisfaction. This is an area where ABM is criticized because manager using the
information obtained by ABC tend to improve processes without considering the
negative effects of these improvement on the flexibility and customer satisfaction.
Organizations begun to look at ABM for a variety of reasons. Among the most
commonly cited are:
Top-down pressure to reduce costs.
Competitive pressure/ market conditions.
Organizations-wide programs ( Cima, 2001).
2.13.1 Activity Based Management – ImplementationCima (2001) argues that the Activity based management builds off of an activity-
based costing system. Once a company has developed and implemented an activity-
based costing system, implementing activity-based management involves three steps:
1. Classify activities as either value-added or non-value-added
2. Rank value-added activities in terms of added customer-perceived value
3. Enhance value-added activities and eliminate or reduce non-value activities.
A company should only implement ABM if the benefits of doing so exceed the costs.
Implementing ABC and ABM can be costly in terms of time and resources.
Implementing ABM is recommended for company’s facing intense price competition.
It is also recommended more for companies with many complex products and
processes as opposed to companies with simple products and processes.
According to Wiley and his sons(1999), they stated some symptoms and treatments of
challenges to ABM implementation include the following:
Symptoms
41
Lack of enthusiasm or encouragement from top management.
Difficulty in getting approval for necessary resources such as full-time team
members, funding for equipment, or outside resources.
Failure of management to spend time understanding the initiative or failure to
attend briefings.
Treatment
Link the initiative to key business objectives. Clearly articulate how
improvement will be delivered in the area specified in the company's key
strategic issues.
Find an executive who owns the initiative, who will help to develop it, and
showcase the benefits of using ABM. Then use the benefit to convince more
people in and own the approach. If successful, this creates a groundswell of
supports overwhelms ABM opponents.
Expose top management to the potential benefit of ABM through visits to
other successful companies and via benchmarking reports and anecdotes.
Find competitors who are using or experimenting the approaches; competition
often spurs management in to action.
42
Chapter 3
Bashir Al-Siksik Company for Sanitary ware and plumbing
3.1 Introduction3. 2 Origin and definition3.3 Mission3.4 Vision3.5 Objectives3.6 Factory structure3.7 Factory location3.8 Production line in the factory3.9 production method3.10 many agencies3.11 company product3.12 Implementing Activity Based Costing(ABC) system3.13 Choosing cost driver3.14 Computing Cost rate per cost driver3.15 Assigning costs to products
43
3.1 Introduction
It is a Palestinian private limited company, established in 1976 by Mr. Bashir Al-
Siksik, and started its work as a supplier for plumbing and infrastructure materials.
Its supply plumbing and infrastructure materials for governmental, nongovernmental
institutes and contracting companies in Palestine.
Its decided to establish the factory of Bashir Al-Siksik company for plastic pipes,
with an approximate capital of 3000,000$. This will be a credit for the national
Palestinian industry, with following Palestinian and international standards. The
factory is 2500m2 area, and is designed to have three main production lines.
Currently, the factory has started its production with one production line. It attached
to the factory an updated laboratory for testing & ensuring the quality of our pipes. ,
in addition to special stored to accommodate the raw materials used in the industry, as
well as to accommodate production.
3.2 Origin and definition
Bashir Siksik Ltd. Co. for Sanitary ware and plumbing, it's an ancient name for the
Palestinian company was built through a long march of struggle and tender in the field
of construction and infrastructure at the hands of Mr. Bashir Al-Siksik.
Bashir Al-Siksik Co. has become a national monument proudly that seek to settle its
product and produced it locally since 38 years of effort, excellence and giving.
Bashir Al-Siksik Ltd. Co. consider the first and largest company of its kind in
Palestine, which one of the leading companies in pipes industry with various
diameters and types, which characterized by the technological development of
devices, equipment and manufactured production lines with the latest international
standards.
44
3.3 Mission
To be the first Palestinians company in the sale and manufacture of plumbing and
infrastructure materials and equipment, according to international quality standards
and production features of the Palestinian.
3.4 Vision
Our vision is to insure that our company is the customer's first choice, through the
delivery of unbeatable products and the quality of our services.
3.5 Objectives
1 ) Contribute in the development of the Palestinian economic situation.
2 )Improving the food security situation and ways to save water.
3 ) Making technical support for designers and participating in solving technical
problems.
3.6 Factory structure
The factory contain from office building consists of two floors and total area of the
administrative building 600 square meters and laboratory building and several
different rooms for workers service and 10 department as in the diagram:
approximately distribuation to special department in the factory
accounting storemaintinanceserviceproducationtesting sam.HRcommunicatetraining
45
Also it's containing from more than 160 workers and more than 30 employees
3.7Factory location
The factory residence place was selected in Montar zone or what is known as Karni
industries zone that is after studying a various factor are:
1) Closer to the markets
2) Ease of transportation
3) Provide basic services such as electricity and industrial water and Networks
4) Ease shipping raw materials to the factory
5) Provide an environment suitable for industrial manufacturing processes are far
from residential areas
6) Ease export
3.8 Production lines in the factory
Production line Was selected from a German company specialized, which is
considered one of the first international companies to the production lines
manufactured pipes as it permanent research and development in this area
Appropriate technological, machinery and equipment was selected based on a study a
group of the most important factors:
1) The nature of industrial activity
2) The cost of production
3) The size of Expected annual demand
4) Competition in the market
In dealing with the production lines there is a large segment of Engineers for several
disciplines as well as accountants to monitor the financial affairs and the following
figure shows the distribution in general:
46
Civil Eng. Accountants Elctronic Eng Industrial Eng0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
3.9 Production method
Production for plastic pipes is done by automatic methods depending on programming
for the highly advanced production line, with the supervision of the engineers and the
technicians.
3.10 Many agencies
Bashir Al-SiksikCompany is the exclusive agent in Palestine for a number of well-
known companies from UK, Italy, Germany, Turkey, India, Israel, France, Poland and
China. This is why we trust our products.
The most important institutions that have been dealt with:
Local InstitutionsInternational institutions
GMWUUNRWA, UNDP
PWAOXFAM
Local municipalitiesCHF
ElshekhZaeed cityICRC, CDM
47
3.11 Company products:
Bathroom furniture
Plumbing
PP Pipes and fitting
PPR Pipes and fitting
PE Pipes and fitting
PVC-U Pipes and fitting
Ceramics and others
The company has applied Activity Based Cost System "ABC" in its calculation for
each product cost and its special production line, we will study the production for one
product "PP Pipes and fitting":
This table shows the production cost for PP Pipes and fitting in each stage and how
the company determines the selling price for this product and how it holding the other
cost in it price
In this way the company can determine the selling price for PP Pipes and fitting
product
Now we will talk about how the company purchased the product and how it will put
the price for importer products.
Firstly its research in the net about the product that it's wanted then make contract
between it and other company to importer the product.
The company deals with three type of purchasing
1 ) FOB: its mean that the importing company did not hold anything from shipping
cost before the products arrived the port of exporting country. it’s the best one for the
company.
2 ) EX-Work: means all shipping cost are holding in the importing company itself.
So, it's a very bad one
48
3 ) CIF: means that all the shipping cost are holding from the exporting country till
the product arrived the local port " Isdud Port" and the products are insured but the
price will be expensive.
49
المواد الخام/PPكجم
لونسكني
لونأخضر
لونأبي ض
GRAN Total
800141 00000
815 سعر8.06الصنف
28.2820.65000000
المجمو6448ع
395.9220.650000006464.57
المواد المنتجة
المطاب ق
متر((
بود رةمرجعة
فاقد( كجم( للجر ش
التا لف
كج(م)
وزن المتر
كجم((
الكميةالمتوق
م / عة
Target %
عدادالكه رباء
عدادالكه رباء
عدا دالس والر
عدا دالسوالر
بدايةالتشغيل
نهاي ةالتشغيل
بداي ةالتشغيل
نهاي ةالتشغيل
مواسيرPP ملم
3680000متر 4 400.217162437531004275430100
0طاقة تكلفة
0السوالر
0الطاقة تكلفة
الكهربائية374.
4
0تكاليفزوايا 0
0 تكاليفمتفرقة 450ثابتة
0 تكاليفمتفرقة
0متغيرة الزمنالتكلفة 8.15المتوقع إجمالي
7688.97
الزمن9الفعلي تكلفة الساعة50ثابت تكلفة الساعة0متغير
خصائص الطول والسرعةوالسماكة
القط40ر
وزن المترالفعلي
0.221467
4
متو سطالسم2اكة
تكلفةالمتر
2.089394
سع ر
الطو2.72ل
4
50
البيع
سعر البيع2.72للشركة
الكي لوللمصنع
9.4343
الطو لالفعل4ي
الكي لومخل8.42وط
سرع ةالخ100طالكثا0.91 فة
So the company preferred CIF especially in our situation.
Bashir Siksik Co. has method to calculate the percentage of profit it's like:
The percentage of total cost till the product arrive the company including the shipping
cost * negotiated price * exchange rate
As = 20% * 15$ * 3.90NIS =11.7 NIS
Then the company will put the profit percentage in 11.7 NIS "final price" and that
according company policy and market situation.
3.12 Implementing Activity-based costing (ABC) system
1. Identify the cost object which will be the product of the company or if we talk
about service company will be the services which we want to calculate the
cost.
2. Identify the direct cost of the product(Cost object) like direct labor and direct
material.
3. Select the activities _ design the product, marketing, and distribution _ and the
cost allocation base for allocating indirect cost.
4. Identify indirect cost associated with each cost allocation base.
5. Compute the rate per unit of each cost allocation base.
6. Compute the indirect cost allocated to the product.
7. Compute the total cost for the product(direct cost plus indirect cost).
(Horngren, Ch. et al. 2006)
51
3.13 Choosing cost driver
The following table shows several examples of the types of cost drivers that
companies use. Most are related either to the volume of production or to the
complexity of the production or making process.
Cost incurred Number of items produced or soldPounds of material handled Customers servedMachine setups Surgeries performedQuality inspections performed Hours of testing time spentNumber of parts installed in a product Number of different customers served
The best cost driver is one that is causally related to the cost being allocated. Finding
an allocation base that is causally related to the cost is often not possible. With an
ABC system, the selection of an allocation base, or cost driver, is often easier because
we can use a measure of the activity volume. For example, a reasonable allocation
base for machine set-up costs is machine set-up hours. Notice that many of the cost
drivers in the previous table refer to an activity.(Michael W.et.al.2004)
3.14 Computing a Cost Rate per Cost Driver
In general, predetermined rates for allocating indirect costs to products are computed as follows:
Predetermined rate = Estimated indirect cost / Estimated volume of allocation base
This formula applied to any indirect cost, whether manufacturing overhead or
administrative, distribution, selling, or any other indirect costs. Workers and machines
perform activities on each product as it is produced. Costs are allocated to a product
by multiplying each activity's predetermined rate by the volume of activity used in
making it.
In the two-stage cost system, the first stage consists of activities, not
departments. Instead of a department rate, activity-based costing computes a cost
driver rate for each activity center. This means that each activity has an associated
cost pool. If the cost driver for material handling is the number of production runs, for
example, the company must be able to estimate the costs of material handling before
52
the period and, ideally, track the actual cost of material handling as it is incurred
during the period.(Horngren, Ch. et al. 2006)
3.15Assigning costs to products
The final step in the activity-based costing system is to assign the activity costs to
products. We do this just as we have done for the other product costing systems we
have considered. We multiply the cost driver rates by the number of units of the cost
driver in each product. The following table shows a cost flow diagram with the four
steps of developing activity-based costs graphically.
CHAPTER 4
DECISION MAKING LITERATURE
53
4.1 Introduction4.2 Definition of decision-making4.3 Significance of decision making4.4 Characteristic of decision making4.5 Steps in decision making4.6 Good decision making 4.7 Types of decision4.8 ABC and decision making
4.1 Introduction
Our lives are full of decisions: What to wear; What to eat for breakfast; Which way to
go to work. And when we reach the decision really start to pile in. Worse still, those
organizational decision can affect the lives and the livelihood of hundreds of people
and large sums of money, not to mention the very existence of the organization in
which we work.
No wonder are of the conviction that decision-making is the core task or activity of
the manager. Cheser Barnard(1938), included it as one of the four key elements of
formal organizations in the functions of the executives. Minzberg (1989) felt it was
possibly the most important activity, representing the most common and crucial
managerial task. Peter Druler was similarly persuaded.
Henry Simon concurred, arguing:
" The executive's job involve not only making decision himself, but also seeing that
the organization, or part of an organization, that he directs makes decision effectively.
The vast bulk of the decision-making activity for which he is responsible is not his
personal activity, but the activity of his subordinates " (1960, P:4-5).
Making decision is one of the basic function of the manager. Mangers are constantly
faced with the problems of deciding what products to sell, What production method to
use ,Whether to make or to buy components parts, What prices to charge, What
54
channels of distribution to use, Whether to accept special order at special price,, and
so forth. Decision making is often difficult task that is complicated by the existence of
numerous alternative and massive amount of data, only some of which may be
relevant( Garrison et. al. 2007 ).
Decision-making pervades all managerial actions. It is a continuous process.
Decision-making is an indispensable component of the management process
itself( Salem,2008).
This clearly suggests that decision-making is necessary in planning, organizing,
directing, controlling and staffing. For example, in planning alternative plans are
prepared to meet different possible situations. Out of such alternative plans, the best
one (i.e., plan which most appropriate under the available business environment) is to
be selected. Here, the planner has to take correct decision. This suggests that decision-
making is the core of planning function. In the same way, decisions are required to be
taken while performing other functions of management such as organizing, directing,
staffing, etc. This suggests the importance of decision-making in the whole process of
management( Harper, 1994 ).
Decision-making has priority over planning function. According to Peter Drucker, it
is the top management which is responsible for all strategic decisions such as the
objectives of the business, capital expenditure decisions as well as such operating
decisions as training of manpower and so on. Without such decisions, no action can
take place and naturally the resources would remain idle and unproductive. The
managerial decisions should be correct to the maximum extent possible. For this,
scientific decision-making is essential.
Decision-making is an essential aspect of modern management. It is a primary
function of management. A manager's major job is sound/rational decision-making.
He takes hundreds of decisions consciously and subconsciously. Decision-making is
the key part of manager's activities. Decisions are important as they determine both
managerial and organizational actions(Ayash,2008).
Yet, at another level, it might be regarded as a problem solving activity which is
terminated when a satisfactory solution is reached. Therefore, decision making is a
55
reasoning or emotional process which can be rational or irrational, can be based on
explicit assumptions or tacit assumptions( Garrison et. al. 2007 ).
Managers are constantly called upon to make decisions in order to solve problems.
Sometimes the decision-making process is extremely short, and mental reflection is
essentially instantaneous. In other situations, the process can drag on for weeks or
even months( Garrison et. al. 2007 ).
Decisions are made to achieve goals through suitable follow-up actions. Decision-
making is a process by which a decision (course of action) is taken. Decision-making
lies embedded in the process of management.
The effectiveness of management depends on the quality of decision-making. Thus,
every decision involves a certain amount of risks. If there is no uncertainty You don’t
have a decision; you have an algorithm_ a set of steps recipe that is followed to bring
about a fixed results ( Al-Omari, 2007 ).
One must keep in mind that most decisions are made unconsciously. Jim Nightingale,
Author of Think Smart-Act Smart, states that "we simply decide without thinking
much about the decision process." In a controlled environment, such as a classroom,
instructors encourage students to weigh pros and cons before making a decision.
However in the real world, most of our decisions are made unconsciously in our mind
because frankly, it would take too much time to sit down and list the pros and cons of
each decision we must make on a daily basis.
4.2 Definition of decision-making
The word 'decision' is derived from the Latin words de ciso which means 'a cutting
away or a cutting off or in a practical sense' to come to a conclusion( Harper, 1994;
P:67).
The decision is the tool that used by management to enable it to perform its functions
and complete all activities that assigned to it(Kanan, Nawaf, 1998; p:75).
Decision making involve many definitions:
56
Josephson from Institute of Ethics claims (2012) that the decision-making is
an essential and part of the life of every person, but it becomes gradually more
importance when the individual moves into leadership roles for the fact that
he/ she has the possibility to use all the resources that enable him/ her to take
better decisions.
The process of selecting an alternative from several alternatives_ two or more
because if we have only one alternative this will not mean a decision_ to
achieve a desired result." It represents a well-balanced judgment and a
commitment to action (Ashour,2002).
Choose warned of an alternative set of alternatives to achieve the maximum
return on the alternative using the same resources as the decision-making to
solve the problem either by nature or are expected to solve the problem to
occur in the future (Abu moamer,2000 ).
The Oxford Dictionary defines the term decision-making as "the action of
carrying out or carrying into effect".
Decision-making is the process of sufficiently reducing uncertainty and doubt
about alternatives to allow a reasonable choice to be made from among them.
This definition stresses the information-gathering function of decision making.
It should be noted here that uncertainty is reduced rather than eliminated. Very
few decisions are made with absolute certainty because complex knowledge
about all alternative is seldom possible( Al-Omari, 2007).
Every decision involve choosing from at least two alternatives. In making a decision,
the cost and benefits of one alternative must be compared to the cost and benefits of
the other alternatives. Cost that differ among alternative are called relevant costs. If
the cost will be the same regardless of the alternative selected, then the decision has
no effect on the cost and it can be ignored relevant costs. In most decision making
situation costs abound. It is, however, a fundamental principle that only relevant costs
should be considered( Harper,1994 ).
Two broad categories of costs are never relevant in decision. Theses irrelevant costs
are :
1. Future costs that don’t differ among alternative.
57
2. Sunk costs, which is the costs that has already been incurred and that can't be
avoided regardless of what managers decides to do.
3.4 Significance of decision making
Various advantages of decision-making are easily available when the entire decision-
making process is followed properly. Decisions are frequently needed in the
management process. However, such decisions should be appropriate, timely and
rational. Faulty and hasty decisions are wrong and even dangerous. This clearly
suggests that various advantages of decision-making are available only when
scientific decisions are taken by following the procedure of decision-making in an
appropriate manner.
From Shams Al-Deen(2009; p9) point view decision making is the primary function
of management; The functions of management starts only when the top-level
management takes strategic decisions. Without decisions, actions will not be possible
and the resources will not be put to use.
Decision-making facilitates the entire management process: Decision-making creates
proper background for the first management activity called planning. Planning gives
concrete shape to broad decisions about business objectives taken by the top-level
management. In addition, decision-making is necessary while conducting other
management functions such as organizing, staffing, coordinating and communicating.
For accurate/rational decision-making attention, decision making should identify a
wide range of alternative courses of action. This provides wide choice for the
selection of suitable decision for follow-up actions. Efforts should be made to search
for new information relevant to further evaluation of the alternatives. This is
necessary as the quality of decision depends on the quality of information used in the
decision-making process(Al-Fadel and Shaban,2003).
Decision-making is a continuous managerial function: Managers working at all levels
will have to take decisions as regards the functions assigned to them. Continuous
decision making is a must in the case of all managers/executives. Follow-up actions
are not possible unless decisions are taken.
58
Decision-making is essential to face new problems and challenges: Decisions are
required to be taken regularly as new problems, difficulties and challenges develop
before a business enterprise. This may be due to changes in the external environment.
New products may come in the market, new competitors may enter the market and
government policies may change. All this leads to change in the environment around
the business unit. Such change leads to new problems and new decisions are needed.
Decision-making is a delicate and responsible job: Managers have to take quick and
correct decisions while discharging their duties. In fact, they are paid for their skill,
maturity and capacity of decision-making. Management activities are possible only
when suitable decisions are taken. Correct decisions provide opportunities of growth
while wrong decisions lead to loss and instability to a business unit.
The researchers saw that the importance of the decision making increase in the large
companies and organizations, which always need to make a decision, The importance
of the decision making depend on the degree of the needed information for the
organization, So if the information have all characteristic and requirements it will
give a good and clear managerial decision.
4.4 Characteristics of Decision Making
Decision making implies choice: Decision making is choosing from among two
or more alternative courses of action. Thus, it is the process of selection of one
solution out of many available (Ashour,2002). For any business problem,
alternative solutions are available. Managers have to consider these alternatives
and select the best one for actual execution. Here, planners/ decision-makers
have to consider the business environment available and select the promising
alternative plan to deal with the business problem effectively Here, the
available business environment also needs careful consideration. The
alternative selected may be correct or may not be correct. This will be decided
in the future, as per the results available from the decision already taken.
Moreover, in the decision-making process, information is collected; alternative
solutions are decided and considered critically in order to find out the best
solution among the available. Every problem can be solved by different
methods(Al-Omari,2007). These are the alternatives and a decision-maker has
59
to select one alternative which he considers as most appropriate. Out of such
alternatives, the most suitable is to be selected for actual use. The manager
needs capacity to select the best alternative. The benefits of correct decision-
making will be available only when the best alternative is selected for actual
use( Garrison et. al. 2007 ).
Continuous activity/process: Decision-making is a continuous and dynamic
process. It pervades all organizational activity. Managers have to take decisions
on various policy and administrative matters. It is a never ending activity in
business management (Shubair,2006).
But( kanan,1998; P87)mentioned another characteristic like:
Mental/intellectual activity: Decision-making is a mental as well as intellectual
activity/process and requires knowledge, skills, experience and maturity on the
part of decision-maker. It is essentially a human activity.
Based on reliable information/feedback: Good decisions are always based on
reliable information. The quality of decision-making at all levels of the
Organization can be improved with the support of an effective and efficient
management information system (MIS).
Goal oriented process: Decision-making aims at providing a solution to a given
problem/ difficulty before a business enterprise. It is a goal-oriented process
and provides solutions to problems faced by a business unit.
Needs effective communication: Decision-taken needs to be communicated to
all concerned parties for suitable follow-up actions. Decisions taken will
remain on paper if they are not communicated to concerned persons. Following
actions will not be possible in the absence of effective communication.
Time-consuming activity: Decision-making is a time-consuming activity as
various aspects need careful consideration before taking final decision. For
decision makers, various steps are required to be completed. This makes
decision-making a time consuming activity.
Responsible job: Decision-making is a responsible job as wrong decisions
prove to be too costly to the Organization. Decision-makers should be matured,
experienced, knowledgeable and rational in their approach. Decision-making
60
need not be treated as routing and casual activity. It is a delicate and
responsible job.
Pervasive process: Decision-making process is all pervasive. This means
managers working at all levels have to take decisions on matters within their
jurisdiction.
4.5Steps Involved In Decision Making Process
Charles et. al(2006) talked about the steps involved in decision making as follow:
Decision-making involves a number of steps which need to be taken in a logical
manner. This is treated as a rational or scientific 'decision-making process' which is
lengthy and time consuming. Such lengthy process needs to be followed in order to
take rational/scientific/result oriented decisions. Decision-making process prescribes
some rules and guidelines as to how a decision should be taken / made. This involves
many steps logically arranged. It was Peter Drucker who first strongly advocated the
scientific method of decision-making in his world famous book 'The Practice of
Management' published in 1955. Drucker recommended the scientific method of
decision-making which, according to him, involves the following seven steps:
Define the problem.
Analyzing the Problem.
Collecting Relevant Data.
Develop potential alternatives.
Analyze the alternatives.
Select the best alternative.
Implement the decision.
Establish a control and evaluation system.
61
Define the problem
The decision-making process begins when a manager identifies the real problem.
The accurate definition of the problem affects all the steps that follow; if the
problem is inaccurately defined, every step in the decision-making process will be
based on an incorrect starting point. Information relevant to the problem should be
gathered so that critical analysis of the problem is possible. This is how the
problem can be diagnosed. One way that a manager can help determine the true
problem in a situation is by identifying the problem separately from its symptoms.
So, clear distinction should be made between the problem and the symptoms
which may cloud the real issue.
The most obviously troubling situations found in an organization can usually be
identified as symptoms of underlying problems. (See The following table for
some examples of symptoms.) These symptoms all indicate that something is
wrong with an organization, but they don't identify root causes. A successful
manager doesn't just attack symptoms; he/she works to uncover the factors that
cause these symptoms.
Symptoms and Their Real Causes
Symptoms Underlying Problem
Low profits and/or
declining sales
Poor market research
High costs Poor design process; poorly trained employees
Low morale Lack of communication between management
and subordinates
High employee turnover Rate of pay too low; job design not suitable
High rate of absenteeism Employees believe that they are not valued
62
Analyzing the Problem
After defining the problem, the next step in the decision-making process is to analyze
the problem in depth. This is necessary to classify the problem in order to know who
must take the decision and who must be informed about the decision taken. Here, the
following four factors should be kept in mind:
Futurity of the decision,
The scope of its impact,
Number of qualitative considerations involved, and
Uniqueness of the decision.
Collecting Relevant Data
After defining the problem and analyzing its nature, the next step is to obtain the
relevant information/ data about it. There is information flood in the business world
due to new developments in the field of information technology. All available
information should be utilized fully for analysis of the problem. This brings clarity to
all aspects of the problem.
Develop potential alternatives
Time pressures frequently cause a manager to move forward after considering only
the first or most obvious answers. However, successful problem solving requires
thorough examination of the challenge, and a quick answer may not result in a
permanent solution. Thus, a manager should think through and investigate several
alternative solutions to a single problem before making a quick decision. One of the
best known methods for developing alternatives is through brainstorming, where a
group works together to generate ideas and alternative solutions. The assumption
behind brainstorming is that the group dynamic stimulates thinking — one person's
ideas, no matter how outrageous, can generate ideas from the others in the group.
Ideally, this spawning of ideas is contagious, and before long, lots of suggestions and
ideas flow. Brainstorming usually requires 30 minutes to an hour. And also Delphi
technique ,With this technique the participants never meet, but a group leader uses
written questionnaires to conduct the decision making.
63
No matter what technique is used, group decision making has clear advantages and
disadvantages when compared with individual decision making. The following are
among the advantages:
Groups provide a broader perspective.
Employees are more likely to be satisfied and to support the final decision.
Opportunities for discussion help to answer questions and reduce uncertainties
for the decision makers.
These points are among the disadvantages:
This method can be more time-consuming than one individual making the
decision on his own.
The decision reached could be a compromise rather than the optimal solution.
Individuals become guilty of groupthink — the tendency of members of a
group to conform to the prevailing opinions of the group.
Groups may have difficulty in performing tasks because the group, rather than
a single individual, makes the decision, resulting in confusion when it comes
time to implement and evaluate the decision.
So, are two (or more) heads better than one? The answer depends on several factors,
such as the nature of the task, the abilities of the group members, and the form of
interaction. Because a manager often has a choice between making a decision
independently or including others in the decision making, she needs to understand the
advantages and disadvantages of group decision making
Analyze the alternatives
The purpose of this step is to decide the relative merits of each idea. Managers must
identify the advantages and disadvantages of each alternative solution before making
a final decision.
Evaluating the alternatives can be done in numerous ways. Here are a few
possibilities:
Determine the pros and cons of each alternative.
64
Perform a cost-benefit analysis for each alternative.
Weight each factor important in the decision, ranking each alternative relative
to its ability to meet each factor, and then multiply by a probability factor to
provide a final value for each alternative.
Regardless of the method used, a manager needs to evaluate each alternative in terms
of its
Feasibility — Can it be done?
Effectiveness — How well does it resolve the problem situation?
Consequences — What will be its costs (financial and nonfinancial) to the
organization?
Select the best alternative
After a manager has analyzed all the alternatives, he/she must decide on the best one.
The best alternative is the one that produces the most advantages and the fewest
serious disadvantages. Sometimes, the selection process can be fairly straightforward,
such as the alternative with the most pros and fewest cons. Other times, the optimal
solution is a combination of several alternatives.
Sometimes, though, the best alternative may not be obvious. That's when a manager
must decide which alternative is the most feasible and effective, coupled with which
carries the lowest costs to the organization. Probability estimates, where analysis of
each alternative's chances of success takes place, often come into play at this point in
the decision-making process. In those cases, a manager simply selects the alternative
with the highest probability of success.
Implement the decision
Managers are paid to make decisions, but they are also paid to get results from these
decisions. Positive results must follow decisions. Everyone involved with the decision
must know his or her role in ensuring a successful outcome. To make certain that
employees understand their roles, managers must thoughtfully devise programs,
procedures, rules, or policies to help aid them in the problem-solving process.
65
Converting Decision into Action: After the selection of the best decision, the next step
is to convert the selected decision into an effective action. Without such action, the
decision will remain merely a declaration of good intentions. Here, the manager has to
convert 'his decision into 'their decision' through his leadership. For this, the
subordinates should be taken in confidence and they should be convinced about the
correctness of the decision. Thereafter, the manager has to take follow-up steps for the
execution of decision taken
Establish a control and evaluation system
Ongoing actions need to be monitored. An evaluation system should provide feedback
on how well the decision is being implemented, what the results are, and what
adjustments are necessary to get the results that were intended when the solution was
chosen.
In order for a manager to evaluate his decision, he/she needs to gather information to
determine its effectiveness. Was the original problem resolved? If not, is he closer to
the desired situation than he was at the beginning of the decision-making process?
If a manager's plan hasn't resolved the problem, he needs to figure out what went
wrong. A manager may accomplish this by asking the following questions:
Was the wrong alternative selected? If so, one of the other alternatives
generated in the decision-making process may be a wiser choice.
Was the correct alternative selected, but implemented improperly? If so, a
manager should focus attention solely on the implementation step to ensure
that the chosen alternative is implemented successfully.
Ensuring Feedback: Feedback is the last step in the decision-making process.
Here, the manager has to make built-in arrangements to ensure feedback for
continuously testing actual developments against the expectations. It is like
checking the effectiveness of follow-up measures. Feedback is possible in the
form of organized information, reports and personal observations. Feed back is
necessary to decide whether the decision already taken should be continued or be
modified in the light of changed conditions.
66
We can summarize all steps in this figure (Charles et. al. 2006)
4.6Good decision making
Often said that things are measured by their conclusions it means by its final results, if
the results were good the decision that led to these results will be good decisions and
vice versa, this argument assumes that the decision maker knows what will happen in
the future, but this assumption is not true because the vision of the future is not within
the framework of knowledge built humans( Shubair,2006).
Therefore, good decision making can be defined as:
Good decision that is taken in the light of the data and information available to the
decision maker when he/she takes, and that this decision might not achieve its goals if
it occurred in circumstances that were not unexpected during the decision-
making( Al-rajbi,2003,P:144).
4.7 Types of decision
There are several different ways of classifying decisions and this section will briefly
give three of them:
First classification:(Moshrefi,1997,P:35-36).
1. Programmed decision
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Programmed decisions are routine and repetitive, and the organization typically
develops specific ways to handle them. A programmed decision might involve
determining how products will be arranged on the shelves of a supermarket. For this
kind of routine, repetitive problem, standard arrangement decisions are typically made
according to established management guidelines.
2. Non programmed decision
Non programmed decisions are typically one shot decisions that are usually less
structured than programmed decision
The second classification: (Ashour,1996, P:6-7)
1. Business decision making
It includes decisions that are made to determine business or organization outcomes.
2. Personal decision making
It has the decisions that determine who we are as individuals and the outcomes we
create for ourselves and others with which we have relationships. This category
includes what is sometimes referred to as life decisions
3. Consumer decision making
It consists of choices that determine our effectiveness in purchase decisions that occur
in either a personal or business context. In this case, the consumer (entity) can be an
individual or a person within a business
The third classification: (Moshrefi,1997,P:37)
1. Cautious
It allows time for contingencies and problems that may crop up later at the time of
implementation. The decision-makers hedge their best of efforts to adopt the night
course. It helps to limit the risks that are inherent to decision- making. Although this
68
may also limit the final gains. It allows one to scale down those projects which look
too risky in the first instance.
2. Conditional
Such types of decisions can be altered if certain foreseen circumstances arise. It is an
‘either / or’ kind of decision with all options kept open. It prepares one to react if the
competition makes a new move or if the game plan changes radically. It enables one
to react quickly to the ever changing circumstances of competitive markets.
3. Delayed
Such decisions are put on hold till the decision–makers feel that the time is right. A
go-ahead is given only when required elements are in place. It prevents one from
making a decision at the wrong time or before all the facts are known. It may, at times
result into forgoing of opportunities in the market that needs fast action.
4.8ABC and decision making
Accounting systems are important because they are primary source of information for
managers. Many, if not most, decision require information that is likely to come from
the accounting system Our concern with accounting system is whether it is providing
the "best" information to managers. The decision managers make will be only as a
good as the information they have many organizations produce mountains of cost data
but provide management with little or no useful information on costs and
performance. `Management accounting information is too late, too aggregated and too
distorted to be relevant for management's planning and control decisions' (Johnson
and Kaplan, 1987). As a result organizations are making erroneous decisions, such as
rationalizing products that are profitable, developing products that are not profitable,
making across-the-board cost reductions, unnecessarily outsourcing etc. Management
in many organizations suspect traditional cost figures and often resort to unofficial
cost analyses.
The primary aim of financial accounts is to provide historical reports that satisfy
accounting conventions rather than aid management decision-making. The traditional
allocation of overhead costs to products as a percentage of direct labor used to be
69
satisfactory but over the last 50 years there has been a marked swing away from direct
labor to overhead costs due to automation and increased knowledge workers.
The traditional allocation of overheads to products as a percentage of direct labor
encourages long production runs and inventory buildup, longer lead times, poor
schedule dependency, faster but less flexible machines, more scrap and rework and
capital for labor substitution. Traditional costing systems do not provide adequate
information about the profit effects of increasing or reducing services, introducing or
rationalizing products, changes in volume, changes in capacity or outsourcing.
Arbitrarily allocating overhead costs distorts the figures so that some products appear
unprofitable although in fact discontinuing them will not result in savings and may
lead to the loss of a highly valued channel or customers.
Activity-based costing (ABC) was originally developed in manufacturing but is being
adopted in services and the public sector. ABC helps organizations to:
* identify the profitability of products and services, channels, customer groups, new
products, pricing, promotion, distribution etc;
* provide more useful cost control information to pinpoint potential improvements etc
rather than traditional expense line reporting;
* evaluate capital expenditure, acquisitions, make or buy etc.
With ABC, an organization can soundly estimate the cost elements of entire products
and services. That may help inform a company's decision
Identify and eliminate those products and services that are unprofitable and
lower the prices of those that are overpriced (product and service portfolio
aim)
Or identify and eliminate production or service processes that are ineffective
and allocate processing concepts that lead to the very same product at a better
yield (process re-engineering aim).
In a business organization, the ABC methodology assigns an organization's resource
costs through activities to the products and services provided to its customers. ABC
is generally used as a tool for understanding product and customer cost and
70
profitability based on the production or performing processes. As such, ABC has
predominantly been used to support strategic decisions such as pricing, outsourcing,
identification and measurement of process improvement initiatives
(Walker, Attribte based costing for decision making, 1999)
Chapter 5
Research methodology
5.1 Introduction5.2 Research Design5.3 Research Methodology
5.3.1 Data Collection Methodology5.3.2 Data Analysis Methodology
5.4 Population and Sample Size5.5 Questionnaire Content
71
5.5.1 Pilot Study5.6 Validity of the Research5.7 Content Validity of the Questionnaire5.8 Statistical Validity of the Questionnaire5.9 Criterion Related Validity
5.9.1 Internal Consistency5.9.2 Structure Validity of the Questionnaire
5.10 Reliability of the Research5.10.1 Half Split Method5.10.2 Cronbach’s Alpha Coefficient
5.11 Data analysis and discussion
5.1 Introduction
This chapter discuss the methodology which used in our research. The followed
methodology used to complete this study uses the following ways: The information of
the research design, questionnaire design, research population, statistical data
analysis, content validity.
5.2 Research design
The first phase of the research proposal includes identifying, defining and studying
the problems and establishment objective of the study and development research plan.
The second phase of the research includes a summary of the literature review.
The third phase of the research includes a field questionnaire which was conducted
about applied Activity Based Cost System at Bashir Siksik Company and how it
affects in their decision making. And then the research focused on the modification of
the questionnaire design, through distributing the questionnaire to pilot study, The
purpose of the pilot study was to test and prove that the questionnaire questions are
clear to be answered in a way that help to achieve the target of the study.
The fourth phase of the research focused on distributing questionnaire and data
analysis and discussion. Statistical Package Social Sciences (SPSS) was used to
perform the required analysis.
72
The final phase includes the conclusion and recommendations.
Thirty questionnaires were distributed to the research population and twenty
questionnaires are received.
5.3 Research methodology
5.3.1 Data Collection MethodologyIn order to collect the needed data for this research , we use the secondary resources
in collecting data such as books, journals, statistics and web pages, in addition to
preliminary resources that not available in secondary resources through distribute
questionnaires on study population in order to get their opinions about Activity-based
costing system and its role in decision making in Al-Siksik company.
5.3.2 Data Analysis MethodologyResearch methodology depend on the analysis of data on the use of descriptive
analysis, which depends on the poll and use the main program (SPSS).
5.4 population and Sample size
Our model incorporates Activity-based costing system and its role in decision making
in Al-Siksik Company. We distributed our questionnaire to 30 employees from Al-
Siksik company and Masoud and Ali company and Al-Mashharawi company and 20
questionnaires are received, and the following tables illustrated the properties of the
samples:
Section 1: General Information
1. Gender:
Table No.(1) show that 90 % from the sample are “Male “, and 10% from the sample are “Female “.
Table No.( 1)Gender
Gender Frequency Percentages
Male 18 90
Female 20 10
73
Total 20 100
Figure No.(1)
Gender
18
%90
2%10
MaleFemale
2. Age:
Table No.(2) show that 35% from the sample ages “Less than 30 years “ , and 20% from the sample ages “30- 40 years “ , and 15% from the sample ages “41- 50 years “, and 30% from the sample ages “More than 50 years “ .
Table No.(2)Age
Age Frequency Percentages
Less than 30 7 35
30 - 40 years 4 20
41- 50 years 3 15
74
More than 50 years
6 30
Total 20 100
Figure No.(2)
Age
Less than 30 30 - 40 years 41- 50 years More than 50 years
0
5
10
15
20
25
30
35
40
74 3
6
Series1Series2
3. The level of scientific qualification(Degree):
Table No.(3) show that 20% from the sample the level of scientific qualification are
“Diploma “, and 65% from the sample the level of scientific qualification are
“Bachelor degree “, and 10% from the sample the level of scientific qualification are
75
“Master degree “, and 5% from the sample the level of scientific qualification are
“PhD “ .
Table No.( 3)level of scientific qualification(Degree)
level of scientific qualification(Degree) Frequency Percentages
High school - -
Diploma 4 20
Bachelor degree 13 65
Master degree 2 10
PhD 1 5
Total 20 100
Figure No.(3)
level of scientific qualification(Degree)
Diploma Bachelor degree
Master degree PhD0
10
20
30
40
50
60
70
4
13
2 1
4. Years of experience:
Table No.(4) show that 10 % from the sample years of experience “1 to 3 years “ ,
and 15% from the sample years of experience “3 to 6 years “ , and 25% from the
sample years of experience “6 to 10 years “ , and 20% from the sample years of
76
experience “10 to 15 years“ ,and 30% from the sample years of experience “More
than 10 years“ .
Table No.(4)Years of experience
Years of experience
Frequency Percentages
1 to 3 years 2 10
3 to 6 years 3 15
6 to 10 years 5 25
10 to 15 years 4 20
More than 15 years 6 30
Total 20 100
Figure No.(4)
Years of experience
1 to 3 years 3 to 6 years 6 to 10 years 10 to 15 years More than 15 years
0
5
10
15
20
25
30
35
2 35 4
6
Series1 Series2
5. Specialization:
Table No.(5) show that 75% from the sample Specialization are “Accounting “ , and
15% from the sample Specialization are “Business administration “, and 10% from
the sample Specialization are “Bank finance “.
77
Table No.(5)Specialization
Specialization Frequency Percentages
Accounting 15 75
Business administration
3 15
Economic - -
Bank finance 2 10
Total 20 100
Figure No.(5)
Specialization
Accounting Business administration Bank finance0
10
20
30
40
50
60
70
80
15
3 2
Series1 Series2
6. Career center
Table No.(6) show that 5% from the sample the career center are “Chairman of the
Board of Directors “ , and 10% from the sample the career center are “General
Manager “ , and 20% from the sample the career center are “Executive manager “,
and 55% from the sample the career center are “Head of department “,and 10% from
the sample the career center are “Employee “ .
Table No.(6)
78
Career centerCareer center Frequency Percentages
Chairman of the Board of Directors
1 5
General Manager 2 10
Executive manager 4 20
Employee 11 55
Head of department 2 10
Total 20 100
Figure No.(6)
Career center
0
20
40
60
124112 510
20
55
10
Section 2 Cost systems Company information
1. The responsible administration of the cost accounting
Table No.(7) show that 20% from the samplethe responsible administration of the
cost accounting “A separate section for the cost accounting “ , and 25% from the
samplethe responsible administration of the cost accounting “division of Financial
Management “ ,55%from the samplethe responsible administration of the cost
accounting “division of Accounting “ .
79
Table No.(7)The responsible administration of the cost accounting
The responsible administration of the cost accounting Frequency Percentages
A separate section for the cost accounting 4 20
division of Financial Management 5 25
division of Accounting 11 55
others - -
Total 20 100
Figure No.(7)
The responsible administration of the cost accounting
A separate section for the cost accounting
division of Financial Management
division of Accounting
4511
2025
55
2. The numbers of accountants in the accounting department
Table No.(8) show that 25% from the sample The numbers of accountants in the
accounting department “less than 5 employees “ , and 40% from the sample The
numbers of accountants in the accounting department “from 5 to 10 employees
“ ,35%from the sample The numbers of accountants in the accounting department
“more than 10 employees “ .
Table No.(8)
80
The numbers of accountants in the accounting department
Figure No.(8)
The numbers of accountants in the accounting department
less th
an 5 em
ployees
from 5 to
10 employe
es
more than
10 employee
s
587
25
4035
3. The type of accounting system which is used in the company
Table No.(9) show that 30% from the sample the type of accounting system which is
used in the company are “Manual system “ , and 40% from the sample the type of
accounting system which is used in the company are “Computerized system
“ ,30%from the sample the type of accounting system which is used in the company
are “Mixed system “ .
Table No.(9)The type of accounting system which is used in the company
81
The numbers of accountants in the accounting department Frequency Percentages
less than 5 employees 5 25
from 5 to 10 employees 8 40
more than 10 employees 7 35
Total 20 100
Figure No.(9)
The type of accounting system which is used in the company
Manual systemComputerized systemMixed system
686
30
40
30
4. Does the company apply any cost-accounting system?
Table No.(10) show that 85% from the companyapplied cost-accounting system , and
15% from the company notapplied cost-accounting system .
Table No.(10)Does the company apply any cost-accounting system?
82
The type of accounting system which is used in the company
Frequency Percentages
Manual system 6 30
Computerized system 8 40
Mixed system 6 30
Total 20 100
83
Does the company apply any cost-accounting system? Frequency Percentages
Yes 17 85
No 3 15
Total 20 100
Figure No.(10)
Does the company apply any cost-accounting system?
17
85
3
15
YesNo
Section 3 Respondent information1. Did you attend any training courses about activity based costing
system(ABC) in the companies?
Table No.(11) show that 75% from the sample attend training courses about activity
based costing system(ABC) in the companies , and 25% from the sample not attend
training courses about activity based costing system(ABC) in the companies .
Table No.(11)Did you attend any training courses about activity based costing system (ABC) in
the companies?
Figure No.(11)
Did you attend any training courses about activity based costing system(ABC) in the companies?
84
Did you attend any training courses about activity based costing system(ABC) in the companies ?
Frequency Percentages
Yes 15 75
No 5 25
Total 20 100
15
75
5
25
YesNo
2. Do you have enough and appropriate knowledge of activities based costing system (ABC)?
Table No.(12) show that 80% from the sample have enough and appropriate
knowledge of activities based costing system (ABC), and 20% from the sample not
have enough and appropriate knowledge of activities based costing system (ABC) .
Table No.(12)Do you have enough and appropriate knowledge of activities based costing system
(ABC)?
Figure No.(12)
Do you have enough and appropriate knowledge of activities based costing system (ABC)?
85
Do you have enough and appropriate knowledge of activities based costing system (ABC)?
Frequency Percentages
Yes 16 80
No 4 20
Total 20 100
0
10
20
30
40
50
60
70
80
90
16
80
4
20
YesNo
5.5 Questionnaire content
The questionnaire was provided with a covering letter explaining the purpose of the
study, the way of responding, the aim of the research and the security of the
information in order to encourage a high response. The questionnaire included
multiple choice questions: which used widely in the questionnaire, The variety in
these questions aims first to meet the research objectives, and to collect all the
necessary data that can support the discussion, results and recommendations in the
research.
The sections in the questionnaire will verify the objectives in this research related to
Activity-based costing system and its role in decision making in Al-Siksik company
as the following:
Section 1: General Information consists from 6 questions.
Section 2: Cost System:
Company information: consist from 4 questions. Respondent information: consist from 2 questions.
Section 3: divided into three fields as follows:
First field: The adoption of management on the costs systems for obtaining
accurate information for the cost of the product consist from 6 questions.
Second field: The usage of Activity based costing consist from 14 questions.
86
Third field: the extent of use ABC system in decision-making consist from 6 questions.
And all questions follows lekart scale as the following table (13):
Table No.(13)lekart scale
Level
Very high importance
High importance
Intermediate importance
Week importance
Very week importance
Scale 5 4 3 2 1Level Strongly agree agree neutral disagree Strongly
disagreeScale 5 4 3 2 1
5.5.1 Pilot Study A pilot study for the questionnaire was conducted before collecting the results of the
sample. It provides a trial run for the questionnaire, which involves testing the
wordings of question, identifying ambiguous questions, testing the techniques that
used to collect data, and measuring the effectiveness of standard invitation to
respondents.
5.6 Validity of the Research
We can define the validity of an instrument as a determination of the extent to which
the instrument actually reflects the abstract content being examined. "Validity refers
to the degree to which an instrument measures what it is supposed to be measured".
High validity is the absence of systematic errors in the measuring instrument. When
an instrument is valid; it truly reflects the concept it is supposed to measure.
Achieving good validity required the care in the research design and sample
selection.
5.7 Content Validity of the Questionnaire
Content validity test was conducted by consulting two groups of experts. The first was
requested to evaluate and identify whether the questions agreed with the scope of the
items and the extent to which these items reflect the concept of the research problem.
The other was requested to evaluate that the instrument used is valid statistically and
that the questionnaire was designed well enough to provide relations and tests
87
between variables. The two groups of experts did agree that the questionnaire was
valid and suitable enough to measure the concept of interest with some amendments.
5.8 Statistical Validity of the Questionnaire
To insure the validity of the questionnaire, two statistical tests should be applied. The
first test is Criterion-related validity test (Spearman test) which measure the
correlation coefficient between each item in the field and the whole field. The second
test is structure validity test (Spearman test) that used to test the validity of the
questionnaire structure by testing the validity of each field and the validity of the
whole questionnaire. It measures the correlation coefficient between one filed and all
the fields of the questionnaire that have the same level of similar scale.
5.9 Criterion- Related Validity:
5.9.1 Internal consistency: Internal consistency of the questionnaire is measured by a scouting sample, which
consisted of twenty questionnaires, through measuring the correlation coefficients
between each paragraph in one field and the whole filed. Tables No.'s (14 - 16) below
shows the correlation coefficient and p-value for each field items. As show in the
table the p- Values are less than 0.05,so the correlation coefficients of this field are
significant at α = 0.05, so it can be said that the paragraphs of this field are consistent
and valid to be measure what it was set for.
Table(14)The correlation coefficient between each paragraph in the first field (The adoption of management on the costs systems for obtaining accurate information for the cost
of the product) and the whole field
No. Paragraph
Spearman correlation coefficient
p-value
5. To get the cost of the product. 0.757 0.000
6. To get a more detailed information. 0.784 0.000
7. Assign indirect costs to cost object by identifying activities and cost drivers.
0.692 0.000
8. Except the idle capacity. 0.589 0.002
9. Avoid overcosted and undercosted problems. 0.506 0.010
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10. Has as important role in decision making. 0.651 0.000
Table(15)The correlation coefficient between each paragraph in the second field(The usage
of Activity based costing) and the whole field
No. Paragraph Spearman correlation coefficient
p-value
1. The company has s desire to use modern systems to calculate the costs of products.
0.688 0.000
2. ABC system is consider one of the modern cost systems and not traditional system.
0.824 0.000
3.
The inability of traditional costing system in addressing the diversity of activities supports the necessity of adopting a system that is capable and efficient in dealing with these activities.
0.617 0.001
4.ABC system is used in the company by a group of accountants specialists who have the knowledge to use the cost systems. 0.789 0.000
5.
The company depends on the resulting numbers from ABC system as a correct number and don’t subject to correction and review.
0.872 0.000
6.The usage of ACB system is considers an effective for calculating the cost of the products. 0.858 0.000
7. ABC system is consummate with the complexity of the company's activities.
0.882 0.000
8. the responsible administration in the company see that the cost of implementing ABC system more than the expected benefit.
0.845 0.000
9. The complexity of activities and the provided products requires applying an ABC system.
0.854 0.000
10. The increasing in using modern technology in products are require to apply activities based costing system (ABC).
0.690 0.000
11. The inability of traditional costing system for determining the cost of each component of the products, requires from the company to use ABC system.
0.712 0.000
12. The management see that the traditional system distort the cost of the products, so there is a need to implement ABC system.
0.813 0.000
13. The increasing competition from the private companies requires an implementation for ABC system.
0.672 0.000
14. The inability to calculate the indirect costs for the cost objects through the large percentage of indirect costs will lead the company to use an ABC system.
0.742 0.000
89
Table(16)The correlation coefficient between each paragraph in the third field (The extent of
use ABC system in decision-making) and the whole field
No. ParagraphSpearman correlation coefficient
p-value
1. ABC system is used in traditional decision 0.737 0.000
2. ABC system is used in the planning 0.706 0.000
3. ABC system is used in the control 0.802 0.000
4. ABC system is used in the correction of decision, promote and ensure its effective
0.857 0.000
5. ABC system provide information that is used in making difficult decisions
0.764 0.000
6. ABC system is consider one of the most important cost systems in decision-making
0.377 0.063
5.9.2 Structure Validity of the Questionnaire
Structure validity is the second statistical test that used to test the validity of the
questionnaire structure by testing the validity of each field and the validity of the
whole questionnaire. It measures the correlation coefficient between one filed and all
the fields of the questionnaire that have the same level of liker scale.
As shown in table No. (17), the significance values are less than 0.05, so the
correlation coefficients of all the fields are significant at α = 0.05, so it can be said
that the fields are valid to be measured what it was set for to achieve the main aim of
the study
Table No. (17)Structure Validity of the Questionnaire
No. Field Spearman correlatio
n
p-value
90
coefficient
1.The adoption of management on the costs systems for
obtaining accurate information for the cost of the product.0.709 0.000
2. The usage of Activity based costing . 0.892 0.000
3. The extent of use ABC system in decision-making . 0.753 0.000
5.10 Reliability of the Research
To measure the reliability can be achieved by using Cronbach’s Alpha coefficient and
Half Split Method through the SPSS software.
5.10.1 Half Split Method This method depends on finding Spearman correlation coefficient between the means
of odd rank questions and even rank questions of each field of the questionnaire.
Then, correcting the Spearman correlation coefficients can be done by using
Spearman Brown correlation coefficient of correction. The corrected correlation
coefficient ( consistency coefficient) is computed according to the following equation:
Consistency coefficient = 2r/(r+1), where r is the Spearman correlation coefficient.
The normal range of corrected correlation coefficient 2r/(r+1) is between 0 and 1 As
shown in Table No.(18), all the corrected correlation coefficients values are between
0.818 and 0.924 and the general reliability for all items equal 0.859, and the
significant (α ) is less than 0.05 so all the corrected correlation coefficients are
significance at α = 0.05. It can be said that according to the Half Split method, the
dispute causes group are reliable.
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Table (18)Split-Half Coefficient method
No. Field Spearman- correlation
Spearman-Brown Coefficient
p-value
1.
The adoption of management on the costs
systems for obtaining accurate information
for the cost of the product.0.729 0.844 0.000
2. The usage of Activity based costing . 0.700 0.924 0.000
3.The extent of use ABC system in decision-
making .0.692 0.818 0.000
Total 0.753 0.859 0.000
5.10.2Cronbach’s Coefficient Alpha This method is used to measure the reliability of the questionnaire between each field
and the mean of the whole fields of the questionnaire. The normal range of
Cronbach’s coefficient alpha value between 0 and 1 , and the higher values reflects a
higher degree of internal consistency. As shown in Table No. (19) the Cronbach’s
coefficient alpha was calculated for the fields. The results were in the range from
0.839 and 0.867, and the general reliability for all items equal 0.889. This range is
considered high; the result ensures the reliability of the questionnaire.
Table (19)ReliabilityCronbach's Alpha
No. Field No. of
ItemsCronbach's
Alpha
1.The adoption of management on the costs systems for
obtaining accurate information for the cost of the product.6 0.867
2. The usage of Activity based costing . 14 0.853
3. The extent of use ABC system in decision-making . 6 0.839
Total 26 0.889
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5.11 Data Analysis and Discussion
The First Field: The adoption of management on the costs systems for obtaining
accurate information for the cost of the product.
We use a Sign test to test if the opinion of the respondent about The adoption of
management on the costs systems for obtaining accurate information for the cost of
the product and the results shown in Table No. (20) as follows:
The highest two questions according to the Weight mean as follows:
1- In item No. (4) the weight mean equal “ 93.61%" and p-value equal " 0.000"
which is less than 0.05, that means (Except the idle capacity).
2- In item No. (3) the weight mean equal “91.90%" and p-value equal " 0.000" which
is less than 0.05, that means (Assign indirect costs to cost object by identifying
activities and cost drivers).
The lowest two questions according to the weight mean as follows:
1- In item No. (1) the weight mean equal “90.46%" and p-value equal " 0.000"
which is less than 0.05, that means (To get the cost of the product).
2- In item No. (2) the weight mean equal ” 90.72%" and p-value equal "0.000 "
which is less than 0.05, that means (To get a more detailed information).
For general the results for all items of the field show that the average mean 4.57
equal and the weight mean equal 91.45% which is greater than " 60%" , and the p-
value equal 0.000 which is less than 0.05, that means the respondents agreement on
the first field (The adoption of management on the costs systems for obtaining
accurate information for the cost of the product ) use at significant level α = 0 .05
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Table(20)The adoption of management on the costs systems for obtaining accurate
information for the cost of the product
No. Paragraph Mean
Weight mean
P-value
1. To get the cost of the product. 4.52 90.46 0.000
2. To get a more detailed information. 4.54 90.72 0.000
3. Assign indirect costs to cost object by identifying activities and cost drivers. 4.59 91.90 0.000
4. Except the idle capacity. 4.68 93.61 0.000
5. Avoid overcosted and undercosted problems. 4.55 91.08 0.000
6. Has as important role in decision making. 4.55 90.93 0.000
Total 4.57 91.45 0.000
The second Field: The usage of Activity based costing.
We use a Sign test to test if the opinion of the respondent about the usage of Activity
based costing and the results shown in Table No. (21) as follows:
The highest two questions according to the Weight mean as follows:
1- In item No. (4) the weight mean equal 92.39%" and p-value equal " 0.000" which
is less than 0.05, that means (ABC system is used in the company by a group of
accountants specialists who have the knowledge to use the cost systems).
2- In item No. (3) the weight mean equal “91.88%" and p-value equal " 0.000"
which is less than 0.05, that means (The inability of traditional costing system in
addressing the diversity of activities supports the necessity of adopting a system
that is capable and efficient in dealing with these activities).
94
The lowest two questions according to the weight mean as follows:
1- In item No. (13) the weight mean equal “81.00%" and p-value equal "0.007 "
which is less than 0.05, that means (The increasing competition from the private
companies requires an implementation for ABC system).
2- In item No. (14) the weight mean equal 83.20%" and p-value equal "0.002 "
which is less than 0.05, that means (The inability to calculate the indirect costs for
the cost objects through the large percentage of indirect costs will lead the
company to use an ABC system).
For general the results for all items of the field show that the average mean 4.44equal
and the weight mean equal 88.83% which is greater than " 60%" and the p- value
equal 0.000 which is less than 0.05, that means the respondents agreement on the
second field (The usage of Activity based costing) use at significant level α = 0 .05
Table(21)The usage of Activity based costing
No. Paragraph Mean
Weight mean
P-value
1.The company hassdesireto usemodernsystemsto calculate
thecosts of products.4.52 90.46 0.000
2.ABC system is consider one of the modern cost systems and
not traditional system.4.58 91.68 0.000
3.
The inability of traditional costing system in addressing the
diversity of activities supports the necessity of adopting a
system that is capable and efficient in dealing with these
activities.
4.59 91.88 0.000
4.
ABC system is used in the company by a group of
accountants specialists who have the knowledge to use the
cost systems.
4.62 92.39 0.000
5.
The company depends on the resulting numbers from ABC
system as a correct number and don’t subject to correction
and review.
4.53 90.66 0.000
6.The usage of ACB system is considers an effective for
calculating the cost of the products.4.58 91.69 0.000
7. ABC system is consummate with the complexity of the 4.50 89.95 0.000
95
company's activities.
8.
the responsible administration in the company see that the
cost of implementing ABC system more than the expected
benefit.
4.49 89.74 0.000
9.The complexity of activities and the provided products
requires applying an ABC system.4.58 91.57 0.000
10.The increasing in using modern technology in products are
require to apply activities based costing system (ABC).4.57 91.4 0.000
11.
The inability of traditional costing system for determining
the cost of each component of the products, requires from
the company to use ABC system.
4.24 84.8 0.001
12.
The management see that the traditional system distort the
cost of the products, so there is a need to implement ABC
system.
4.16 83.2 0.003
13.The increasing competition from the private companies
requires an implementation for ABC system.4.05 81 0.007
14.
The inability to calculate the indirect costs for the cost
objects through the large percentage of indirect costs will
lead the company to use an ABC system.
4.16 83.2 0.002
Total 4.44 88.83 0.000
Third Field:The extent of use ABC system in decision-making
We use a Sign test to test if the opinion of the respondent about The extent of use
ABC system in decision-making and the results shown in Table No. (22) as follows:
The highest two questions according to the Weight mean as follows:
1- In item No. (1) the weight mean equal 95.43%" and p-value equal " 0.000 "
which is less than 0.05, that means (ABC system is used in traditional decision).
2- In item No. (4) the weight mean equal 94.31%" and p-value equal " 0.000 "
which is less than 0.05, that means (ABC system is used in the correction of
decision, promote and ensure its effective).
96
The lowest two questions according to the weight mean as follows:
1- In item No. (6) the weight mean equal 91.98%" and p-value equal " 0.000 " which
is less than 0.05, that means (ABC system is consider one of the most important
cost systems in decision-making).
2- In item No. (2) the weight mean equal 92.59%" and p-value equal " 0.000 " which
is less than 0.05, that means (ABC system is used in the planning).
For general the results for all items of the field show that the average mean 4.68equal
and the weight mean equal 93.58% which is greater than " 60%" and the p- value
equal 0.000 which is less than 0.05, that means the respondents agreement on the
second field (The usage of Activity based costing) use at significant level α = 0 .05
Table(22)The usage of Activity based costing
No. Paragraph Mean Weight mean P-value
1. ABC system is used in traditional decision 4.77 95.43 0.000
2. ABC system is used in the planning 4.63 92.59 0.000
3. ABC system is used in the control. 4.66 93.30 0.000
4. ABC system is used in the correction of decision, promote and ensure its effective.
4.72 94.31 0.000
5. ABC system provide information that is used in making difficult decisions
4.69 93.88 0.000
6. ABC system is consider one of the most important cost systems in decision-making
4.60 91.98 0.000
Total 4.68 93.58 0.000
97
Chapter six
Results and recommendations
6.1 Results
6.2 Recommendations
98
6.1 Results
After analyzing the data and testing the research hypothesis using different statistical
analysis, the researchers conclude that:
1. The costing and the accounting system used in Gaza strip companies are mainly
for the following:
To determine the product's profitability.
To determine the product's costs.
To allocate costs to the final products.
To support decision making.
2. Activity-Based costing(ABC) is one of the modern cost accounting systems that
assign indirect cost to the cost objects and provides more accurate and detailed
information.
3. There is an implemented Activity-Based costing system in Al-Siksik company,
but at the same time not all manufacturing firms implement ABC like Masoud
and Ali company and Al-Mashharawi company implement ABC system.
4. ABC system facilitates the works in Al-Siksik company through calculating the
cost of its cost objects by dividing it's in to individual activities and at the same
time helping the managers in making different decisions.
5. ABC system is more important in manufacturing firms rather than merchandise
and service companies because here will be difficult to assign indirect costs to
cost objects and reduce or eliminate unused capacity because in the service
companies unused capacity represents unavoidable costs.
6. There is some reasons for launching an ABC system in the companies which
include the following:
The inability of the traditional cost system to provide detailed and accurate
cost products and to assign the overhead costs to the products.
99
The advanced technology day after day.
The tendency of the companies to more complex works.
7. ABC system pervades in all managerial functions starting from planning the
activities till and making the final decisions and staffing the workers.
8. ABC system extended to Activity based management(ABM) in order to improve
customer satisfaction, profitability, and maximize the value adding activities
while minimizing or eliminating non value added activities.
9. The study ranked the important in decision making elements for manufacturing
companies are as follows:
Decisions related to the product quality.
Division related to the total product costing.
Decision related to the centralized decision making.
Decision related to the product pricing.
10. ABC system suffer from limitations which include the following:
Time consuming.
Costly system.
Complex system so its need efforts from a group of specialists.
Increasing the number of the cost drivers complicate the works.
6.2 Recommendations
1. The need to use Activity-based costing(ABC) system in all complex
manufacturing firms in Gaza strip will facilitate its works and lead to more
accurate information and easier decision making process.
2. More efforts should be paid to develop and enhance ABC system in order to
decrease its limitations as much as possible in all manufacturing firms specially
Al-Siksik company to increase the level of efficiency and effectiveness.
3. Manufacturing firms should provide more courses about ABC system through
providing developed system involve motivation the accountants join training
courses to gain skills and increase the functional and practical experience and
knowledge.
4. providing a group of specialist to learn the employees about how they should
implement an ABC system accurately.
100
5. The need to the support from the senior management in companies to the
sections and accounting departments and to provide them competencies and
expertise necessary to implement the cost accounting system and making
decisions.
6. Enhance team work among staff and top managers, which facilitates the process
of decision making and promote cross functional work.
7. The necessity to use a computer in the conservation and storage of accounting
data, to get The accounting information to provide accuracy and speed in the
delivery of this information to decision makers.
101
102
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103
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107
Appendix
108
الرحيم الرحمن الله بسم
اإلسالمية – الجامعةغزة
التجارة كليةالمحاسبة قسم
Islamic University – Gaza
Faculty of Commerce
Department of Accounting
This questionnaire is a part of the study(Activity-based costing system
and its role in decision making in Al-Siksik company) to complete the
requirement for obtaining the bachelor degree in the faculty of commerce
from the Islamic university of Gaza.
Also, this is for comparing between traditional costing systems and
Activity-based costing system and its importance in calculating the
products costs in the complex organizations.
The collected information is just only used for scientific research and
studies purposes.
We are greatly thankful for your response and cooperation
With all respect,
Researchers
Lina A. Eid
Caroline A. Abu Kwaik
109
General information
1. Gender Male Female
2. Age Less than 30 30 to 40 41 to 50 More than 50
3. Degree High school Diploma Bachelor degree Master degree PhD
4. Years of experience 1to 3 years 3to 6 years 6to 10 years 10to 15 years More than 15 years
5. Specialization Accounting Business administration Economic Bank finance Others
6. Career center Chairman of the Board of Directors General Manager Executive manager
110
Head of department Employee Other
Cost systems
Company information7. The responsible administration of the cost accounting
A separate section for the cost accounting
division of Financial Management
division of Accounting
others (specify please)
8. the numbers of accountants in the accounting department
less than 5 employees
from 5 to 10 employees
more than 10 employees
9. the type of accounting system which is used in the company
Manual system
Computerized system
Mixed system
10. Does the company apply any cost-accounting system?
Yes
No
Respondent information1. Did you attend any training courses about activity based costing system(ABC) in
the companies?
Yes
No
2. Do you have enough and appropriate knowledge of activities based costing
system (ABC)?
Yes
No
111
Activity based costing(ABC)questionnaire1. The adoption of management on the costs systems for obtaining accurate
information for the cost of the product. Select how important the following objectives as targets for the adoption of
ABC system as a cost accounting system
Item Very high importance
High importance
Intermediate importance
Week importance
Very week importance
a. To get the cost of the product.
b. To get a more detailed information.
c. Assign indirect costs to cost object by identifying activities and cost drivers.
d. Except the idle capacity.
e. Avoid overcosted and undercosted problems.
f. Has as important role in decision making.
g.
2. The usage of Activity based costing
Item Strongly agree
agree neutral
disagree Strongly disagree
1. The company has desire to use modern
112
systems to calculate the costs of products.
2. ABC system is consider one of the modern
cost systems and not traditional system.
3. The inability of traditional costing
system in addressing the diversity of
activities supports the necessity of
adopting a system that is capable and
efficient in dealing with these
activities.
4. ABC system is used in the company by a
group of accountants specialists who have
the knowledge to use the cost systems.
5. The company depends on the resulting
numbers from ABC system as a correct
number and don’t subject to correction and
review.
6. The usage of ACB system is considers an
effective for calculating the cost of the
products.
7. ABC system is consummate with the
complexity of the company's activities.
8. the responsible administration in the
company see that the cost of implementing
ABC system more than the expected
benefit.
9. The complexity of activities and the
provided products requires applying an
ABC system.
10. The increasing in using modern technology in products are require to
113
apply activities based costing system (ABC).
11. The inability of traditional costing
system for determining the cost of each
component of the products, requires
from the company to use ABC system.
12. The management see that the
traditional system distort the cost of
the products, so there is a need to
implement ABC system.
13. The increasing competition from the
private companies requires an
implementation for ABC system.
14. The inability to calculate the indirect
costs for the cost objects through the
large percentage of indirect costs will
lead the company to use an ABC
system.
3. the extent of use ABC system in decision-making
Strongly agree
agree neutral disagree Strongly disagree
1. ABC system is used in traditional decision
2. ABC system is used in the planning3. ABC system is used in the control4. ABC system is used in the correction of
decision, promote and ensure its effective
5. ABC system provide information that is used in making difficult decisions
6. ABC system is consider one of the most important cost systems in decision-making
114
الرحيم الرحمن الله بسم
اإلسالمية – الجامعةغزة
التجارة كليةالمحاسبة قسم
Islamic University – Gaza
Faculty of Commerce
Department of Accounting
) لالنشطة المستند التكاليف نظام الدراسة من جزء هو االستبيان هذا ( متطلبات الستكمال السكسك بشير شركة في القرار اتخاذ في ودورهاإلسالمية الجامعة من التجارة كلية في البكالوريوس درجة على الحصول
غزة في
على القائم والنظام التكاليف لحساب التقليدية النظم بين للمقارنة أيضا،في المنتجات تكاليف حساب في والمهم البارز ودوره االنشطة اساس
االنشطة معقدة الشركةاالدراسة واهداف العلمي البحث الغراض المعلومات جمع يتم
معنا وتعاوكم الستجابتكم الشكر امتنان ولكم
, االحترام كل معالباحثتين
عيد لينا
115
كويك ابو كارولين
عامة معلومات
الجنس.1ذكرانثى
العمر.2 من سنة 30اقل31_40
41 _50 سنة من سنة 50اكثر
العلمي .3 المؤهل ثانوية مدرسةدبلوم البكالوريوس درجة الماجستير درجةدكتوراه
الخبرة .4 سنوات1_3 سنة3_6 سنة6_10 سنة10_15 سنة من سنة 15اكثر
العلمي .5 التخصص محاسبة اعمال ادارة
116
اقتصاد ومصرفية مالية علوماخرى
الوظيفي .6 المركز رئيسمجلساإلدارة العام المدير التنفيذي المدير رئيسقسمموظفاخرى
التكاليف أنظمة
الشركة معلوماتعنالتكاليف .1 محاسبة عن المسوؤلة االدارة
التكاليف لمحاسبة مستقل قسم المالية لالدارة تابع قسم للمحاسبة تابع قسم( رجاء ( اذكرها اخرى جهة
المحاسبة :.2 قسم موظفين عدد5 اقل او6-10
10 اكثر او3.: الشركة في المستخدم المحاسبي النظام نوع
يدوي نظام محوسب نظام مختلط نظام
المجيب معلوماتعن
117
لالنشطة (.1 المستند التكاليف نظام تطيبق في تدريبية دورات حضرت هلABC (الشركات فينعمال
باالنشطة ( ( .2 المستند التكاليف بنظام مالئمة معرفة لديكم ؟ ABCهلنعمال
118
االنشطة ( الى المستند التكاليف نظام )ABCاستبانة
معلومات .1 على الحصول في التكاليف انظمة على االدارة اعتماد مدىالمنتج بتكلفة خاصة دقيقة
المستند التكاليف نظام العداد كأهداف التالية االهداف اهمية مدى حددمحاسبي تكاليف كنظام لالنشطة
اهميالبند ة
عاليةجدا
اهم يةعاليه
اهمي ة
متوسطة
اهمي ةضعيفة
اهميةضعيف
جدا ة
المنتج .1 تكلفة على للحصول
اكثر .2 تفصيلية معلومات على للحصول
حساب .3 المراد للهدف المباشرة الغير التكلفة تعيينالمختلفة االنشطة تحديد خالل من له التكلفة
التكلفة ومسببات
المعطلة .4 االنتاجية الطاقة استثناء
النقصان .5 او المنتج تكلفة في الزيادة مشاكل تجنبالمنتج تكلفة في
التكلفة .6 القرارت واداء اتخاذ في وكبير مهم دور ذوومسببات المختلفة االنشطة تحديد خالل من له
التكلفة
لالنشطة .2 المستند التكاليف نظام استخدام
البند
اواف قبشد ةكبيرة
اواف قبشدة
محايد
اواف قبدرج ةصعيفة
اوافق بدرجةضعيف
جدا ة
الحديثة .1 االنظمة استخدام في الرغبة الشركة تمتلك. المنتجات تكلفة لحساب
انظمة .2 من لالنشطة المستند التكاليف نظام يعتبر. التقليدية وليست الحديثة التكاليف
119
تنوع .3 معالجة في التقليدي التكاليف نظام عجز يمثلوكفء قادر نظام تبني ضرورة المساندة االنشطة
لها الصحيحة المعالجة من .يمكن
4.) لالنشطة المستند التكاليف نظام في ABC(يستخدمولديهم المحاسبين متخصصمن كادر الشركة
. المحاسبية التكاليف بانظمة المعرفةنظام .5 من الناتجة االرقام على الشركة تعتمد
)) لالنشطة المستند صحيحة ABCالتكاليف كأرقاموالمراجعة للتعديل قابله وغير
6.)) لالنشطة المستند التكاليف نظام استخدام يعدABC. المنتجات تكاليف لحساب فعال نظام
7.) لالنشطة المستند التكاليف نظام مع ABC(يتوافقالشرك انشطة تعقيد ة.درجة
تطبيق .8 تكلفة ان الشركة في المسوؤلة االدارة ترىالمستندلالنشطة ( التكاليف تفوق) ABCنظام
. تطبيقه من المتوقعة المنافع
تطبيق .9 المقدمة المنتجات تطور و تعيقد يستلزم) باالنشطة المستند التكاليف ).ABCنظام
انتاج .10 في الحديثة التكنولوجيا استخدام تزايد يتطلبالمستند التكاليف نظام تطبيق الى المنتجات
).ABCلالنشطة (
تكلفة .11 حساب في التقليدي التكاليف نظام عجز يمثلالتكاليف نظام تبني ضرورة دقيقة تكلفة المنتجات
باالنشطة ( ) .ABCالمستند
يشوه .12 التقليدي التكاليف نظام ان االدارة ترىتطبيق يستدعي مما المنتج تكلفة تحميل معدالت
) لالنشطة المستند التكاليف ).ABCنظام
الشركات .13 قبل من المافسة حدة تزايد مواجهة انالمستند التكاليف نظام تطبيق تتطلب الخاصة
.)ABCباالنشطة (
مباشرة .14 الغير التكاليف توجيه على القدرة عدمكبر و كثرتها مع دقيق بشكل مسبباتها نحو المحملة
المستند التكاليف نظام تطبيق يتطلب نسبتها ).ABCباالنشطة (
القرارت .3 اتخاذ في لالنشطة المستند التكاليف نظام استخدام مدى
120
اواف قبشد ةكبيرة
اوافق محايدبشدة
اوافق بدرجةصعيفة
اوافق بدرجة ضعيفةجدا
3.) لالنشطة المستند التكاليف نظام في)ABCيستخدمالتقليدية القرارت اتخاذ
لالنشطة (.4 المستند التكاليف نظام في)ABCيستخدمالتخطيط عملية
لالنشط .5 المستند التكاليف نظام في)) ABCيستخدم. الرقابة عملية
لالنشطة .6 المستند التكاليف نظام ))ABCيستخدم. فاعليتها من والتأكد وتعزيزها القرارات تصحيح في
7.) لالنشطة المستند التكاليف نظام )ABCيوفراتخاذ في تساعد التى المحاسبية المعلومات
. الصعبة القرارت
لالنشطة .8 المستند التكاليف نظام يستخدم يعتبرABC ( (المحاسبية التكايلف انظمة اهم من واحد
. القرارات اتخاذ في تساعد التي
121
