Article
citation information:
Stopka, O. Stopkova,
M. Rybicka, I. Gross, P. Jeřábek,
K. Use of
activity-based costing approach for cost management in a railway transport
enterprise. Scientific Journal of
Silesian University of Technology. Series Transport. 2021, 111, 151-160. ISSN: 0209-3324. DOI: https://doi.org/10.20858/sjsutst.2021.111.13.
Ondrej STOPKA[1], Maria STOPKOVA[2], Iwona RYBICKA[3], Patrik
GROSS4, Karel JEŘÁBEK5
USE OF ACTIVITY-BASED
COSTING APPROACH FOR COST MANAGEMENT IN A RAILWAY TRANSPORT ENTERPRISE
Summary. This research outlines
a research study wherein an implementation
of the activity-based costing
(ABC) approach for cost
management in a railway transport enterprise is addressed. ABC is an efficient
technique for enhancing the
quality of provided
services and process complexity
of certain railway companies,
executing its activities at a regional or international
scale. It is one of the new costing approaches
that eliminate the inaccuracies and deficiencies of
the traditional costing
system. Compared to other costing techniques, considerable change lies especially in the way of assigning indirect cost units
to activities based on
actual causations, and subsequently, assigning activities to the very cost items by the intensity of their consumption. Furthermore, this approach allows
decision-makers to identify
specific cost item in terms of determining ways of how they can
be managed. The main objective of this work is to elaborate
a particular study with a
draft application of the ABC method
encompassing a description
of procedure steps, along with relevant quantifications, as well as summarising the results obtained.
Keywords: railway enterprise, cost management, indirect transport cost, activity-based costing approach
1. INTRODUCTION
Cost calculation (or costing) approaches refer
to various ways for quantification of cost entries and their assigning to
calculation unit. Identifying an adequate technique depends on the nature of
the performances and conditions in which the processes are carried out. The way
of costing depends on the subject of calculation, required cost structure,
method of cost's assignment as well as its conversion to a cost calculation
unit [10, 13, 24].
Calculation by dividing and calculation by
surcharge are the most commonly used costing approaches [6]. These techniques
are applied mostly in enterprises where costs for a certain time period or
certain performance volume (such as production or services provided) are
related only to one type of performance or, in the same production process, a
small number of species of homogenous products varying in their weight, labour content, or quality [23].
Costs of transport enterprises are characterised by significant differentiation of products,
wherein it is necessary to provide a large number of service activities. In
such a scenario, it is suitable to apply the activity-based costing (ABC) approach, which is primarily focused on indirect transport costs
[16, 29].
As aforementioned, the ABC technique is one of
the most advanced costing approaches, which removes the deficiencies of the
traditional calculation system. This approach was founded by R. Cooper, R. S.
Kaplan and H. T. Johnson [8] and its purpose is to assign corporate indirect
costs to relevant cost items having the crucial significance in expending these
costs [4].
In general, it is possible to perceive a
company (in our case, railway transport enterprise) as a system of processes,
activities and operations, which are imperative to be able to carry out a
company’s mission [5]. The ABC approach tries to structurally specify all
the processes, activities and operations being executed in an enterprise with
their mutual relationships [19, 21]. Activities carried out in an
enterprise can be regarded as partial processes and procedures necessary to be
performed to provide services [18]. Grouping operations, which are related to
each other and can be assigned to a relevant cost item, form an essential
activity of an enterprise [27].
2. DATA, METHODS AND LITERATURE REVIEW
A detailed insight into an
enterprise can be achieved by the decomposition of basic processes [7]. The
prime aim is to get on a level of activities, which are considered the centre of attention when managing costs using the ABC
approach. For completeness, it is necessary to mention that a level of
activities is not the lowest level of decomposition, given that the activities
per se can be further analysed and diversified in
terms of operations being performed in individual examined activities [2, 12].
Furthermore, as far as a hierarchy
of this approach is concerned, processes being a set of interdependent
activities stand on the highest level. These processes support the key
functions of an enterprise and have identifiable outputs. On the level below,
activities, which identify what people conduct in enterprises in detail, are
included. When applying the ABC technique, the manager's major object of
interest is represented by activities responsible for generating corporate
costs. From the long-term standpoint, it can be stated that if a company does
not perform, no costs will be generated [17]. Moreover, vice versa, executing
activities causes a generation of fixed and variable costs for an enterprise
and that is why it is inevitable to deal with a relationship among costs and
activities [12, 28].
The principle of the ABC approach consists of several steps as follows.
For the first step, direct costs are assigned to relevant outputs. In the
second step, indirect (overhead) costs are assigned to appropriate activities.
This process represents a significant change in comparison with other
techniques dealing with cost calculation. While at the third step, activities
are assigned to individual cost items depending on the extent of demand for
consumption of activities needed for their provision; that is, by the intensity
of activities consumption. The entire procedure of this approach is specified
in detail, for example, in the paper [1] written by Bokor
(2012) and in the work [11] compiled by Foltinova et
al. (2007).
Unlike the traditional costing approach “everything to everyone
with the same piece”, thus, a selective application of indirect costs
based on the actual causalities occurs, that is, “to everyone only what
he consumes, or what is consumed because of him”, which is stated for
example in the publication [22].
The ABC technique focuses on indirect (overhead) costs and converts them
to direct costs. Specifically, indirect costs are assigned to the corresponding
performance type instead of being arbitrarily divided into all performance
types. In this case, it is possible to find out actual costs of performance
(operation) with greater accuracy compared to the traditional cost system. The
ABC approach is a suitable tool to be applied in the following scenarios [4, 9,
11]:
·
corporate indirect costs are high,
·
products or performances are
differentiated,
·
costs related to malfunctions and
defects are high,
·
strong competition on the market,
·
production and services are
automated,
·
share of service activities being provided increases (indirect cost
increases).
More so, the ABC approach is a powerful technique to improve product,
service, process and market strategies in a variety of companies. Xu et al.
stated that this method allows the transport enterprise's management to
understand the cause of cost generation and how it can be managed [30]. The
crucial objective of their research was to examine transport enterprises in
terms of addressing specific issues such as information asymmetry in transport
processes when implementing a technique of linear programming of time-driven
activity-based costing model. According to this approach, an enterprise can
gain insight into the effective conversion of corporate resources to
value-added, as presented by Yang et al. in the literature [31]. They applied
selected methods of multi-criteria decision-making (when using ABC) to evaluate
the sustainable development of transport infrastructure projects while
considering a wide array of social, financial, traffic and environmental
criteria to deal with the strategic decision-making process under resource
constraints as well as the carbon footprint aspect. A similar subject is
discussed in the manuscript [25], elaborated by Rouse and Putterill,
wherein various factors of the cost driver framework and application to
planning and control accountability are analysed, and
dynamic relationships among activity-based costing and activity activity-based
management are characterised with an emphasis on the
nature and extent of an effect of environmental cost drivers on costs regarding
transport infrastructure maintenance.
Unambiguously, a railway transport enterprise can identify those
activities which consume a disproportionately huge amount of costs and bring
small value-added, and thus, these activities can be excluded or at least
limited, which is outlined for instance in the literature sources [3, 6, 26].
As previously mentioned, the basic principle of the ABC approach is to
assign consumed resources to relevant activities (operations). Subsequently,
those activities can be grouped into activity sets which are then assigned to
cost items [14]. For clarity, this stage of application of the ABC technique is
summarised in the following table (Table 1):
Tab.1
The assignment of consumed resources to cost items
|
Consumed
resources |
Operations
(activities) |
Set
of activity |
Cost
item |
|
Traction
energy |
Traction
energy consumption |
Transport |
The
number of transport performance operations |
|
Railway
infrastructure charge |
Railway
infrastructure use |
The
number of transport performance operations |
|
|
Engine-driver
labour cost |
Transport
performance execution |
The
number of transport performance operations |
|
|
Administrative-staff
labour cost |
Administrative
activity |
Administrative |
The
number of administrative operations |
|
Electric
power consumption |
Electronic
registry entry |
The
number of operations carried out electronically |
Source:
authors
The next step is
to create the calculation formula. To this end, the following formula for three
types of performance; I, II, and III (representing different railway transport
sections with various kinds of cargo being carried) even with input data values
is compiled (Table 2).
Tab. 2
Calculation
formula for performance types “I”, “II” and
“III”
|
Calculation formula element |
Performance
type |
|||
|
I |
II |
III |
||
|
Traction
energy |
14,300
€ |
15,200 € |
16,020
€ |
|
|
Railway
infrastructure charge |
6,100
€ |
7,050
€ |
8,500
€ |
|
|
Engine-driver
labour cost |
800
€ |
900
€ |
1,000
€ |
|
|
Administrative
overhead cost |
Administrative-staff
labour cost |
13,000
€ |
||
|
Electric
power consumption |
15,000
€ |
|||
Source: authors according to the [11]
Input data, namely, values of individual cost
items for performance types I, II, and III needed for costing is summarised in the following table (Table 3):
Tab. 3
Values of
cost items for performance types “I”, “II” and
“III”
|
Cost item |
Performance type |
In total |
||
|
I |
II |
III |
||
|
The number of transport performance operations |
200 € |
500 € |
80 € |
- |
|
The number of administrative operations |
8 € |
6 € |
14 € |
28 € |
|
The number of operations carried out electronically |
2 € |
6 € |
3 € |
3,640 € |
Source: authors
3. FINDINGS AND
DISCUSSION
3.1. Quantification of
direct costs by the ABC approach
Traction energy consumption per one calculation unit is quantified as a
share of direct material value corresponding to the performance type I and the
number of transport performance operations for I (Equation 1).
Accordingly, as previously mentioned, direct cost per one calculation
unit for performance types II, and III is calculated analogously (Equations 2
and 3):
(1)
(2)
(3)
Charge for the use of railway infrastructure per one calculation unit is
determined likewise as traction energy consumption per one calculation unit
– share of a railway infrastructure charge for certain performance type
and the number of executed performance operations (Equations 4, 5 and 6).
(4)
(5)
(6)
By analogy, as for engine-driver labour cost,
its calculation is as follows (Equations 7-9):
(7)
(8)
(9)
3.2. Calculation of indirect costs by the ABC approach
Administrative overhead cost is referred to as indirect cost. The
fundamental idea regarding administrative overhead costing is to specify a
cause of occurrence of individual cost items [11].
Assignment of cause of occurrence to relevant cost item is conducted in
Table 4.
Tab. 4
Costing – administrative overhead cost
|
Cost item |
Cause of occurrence |
|
Administrative-staff labour
cost |
The number of administrative operations
(I+II+III) |
|
Electric power consumption |
The number of operations carried out
electronically (I+II+III) |
Source:
authors
First, to quantify administrative-staff labour
cost per one calculation unit, it is necessary to split these cost items into
individual administrative activities (for each type of performance in total)
(Equation 10):
(10)
Subsequently, the outcome is multiplied by the number of administrative
operations for the given type of performance and is divided by the number of
executed performance operations of a certain type. Specific calculations are
listed as follows (Equations 11, 12 and 13).
(11)
(12)
(13)
To quantify the cost item called electric power (or energy) consumption
per one calculation unit, its value is divided by the number of administrative
operations carried out electronically (for each type of performance in total),
then, determined for each type of performance (Equations 14, 15, 16 and 17):
(14)
(15)
(16)
(17)
A summary of the ABC procedure when converting to one calculation unit
for each type of performance is shown in Table 5.
Tab. 5
The resulting table of quantified cost items for each
performance type
|
Cost item |
Performance type |
||
|
I |
II |
III |
|
|
Traction
energy |
71.50
€ |
30.40
€ |
200.25
€ |
|
Railway
infrastructure charge |
30.50
€ |
14.10
€ |
106.25
€ |
|
Engine-driver
labour cost |
4.00
€ |
1.80
€ |
12.50 € |
|
Administrative-staff
labour cost |
18.57
€ |
5.57
€ |
81.25
€ |
|
Electric
power consumption |
8.24
€ |
24.73
€ |
12.36
€ |
|
In total |
156.88
€ |
84.85
€ |
438.39
€ |
Source:
authors
Following the findings, transport performance type III represents the
most costly performance type (438.39 €), followed by performance I
(156.88 €), and the lowest value is assigned to performance type II
(84.85 €).
The outcomes of this research confirm that the ABC approach can be used
for indirect cost management in a railway transport enterprise, even with more
precise results compared to traditional costing approaches. Nonetheless, using
this technique requires a comprehensive and thorough analysis of operations,
processes and activities as performed in the analysed
enterprise [15].
4. CONCLUSION
The ABC approach is one of the most advanced costing techniques, which
removes the inaccuracies of the traditional cost calculation system. Unlike
other costing methods, significant change lies, in particular, in the way of
assignment of indirect (overhead) costs to activities (or operations)
based on actual casual links, and then, assignment of activities to individual
cost items by the intensity of their consumption.
Since the ABC technique belongs to powerful costing approaches, which
eliminate error rate and other deficiencies of traditional cost calculation
methods, a railway transport enterprise can identify activities and operations
which consume a disproportionately huge amount of costs and do not bring
value-added by applying it, thus, these operations can be excluded or at least
confined. This is why the ABC approach can be regarded as a very strong
mechanism to improve the quality of services, processes and market strategies
of companies being investigated. Furthermore, this technique allows corporate
management to understand where the cause of cost generation is and how it can
be managed. By implementing this approach, an enterprise can better understand
the effective conversion of its resources on value-added.
However, the implementation of the ABC tool in our research indicates
multiple subjects that might require streamlining and recommendations for
research experiments in the future. For instance, it would be reasonable to
decompose individual set of activities according to their function or transport
territory (in our scenario, regional versus international territory), or even
to differentiate each transport operation individually. Indirect cost analysis
may be improved as well, while conducting a thorough analysis of a function,
structure and purpose of corporate costing procedure and system, thereby
influencing indirect cost assignment to the cost item.
Acknowledgement
This
work was supported through solving the research project entitled
“Autonomous mobility in the context of regional development LTC19009” of the INTER-EXCELLENCE programme,
the VES 19 INTER-COST subprogram.
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Received 27.03.2021; accepted in revised form 30.05.2021
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