Evaluation of Cost Centers Operations Using ABC Method
Grigore, Nicolae and Giju in an article evaluation of cost centers operations using ABC methodcomment that organizations often thrive based on their skill of managing costs which are replicated on the level efficiency they achieve. They add that in today’s world, emphasis on efficiency is at the heart of almost all aspects of organizations, but unfortunately, there are continued changes affecting how organizations are to manage efficiency considering they are still using the old tactics of managing their operations such as costs. They suggest that for an organization to measure up to the current trends and changes, they should adopt new methods that are flexible and would assure proper management of their resources. This outline will give a summary their article, reviewing their suggestion on the most appropriate method that would suit organizations (56).
Their article begins by analyzing the form of costs centers that would form an organized whole through creation of a high level of autonomy in order to optimize resources. They define these to be responsibility centers. The two subdivisions of the responsibility centers are partial responsibility centers which further branches to cost centers and income centers. There is also the global responsibility centers which branches to profit centers and investment centers (57). The three are keen to note other views made by other authors regarding these cost centers noting their advantages and disadvantages.
Under advantages they praise these decentralized methods in tracking of costs, unraveling of hidden costs, identification of variances and measuring of overall performances. They also add limitations noting that through these methods team leaders may not have the confidence in identifying fairness of the system, the method may be demoralizing in assessing performance, while they add that success of the method may depend on the financial strength of an organization. Owing to these limitations, they recommend the ABC method as pointed out by Peter Drucker while he was working at General Electric.
According to Grigore, Nicolae and Giju (59), ABC is an analytical accounting system which revolves around features such as duration, Permanent fitting, multiple evolutionary states, continuous management dialogue and permanent fitting. The method follows specific steps which are;
- Identification of the main activities of a company; Identification uses Harvat/Nayer model which has four phases; formulation of hypothesis on processes, analysis of partial processes, allocation of capacities and costs and concentration of partial processes. The method advises that calculation arises by establishment of four levels of activities (Unit, Lot, Product and enterprise). The article notes that these can further be subdivided depending specific cost centers to be addressed.
- Secondly, they urge identification of cost inducers, or factors that determine the cost of a company. These inducers meet the following conditions ease of identification, use and accessibility, cause resource consumption variation and they do not influence staff behavior centers
- Thirdly, ABC encourages collection of the cost of each activity and relating them to the traditional costs centers. This step allows for comprehension of total volume of inducers and cost centers aggregation.