The purpose of this paper is to present the importance of Activity-Based Costing method (ABC) in Romania's business environment changes. We analyzed the possibilities to adapt to a modern management accounting method and managerial accounting organization assumptions of the ABC (Activity-Based Costing) method in Romanian enterprises. The article ends with the authors' conclusions about the changes of the ABC method in the Romanian’s business environment.Activity-Based Costing; management accounting; entity; implementation; business environment

Barbu, Cristian Marian

Cokins, Gary

Căpuşneanu, Sorinel/I

English

Research Papers in Economics

  1 
THE IMPORTANCE OF ACTIVITY-BASED COSTING METHOD (ABC) 
IN ROMANIA'S BUSINESS ENVIRONMENT CHANGES 
 
Sorinel Căpuşneanu 
Artifex University, Bucharest, Romania 
Gary Cokins 
SAS Institute Inc., Cary, North Carolina, USA 
Cristian-Marian Barbu 
Artifex University, Bucharest, Romania 
 
 
  Abstract 
The purpose of this paper is to present the importance of Activity-Based Costing method 
(ABC) in Romania's business environment changes. We analyzed the possibilities to adapt to 
a  modern  management  accounting  method  and  managerial  accounting  organization 
assumptions  of  the  ABC  (Activity-Based  Costing)  method  in  Romanian  enterprises.  The 
article  ends  with  the  authors'  conclusions  about  the  changes  of  the  ABC  method  in  the 
Romanian’s business environment. 
 
  Key words: Activity-Based Costing, management accounting, entity, implementation, 
business environment.  
  JEL Code: M41, M21. 
 
 
Introduction 
  The article refers to  the importance of changes brought  by the ABC method in  the 
Romanian business environment. The purpose of this article is to highlight the benefits of the 
ABC method. Starting from this, the authors intended to meet the information needs and 
analysis needs of traditional management accounting methods applied in Romania in order to 
achieve  higher  performance  in  enterprises.  Unlike  studies  performed  so  far,  the  authors 
attempt to  examine the assumptions  of organizing the managerial  accounting through the 
ABC method. 
The analysis is focused on a survey done in enterprises applying the ABC method in 
Romania and the conclusions of the USA specialists, thus demonstrating the possibility to 
adapt this method to the data requirements of enterprise managers and the impact they have 
upon the Romanian business environment. The results of future investigations will contribute 
to  enlarging  the  area  of  analysis  and  research  of  the  actual  problems  that  the  business 
environment in Romania faces; we are hereby only trying to pave the way for better publicity 
and  to  create  a  flexible  framework  for  implementing  and  adapting  to  new  requirements 
imposed by the international business environment. 
 
The  impact  of  traditional  management  accounting  methods  on  the  business 
environment in Romania 
Permanent  increase  of  production  quality  and  reduction  of  cost/completion  time  of 
products are the two essential objectives of entities in today's business environment required 
to handle international and even domestic competition. Achieving these objectives requires, 
primarily, adjustment and improvement of production processes and using new methods of 
organizing production, to cover customers’ requirements, while avoiding the formation of 
stocks.   2 
Making the first essential objective of an entity in the current business environment 
requires  continuous  reduction  and  strict  emphasis  losses  due  to  obtaining  final  scrap  and 
waste generated by reprocessing them, so that they are removed from the obtained finished 
product costs, the corresponding terms quality. It is also necessary emphasizing and tracking 
the quality of costs, respective those generated by activities aimed at ensuring growth and 
quality of products. 
For  over  75  years,  most  entities  in  Romania  have  used  and  still  use  standard  cost 
systems  to  determine  their  financial  situations,  but  also  for  management  purposes.  The 
standard  cost  system  has  some  advantages  to  the  purposes  of  financial  statements  (e.g., 
simplicity and consistency). Traditional cost accounting systems focus, in particular, on issues 
related  to  determining  pre-calculated  or  actual  costs  related  to  stages  of  production  and 
delivery and do not follow strictly the total costs of products on their stage of development. In 
this way may be mentioned: the ordering method, phased method, the global method and 
other methods of cost calculation, characterized by rigid mass production and manufacturing 
technologies. Traditional cost system worked well until the business environment has changed. 
About 20 years ago, most manufacturing companies have started to adopt changes in their 
operations, which were not in accordance with traditional cost accounting methods. 
 
The  analysis  of  adaptation  possibilities  to  a  modern  management  accounting 
method in Romania 
The cost system plays an important role in the making decision process by managers in 
any entity. It is therefore important to consider several factors before choosing or changing 
the management accounting and cost calculation method of a specific entity. It is therefore 
important to consider several factors before choosing or changing the method of management 
accounting  and  costing  of  a  specific  entity.  Currently,  globally  some  entities  thrive  by 
implementing strategies that create competitive advantages. The Romanian entities do not 
seem to keep step with the growing number of modern management accounting and cost 
calculation methods, appeared, presented and discussed after 1990. 
The necessity for exploring possibilities of adapting the Activity-Base Costing (ABC) 
method into the Romanian’s entities is based on four main causes: failure to deepen modern 
cost accounting systems, deficiencies of classical or contemporary cost accounting systems, 
diversification of information requests for entities’ management and producing changes in the 
market strategic position of entities. 
The first cause is due to poor information in management accounting. The fear of trying 
new methods still exists in Romania, and this makes us think that we really still do not want 
to practice performant methods to favor entities in any sector or is just our supposition? This 
aspect can be resolved relatively easily by organizing  and participating in the practice of 
information  courses  at  institutions  or  economic  agents  by  specialists  in  the  management 
accounting field, through publication of specialized books, materials via internet or e-book, 
through conferences and scientific symposia.   
The  second  cause  refers  to  the  indirect  costs  that  are  distributed  over  the  products 
through non-specific reference sizes relative to their degree of incurring. In many entities, as 
well as in other branches of the economy, the indirect cost allocation process is performed by 
using supplementation (classical form). This allocation of indirect costs does not comply with 
their  causation  principles  and  may  lead  to  erroneous  policy  decisions,  due  to  the  use  of 
arbitrary allocation keys.  
 The third cause of adaptation of the ABC method, such as, diversifying demand for 
management  information  covers  all  value  creating  activities  (production  sectors,  support 
activities etc.). Based on this aspect, the decisions aimed at inter alia: providing complex 
information  regarding  the  costs  of  all  calculation  objects,  the  determination  of  costs  for   3 
specific orders, the determination of optimal number of product variants, and the reduction in 
size batches, ensuring economic efficiency control in the indirect costs sectors. 
The fourth cause of adaptation of the ABC method aimed at the company's strategic 
position. With the development of IT (information technology), the company environment has 
changed radically and its strategic position. After the introduction and use of CIM systems 
(Computer  Integrated  Manufacturing),  important  changes  have  occurred  in  all  areas  and 
sectors of an entity. Due to fierce market competition, there is a tendency of entities for 
reduction of costs, improvement of products quality and development of new products. All 
this results in further shortening the life span of products. 
Entities  from  all  Romanian  economic  sectors  and  elsewhere,  should  try  to  satisfy 
customers requests who are growing and diversifying, because many markets have become 
demand and control markets, and thus  will lead to  a broadening  exponential  models  and 
assortments of products and/or offered by both sides.  
 
The premises of organizing management accounting through (ABC Activity-Based 
Costing) method in the Romanian entities 
In order to guarantee efficient management accounting organization through the ABC 
method by Romanian entities it had considering the following premises: 
Adopting the Activity-Based Costing (ABC) method. In choosing of the ABC method 
were considered  the  organizing factors of management accounting, such as: entity’s size, 
technology usage, number of manufactured products, the significance of indirect costs and 
competition.  Implementation of the ABC method in an entity is done in accordance with 
certain requirements related to the above mentioned factors and requires: 
- Establishing processes, activities and operations, according to the specific transversal 
organization of the entity. 
- Establishing of cost drivers related to cost calculation objects, specific of entity to 
which it belongs. With ABC cost drivers (1) are units that are used to causally assign and 
trace indirect and shared resource expenses related to activities based on the consumption that 
cost objects place demands on resources.  
- Adoption and improvement documents system according to the specific of the ABC 
method. Within that will include registration documents that concern the production, costs 
and  deviations  from  pre-calculated  costs,  analysis  and  monitoring  and  measuring 
performances instruments. 
Establishing the time period for carrying out economic and financial operations and 
costs determination. For not disrupting the costs during the exercise is preserved in the chosen 
reporting period of pre-determined or post-calculation. Thus, according to the specific entity 
branch,  the  chosen  reporting  period  relates  to  the  month  or  semester,  but  with  some 
exceptions,  and  annually.  In  the  case  of  regular  reports  (monthly),  the  management  and 
operational services of the entity must take into consideration some aspects that concern: 
-  Technical  and  personnel  resources  allocated  to  achieve  these  activities.  If  we  are 
considering  the  specifics  of  the  ABC  method,  this  is  not  an  impediment  to  the  entity's 
functional services and human resources are clearly defined; 
- Determination the correctness of production and obtained costs production. The ABC 
method is noted in particular through this aspect of the accuracy of determining costs; 
- Organization of operatively and post-operatively control. The possibilities offered by 
the ABC method in this way come to supplement the previous mentioned issues;  
- Informing the various categories of users of the entity. The ABC method offers a huge 
amount of information necessary for all categories of users (management, operational services, 
other services) being used for analysis and reporting.   4 
Choosing the responsible staff for execution of management accounting specific works. 
In the case of the ABC method, each functional service or department has its representative. 
Development works of pre-determination and post-calculation, is realizing at the functional 
level and thus the responsibility for establishing and assuming responsibility in this case is 
just for the department. All budgets are then collected by the entity's accounting department 
and subject to approval by management. 
The time planning of  specific management  accounting works. This  aspect is  closely 
linked to previous and the visibility how the degree of fulfillment of the undertaken tasks by 
departments  is  done  using  graphs  or  tabular  statements,  they  may  take  different  forms, 
depending on the entity’s requirements. 
Choosing the processing way of obtained management accounting information. Because 
of the ABC method requires a large amount of data entry and processing, their processing is 
necessary with the help of powerful software that runs on platforms equipped with modern 
performant  computers.  Here comes the advantage of data processing network, intranet  or 
internet. 
 
Activity-Based Costing (ABC) method and the changes in the Romanian business 
environment 
ABC  is  a  cost  calculation  technique  that  allows  an  entity  to  determine  actual  costs 
associated with each product manufactured, work executed or service provided. ABC method 
delineates the activities of entities in: value activities (2) and non-value activities (3). ABC 
method helps an entity in finding opportunities to streamline or reduce or eliminate costs 
throughout the activity, where it is found that it provides no value. 
The ABC method allows managers to see if resources are used efficiently and also the 
activities that contribute to creating value product fabricated, work done or service rendered. 
One of the most important contributions of the ABC method is the fact that remedies the 
approaches  weaknesses  of  traditional  costs  calculation  production.  Also,  ABC  method 
presents other advantages such as: 
- Obtaining more real production costs than those obtained for traditional management 
accounting methods; 
- Focuses on the real nature of the behavior of costs, thus helping to identify non-value 
activities;  
- Uses multiple cost drivers that highlight the direct cause-effect relationship between 
the allocated costs and allocation bases used; 
- Provides flexibility in allocating costs on manufactured products, work performed or 
services rendered on different strategic segments of customers; 
- The type used to aggregate support activities by the main activities; 
-  Uses  dashboards  compiled  on  the  basis  of  pilot  indicators  carefully  selected,  thus 
providing reliable long-term strategic decisions relevant on long-term; 
-  Offers  the  possibility  of  adapting  the  Romanian  General  Accounting  Plan  to  the 
specificity of the ABC method. 
Data from our studies reveal that Activity-Based Costing method is not indeed fully 
appreciated by the most companies in Romania. Despite the inherent strengths of the ABC 
method, very few companies have chosen to adopt it in their business operations. Our studies 
have  found  lack  of  knowledge  of  many  employees  from  different  companies  questioned 
regarding the activity-based costing engineering (technique). We can enumerate some of the 
reasons for low adoption of the ABC method in Romania: the lack of basic knowledge of 
employees  about  the  specifics  of  the  ABC  method,  the  resistance  of  employees,  key 
organizational changes to implement the ABC method.   5 
Some  respondents  identified  as  the  source  of  the  failure  of  the  ABC  method,  the 
complexity of the steps which it involves, as the ABC method requires detailed records of 
costs associated with the production of goods and services compared to traditional methods. 
Other respondents believe that the ABC method will be adopted more than those companies 
in which they were covered well by their accountants. 
Companies from Romania, who initially adopted the ABC method and finally gave it up 
and  those  companies  that  refuse  to  adopt  its  techniques  only  see  the  high  cost  of  its 
implementation. General or long-term success of an ABC system is not only the achievement 
of architectural elegance and used software, but proper implementation and maintenance of its 
proper operation. It is very important that the Romanian companies to review their current 
cost systems in use to ensure that they adequately respond to various changes in competition 
and technological innovations.  
 
Conclusions 
From the above, it follows that the emergence of new production technologies and new 
methods  of  organization  and  management  requires  constant  reconsideration  of  existing 
information systems, within which managerial accounting occupies an important place. In this 
context,  Activity-Based  Costing  can  be  a  way  to  improve  the  profitability  and  cost 
management, more rigorous determination of the cost of their products in every stage of their 
development. In the last decade, many entities have tried to implement the ABC system, not 
only in Romania but also in many other countries. There is an evidence of enlargement, but 
many of these entities are faced with problems of implementation of the ABC method, and in 
extreme registers not successful with this method. Most of the entities that adopt ABC method 
are  treating  only  as  a  technical  innovation,  and  not  as  an  administrative  innovation.  In 
adopting the ABC system, are very important and valuable treatment of the technical aspects 
of design, so as to ensure that proper cost information can be provided to support management 
decisions and actions of an entity. 
 
References 
(1) Cokins, G., Căpuşneanu, S. “Cost drivers. Evolution and benefits”, Theoretical and Applied 
Economics, no. 8/2010, p. 9. 
(2) Those tasks assumed by the entity for which customers are willing to pay for this service. 
(3) Those activities that create waste, resulting in  delay or add costs to products for which 
customers are willing to pay. 
 
Bibliography 
1. Briciu S., Căpuşneanu S., Rof L.M., Topor D. (2010), Accounting and management control. 
Performance assessment tools, Aeternitas Publishing House, Alba-Iulia. 
2. Căpuşneanu S. (2009), Elements of cost management, Economic Publishing House, Bucharest. 
3. Cokins G., (2001), Activity-Based Cost Management: An Executive’s Guide, Wiley. 

The importance of activity-based costing method (ABC) In Romania's business environment changes

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