Chapter 1: The ABC Method

The method is based on the notion of customer needs satisfaction: the company is no longer
a simple production tool, but becomes an organization aiming to satisfy its customers.
We will therefore integrate all activities perceived by the client and participant in their mind.
satisfaction of his need.
I. Why the ABC method?
Definitions
The ABC method (Activity Based Costing) takes up the
methods of analysis centers, but chooses units of measurement of different natures,
depending on the type of activity.
II. How to implement the ABC method:
 To summarize:
Initially, activities are defined within the company to which we allocate the
direct and indirect charges.
Secondly, we look for cost drivers, cost objects, for example
the clients, the products, etc...
Finally, we can calculate the actual cost of a product by summing all the indirect costs it has.
generated.
 Series No. 1: The ABC Method

Case No. 1: LESSIVA Case

The company 'LESSIVA' specializes in the manufacture of two categories of detergents.
for cars:
- LESSIVA 1 for metallic paint (L1)
- LESSIVA 2 for normal paint (L2).
Products L1 and L2 are manufactured in two workshops (Launch and packaging) at
from the same raw material (M1).
For the month of May 2016, we are providing you with the following information:
Purchases of material M1: 110 tons at 6 dirhams/kg (1 ton = 1000 kg)
- Consommation de la matière M1 : 110 tonnes (dont 66%pour L1 et 34% pour L2)
Production: 9,000 units of L1 and 1,500 units of L2.
Sales : 9,000 units of L1 at 94 dirhams each and
1,500 units of L2 at 420 dh per unit.
MOD :
- Launch Workshop: 9,000 hours at 15 dirhams per hour for L1 and 7,250 hours at 15 dirhams
the time for L2.
Packaging workshop: 10,000 hours at 12 dirhams per hour for L1 and 7,500 hours at
12 euros per hour for L2.

Table of distribution of indirect costs:

Elements Workshop launch Packaging workshop Distribution
Total RS 130,000 87,500 42,000
Nature UO H MOD H MOD Quantity sold
Number of work units 16,250 17,500 10,500
UO costs 8 5 4

NB: No intermediate storage between the workshops

1erapart: method of analysis centers:

Work to do:
Calculate using the method of analysis centers:
The production cost of product L1 and L2
2) The cost price per product,
3) The total analytical result and by product.

2ème part: ABC Method:

The company's results continue to decline and management is increasingly questioning
questions about the accuracy of its cost calculation system. She plans to test
the use of ABC-type management accounting
The traditional management accounting system used in the company
distributes indirect manufacturing costs based on direct labor hours
(MOD). The company decides to allocate indirect manufacturing costs based on 7
activities.
 For the month of May 2016, the distribution of these charges across activities is as follows
next:
Volume
Centers Cost Cost (in Cost per
Activity Inductor of the
of analysis total DH) inductor
inductors
Plan the Name of
90000 20 4500
Workshop orders orders
130000
launch Launch it Name of
40000 5 8000
production launches
Packaging Manufactured lot 56000 8 7000
Workshop Control the
87500 Controlled product 10500 10500 1
packaging quality
Maintain Machine hours 21000 700 30
Shipping customer orders 22500 30 750
Distribution 42000 References
Promotion 19500 15 1300
products
Total 259500 - 259500 - -

The distribution of the inductors between the two products is as follows:

Inductor volume
Activity Inductor
Model L1 Model L2 Total
Name of
Plan the orders 4 16 20
orders
Launch production Number of launches 2 3 5
Packaging Lot manufactured 2 6 8
Control the quality Controlled product 9000 1500 10500
Maintain Machine hours 100 600 700
Shipping customer orders 3 27 30
Promotion Product references 5 10 15

Work to do:
Calculate by the ABC method:
The production cost of product L1 and L2
2) The cost price per product,
3) The total analytical result and by product.
4) What to conclude?

Case No. 2: TALBORJT Case

The company TALBORJT is specialized in catering for businesses. The meals are
prepared every day for lunch in the company's premises, and delivered to clients on trays
individuals in plastic in vans, specially designed for this purpose. They are offered to
clients two types of breakfasts:
- The 'Must' breakfast, intended for executives, is charged at 45DH excluding tax for the meals.

- The 'Standard' breakfast, intended for other categories of staff, charged at 35 DH.

tax-exempt meals.

The company is organized into three centers of responsibility:

The shopping center, which takes care of the general management and all aspects
sales representatives, including negotiation with clients and delivery of meals.
The administrative center, responsible for work related to payroll, accounting, and
other administrative tasks, including the logical tracking of operations.
The catering center, which is responsible for the preparation of meals for the county and under the

responsibility of the shopping center. The company has an accounting system allowing it to
monthly follow-up of costs and results.

For the month of 'March 2018', the recorded charges in accounting were as follows (DH):
Purchase of plastic trays 25,000 units for 50,000 DH
Food materials purchases 546 900 DH
External charges 370 40 DH
Personal expenses 321,000 DH
Amortizations 54 000 DH
The food ingredients incorporated into each prepared meal are estimated at 28.
18 DH for the meal must, and 18 DH for the standard meal. The supply costs.
are negligible, given that the food materials are delivered every morning
by the suppliers to the company's premises depending on the orders placed the day before.
The other charges than the materials are allocated to the services as follows (in DH):

CHARGES/SERVICE ADMINISTRATION RESTORATION COMMERCIAL TOTAL

Staff costs 21 000 100,000 200,000 321,000
Depreciation 9000 25,000 20,000 54,000
External charges 10,000 12 040 15,000 37,040
TOTAL 40,000 137040 235,000 412 040

The stocks stand out as follows:

Initial stock
Plastic trays 5,000 units for 10,000 dirhams
Other (foodstuffs and meals Négligéablé : matiéré périssablé offérté aux
prepared) necessary.
The plastic trays, including the lids, in which the meals are delivered are
considered as unpackaged losses included in the cost of meals.

During the month of March 2018, the registered activity elements were as follows:

Meals must Standard meal

Number of contracts processed 7 10
Number of meals prepared 13,500 14,700
Number of trucks delivered 140 152
Number of working hours at the center 750 600
restoration
The company currently has a very simplified analytical accounting in sections.
homogeneous, allowing him to track costs centrally and calculate costs of
It comes back. There are three sections corresponding to the three centers of responsibilities that
accounted for the enterprise. The sections used in this system are the following:

Sections Unit of work Distribution method

Administration flat-rate 50% to the commercial section
50% off at the dining section
Restoration Happy worker Proportionally to the working hours
worker
Commercial Sold meals Proportionally to the number of meals

Question:
1-Present the table of the distribution of indirect charges
Determine the cost of return and the analytical result for each product.

Continuation of the application:

The management control of the company thinks that the costs and results obtained are thus not
not relevant for decision-making at the management. It proposed to reconsider the
model and change calculation methods of costs by adopting the ABC method. At this
Regarding this, he conducted an analysis of the company's activities which led him to retain the ...
following elements:
For the center restoration, it seemed that it is difficult to obtain a
décomptéfiablé dés héurés dé travail passéés sur chaqué produit, én raison du fait qué
The workers are monthly paid, it is therefore proposed to retain for this activity the 'number'
prepared meals" as a cost inducer, instead of hourly worker.
The analysis of the work carried out by the shopping center allowed for the emergence of
two well-distinguished activities:
-The negotiation activity, for which he proposed to retain the name of
"negotiated contracts" as an inducer of costs, instead of sales in value.
-The delivery activity, for which it is proposed to retain thenumber of trucks
"loaded vans", full or not, as cost inductors, instead of sales in
number of meals. A delivery truck can carry up to 100 delivered meals.
on individual plateaus
For the administrative service, it seemed that one could distinguish three
activités:
Administrative and accounting follow-up of contract execution.
Administrative and accounting monitoring of restaurant supplies.
Administrative and accounting follow-up of deliveries.

Based on this analysis, the management control has performed the following ventilation,
linking activities to existing centers:
Activities/centers administration restoration commercial total
Meal preparation 18,000 DH 137 040 DH 0 155,040 DH
Negotiation 9 000 DH 0 140 250 DH 149,250 DH
Delivery 13,000 dirhams 0 94,750 DH 107,750 MAD
Total 40 000 DH 137,040 DH 235,000 MAD 410 040 DH

Questions (continued):
 Determine in advance the cost of inductors (using the table here)
below).
Activities Total cost Inductors Name Cost per
of the inductor inductor
Meal preparation
Negotiation
Delivery
Total

4-Calculate the cost of the return and the analytical result based on this analysis.

5-Compare the results obtained with those obtained previously by the

method of decentralized analysis.
 Case No. 3: LINA Case
The industrial company 'LINA' is responsible for assembling products P1 and P2 from 5 components. She
provides information related to its activity for the month of March 2018 and asks you to calculate its
result according to the ABC method.

The indirect production costs are distributed in the table below:

Table 1: Distribution table of indirect costs among homogeneous sections

Sections Administration Methods Supply Workshop
Total indirect costs 5.781.000 7,512,000 4,320,000 1.496.000
The supply is done just in time and the finished products are transferred to the sales department that handles them.
is responsible.
Table 2: Activities of the analytical sections
Sections Administration Methods Supply Workshop
Accounting - Management of the Management of Montage
General Administration production goods
Activities Scheduling Control at reception
Modifications
technique

Table 3: Distribution of indirect costs among activities

Sections Administration Methods Supply Workshop
Activities
Accounting 1,701,000
General Administration 4,080,000
Management of production 2,500,000
Scheduling 2,128,000
Modification technique 2.884.000
Market Management 1,440,000
Reception control 2.880.000
Montage 1,496,000
Total cost 5.781.000 7.512.000 4,320,000 1,496,000
Table 4: Activity Cost Drivers
Activities Inductors Volume of inductors
P1 P2 Total
Accounting Invoice number 120 90 210
General Administration Quantity sold 100,000 20,000 120,000
Production management Reference number 50 30 80
Scheduling Launch name 120 160 280
Modification technique Number of modifications 80 23 103
Market management Number of suppliers 6 2 8
Control at reception Control number 8 10 18
Montage Number of manufactured series 12 10 22
Table 5: Other information
Elements P1 P2
Unit direct cost 7 dirhams 11 DH
Quantity produced and sold 100,000 20,000
Unit selling price 150 DH 250 DH

T.A.F :
1) Calculate the unit cost of the inductors.
Calculate the cost price and the result of each product according to the ABC method.
Case No. 4: OMEGA Case
The company OMEGA manufactures product P. The information related to its cycle.
Operational results for the month of January 2019 can be summarized as follows.
Consumption of raw materials: 130 kg at 42 dirhams per kg
Consumption of raw materials: 100 kg at 62 dirhams per kg
MOD - Workshop A: 200 hours at 60 DH per hour
MOD - Atelier B: 150 hours at 70 DH per hour
Annex 1: data of the month concerning product P1
Products P1
Produced quantities 1000
Reference names of the
400
products
Number of lots produced 1300
Quantity sold 1000
Customer order number 190
Selling price 1500
Maintenance and repair:
Workshop A Workshop B
Named 8 15
interventions
Annex 2: Total of purchases from January of materials consumed for product P:
Raw materials Y Raw materials Z
Number of orders
60 160
suppliers

Annex 3: Activities carried out by the company in the centers of responsibility

costs of these activities for January:

Sections Activities Total cost Activity drivers

Service management 300000 Business code
Management of orders 16500 Ordered supplier
Supply
Management of receptions 33000 Ordered supplier
Ordered planning 26000 Lot manufactured

General organization 600000 Business code

Planning of orders 32500 Batch made
Production management
Studied and methodical 27600 Product reference
Reference management 66000 Supplier command
Maintenance 6500 Batch manufactured

Workshop A Maintenance and repair 4600 Product reference

Launch of productions 65000 Batch made
Maintenance 9750 Manufactured lot

Workshop B Maintenance and repair 69000 Product reference

Launch of manufacturing 97500 Manufactured lot

Shipments 15000 Business coded

Distribution
Promotion 13800 Product reference
T.A.F :
1. Following Table 1, calculate the volume and cost per inducer (before
grouping of activities
2. Group the activities with the same driver and calculate the
cost per inducer. (When filling out table 2)
3. calculate the cost price and the result using the ABC method.

Table 1 :
Volume of Costs
Activities Total cost Activity drivers
inductors of the inductor

Service management 300000 Revenue

Management of orders 16500 Supplier order

Reception management 33000 Supplier order

Planning of orders 26000 Manufactured lot

General organization 600000 Turnover

Ordered planning 32500 Lot manufactured

Studied and methodical 27600 Product reference

Referenced management 66000 Supplier order

Maintenance 6500 Manufactured lot

Maintenance and repair 4600 Product reference

Launch of manufacturing 65000 Batch manufactured

Maintenance 9750 Batch made

Maintenance and repair 69000 Product reference

Launch of productions 97500 Manufactured lot

Shipments 15000 Revenue

Promotion 13800 Product reference

Tableau 2:
Figure Order Reference
Activities Inductors Batch manufactured
of business supplier product
Service management
Management of orders
Management of receptions
Ordered planning
General organization
Planning of orders
Studied and methodical
Management of references
Maintenance
Maintenance and repair
Launch of manufacturing
Maintenance
Maintenance and repair
Launch of manufacturing
Shipments
Promotion
Cost of inductors
Volume of inductors
Total Cost

3. calculate the cost of returning and the analytical result using the ABC method.
 Case No. 5: Excerpt from the Final Exam 2018/2019
The Moroccan Highways Company (ADM) has implemented a cost monitoring system focused on
realization of the sites. In this context, the management controller is tasked with calculating the cost
forecast of a construction site in light of annexes 1, 2, 3, and 4. This forecast cost is a
essential information to assess the estimates for upcoming projects and to establish the specifications
propose for the launch of new calls for tenders intended for subcontractors.

ANNEX 1: ELEMENTS NECESSARY FOR FOUNDATION WORK

EARTHWORK
For one square meter (1 m2The planned work on site number "AX01/2018" requires:
10 kg of cement,
0.25 m3of sands,
0.5 m3of gravel,
0.75 m of 5mm wire
0.5 m of 10mm wire
20 units of stones,
2 hours of MOD.
The company retains an hourly rate of 14 DH (including social charges) for its labor.
directly on the foundation excavation sites.
The planned work on site number 'AX01/2018' requires 16 meters in width of work.
foundation excavation over a length of 2.2 km (total area of 35,200 m²)2The duration
The scheduled duration for the construction site is 60 days.

ANNEX 2: EXTRACT FROM THE BETOMAR SUPPLIER CATALOGUE

The company BETOMAR is, for the ADM, the reference supplier of construction materials.
Here is an excerpt from her catalog:
Material references Designation Unit Price excluding tax for one unit
A364 Cement Kg 1.25 DH
A241 Sable Cubic meter (m³)3) 0.50 DH
A246 Gravel Cubic meter (m)3) 1.30 DH
A807 5mm wire Linear meter 10.25 DH
A840 10mm wire Linear meter 11.90 DH
A430 Peter Unit 0,80 DH
The company operates on a just-in-time basis for its supplies and deliveries.
Thus we can neglect storage problems.

ANNEX 3: COMMON EXPENSES OF A CONSTRUCTION SITE

The excerpt of costs that cannot be easily allocated to the production costs of the sites are
called 'common or indirect charges'. These include costs: Study, planning,
of management and procurement.
 ANNEX 4: THE COMMON COST ALLOCATION METHOD
The method adopted by the ADM is based on the activity-based costing (ABC) model which relies on a
study in terms of activities of existing analysis centers, which made it possible to obtain the data
next global:
Total of
Centers Inductors Volume of
Activities Resources
of analysis of activity the inductor
in DH
Studies Technical study of the site 1,944,000 Study hours 1,080
Selection sequence 2,160,000 Number of construction sites to be carried out 18
Planning
Scheduling 3,000,000 Number of sequences of the construction site 100
Management Control 4,320,000 Number of construction sites to be completed 18
Supply Material procurement 100,000 Number of MP orders 100
noon Transport 1,156,000 batch of materials shipped 170

Additional information:
For the project in question (AX01/2018), the consumed inductors are distributed as follows:
The construction site No. "AX01/2018" requires 600 hours of study.
The planning of the construction site results in a schedule in 12 sequences.
The supply of materials is carried out every three days during the duration of the construction site.
The shipments of purchased materials are organized based on the number of references.
materials, except for the 5mm and 10mm wire threads which are the subject of the same shipment (same batch).

Work to do:
1- Determine the cost of the inductors (in a table).
2- Determine the cost of the site number 'AX01/2018' according to the ABC method (in a
another table).