Changing in Costing Models from Traditional to Performance Focused Activity Based Costing (PFABC)

European Online Journal of Natural and Social Sciences 2013; www.european-science.com
Vol.2, No.3 Special Issue on Accounting and Management.
ISSN 1805-3602
2497
Changing in Costing Models from Traditional to Performance Focused
Activity Based Costing (PFABC)
Fatemeh Kowsari
M.A Student in Industrial Management of Fars Research Science Branch, Islamic Azad
University, Shiraz, Iran
Email: [e-mail]
Abstract
This article is aimed at studying changes in models and discussing and comparing the states
of these changes and their advantages. Today, industry and occupation need a costing system to
meet their own needs. Costing experts believe that designing a costing system is only possible by
fulfilling all its needs. On this basis, they developed different costing models for different industries
according to their structures and natures. The most fundamental method used for costing was
traditional costing which utilizes only one cost driver for allocating overhead and caused the
obtained cost price to have a great difference with the real cost price. The costing system based on
Activity Based Costing (ABC 1 ) was designed by Cooper and Kaplan to remove the shortcomings of
traditional costing system and to allocate a cost driver suitable to any activity comparing with
traditional system and to calculate the cost price according to it. However, Activity Based Costing
model is problematic to some extent for organizations because of high costs of interviewing people,
using subjective and expensive approaches for evaluating time allocations and protection difficulties
and updating. Then, Time Driven Activity Based Costing (TDABC2 ) was introduced which
calculates the costs based on time driver and is simpler and less expensive than Activity Based
Costing model. In addition to solving some of the difficulties of ABC, this model can measure
unused capacity and help managers evaluate the function of different departments. However,
because of great emphasis that this system puts on "time" and due to some limitations, Namazi
introduced Performance Focused Activity Based Costing system (PFABC3 ) which has caused more
flexibility in allocating costs to activities by selecting different cost drivers. This model which is an
integration of Activity Based Costing and Time Driven Activity Based Costing undertakes costing
during 8 stages, but the ambiguity and uncertainty in costing systems create some problems for
Performance Focused Activity Based Costing.
Keywords: Activity Based Costing (ABC), Time Driven Activity Based Costing (TDABC),
Performance Focused Activity Based Costing (PFABC).
Introduction
In recent decades, the development of information technology has caused a remarkable
progress in gathering and interchanging cost information in organizations. Along with these
changes, accounting as an important part of an information system has encountered similar changes.
In fact, cost information and cost price by accounting information system are used as an instrument
by managers for planning, controlling and evaluating the operations. These systems can help
managers in performing their duties when they provide them with reliable and correct information.
1 Activity Based Costing
2 Time Driven Activity Based Costing
3 Performance Focused Activity Based Costing

Fatemeh Kowsari
Openly accessible at http://www.european-science.com 2498
Therefore, in selecting costing systems for calculating the cost price of products and services,
managers should pay special attention. The existence of changes in trade environment has caused
some problems in costing system and has evolved and updated them according to the present needs.
Based on these changes, traditional costing system was replaced by Activity Based Costing system
so that this system could remove the existing faults in traditional costing system. this system has
improved traditional system to a great extent, but because of the high costs of interview,
performance, and updating it made researchers think of creating a new system to remove the above
faults and the obtained information become more exact and correct and help managerial decisions
more than before and made Time Driven Activity Based Costing come to existence which used time
driver to allocate costs to activities. In spite of advantages, this system has some disadvantages the
most important of which was the great emphasis on "time" and this caused the introduction of
Performance Focused Activity Based Costing.
Traditional Costing System
In this system, the costs of direct material and direct payment are directly allocated to the
production. Productive and non-productive overheads have also been considered as direct cost and
allocated to production by using the pre-assigned overhead rate. In traditional costing system, based
on the volume of cost price, each product consists of the sum of the costs of direct material, direct
labor, and the allocated construction overhead.(Shabahang.r, 2012).
The most popular used basis for allocating overhead in determining the type of costing is
direct labor hours. To calculate the overhead rate, the sum of the budgeted construction overhead is
divided by the sum of the direct labor hours or any other basis such as machine labor hours. The
basic difficulty of this system is that it doesn’t give exact information about the cost price of
products and services to decision makers and even by giving wrong information it causes managers
to make mistakes in their decisions and this system cannot be used as a reference for managerial
decisions. Also, in this system the costs of overhead between productions are common. Therefore,
some of the products, according to their production cost, have a greater share in allocating the
overhead. For example, if the construction overhead is allocated according to the direct labor hours,
the products to which have been allocated more direct labor hours will attract more overhead costs
(Tadbir Periodical). In the whole, irrelevant costs of the product unit and the variety of products are
two important factors which have not been considered in traditional costing system. This costing
system is focused more on production cost whereas for marketing and sale costs and other costs no
shares are allocated to production. Traditional systems consider the obtained advantages of changing
the processes and improving the methods as saving money in labor force. Therefore, they do not
show the improvement of functions in operational processes. Using a common basis and unit for
allocating costs such as direct labor hours of human force is considered as another shortcoming of
this type of costing. Because by developing the technology, the rate of human force engaging in
labor process has decreased to a great extent. These shortcomings caused the experts to think of
designing a new costing system that can remove the shortcomings of traditional system.
In traditional system, the cost price of product is calculated as follow:
1- Tracing: allocating direct material and direct payment to products and services.
2- Allocating overhead costs to products or services based on a definite attraction rate.
3- Calculating the cost price of products.(Gahramani, 2008)
In an economically stable time, little attention is paid to effectiveness, but in hard time, it
become essential. Therefore, reassessment of activities and reform, caused by the recent financial
crises, aim to save money and improve work performance in the public, as well as in the private
sector. Public sector organizations may have less incentive for efficiency, and this is related to the

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principle of budgetary control. Indeed, a public organization’s budget does not depend on the
efficiency and performance of the organization.
Because of this lack of control, public sector organizations were seldom interested in saving
their budgetary funds. If financially effective and economized, this may well have resulted a lower
budget for the next year (Riinkont.K, Jantson.S, 2011).
Today, in the present social and economic industry, paying attention to productivity and
efficiency is considered as a necessity. Taking in to consideration the great change in technology
and presenting new methods in the early 1980s, organizations found out that they should increase
the quality while decreasing the costs to survive. This subject and the existing shortcomings in
traditional costing system made them revise their accounting and managerial methods. Because of
the shortcomings of traditional system, a new system called Activity Based Costing system came to
existence. In the whole, the most important reasons for the shortcoming of traditional system are as
follows.
1- The lack of ability in presenting information about cost price especially in
organizations which give various services to their customers. Since the traditional system does not
consider the special features of each service in distributing the costs, the allocated costs and the
costs price will be considered wrongly.
2- The lack of separating different cost domains – In traditional system, they use
common cost centers to gather cost payments and overheads. This problem causes the allocation of
unreal costs to the given services.
3- Using common basis and unit for allocating costs – These systems usually used a
division basis to allocate different costs. One of these bases is direct human force labor hours. To
consider the fact with the complexity and quick technology changes, the engaging rate of human
force in labor force has decreased a lot, therefore, by using this basis, the division of cost is not
really done.
4- The lack of preparation exact information about cost price and other necessary
information for decision making. Traditional systems mainly divide the existing costs in
organizations into two groups – Direct costs and periodic costs – and they only consider the direct
costs in calculating the cost price. But in making decision they need to use both of them, direct and
periodic costs. Therefore, based on traditional methods, analysis of the improvement of activities
and methods for decreasing the costs won’t be possible.
5- Traditional systems consider the advantages obtained from changing the processes
and the improvement of methods as saving money in labor force. Therefore, they don’t show the
improvement of functions in operational processes.
6- Traditional costing systems do not show the real information about operational
process and costs. These systems only consider the costs which are easily identifiable in calculating
the costs price, and indirect costs don’t play any roles in calculating cost price (Tadbir).
In addition to shortcomings of traditional system, the growth of competition and the
complexity of technology have intensified the necessity of using new costing systems. Since the
organizations need to access correct information about costs to price products and services, It is
obvious that traditional systems are not efficient enough because of their nature.
The history of Activity Based Costing
In the late 1960s and early 1970s, accounting writers pointed to the relationship between
activity and cost. But in 1980s, because of the reflection of weaknesses and shortcomings of
common accounting systems in giving exact cost information, this relationship was focused on more
by university and occupational centers. This consideration was mainly on the basis of three basic

Fatemeh Kowsari
Openly accessible at http://www.european-science.com 2500
structures. The first structure was a new change in the world which occurred in different countries
especially Japan to introduce modern technology and new productive mechanisms. The second
structure was that in 1980s, the conceptual philosophy of many company managers changed a lot
and in addition to productivity, competition in the world level, and the growth of customers'
satisfaction, the basic goal of managers was to emphasize the quality control of products and to
decrease the costs. The third structure was that some of the accounting writers explained new
product situation, various technology roles, and new viewpoints to manager. They claimed that
traditional systems of industrial accounting and managers are not only responsible for managers'
needs but also their obtained information causes the managers to make wrong decisions. As a result,
the writers tried to introduce a new system called Activity Based Costing (Carol Fia).
Activity Based Costing System (ABC)
Cooper and Kaplan along with Johnson (1980) have an important role in reflecting the
shortcomings of management accounting system in giving exact cost information. In 1980s, Cooper
and Kaplan suggested Activity Based Costing for the first time and it was used as a creative
invention. ABC is used as the best known method in management accounting during several last
years. In fact, in response to the need of production sector to face the dissatisfaction of using
traditional costing system, this approach depends on allocating overhead to products. In the whole, it
is not logical to use traditional approach in modern production environment (Alinezhad & Saviz,
2013). Today, most of remarkable costs in producing an item are not related to its volume. For
instance, the costs of engineering, order processing, planning, and quality controlling, or the costs of
delivering the products in time don’t relate to the production volume (Riinkont & Jantson,
2011).Activity Based Costing consist of the ability of measuring real sources used by daily activities
of a company that the obtained information of this kind of costing is considered as supporting the
management decision making. Activities done on the basis of costs related to each of the products
are an important factor in analyzing the profitability of products (Ghahramani, 2008).
According to Cokins theory, the reason why ABC comes to existence results from three
factors:
1- Structure change of the company cost price, that is to say the increase of overhead
against the decrease of direct payment costs and direct material costs.
2- Reciprocal function behavior inside the trade unit.
3- The appearance of related data base and the languages of the fourth generation
which makes the quick organizing of data possible.
In this system there are three basic parts:
Sources
Activities (Ghahramani, 2008)
Cost subjects
Figure 1: The structure of the Activity Based Costing system (Resources: an economic
element that is required in the performance of activities)