Activity Based Costing at Thales Nederland: A better “distribution” of logistics costs! University of Groningen

Activity Based Costing at Thales Nederland:

A better “distribution” of logistics costs!

University of Groningen

University of Groningen Faculty: Economics & Business

MSc Controlling

March 2009

Author: Sander Rikhof srikhof@hotmail.com Student number: s1654624

Supervisor Thales Nederland B.V. Dhr. R. Pijpe

Supervisor University of Groningen Drs. A. Smeenge RA

Author: Sander Rikhof

Address: Hartmanstraat 8

7679 TT Langeveen

E-mail: srikhof@hotmail.com

sander.rikhof@nl.thalesgroup.com

Date: October 2008 – March 2009

University: University of Groningen

Faculty: Economics & Business

Supervisor: Drs. A. Smeenge RA

Company: Thales Nederland B.V.

Business Unit: Service Radar

Department: Shipping & Distribution

Supervisor: Dhr. R. Pijpe Thales Nederland B.V. Visiting address: Haaksbergerstraat 49 7554 PA Hengelo Postal address: Post office box 42 7550 GD Hengelo

Tel: (074) 248 81 11 Fax: (074) 242 59 36

University of Groningen (Faculty of Economics & Business)

Visiting address: Nettelbosje 2 9747 AE Groningen

Postal address: Post office box 800 9700 AV Groningen

Tel: (050) 363 70 98 Fax: (050) 363 37 20

PREFACE

This Master of Science thesis is the result of my graduation period at Thales Nederland in Hengelo at the department Shipping & Distribution. The research has been conducted during the period October 6 (2008) and March 6 (2009).

I am very thankful to Thales Nederland for giving me the opportunity to graduate for my master Controlling at the faculty Economics & Business in Groningen. Especially I would like to thank my daily supervisor at Thales Nederland dhr. R. Pijpe. He made this assignment possible and his knowledge, practical insight and suggestions for improvements were of great value to me.

I also like to use this opportunity to thank my supervisor from the University of Groningen. The evaluations and comments provided by drs. A. Smeenge RA during my graduation project were very useful.

Finally I would like to thank my colleagues at the department Shipping & Distribution for giving me the information required for my master thesis and providing a friendly and challenging research atmosphere.

Looking back at my graduation period, I consider it as a pleasant and valuable experience and would certainly recommend other students looking for an internship or graduation period to apply for at Thales Nederland.

Sander Rikhof Hengelo, March 2009

“As far as the laws of mathematics refer to reality, they are not certain, as far as they are certain, they do not refer to reality.”

TABLE OF CONTENT

SUMMARY ... 8

SAMENVATTING... 9

CHAPTER 1: RESEARCH DESIGN... 11

1.1 INTRODUCTION...11

1.2 FORMULATION OF THE PROBLEM...11

1.3 RELEVANCE...12

1.4 STRUCTURE OF THIS THESIS...13

CHAPTER 2: BUSINESS DESCRIPTION THALES NEDERLAND ... 14

2.1 HISTORY...14

2.2 ORGANISATION...14

2.3 SHIPPING &DISTRIBUTION...15

CHAPTER 3: LITERATURE RESEARCH ... 17

3.1 WHAT IS ACTIVITY BASED COSTING?...17

3.1.1 The rise of Activity Based Costing ...17

3.1.2 The multiple purposes of Activity Based Costing ...18

3.2 STEPS IN IMPLEMENTING ACTIVITY BASED COSTING...19

3.2.1 Designing the Activity Based Costing method ...19

3.2.2 Behavioural and organisational variables ...23

3.3 ADVANTAGES & DISADVANTAGES OF ACTIVITY BASED COSTING...24

3.3.1 Traditional cost accounting system...24

3.3.2 Advantages of Activity Based Costing ...26

3.3.3 Disadvantages of Activity Based Costing ...26

3.4 ACTIVITY BASED COSTING APPLIED TO LOGISTICS...27

CHAPTER 4: CURRENT COST ACCOUNTING SYSTEM ... 30

4.1 COST ACCOUNTING SYSTEM...30

4.1.1 Costs charged ...30

CHAPTER 5: ACTIVITY BASED COSTING AT THALES NEDERLAND ... 34

5.1 DESIRABILITY ACTIVITY BASED COSTING...34

5.2 DESIGNING ACTIVITY BASED COSTING...35

5.2.1 Determine the activity centres...35

5.2.2 Assign costs to the activity centres: identifying the costs ...37

5.2.3 Assign costs to the activity centres: identifying the resource drivers ...40

5.2.4 Define the cost objects ...44

5.2.5 Link activity costs to the objects ...45

5.3 BOTTLENECKS AND SUGGESTIONS FOR IMPROVEMENTS IN THE FUTURE...47

CHAPTER 6: CONCLUSION ... 49

6.1 RECOMMENDATIONS REGARDING ACTIVITY BASED COSTING...49

6.2 LIMITATIONS OF THE RESEARCH...50

6.3 FUTURE RESEARCH TOPIC...51

LIST OF FIGURES

FIGURE 1-ACTIVITY BASED COSTING/MANAGEMENT VIEW...18

FIGURE 2-MOTIVATIONS FOR IMPLEMENTING ACTIVITY BASED COSTING...19

FIGURE 3-COST OF ERRORS VS. COST OF MEASUREMENT...22

FIGURE 4-SEVEN CS MODEL...23

FIGURE 5-DECREASE OF THE COST OF MEASUREMENT...25

FIGURE 6-TRANSFORMATION PROCESS FOR A PRODUCTION ORGANISATION...27

FIGURE 7-TRANSFORMATION PROCESS FOR A LOGISTICS ORGANISATION...28

FIGURE 8-ACTIVITY BASED COSTING FOR A LOGISTIC ORGANISATION...29

FIGURE 9-CURRENT SYSTEM VS.ACTIVITY BASED COSTING...35

LIST OF TABLES

TABLE 2-REGULATING COSTS BUDGET SHIPPING &DISTRIBUTION...39

TABLE 3-COST TYPE 1:SALARY EXPEDITION EMPLOYEE...40

TABLE 4-COST TYPE 2:SALARY TRANSPORT PLANNER EMPLOYEE...40

TABLE 5-COST TYPE 3:SALARY CUSTOMS OFFICER EMPLOYEE...41

TABLE 6-COST TYPE 4:DEPRECIATION EXPEDITION INVENTORY & REPAIRS...41

TABLE 7-COST TYPE 5:DEPRECIATION TERRAIN AND BUILDINGS...42

TABLE 8-COST TYPE 5:OFFICE MATERIALS / INVENTORY...43

TABLE 9-ACTIVITIES &ACTIVITY DRIVERS “EXPEDITION” ...45

TABLE 10-ACTIVITIES &ACTIVITY DRIVERS “TRANSPORT PLANNING” ...46

TABLE 11-ACTIVITIES &ACTIVITY DRIVERS “CUSTOMS OFFICE” ...46

SUMMARY

The objective of the thesis was to investigate whether it is desirable and achievable to apply the Activity Based Costing method for the department Shipping & Distribution at Thales Nederland. Thales Nederland is a subsidiary of the Thales Group which has over 68.000 employees and is active in three main business areas: Aerospace & Space, Defence and Security. The department is responsible for the incoming and outgoing products, internal transport and takes care of the necessary customs regulations, transport documents, inspections and packing materials.

With Activity Based Costing the costs are traced from activities to products based on the product’s demand for these activities during the production process. The allocation bases used in Activity Based Costing are measures of the activities performed (Cooper 1988a). As this quotation indicates, a lot of the literature regarding Activity Based Costing is about production companies. The main difference for a logistics company is that there are no goods bought, produced or sold, but services being provided.

It is important to mention that the purpose of a cost accounting system is not being the most accurate, but the most optimal system. This is to the point at which the marginal cost of an improvement just equals the marginal benefits of the improvement (Cooper, 1988b). Activity Based Costing creates a cause and effect relationship that leads to a better insight in costs. This cannot be achieved with the current system and therefore it can never reach the point mentioned by Cooper (1988b). The accuracy of an Activity Based Costing system depends on the number of activities, the number of cost drivers and the type of cost drivers used. A combination of the right activities and cost drivers must lead to the optimal system.

For the research we used the steps described by Cooper et al. (1992). First we determined the activity centres. The second step was to assign costs to these activity centres that were diverted from the budget. After that the cost objects were defined. For the department these are the inbound and outbound orders. The last step was to link the activity costs to these objects. This is called second stage allocation and led to some difficulties. The system in use does not register the volume (m3) of inbound orders. Currently time registration can be used, but it must be made possible to register the volume in the nearby future. Another shortcoming of the system is that it’s only capable to allocate costs on a project and not to a department. These departments are responsible for the costs and therefore you need to allocate anonymous orders to these departments. Both actions will lead to a more optimal cost accounting system.

Despite a few bottlenecks concerning the internal resources, the conclusion of the thesis is that it is desirable and also achievable for the department Shipping & Distribution at Thales Nederland to

SAMENVATTING

Het doel van deze scriptie was om te onderzoeken of het wenselijk en haalbaar is om de Activity Based Costing methode toe te passen voor de afdeling Shipping & Distribution bij Thales Nederland. Thales Nederland is een dochtermaatschappij van de Thales Groep waar meer dan 68.000 werknemers actief zijn op drie gebieden: Aerospace & Space, Defence and Security. De afdeling is verantwoordelijk voor de inkomende en uitgaande producten, intern transport en regelt de noodzakelijke douanedocumenten, transportdocumenten, inspecties en verpakkingmaterialen.

Met Activity Based Costing worden de kosten vanuit activiteiten toegekend aan producten gebaseerd op de hoeveelheid vraag naar deze activiteiten gedurende het productieproces. De toewijzingen die bij Activity Based Costing worden gebruikt zijn maatstaffen voor de activiteiten die zijn uitgevoerd (Cooper 1988a). Zoals deze citaat aangeeft, gaat veel literatuur met betrekking tot Activity Based Costing over productieondernemingen. Het grootste verschil voor een logistieke onderneming is dat er geen goederen worden gekocht, geproduceerd of verkocht, maar diensten worden aangeboden.

Het is belangrijk om te vermelden dat het doel van een kostprijssysteem niet is om het meest accuraat te zijn, maar het meest optimaal. Dit is tot het punt waarbij de marginale kosten van een verbetering gelijk is aan de marginale voordelen van de verbetering (Cooper, 1988b). Activity Based Costing creëert een oorzaak en gevolg relatie dat leidt tot een beter inzicht in kosten. Dit kan niet worden bereikt met het huidige kostprijssysteem en daarom kan het nooit het punt bereiken waar Cooper (1988b) naar verwijst. De accuraatheid van een Activity Based Costing systeem is afhankelijk van het aantal activiteiten, het aantal kostenveroorzakers en het type kostenveroorzakers dat wordt gebruikt. Een combinatie van de juiste activiteiten en kostenveroorzakers moet leiden tot het optimale systeem.

Voor het onderzoek is het stappenplan van Cooper et al. (1992) gebruikt. Eerst zijn de activiteitscentra vast gesteld. De tweede stap was het toekennen van kosten aan deze activiteitscentra. Deze zijn afgeleid van het budget. Daarna zijn de kostenveroorzakers gedefinieerd. Voor de afdeling zijn dit de ingaande en uitgaande orders. De laatste stap was om de activiteitskosten toe te kennen aan deze kostenveroorzakers. Dit wordt “second stage allocation” genoemd en leidde tot een aantal problemen. Het systeem wat momenteel in gebruik is registreert geen volumes (m3) van ingaande orders. Momenteel kan tijdsregistratie gebruikt worden, maar in de nabije toekomst moet dit mogelijk gemaakt worden. Een andere tekortkoming van het systeem is dat het alleen kosten kan toekennen aan een project en niet aan een afdeling. Deze afdelingen

Ondanks een aantal knelpunten aangaande de interne middelen, is de conclusie van de thesis dat het gewenst en ook haalbaar is voor de afdeling Shipping & Distribution bij Thales Nederland om de Activity Based Costing methodologie the implementeren.

CHAPTER 1: RESEARCH DESIGN

In this chapter the first section contains the reason why this research study was initiated at Thales Nederland. The formulation of the problem, together with the sub-questions that need to be answered to solve the problem, will be defined in section 1.2. The next section will point out the relevance of the research in general and for Thales Nederland in particular and the chapter will conclude with the structure of the thesis in section 1.4.

1.1 Introduction

The department Shipping & Distribution is responsible for the physical and administrative dispatch of incoming and outgoing goods at Thales Nederland. Until recent years a traditional cost accounting system was used to cover the department costs. The costs were allocated as a percentage of the cost of materials. Nowadays the department costs are allocated on order (project) by charging a price on outgoing goods for every m3. The formula is described in chapter 4. The departments that are charged for the services regularly complain about the current cost allocation. The reason for this is that the amount of work does not always correspond with the costs that are charged. Therefore the department Shipping & Distribution needs a method of cost accounting on order that is based on the type and amount of activities involved: Activity Based Costing. The assignment at the company is formulated below:

“Determine whether it is possible to apply the Activity Based Costing method for allocating the costs of the department Shipping & Distribution. Test Activity Based Costing on acceptance within the organisation and set up a cost accounting method that can be used in actual practice.”

1.2 Formulation of the problem

Verschuren (1986) indicates that the formulation of the problem exists of two components. These are the objective and the phrasing of a question. The objective of the research needs to answer the following four questions:

- What does the problem exist of?

- What are the consequences of the problem? - What is the cause of the problem?

- What is the connection of the problem with other problems?

disposal. Consequence is orders are being charged too much or too little. The cause of the problem is the current way of charging costs. The formula is not a good indication for the type and amount of work. A problem that is related to this problem is making management decisions for the department Shipping & Distribution that are based on correct financial data. This is a logical consequence, since the original problem is related to these data.

The research will be restricted to whether it is achievable to implement the Activity Based Costing method and in that respect excludes Activity Based Management. In the literature section Activity Based Management will be included to be able to determine what the advantages and disadvantages of Activity Based costing can be for Thales Nederland.

The second object that involves the formulation of the problem according to Verschuren (1986) is to phrase a question that is given below:

“Is it desirable and achievable to apply the Activity Based Costing method for the department Shipping & Distribution at Thales Nederland?”

To help answering this question a number of sub-questions need to be answered. These are the following:

- Which cost accounting system does the department Shipping & Distribution currently make use of?

- What are the advantages and disadvantages of Activity Based Costing compared to traditional cost accounting methods and the system currently in use?

- What kind of financial information is needed at Thales Nederland for the implementation of Activity Based costing?

- Which bottlenecks arise within the organisation during the design of Activity Based Costing and how can these bottlenecks be solved?

1.3 Relevance

According to Van der Zwaan (1995) the quality of business research is dependant on the relevance of the research. Relevance means the practical and functional appropriateness of the information-product.

Theunisse and Lefebvre (1992) say only 5 to 10% of the costs of a company are caused by direct labour. As a consequence the allocation of indirect costs is becoming more and more important. The research is relevant for the department Shipping & Distribution while it can lead to the introduction of Activity Based Costing when this is desirable and achievable. Another reason why it is relevant is that if the above is the case, a cost accounting system will be developed that can be used in actual practice. It is important to take a good look at the characteristics of the department,

1.4 Structure of this thesis

Chapter 2 begins by giving a short description of Thales Nederland and the French parent company Thales Group. First we look at the existence and history of the company and after that we take a look at the organisation, whereby the services of the Shipping & Distribution department will be described separately.

The literature research with regard to Activity Based Costing is discussed in chapter 3. A description will be given together with the advantages and disadvantages compared to traditional cost accounting systems. The steps for implementing Activity Based Costing and the financial information needed for a logistic company or business unit are handled in the last two sections of the chapter.

Chapter 4 will sketch an image of the current situation at the department Shipping & Distribution and this is compared with Activity Based Costing. The consequences for introducing a new cost accounting system can be very radical. Therefore it is also important to assess the advantages and disadvantages of both account systems compared to each other.

The research must lead to a cost accounting system that can be used in actual practice. This is being handled in chapter 5. It is important that the research is conducted in view of scientific rules and criteria, since this is a criterion for the quality of business research (Van der Zwaan, 1995).

The conclusion of the report will be given in chapter 6 and shall give an answer to the question whether it is desirable and achievable to implement Activity Based Costing for the department Shipping & Distribution.

CHAPTER 2: BUSINESS DESCRIPTION THALES NEDERLAND

The history of Thales Nederland is more than 80 years old. To get a good image of how the company started and has been growing over the last few decades, section 2.1 gives an overview of the historical events that have taken place. Thales Nederland is a subsidiary of the Thales Group. Both organisations are shortly described in section 2.2. In section 2.3 the activities of the department Shipping & Distribution will be described.

2.1 History

The history of Thales started in 1922 with the foundation of “NV Hazemeyer’s Fabriek van Signaalapparaten” in Hengelo (the Netherlands). The reason that the company was founded was to produce fire control equipment for the Royal Navy. As the company grew it also welcomed customers from a.o. Greece, Spain and Sweden.

After World War II the factory was deserted and pillaged, but the government bought the factory because she was aware of the importance of a good defence industry, especially after the war. The company got the new name N.V. Hollandse Signaalapparaten. During this period the company kept growing and a lot of systems and techniques were developed. A few examples are the radar, fire control for the army and computers and air traffic control equipment.

Philips bought a large part of the shares and became the main shareholder in 1956. The business went good, which led to the opening of three other factories in Eindhoven, Huizen en Delft. Hengelo remained the main office.

The end of the Cold War had a negative impact for N.V. Hollandse Signaalapparaten. The reason for this is that there were major cuts in defence budgets. At the same time Philips decided that “Defence and Control Systems” weren’t part of its core business. In 1990 N.V. Hollandse Signaalapparaten was sold by Philips and became a subsidiary of the French company Thomson-CSF. In the year 2000 Thomson-CSF changed its name to Thales. Because of this, N.V. Hollandse Signaalapparaten got the new name Thales Nederland.

2.2 Organisation

In the previous section you can distract that Thales Nederland is a subsidiary of the Thales Group. The Thales Group has over 68.000 employees working and is active in more than 50 countries. The revenues last year were more than €12 billion. The multinational is an important developer, producer and supplier of electronics and services. The core activities are divided in three main business areas: Aerospace & Space, Defence and Security.

Thales Nederland is a part of the business area Defence and produces defence-equipment for the international market. The products that Thales Nederland develops, produces and supplies are considered state of the art and are divided in four different categories. These categories are: Naval, Air Systems, Land & Joint Systems and Security. The business can be classified as a company with (serial-) unit production and is the largest defence-company in the Netherlands. Within Thales Nederland 2100 employees are active in four different factories. The revenues in the year 2007 were €450 million.

Thales Nederland is divided in five divisions. Four divisions are in alignment with the product categories and next to them is the business unit Service. The organisation charts of the Thales Group, Thales Nederland, the business unit Air Systems and the department Logistics are added in appendix A. Taken all the organisation charts together the department Shipping & Distribution can be distracted from the top to the bottom of the organisation. The main services of the department will be discussed in the next section.

2.3 Shipping & Distribution

If you look at organisation chart 4 in appendix A you see that Shipping & Distribution is a part of the department Logistics. To get a good image of the services that are being conducted by the department, these are handled below. Further in the report the activities used for the purpose of Activity Based Costing will be diverted from these services, among with other sources.

Take care of incoming and outgoing (inter)national transports

The transport is separated in regional, national, European and international (worldwide) transport. Local transport companies mainly do the regional transport. National and European traffic is done by TNT, with exception of special transport. Worldwide international traffic concerns sea-/air freight that is mostly done by DHL Danzas Air & Ocean and Rhenus Logistics. The contact with all these companies and planning the route is done by the department Shipping & Distribution.

Take care of the necessary customs regulations

There are a lot of extensive regulations for the international business transactions resulting from European legislations and international agreements. Correctly dealing with these legislations and agreements guarantees a minimal amount of costs with fulfilling these formalities. The Shipping & Distribution department is responsible for these customs services. They make use of a special permit that gives the department permission to postpone or suspend import rights. If the imported goods are transported outside the European Union within three years, these import rights don’t have to be paid by Thales Nederland permanently. Goods delivered on board of a naval ship are also covered by this permission. Thereby the benefits largely outweigh the costs of having an own customs office.

Take care of the necessary transport documents

A few of the transport documents handled for Thales Nederland by the department Shipping & Distribution are route planning, consignment notes & collection manifests of the goods that are transported and delivered by the couriers that day.

Receiving, inspecting and examining goods

The goods are being received by the department Shipping & Distribution and are registered in the system. By looking at the inspection code the goods are being examined and inspected if necessary. After that they are being delivered to the right department by looking at the delivery code.

Internal transport

Internal transport refers to transport of goods to and from the department Shipping & Distribution. Furthermore the transport between the different departments on the Thales Hengelo terrain is looked after.

Take care of packing material and make ready for delivery

The way products are being packed depends on the destination and means of transport. The demands of the customer or demands mentioned in a contract are also taken into consideration. For transport on the road, over sea and through the air of dangerous cargo there are special packing demands. The packing services also count for internal transport within Thales Nederland.

CHAPTER 3: LITERATURE RESEARCH

To get a good image of the Activity Based Costing method we will first give a description of this cost accounting method, the reason it was introduced and the purposes it can fulfil in section 3.1. According to various sources of information you need to follow a few steps for successfully implementing Activity Based Costing. These steps are given in section 3.2. After that the advantages and disadvantages of Activity Based Costing are compared with traditional cost accounting methods. This chapter concludes with section 3.4 where we take a look at Activity Based Costing specified for logistic companies and the financial information that is required.

3.1 What is Activity Based Costing?

Activity Based Costing is a costing method that identifies the cost pools, or activity centres, in a firm and assigns costs to products and services (cost drivers) based on the number of events or transactions involved in the process of providing a product or service (McKenzie, 1999). Or as Cooper (1988a) describes: “Costs are traced from activities to products based on the product’s demand for these activities during the production process. The allocation bases used in Activity Based Costing are measures of the activities performed.”

3.1.1 The rise of Activity Based Costing

If you look at the description of Cooper you can distract that Activity Based Costing initially only focused on manufacturing industries. Overhead costs as a percentage of overall manufacturing costs have been growing steadily for more than 100 years, while the ratio of direct labour costs has declined (Miller and Vollman, 1985). The cause of this according to Kaplan and Bruns (1987) are the increasing improvements in technology and productivity in the manufacturing industry.

The problem with overhead costs is that they can’t be directly allocated to an individual product and therefore can’t be directly traced to one output. The reason for this is that there are more products that benefit from the resource. Think of the maintenance costs of a painting machine. Traditional cost accounting techniques develop quantity and price standards for labour and/or materials, and allocate indirect costs to the product by means of direct labour, machine hours or material euros. This cost accounting system was also used a few years ago by the department Shipping & Distribution at Thales Nederland.

If you look at the first method in appendix B you see that the overhead costs are traced to the products by using the direct labour hours per unit as a percentage of the total labour hours. For P1 the formula is 0,5 * € 9.924,- / 220 = € 22,55. One of the problems that occur by using this

costs decrease, but also the overhead costs. In reality overhead costs are rising. As a result, the other products are being charged too much and the product itself too little for overhead costs.

3.1.2 The multiple purposes of Activity Based Costing

Research showed the insight in overhead costs rank behind only quality and getting new products out on schedule for manufacturing executives (Miller and Vollman, 1985). The reason for this is that wrong information can lead to wrong decisions. Activity Based Costing does not only serve as an accurate cost accounting system, but can also serve as a decision-making tool and a performance evaluation tool. The combination of both is called Activity Based Management.

Trussel and Bitner (1998) describe Activity Based Management as a system that consists of two viewpoints: a cost view and a process view (figure 1), whereby the cost view refers to Activity Based Costing. Under the process view, Activity Based Management is used to develop financial and non-financial performance indicators.

Based Costing/Management: Cost view & Process view

Figure 1. Activity Based Costing/Management: Cost view & Process view

Processes/

Activities

Outputs

Inputs

(Process View)

Cost Objects

Resources

(Cost View)

Source: Trussel and Bitner (1998)

Figure 1 - Activity Based Costing/Management view

Activity Based Costing is a tool with a lot of purposes. In an article of Foster (1999) you can see the motivation of managers behind implementing Activity Based Costing. The results are shown in figure 2. The reason for the multiple purposes is that ABC addresses inadequacies of traditional cost systems by using a two-stage method that attributes costs first to production and business activities, and then to products on the basis of resource usage (Anderson, 1995). Result is that ABC allows staff to manage activities rather than to just manage dollars (Naughton-Travers, 2001).

One of the motivations for implementing the activity-based system is budgeting. Traditional budgeting systems are adjusted to account for revenue increase/decrease or inflation. Budgeting by using the underlying assumptions of Activity Based Costing is called Activity Based Budgeting. By looking at the demand of cost objects you can trace back how many activities are needed. If

level of effort’ when it concerns human resources and in all other cases ‘the consumption rate’. Doing this creates a recipe for each activity. In fact Activity Based Budgeting is using the Activity Based Costing method upside down and is a part of Activity Based Management.

Figure 2. Motivations for implementing Activity Based Costing

Motivation implementing ABC (%)

6

2

8

2

18

15

23

2

24

Figure 2 - Motivations for implementing Activity Based Costing 3.2 Steps in implementing Activity Based Costing

If you read the relevant literature you will find different methods for implementing Activity Based Costing/Management. Some of these steps are given in appendix C. Although they differ, they all have the same goal. The design of the Activity Based Costing method is described in subsection 3.2.1. Behavioural and organisational variables are also important regarding the implementation of a cost management system. These variables are handled in subsection 3.2.2.

3.2.1 Designing the Activity Based Costing method

We use the steps described by Cooper et al. (1992). The four steps actually relate more to the design of Activity Based Costing and less to the implementation of it. The steps that need to be followed are the following:

- Determine the activity centres - Assign costs to the activity centres - Define the cost objects

that relate to a single activity in the Activity Based Costing system. Trussel and Bitner (1998) describe activity centres as the activities that encompass each process. The more activities used for Activity Based Costing the more accurate, but also expensive and complicated the system becomes. There are five forms of activities described by Seal et al. (2006).

- Unit-level activities are performed each time a unit is produced. The costs of unit-level activities should be proportional to the number of units produced.

- Batch-level activities are performed each time a batch is handled or processed, regardless of how many units are in the batch.

- Product-level activities relate to specific products and typically must be carried out regardless of how many batches are run or units of product are produced or sold.

- Custom-level activities relate to specific customers and include activities that are not tied to any specific product.

- Organisation-sustaining activities are carried out regardless of which customers are served, which products are produced, how many batches are run, or how many units are made.

It is important that when activities are combined, they have the same level. A unit-level activity should not be combined with a batch-level or one of the other three levels. Another point of interest that is important when combining activities is that they are correlated. This is shown in appendix B when the Activity Based Costing method is applied.

The difference between a traditional cost accounting system and Activity Based Costing is that costs are not directly assigned to the products or services of the company, but to the activity centres. Assigning resource expenses to the activities is the basic principle behind the Activity Based Costing system (Stapleton et al., 2004). First you need to determine the costs. The second step is to determine what the cost drivers of the costs are, while these are used to trace these costs to the activities. In the literature cost drivers are also known as first stage cost drivers or resource drivers. A cost driver is used to find out what is causing resources to be consumed by each activity (Trussel and Bitner 1998). Naughton-Travers (2001) describes a cost driver as the measurements used to link expenses to the work activities performed by staff. Examples are space (m2 or m3), time (hours or minutes) and volume (m3 or kg). The process by which overhead costs are assigned to activity cost pools in an Activity Based Costing system is called first-stage allocation (Seal et al., 2006).

Defining the cost objects is referring to the different services being provided, the customers or the type of products manufactured. It allows an organisation to link its processes and activities to the services it provides. It also encourages managers to think about how much they are being paid for services and whether they are profitable (Naughton-Travers, 2001).

process by which activity rates are used to apply costs to products and customers in Activity Based Costing. Horngren et al. (2008) describe three different types of activity drivers.

- Transaction drivers count how often an activity is performed. Examples are the number of setups, receipts or products supported.

- Duration drivers charge the amount of time that is required to perform an activity. Examples are setup-, inspection- or direct labour hours.

- Intensity drivers directly charge the resources being uses for each time an activity is performed. Examples are actual time or specific resources committed.

It is difficult to determine how many cost drivers you need. The more activity centres used, the more cost drivers can be used. Cooper (1989) says the minimum number of cost drivers required by an Activity Based Costing system depends on the desired accuracy of reported product costs and on the complexity of the product mix being produced. As the number of cost drivers used increases, the accuracy of reported cost rises. There are four factors that determine whether how many cost driver are required. Cooper (1989) describes them as:

- Level of accuracy desired in reported costs: the more cost drivers used, the more accurate the system.

- Product diversity: products are diverse when they consume activities in different proportions.

- Relative cost of the activities: this is a measure of how much each activity costs as a percentage of the total cost of the production process.

- Volume diversity: occurs when products are manufactured in batches of different sizes.

The three forms of diversity that determine the number of cost drivers can best be explained by using an example. This example is given in appendix D. At point 1 you see that due to product diversity the actual costs of product A is 133,33% of the costs that are reported. Higher product diversity leads to higher distortion. Using an extra cost driver for the inspection hours solves this problem. Point 2 shows how the relative costs of the activities can be calculated. If the relative costs are high that does not have to mean there is a distortion, as long as the cost driver is correct. But if the cost driver isn’t correct, than a higher “relative cost of the activities” will lead to a higher distortion. The same also applies for the volume diversity calculated at point 3. If the batch sizes between products differ significantly this does not lead to higher distortion as long as the correct cost driver is used. Using the machine hours as a cost driver, and thereby the wrong cost driver for inspection hours, leads to higher distortion if the volume diversity is higher.

After the number of cost drivers to use has been selected, the company needs to determine the appropriate cost drivers. According to Cooper (1989) three factors should be taken into

- Cost of measurement: the lower the cost of a cost driver, the bigger the chance of selecting it. To reduce the costs of Activity Based Costing systems drivers are used whose quantities are easy to obtain. Transaction drivers have the lowest costs and intensity drivers the highest.

- Degree of correlation: the correlation between the actual consumption and the cost driver used. If you look at appendix B point 2 than you notice that “setups”, “orders” and “times handled” all use “setups” as the cost driver because they correlate perfectly. (In the example they use transaction drivers and a product that requires one “setup” also requires one “order”. If they are using duration drivers, maybe “setups” and “orders” aren’t correlating so perfectly. For instance: one “order” can require one hour for both product P1 and P2. One “setup” can require also one hour for product P1, but two hours for product P2.)

- Behavioural effects: generally cost drivers affect behaviour if an employee feels performance is evaluated on the quantity or costs per unit of a cost driver. Behavioural effects can be beneficial or harmful.

In the end the number of activities and drivers determine how accurate the Activity Based Costing system will be. One should take notice that the purpose of a cost accounting system is not being the most accurate, but the most optimal. This occurs when the total costs of the system is the lowest. On one hand there are the costs of measurement. Costs associated with the measurements required by the cost accounting system. On the other hand there are the costs of error. Costs associated with managers making poor decisions because of inaccurate information. A result of the trade off between the cost of measurement and the cost of errors is that the optimal cost system (figure 3) is not the most accurate cost system (Cooper, 1988b).

Figure 3. Cost of errors vs. cost of measurement

Total cost Cost of measurement Cost of errors Accuracy Low a High Low High C o s t Total cost Cost of measurement Cost of errors Accuracy Low a High Low High C o s t Source: Cooper (1988b)

It is important for a company to decide whether their current cost accounting system is positioned in the light blue or dark blue area. If the current system is positioned in the light blue area and cannot provide the accuracy at “point a”, Activity Based Costing should be implemented. If the Activity Based Costing system is positioned too far to the right in the dark blue area, less cost drivers or less expensive cost drivers should be used. This can be realized by using transaction/duration drivers, instead of intensity drivers that have a high cost of measurement.

3.2.2 Behavioural and organisational variables

Cooper et al. (1992) only describe the design of an Activity Based Costing system. Some of the literature in appendix C also applies on behavioural and organisational variables that should be taken into consideration. Although the real implementation of an Activity Based Costing method is not part of the assignment at Thales, it is important to know what variables are important if the cost accounting system is actually being implemented at the department Shipping & Distribution. Shield and Young (1989) used a model with seven factors that are important when managing activities. These are shown in figure 4. During this analysis of the 7 Cs we encounter seven (a-g) behavioural and organisational variables being important when implementing a cost management system. We begin the analysis with the culture of a company, because this is very important with regard to behavioural and organisational variables.

Figure 4. Seven Cs Model

Culture

Controls

Continuous education

Champion

Commitment

Compensation

Change process

Source: Shield and Young (1989)

Figure 4 - Seven Cs model

- There are two reasons that make the culture of a company important. The first reason is culture affects a company’s performance. Second, the most appropriate culture accelerates the rate of continuous improvement. The mindset of employees, including their shared beliefs, values and goals are influenced by the (corporate) culture (Shield and Young,

of changes. It is important he has top management standing behind him for financial and political support.

- The champion initiates the change of the process. Changes lead to resistance by people because of uncertainty. Employees and managers want to protect the current situation. The political top management support (a) plays an important role in overcoming this conflict. The changes also require the necessary internal resources like financial support and time

(b).

- Commitment to continuous education and improvements leads to the champion. The champion again tries to improve the process that leads to better commitment. Commitment can be improved by non-accounting ownership of the system (c).

- Controls are important when a process is changed. Control is designed to make sure that changes will be achieved. To achieve the goal clarity of the objective of the cost

management system (d) is important.

- Compensation is used to control the behaviour of employees and to motivate them. It is important that firms modify systems and thereby processes to achieve their strategic goals

(e). The system must be used to compensate and evaluate performances of employees (f).

- For two reasons continuous education is important, First it can lead to a culture of managing by commitment and continuous improvement. Second, improvements require innovation that is realized by exposing employees to new information in the form of education programs. Training in designing, implementing and using a cost management

system (g) is an important part of education.

The reason that the variables (a-g) are important is that they determine what is important to employees and their preparedness to accept and work with innovation (Shield, 1995). The internal resources are of extra importance. Reason is that Cobb et al. (1993) found that the lack of enough internal resources, particularly employee time and computer resources, are the biggest problems concerning the Activity Based Costing method.

3.3 Advantages & disadvantages of Activity Based Costing

We first take a look at the traditional system and why it is becoming outdated. After that we look at the advantages of Activity Based Costing in subsection 3.3.2. We end this section by also warning companies, and specifically Thales Nederland, for some disadvantages of Activity Based Costing.

3.3.1 Traditional cost accounting system

Before Activity Based Costing was introduced, most companies used the traditional cost accounting system. Two important features are that direct costs, which consist of direct labour and direct material costs, are traced directly to the products and that indirect costs are traced back to the products by using a predetermined overhead rate.

process (Miller and Vollman, 1985). Consequence is that the accuracy of allocating indirect costs declines while the amount of indirect costs is increasing. Therefore a good allocation is even more important. Some products are charged too much overhead costs, while other products are charged too little.

Wrong cost allocation leads to wrong decisions, because profitable products may not be as profitable as the company thinks. If you look at appendix B the overhead costs for P1 according to the traditional cost accounting system are € 22,55 while in fact the overhead costs according to the Activity Based Costing method are € 90,10. If the company uses the traditional cost accounting system and they sell a product with a profit of € 70,-, then the real profit only is € 70,- -/- (€90,10 -/- € 22,55) = € 2,45. If they sold it with a profit less then € 67,55 according to the traditional cost accounting system it wasn’t even actually profitable. Insight in the activities and the value they create is very important. The fact that the traditional cost system cannot offer management to take decisions based on the output is one of its big shortcomings.

The shortcomings described above are due to automation of the production process. If we don’t take this into consideration the traditional method still isn’t optimal. The optimal system looks at the cost of errors and the cost of measurement. The cost of measurement has decreased drastically because of new information systems that gather a lot of information. The information required for a more accurate system already exists, but just isn’t used with the traditional system. This is shown in figure 5. If you look at the right picture, the optimal situation is at point A, while the traditional method is still at point b. This maybe was the optimal situation when there weren’t any information systems and the costs of measurement were more expensive (left picture in figure 5). Nowadays this is outmoded.

Figure 5. Decrease of the cost of measurement

Total cost Cost of measurement Cost of errors Accuracy Low a High Low High C o s t Cost of measure-ment Cost of errors Accuracy Low b High Total cost Low High C o s t a Current values Prior values Total cost current situation

3.3.2 Advantages of Activity Based Costing

In the previous subsection we discussed some shortcomings of the traditional cost accounting system. The main advantages of the Activity Based Costing method are that they deal with these shortcomings. There is al lot of literature (Buchanan, 2007; Stapleton et al., 2004; Geri and Ronen, 2005) that describe why Activity Based Costing should be used. The main advantages are given below. The rest is described in appendix E.

- The data of an Activity Based Costing system are more accurate and reliable than those generated by traditional costing systems.

- Because of better accuracy and reliability of the system, managers are willing to use them for decision-making and performance evaluation (Activity Based Management). - Activity Based Costing identifies value-added activities & eliminates or reduces

non-value added activities.

- The system helps firms to become more efficient and more effective. As a result firms save costs, create more profit, customer satisfaction is higher and they have a competitive advantage compared to firms that don’t use Activity Based Costing.

- Activity Based Costing is suitable for service organisations, in contrary to the traditional cost accounting systems, where not all service costs can be allocated to a product or a customer.

3.3.3 Disadvantages of Activity Based Costing

Buchanan (2007), Naughton-Travers (2001), Stapleton et al. (2004) and Geri and Ronen (2005) also describe some disadvantages of the Activity Based Costing method. Again the main points are enumerated below and the rest is given in appendix E.

- All costs can be defined, but where and how to assign them can be extremely difficult (for example: Salary CEO)

- Activity Based Costing is resource-consuming. The implementation takes time and is costly for the firm to adopt. The registration of time to activities can also be labour-intensive (costs of measurement).

- The benefits of the system, more accuracy and as a consequence lower costs of error do not always outweigh the disadvantages, the costs of measurement involved.

- Employees may be resistant to changes and the extra work involved. They may not be willing to break from the status quo.

- The main difference between traditional absorption costing and Activity Based Costing is the number of cost drivers. It still is based on subjective arbitrary cost allocation, because Activity Based Costing keeps using absorption criteria, allocation criteria and volume assumptions.

- The system regards the relation between activities and resource consumption as linear, absolute and certain. This means that additional activities result in additional costs, and reduced activity levels imply cost reductions. In reality this isn’t always the case.

Although Activity Based Costing has weak points, some of them can be overcome with the design of the system and the behavioural and organisational factors. These are already mentioned in subsection 3.2.2. Some other weak points (like subjective allocation and linear relationship) indicated still are an improvement if you compare it with the traditional cost accounting systems. Generally you can say that if the costs of errors aren’t extremely low and/or the costs of measurement aren’t extremely high, Activity Based Costing is an improvement. Especially if you consider that automation of the process and information gathering systems will only improve.

3.4 Activity Based Costing applied to logistics

Most of the research papers and articles dealing with Activity Based Costing have their focus on manufacturing operations, although the Activity Based Costing approach can be applicable across the spectrum of other company functions like logistics (Pirttilä and Hautaniemi, 1995). Because of the low level of management attention to logistics, many firms do not have sufficient insight into the characteristics of the distribution of their products and therefore, lack sufficient insight into distribution costs (Stapleton et al., 2004).

Logistics costs have become an important part of the added value of products and logistics management is increasingly regarded as an important weapon in the international competitive struggle (van Damme and Amstel, 1996). Activity Based Costing can assist logistics managers by showing the connection between performing particular activities and the demands those activities make on a firm’s resources (Stapleton et al., 2004).

Figure 6. Transformation process for a production organisation

Production Incoming means of production Incoming goods Outgoing flow of money OUTPUT Outgoing goods Incoming flow of money Outgoing flow of money Incoming flow of money INPUT Outgoing flow of money Buying market means of production Buying market goods Capital market Sales market Stock materials and parts Stock end-products

Source: van Damme (2000)

Figure 6 - Transformation process for a production organisation

production organisation is given in figure 6. The flows of money that directly result from the transformation process are called operational or primary flows of money. The outgoing and incoming flows aren’t synchronic due to the cycle time, terms of payment and indivisibility of means of production. This indivisibility and as a result cost not being synchronous is the source of the cost attribution problem (van Damme, 2000).

By comparing the transformation process of a production company with a logistic company you can identify the differences in flows of money. The main difference is that there are no goods bought or sold (figure 7). The flows of money due to means of production and the capital market remain for a logistic company. Only there are no products being produced, but services being provided.

There are a lot of variations in the services provided due to the variations in the way products are being transported. In figure 7 these are pallets, role-containers and boxes/packages. Another reason for variation in services is the type of products and their measurements. A pallet with a box of one m3 is easier to pack than a pallet with ten boxes of 1/10 m3, but both have the same volume. Finally customers can lead to variations in services provided due to delivery distances and specific transport/packing demands (van Damme, 2000).

Figure 7. Transformation process for a logistic organisation

OUTPUT boxes/packages Outgoing flow of money Incoming means of production pallets Outgoing flow of money Incoming flow of money Incoming flow of money INPUT pallets role-containers rolcontainers boxes/packages Buying market means of production: personel equipment buildings Warehousing Transport Transport Capital market Sales market warehousing & transport-services

Source: van Damme (2000)

Figure 7 - Transformation process for a logistics organisation

The Activity Based Costing model uses resources, cost drivers, activities, activity drivers and finally cost objects. In appendix F is a table of Stapleton et al. (2004) that gives an indication of the components that can be used for a logistics company. Especially the “order filling”, “warehousing” and “shipping” activities are of interest for the department Shipping & Distribution at Thales.

Van Damme (2001) created a standard Activity Based Costing model for logistic companies (figure 8). On top are the product costs. If you compare these with the incoming means of production shown in figure 7, you see that these are the same. The activities cause the main differences between a manufacturing company and a logistics company. All activities (inbound, storage, outbound and transport) refer to a service being provided and none of them to a production activity of some kind. The activities take place in the centre part in figure 7. In the end activities are allocated to products or clients. The allocation of activities by using activity drivers and the allocation of cost drivers with cost drivers is already handled in subsection 3.2.1.

Figure 8. Activity Based Costing for a logistic organisation

Cause of activities

Cost objects Product costs

Cause of costs

Activities

Terrain and buildings Material Personnel Raw materials

Inbound Storage Outbound Transport

Product or client 1 Product or client 2 Product or client 3 Product or client 4

space (m2 of m3) time (minute/hours) capacity (m3 or kg)

Pallets Palletplaces Pallets or

package

Kilometre or pallets time

(minute/hours)

Source: van Damme (2001)

CHAPTER 4: CURRENT COST ACCOUNTING SYSTEM

If you want to research whether Activity Based Costing is desired you first need to look at the current situation and compare both systems with each other. Section 4.1 handles the current cost accounting system being used by the department Shipping & Distribution and how it is established. The current system has some advantages and disadvantages. These are discussed in section 4.2.

4.1 Cost accounting system

The cost accounting method that was used a couple of years ago allocated overhead costs of the department Shipping & Distribution by charging a percentage on top of the material costs. This method is already being handled in the previous chapter, together with it’s advantages and disadvantages. Because of the disadvantages a new way of cost allocation was introduced. The overhead costs are allocated by charging a rate on outgoing freight volumes. The costs being charged and the formula used to allocate these costs are described in subsection 4.1.1 and 4.1.2.

4.1.1 Costs charged

The tasks performed by the department relate to the incoming and outgoing goods and all other services that are related to those activities. The costs that need to be charged by Shipping & Distribution to other departments is a fixed amount of which one part is the department cost that are all indirect. The other part is incoming transport cost. The allocation of incoming transport costs is done by charging an amount above the department costs. The reason for this method is that tracing the correct project numbers can be labour-intensive and in a lot of cases orders are anonymous/not project bounded. This, and the fact that only outbound orders are used to allocate costs, makes it impossible for the department to charge incoming transport directly on a project.

The services provided by Shipping & Distribution are done for the other departments of Thales Nederland and are mentioned in section 2.3. The department Mechanical Production & Modules is responsible for the metal working at Thales. As of 1 October 2008 this department is no longer a part of Thales Nederland, while it has been taken over by a company called Norma. The department Mechanical Production & Modules still makes use of the services provided by Shipping & Distribution and therefore is an external customer. A service level agreement has been set up for these services. This service level agreement is added as appendix G. Appendix H gives an overview of the processes at Shipping & Distribution. Together with the services in section 2.3 these are on of the main sources for the activities performed by the department Shipping & Distribution.

4.1.2 Establishment formula

As already mentioned, the costs that need to be allocated to the activities being performed are the indirect costs and the incoming freight costs. A dispatch-advice (an internal assignment for the delivery of goods that also serves the purpose of a packing list) for a project has a certain amount of fixed costs. The department covers these costs by charging a fixed amount. The variable indirect department costs, together with the incoming transport costs (also variable), are allocated by using a rate for each cubic metre. The cubic metres can be distracted from the system where the length, width and depth are registered. The formula used for the calculation of the costs that are being charged is given below.

Stage 1

Amount = fixed amount + variable amount * m3

The real costs made by the department aren’t precisely proportional to the size in cubic metres. Especially with great volumes the real costs aren’t as high as the formula calculates. The best example is the long range scanning radar S1850. If this product is charged for its volume of 450 m3 the costs charged are way to high if you compare this with the real costs. Therefore a maximum for products bigger than 100 m3 is constructed into the formula.

Stage 2

Amount = fixed amount + variable amount * m3

If volume >= 100 m3:

Amount = fixed amount + variable amount * 100

If volume < 100 m3:

Furthermore shipments with certain delivery conditions get a discount of 50%. These are the delivery conditions EXW and FCA. The reason for the discount is that these customers are responsible for the outgoing transport costs and there are almost no activities for Thales involved. Because of the maximum for products bigger than 100 m3 and the different delivery conditions there are four different types of categories for charging the departments costs.

Stage 3

If volume < 100 m3 & delivery conditions aren't EXW or FCA:

Amount = fixed amount + variable amount * m3

If volume >= 100 m3 & delivery conditions aren't EXW or FCA:

Amount = fixed amount + variable amount * 100

If volume < 100 m3 & delivery conditions are EXW or FCA:

4.2 Advantages & disadvantages of the current system Shipping & Distribution

The current cost accounting system has some advantages and disadvantages. Some specific disadvantages that are not yet mentioned in section 3.3 are described below. Although the system is less accurate than the Activity Based Costing method, there are some advantages. These are given in subsection 4.2.2.

4.2.1 Disadvantages of the current system

- The system allocates the department costs by using a volume as the cost driver. This volume is calculated by using the length, width and depth in the system. If goods are packed in square boxes than this is a good indication of the real volume. If this is not the case, too much volume is being allocated.

- Some of the larger products are being charged too much because the volume in the system isn’t a good indicator for the costs involved. To prevent that goods are being charged too much a maximum volume is created in the formula for goods with a volume bigger than 100 m3. This is an improvement in the formula, but it still isn’t realistic. All goods with a volume bigger than 100 m3 are charged the same amount of costs. In most cases it isn’t realistic to charge the same costs for goods with a volume of 100 m3 and 450 m3, because the amount of work probably isn’t the same.

- A dispatch-advice with the delivery conditions EXW and FCA are only charged 50%, because these customers arrange the outgoing transport and the corresponding costs. Like the maximum volume, this idea is created to improve the formula. If you look at the total amount of costs of the department (incoming freights, loading and unloading, outgoing freights, administration costs), charging only 50% of the costs is a rough and probably too low percentage.

- In some cases the (internal) departments that are charged for the services being performed by the department Shipping & Distribution want a specification of the cost. Now the department can only refer to the services generally being performed and the formula used for charging these costs. Some of the services are not performed for all departments. Therefore these departments within Thales may get the idea they are being charged too much.

- The budget for the department and thus the minimal amount that needs to be charged to stand break-even are the indirect department costs and the incoming transport costs. The department is dependant on the volume of the freights, but can’t influence it. If the break-even point can’t be realized, the formula for the underlying costs can be adjusted to still realize the budget. When using this method it isn’t really possible to judge the department on efficiency, while the budget is always realized. It is better to look at the demand of the cost objects and trace back how many activities are needed, because activities are a better indication for the costs. This way you get a better insight in why costs are being made by a department. A consequence is costs being charged can’t be easily adjusted, because they are linked to the activities performed.

doing this you already are looking at the activities performed. After the formula is complete you get a better allocation of costs, but you will never get a clear insight in the costs of the activities that are involved. This way, the cost accounting systems looks more like an Activity Based Costing system, but you don’t get the advantages from Activity Based Management. The current formula only charges 50% for the delivery conditions EXW and FCA. This is a better allocation of the costs, but you still don’t have a good insight in what activities are/aren’t performed and especially the value of those activities.

- The freight costs for outgoing transport are not part of this research. The reason is that costs can directly be allocated to projects and therefore are direct. In contrast with outgoing transport, the department Shipping & Distribution is indirectly charging the incoming freight costs. These costs cannot always directly be allocated to a project, because sometimes they are not project-related. The formula used, is concealing this problem by charging a fixed amount on top for every outgoing cubic metre.

- All costs made at Thales must be allocated to a project. Incoming transport is not always project related and therefore cannot always be allocated to a project. The reason for this is that unlike other departments at Thales, the department Shipping & Distribution is a service centre for these other departments. In the current situation inbound orders cannot be used as a cost object if Activity Based Costing is desired. Inbound orders that are not project related cannot be allocated. Therefore the costs made for an inbound order should not be charged to a project, but to the department that requested the services of the department Shipping & Distribution. The other department can still allocate the costs for the inbound order if this is project related and otherwise the cost made by Shipping & Distribution are for the department that requested the services.

- Even if the department Shipping & Distribution wants to charge the services provided to departments instead of projects, the applications currently do not make this possible.

4.2.2 Advantages of the current system

- Although the system is not very accurate, the formula is easy to apply and there are no costs of measurement. The m3 are already calculated in the system, and it is known what kind of delivery conditions the dispatch-advice has.

- The maintenance costs for a possible adjustment of the system are low.

- The cost accounting system can be made more accurate by using a more differentiated formula.

- With Activity Based Costing it currently is not possible to use orders as cost objects, because these cannot all be allocated to projects. The formula in use doesn’t have this problem.

The department Shipping & Distribution is aware of some defects in the current situation. This is why in the next chapter we take a look at the possibilities for implementing Activity Based Costing