22nd International Conference on Production Research

APPLICATION OF ABC AS AN AUXILIARY TOOL FOR COST REDUCTION

A.
1

M. Brito , R. Q. Nobrega , E. R. S. Silva , M.S.A. Leite

Department of Production Engineering, Universidade Federal da Paraba, Cidade Universitria, Zip code 58051-900, Joo Pessoa, Paraba, Brazil 2 Institute of Computer Science and Mathematics, Universidade Federal de Itajub, Pinheirinho, Zip code 37500-903, Itajub, Minas Gerais, Brazil Abstract This article concerns the application of the Activity Based Costing method (ABC) as a tool to hold cost reduction. A literary review was made and it involved cost management, ABC method, target costing, kaizen costing and value stream mapping. Based on the researched literature, the results could be separated in three phases: (1) application of the costing method in service costing, (2) application of the value stream mapping in services with a greater incidence of indirect costs and (3) suggestion of a more appropriated cost reduction technique to the service in analysis. This research is exploratory and applied; it is also focused on a case study in a restaurant. The results obtained with this article indicate service costs and point out the ABC method as an auxiliary tool in the search for cost reduction. Keywords: Activity Based Costing, Value Stream Mapping, Wastage, Service.

INTRODUCTION

In nowadays economy service sector has been representing one of the most important segments to the world economies. According to [1], in 2009 service sector represented 68.5% of Brazilian GDP. Besides, the sector responded for 77.3% of formal jobs in Brazil. This work was made in a self-service restaurant. According to [2] most commercial restaurants do not contemplate adequate cost systems. In their opinion this may compromise the company structure and detour business focus in strategic level. It also occurs with self-service restaurants as they do not analyze, under different aspects, costs and wastage involved in their productive processes. To the authors it is indispensable the wastage analysis in self-service restaurants. Directing towards competitiveness increase, companies modernize their productive processes and adopt advanced costing techniques as well as activity based costing (ABC), Kaizen costing, processes improvement and quality total cost [3]. ABC aims reduction traditional costing methods limitations which were widely used in 20th century. Especially in the last decades these methodologies became obsolete due to 2 phenomena: 1) competitiveness increasing among organizations and constant search for cost reduction; 2) growth of indirect cost relevance to organizations [4]. In this study, ABC was applied with the objective of supporting costing reduction in a company of services. The

tool used to identify wastage in productive process was Value Stream Mapping. Due to its capacity of gathering, analyzing and presenting information in a short period of time VSM became pointed out as a tool for continuous improvement. The most important objective of Value Stream Mapping is the identification of development opportunities in a short period of time [5]. Therefore, the objective of this work is to identify how ABC can help an organization in service sector in the search for costing reduction. Topic 2 presents a literature review about the approached subjects. 2. LITERATURE REVIEW This topic contemplates theoretical aspects related to ABC, VSM, Kaizen costing and self-service restaurants. 2.1 Activity Based Costing According to [6] ABC arose in the 80s as an answer to traditional costing methods (costing centers) because traditional methods did not provide the necessary support in decision-making. ABC is divided into 2 stages. On first stage resources are assigned to different activities using resources drivers. Costing drivers are factors chosen to allocate costs to activities [7]. And activities costs are allocated to products using activities drivers. Below, picture 1 shows ABC functioning.

Figure 1- ABC functioning

Source: [8] The usage of many costing drivers creates a more exact VSM is a technique used to analyze material and costing calculation; however the choice of costing drivers is information flow which are needed in producing goods and a challenge to the good application of ABC [3]. Selection of services. The technique involves all necessary activities to costing drivers is an important step towards the application attend customers demand, i.e., the mapping approaches of ABC for this choice affects cost management, helping in from supply stages to product or service delivery [11]. reduction and/or elimination of activities which do not add To [12] value stream is made of an integrated material and value to the company [9]. information system. It corresponds to the transfer of stream VSM is a tool used to identify wastage in organizations. value to a map and this mal corresponds to present and Topic 2.2 presents a literature review about this subject. future states of a system. 2.2 Value Stream Mapping According to [13] there are two value stream maps, first map identifies the current state of productive process and In order to face the world financial crisis started in 2008, the second presents an idealization of productive process many companies began to encounter difficulties when it with the adoption of process development. comes to surviving because money flow became a big concern. Besides loyalty to customers was showing itself To draw the present map and future scenario a set of icons significantly affected. Cost reduction, improvement in and symbols are adopted and they are suggested by [13]. quality and construction of powerful bonds with customers Picture 2 shows the main icons and nomenclatures in use. started to become each time more relevant in modern market [10].

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Figure 2 - Main icons and nomenclatures in use CONS

Process Material Flow

Outside sources

Data box

Inventory

Truck Shipment

Push

Finished goods To customer

First in First out Sequence flow

Supermarket

Physical Material Pull

Information flow

Manual Information Flow

Electronic Information Flow

Information

Load Leveling

Source: Adapted of [13] Topic 2.3 presents a literature review approaching Kaizen costing. 2.3 Kaizen Costing According to [14] there are two different forms to contemplate the effort in the search for better performances in productive process: first is the progressive advance and second is about innovation. It is already known that the Japanese industry privileges continuous upgrading while western industry supports development through innovation, that is, improvement happens in big steps. In this article one of the improvement techniques approached in case study application was Kaizen costing. It is a costing method used by organizations in order to find products cost reduction during its lifecycle. Kaizen philosophy has been attracting the interest of researchers due to its effects, for the companies this philosophy aims increasing productivity in an organization and allows them to provide high quality products with smaller efforts [15]. To [16] Kaizen costing corresponds to the continuous improvement process which aims the constant cost reduction in productive process. When it comes to the organization, its systematic consists of cutting costs by eliminating unnecessary activities in productive process. [14] points out that Kaizen applications does not demand high investments in its implantation, thus it is necessary a continuous effort and the commitment of all. In ideal situations the method is continuously applied and generates gradual progress. It is important to note that in Kaizen costing, due to cost reduction made in production stage, the continuous improvement also passes through workers knowledge absorption once these are the ones who have a better knowledge of productive processes and will be able to help develop it [17] 3. METHODOLOGY According to [18], a research may be classified under four aspects: as to the nature of research, as to the way of approaching the problem, as to objectives and as to technical procedures. This research has an applied nature for its objective is to apply techniques previously studied in order to solve a problem. Related to the problem approach, this article can be classified as a quantitative study, because this work aims to calculate the cost in the analized restaurant. According to [19], the classification of research types can be done using two basics criteria : about the purposes (research: exploratory, descriptive, explanatory,

methodological, applied, and interventionist), and about the methods (field research, laboratory research, documentary, bibliographic, experimental, ex post facto, participatory, action research, case study). This research is composed by the following technical procedures: 1) Bibliographic search: it was made a consultation to books, conferences proceedings, dissertations, national and international journals; 2) Documental search: existing documents in the restaurant were identified in order to identify existing expenses; 3) Case study: this study is characterized by the application of ABC in a restaurant. Concerning the research objectives it has an exploratory character for it aims providing a better overall view about and existing fact. The execution of this work is divided into four steps. The table 1, below, presents the steps which were made and also a brief description. Table 1 Steps of this article Steps Application of ABC Description Application of this method aimming to calculate the costs of the services Aim to map the waste in the organization Aim to identify the most appropriate cost reduction tool.

and section 4.2 approaches value stream mapping in the studied entity. 4.1 Application of ABC Table 2 identifies basic characteristics concerning cost management in the studied organization. This information aims identifying the applied costing method, the importance that cost management has to the organization and the methodology used to reduce costs. Table 2- Importance of cost management according to the owner Cost management Importance of management Cost management tool Costs classification Costing method applied cost Answer Important Do not apply Variable, fixed, and indirect Do not apply

direct

Value Stream Mapping Adoption of cost reduction technique

Source : Authors elaboration These aspects related to cost management were obtained through interviews with the entrepreneur. Table 3 synthesizes the main existent cost items in organization, classifies cost according to its nature and measures the financial sum that is monthly used. Table 3- Costs in the restaurant Cost items Electricity Nature Indirect and variable Indirect and fixed Indirect and fixed Indirect and variable Indirect and variable Indirect and variable Indirect and variable Direct and variable Direct and variable Indirect and variable Value (R$) 1200 625 5000 1200 1600 1200 2000 1600 2800 1340

Source : Authors elaboration The first step of the work consists in the application of ABC in order to cost the services provided by the organization. The steps suggested by Bornia (2009) will be adopted in the application of the method. According to [8] four steps are necessary to adopt ABC method: activity mapping, allocation of costs to activities, redistribution of indirect activities cost up to the direct ones and calculation of products or services costs. During the application of ABC method interviews were made with the manager to measure the existing expenses in the organization. Besides, interviews with workers were also made with the objective of identifying the existing activities in service. The creation of cost and activities drivers was accomplished by direct observations. The second step of this work consists of mapping the existing processes in the restaurant. The technique which was used was Value Stream Mapping. In this article the procedure recommended by [13] was used to map the value stream. This procedure is made of four phases: (1) selection of a product family; (2) current state mapping; (3) future state mapping and; (4) work plan and implantation. After identifying inefficiencies in productive process of the restaurant a cost reduction tool will be suggested. Kaizen costing will be suggested if the found wastage happens in productive process. Target costing will be suggested if the organization needs to cut cost down during the phase of developing the product. 4. RESULTS The restaurant is located in Joo Pessoa, in the state of Paraba, it is a self-service type and was founded in 1999; it is considered a micro-company. Data obtained in this chapter were collected in November. The obtained results were divided into two, section 4.1 refers to cost management and application of ABC method

Accountant Rent Water Cleaning Social charges Gas Cook (2) Assistants (4) Waiters (2)

Source : Authors elaboration The costs of transformation found in the restaurant are present on Table 4. This information was obtained with the business manager through interviews and analyses of existing documents in the organization as electricity bills, water bills and cost spread sheets. However, the manager did not have information about the monthly consumption of raw material in the restaurant. So the researcher chose to question workers about the monthly consumption of these raw materials. Table 4 presents the companys existing raw materials, their consumed amount and the cost per kilogram.

Table 4- Raw materials in the restaurant

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Raw materials Rice Macaroni Beans Spaghetti French Fries Chicken Beef Fried Chicken Sirloin Breaded pork Tomato Onion Pepper Potato Carrots Cabbage Chard Pod Beets Watermelon Pineapple Melon Papaya

Quantity (kg) 750 540 180 210 2025 540 540 540 360 240 150 150 60 150 150 120 90 45 150 360 90 140 90

Cost per kilogram (R$) 2,17 2,20 3,67 2,20 2,50 7,20 12,50 7,20 12,50 12,50 1,40 1,40 1,80 1,90 1,15 2,50 2,00 2,00 1,25 0,60 1,55 1,20 0,60

The foods served in the restaurant were divided into four categories: cereals, meat, vegetables and fruit. Table 5 presents the necessary activities to prepare cereals. Table 5- Cereals prepared in the restaurant Product Rice (10 kg) Activities Boil the water Cook rice Cook carrots Season Boil the water Cook Season Boil the water Cook Braise Cook Season Fry Time 5 minutes 10 minutes 10 minutes 5 minutes 5 minutes 20 minutes 4 minutes 5 minutes 15 minutes 5 minutes 40 minutes 3 minutes 1 minute

Macaroni (6 kg)

Spaghetti

Beans (7 kg) French Fries (3 kg)

Source : Authors elaboration Table 6 presents the two types of meat that are served; besides the necessary activities to prepare as well as the time need to perform each activity. Table 6- Meat prepared in the restaurant Product Chicken (4,5 kg) Beef (4,5 kg) Fried Chicken (6 kg) Activities Cut Fry Cut Fry Cut Season Fry Cut Cook Braise Cut Season Fry Time 5 minutes 2 minutes 5 minutes 8 minutes 30 minutes 5 minutes 5 minutes 15 minutes 2 hours 5 minutes 5 minutes 5 minutes 3 minutes

Source : Authors elaboration This measuring of raw materials quantity was made with the help from workers and it refers to November. However the cost of raw material was identified through interviews with the manager along November and through the analyses of existing purchasing documents. After the identification of raw materials consumption in the company it was started a search to identify the sequence of the transformation of raw materials into finished product. Figure 3 synthesizes the process in the organization. Figure 3- Activities in the restaurant

Sirloin cooked (12 kg)

Breaded pork (8 kg)

Source : Authors elaboration Table 7 identifies the vegetables and fruits served in the restaurant, the necessary activities to prepare them and also the time spent in each activity.

Source : Authors elaboration The activity mapping was made through interview with the kitchen workers as well as through direct observation. The preparation might happen in three ways according to the type of product. This activity may happen in the stove (cooking), frying plate or deep frying in the fryer. Tables 6, 7 and 8 identify the preparation steps for each food.

Table 7- Vegetables and fruits prepared in the restaurant Product Vinaigrette (tomato, onions and pepper) Mayonnaise (Potato, carrots and onions) Salad (Cabbage, chard and carrots) Pod Cooked beets Fruit salad (watermelon, pineapple, papaya and melon) Activities Wash Cut Mix Wash Cut Mix Wash Cut Mix Wash Cut Wash and Cut Cook Wash Cut Time 30 minutes 25 minutes 20 minutes 30 minutes 10 minutes 30 minutes 5 minutes 1 minute 30 minutes 5 minutes 10 minutes 1 hour 30 minutes 10 minutes 1 hour

cost, the value and the activity driver used to allocate cost to activities. Table 8- Cost drivers applied in the restaurant Costs Electricity Accountant Rent Water Cleaning Social charges Gas Cook (2) Assistants (4) Waiters (2) Value 1200 625 5000 1200 3800 2000 1600 1600 3500 1340 Cost driver Potencies of equipments (KW) Number of workers rea Number of workers Number of workers Number of products rea Direct allocation Direct allocation Direct allocation

Source : Authors elaboration After selecting the cost drivers to be used a measuring process of these drivers started. Potencies of equipments Source : Authors elaboration were identified through catalog consultations. The number of workers was obtained through an interview with the After tracking cost and mapping the activities in the entrepreneur. The area was calculates through the organization it was started a search in identifying activity measuring of the ambience and the number of products drivers to identify the resources consumption in these that use gas in their activity was obtained through direct activities. Four activity drivers were used: equipment observation of the researcher. Table 9 measures these potency, number of workers, area and number of products drivers in activities. which use gas in the activity. Table 8 presents the type of Table 9 : Measuring of cost drivers Cost drivers Activities Cutting Fry in the plate Fry Baking Transport Storage Service Total Potencies (KW) 0,4 22 43,9 10 0 2 3 81,3 Number of workers Number of products rea

2 0 10 1 1 10 1 4 10 2 4 10 1 0 0 0 0 16 2 0 250 9 9 306 Source : Authors elaboration With the measuring of cost drivers it was possible to In possession of the activity cost, it started an identification support the activities executed in the organization. Table of the relationship between activity costs and services 10 presents allocation of costs to activities using drivers of offered by the organization. To finish this step the activities. First column of table 10 shows the type of cost researcher idealized cost drivers to be used. The following and the activity driver used in the calculation. table identifies the second stage cost drivers which were idealized.

22nd International Conference on Production Research

Table 10:Costs of the activities Activities Cutting (R$) Fry in the plate (R$) 324,72 69,44 163,40 133,33 422,22 222,22 52,29 0,00 0,00 1.387,63 Fry (R$) Baking (R$) Transport (R$) Storage (R$) Service (R$)

Cost items Electricity Accountant Rent Water Cleaning Social charges Gas Cook Assistants Total

5,90 138,89 163,40 266,67 844,44 $ 0,00 52,29 1.400,00 0,00 2.871,59

647,97 69,44 163,40 133,33 422,22 888,89 52,29 700,00 0,00 3.077,55

147,60 138,89 163,40 266,67 844,44 888,89 52,29 700,00 0,00 3.202,18

0,00 69,44 0,00 133,33 422,22 0,00 0,00 700,00 0,00 1.325,00

29,52 0,00 261,44 0,00 0,00 0,00 83,66 0,00 0,00 374,62

44,28 138,89 4.084,97 266,67 844,44 0,00 1.307,19 0,00 1.340,00 8.026,44

Source : Authors elaboration After idealizing activity costs drivers to be used in the events that took place in October. Time is represented in research the measuring of these drivers was aimed. To do minutes, quantity in kilograms and the number of so it was necessary the application of interviews with preparations is a dimensionless measure. Table 11 kitchen workers and these values were measured through presents the values obtained through the research. Table 11- Activity cost drivers applied in the restaurant Activity cost driver applied Cutting time Frying time in the plate Frying time Baking time Number of prepairments Quantity Quantity Source : Authors elaboration Based on these data, activity costs will be allocated to the Table 12 shows a redistribution of activity costs to the services using costs drivers or second stage drivers. services. Table 12- Costs of activities Cutting Fry in the plate Fry Baking Transport Storage Service Activity cost drivers Rice Macaroni Spaghetti Beans French Fries Chicken Beef Fried Chicken Sirloin cooked Breaded pork Vinaigrette Mayonnaise Salad Pod Cooked beets Fruit salad Total Cutting 0 0 0 0 0 450 450 450 450 250 180 1800 450 150 600 450 5680 Frying in the plate 0 0 0 0 0 0 0 450 0 0 0 0 0 0 0 0 450 Frying 0 0 0 0 600 240 960 0 0 90 0 0 0 0 0 0 1890 Baking 1800 1800 450 1200 0 0 0 0 3600 0 0 0 0 0 0 0 8850 Preparation 60 90 30 30 600 120 120 90 30 30 30 30 30 30 30 60 1410 Quantity 750 540 180 210 2025 540 540 540 360 240 300 300 300 45 150 678 7698 Activity

Source : Authors' elaboration

Based on the results obtained in table 12 it was possible to 13 was elaborated with the fabrication total indirect cost, calculate the total indirect cost of services adding the costs amount produced and fabrication indirect cost per kilo of found in the necessary activities to service. With this, table food. Table 13- Indirect cost in the restaurant Services Rice Macaroni Spaghetti Beans French Fries Chicken Beef Fried Chicken Sirloin cooked Breaded pork Vinaigrette Mayonnaise Salad Pod Cooked beets Fruit salad Total (R$) 1.526,17 1.325,18 387,45 691,56 3.750,77 1.320,39 2.492,79 2289,03 1951,15 563,05 446,59 1.265,60 583,09 153,14 495,23 1.023,81 Quantity (Kg) 750 540 180 210 2025 540 540 540 360 240 300 300 300 45 150 678 Indirect cost per kilo (R$) 2,03 2,45 2,15 3,29 1,85 2,45 4,62 4,23 5,42 2,35 1,49 4,22 1,94 3,40 3,30 1,51

Source : Authors' elaboration After dividing indirect costs to services it is possible to to raw material costs and direct labor. Table 14 measures calculate the unit cost of the service adding indirect costs the unit cost per kilo of all food served in the restaurant. Table 14- Cost per kilo Service Raw material (R$) 2,17 2,20 2,20 3,67 2,50 7,20 12,50 7,20 12,50 12,50 1,48 1,60 1,95 2,00 1,25 0,85 Workers (R$) 0,21 0,21 0,21 0,21 0,21 0,21 0,21 0,21 0,21 0,21 0,21 0,21 0,21 0,21 0,21 0,21 Indirect cost per kilo (R$) (R$) 2,03 2,45 2,15 3,29 1,85 2,45 4,62 4,23 5,42 2,35 1,49 4,22 1,94 3,40 3,30 1,51 Cost per kilo (R$)

Rice Macaroni Spaghetti Beans French Fries Chicken Beef Fried Chicken Sirloin cooked Breaded pork Vinaigrette Mayonnaise Salad Pod Cooked beets Fruit salad

4,41 4,86 4,56 7,17 4,56 9,86 17,33 11,64 18,13 15,06 3,18 6,03 4,10 5,61 4,76 2,57

Source : Authors' elaboration 4.2 Value stream mapping After analyzing cost it was found that the food which cost more to the organization was the meat because they have In the restaurant three stages were followed to make the a high value raw material comparing to the other food. value stream mapping: 1) identification of the products Besides, indirect fabrication costs are also strongly related family; 2) current stream mapping; 3) future scenario to these services. Before this observation it was decided to mapping. map the value stream of these services in order to identify The restaurant products were divided into three family wastage through the process. Topic 4.2 approaches the products. First one is represented by produce like chard, value stream mapping made in the restaurant.

22nd International Conference on Production Research

cabbage, tomato, watermelon and papaya. Second family is the one of cereal represented by rice, beans and pasta. The third family has meat as beef, chicken, fish and pork . With the identification of the product family in study it was necessary to make a mapping of the present situation of the productive process. To finish this step interviews with

workers and the owner were made. Interviews with workers aimed measuring the amount of used raw material, products transportation and stocking of raw material. Figure 4 shows the current stream in the restaurant.

Figure 4 Current stream in the restaurant Source : Authors elaboration The process is initiated with weekly demand prediction On the second box it is the meat seasoning step. After this made by the owner. He orders beef and the provider beef stays in waiting state for one hour so that the frying delivers raw material twice a week. The raw material process can start. This step has a cycle time of one hour. remains stocked in the kitchen until production commands After frying beef they go to the hall and are served to the are received. client. Information disposed on data boxes were obtained with the The main problem found was the existence of waiting help from kitchen workers for the entrepreneur did not between the seasoning step and preparing step. have control about the time of productive products as well Nevertheless, waiting between cutting and seasoning as quantity of raw material involved in supply. steps may have been an improvement point to be studied in the future. On the first data box it is represented the cutting process. On this step, during 2 hours, the cook cuts different types The map of the future state was idealized without the of existing meat in the proper serving size. In this process waiting between the seasoning and preparing steps. 44kg of meat are cut every day. After the cutting process Picture 5 illustrates the future scenario idealized by the the beef remains stocked for 10 minutes before they are researchers. seasoned.

Figure 5 - Future scenario in restaurant Source : Authors elaboration According to the idealized future map, waiting between the how Kaizen costing could help the company as a tool to seasoning and frying process was eliminated. It could be seek cost reduction. verified that a one-hour reduction of lead time was possible The study in the restaurant allowed identifying that Activity enabling the realization of other activities in the kitchen Based Costing is an applicable tool in this sector. The during this period. application of ABC allowed supporting different food To implant the suggested improvement it is necessary to served in the restaurant directing wastage analyzes to the search a development in productive system, i.e. the product family with greater cost to the organization. indicated tool to search cost reduction in this case is After choosing the product family with more indirect cost Kaizen costing. It is suggested that the procedure is incidence a value stream mapping was made. The value divided into four steps: stream mapping represented the current state of the 1) Planning on this stage information will be collected productive process and an idealization of the future and techniques will be identified so that they are able to be scenario without the wastage that was found. The used in productive process idealization of the future state suggests that the 2) Implantation on this stage suggested techniques will organization try to eliminate or diminish the waiting existent be implanted and the production process with the new between the process of seasoning and frying. technique will be registered. The indicated tool to reach the desired cost reduction was 3) Verification on this stage theoretical and the identified Kaizen costing for this methodology aims reaching practical results will be compared. operational excellence through the improvement of 4) Acting if reduction is not reached other suggested cost productive processes. reduction option will be analyzed; these options were suggested on the first planning stage. If the improvement is Low cost control and unawareness about the productive reached the procedure is standardized in the company. process were the main problems found during the application of ABC method. Main difficulties in the 5. FINAL CONSIDERATIONS application of Value Stream Mapping were the identification of the productive process steps and the Due to high competitiveness existing in modern market identification of wastage through the process. organizations need to operate more efficiently aiming the cut of wastage in the long productive process. The main contribution of this work consists in the combination of these analyzed tools as support tools in the The aim of this research was achieved. The authors search for operational excellence of the organizations. applied Activity Based Costing in order to identify the most expensive services. The application of Value Stream Mapping allowed the authors to find out about the type of wasting in this company. Thus, it was possible to indicate

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6. ACKNOWDGMENTS

The authors of this paper are grateful to FAPEMIG for their support in the research project, which allowed for greater integration between researchers.
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