Costing methods

The rapid and recent changes in the business field have led to the emergence of modern systems of costing and the fast increase in global competition to maximize the role of cost management. The precise knowledge of the product cost and its pricing as well as proper planning concepts became more important than they were in the past. Each establishment is seeking to gain a competitive advantage to enable them to survive and continue in the global market competitiveness (Abbas,2009).
El-Gibaly and Diab (2012) mentioned that Egyptian businesses are now working in a very competitive environment in making significant process improvements in areas such as productivity, quality, and innovation because the customer need more product choices, at the best prices, with faster delivery and higher quality. It is also clear that companies nowadays need more timely, accurate, and reliable financial, operational and information to enable the managers to make effective tactical and strategic decisions about product line development, pricing, product mix, investment decisions, ….etc.
Kevin(2000) illustrated that (ABC) ACTIVITY BASED COST is a methodology that measures the performance and the cost of activities, resources and all other cost objects providing accurate cost information for managerial decision making. (ABC) ACTIVITY BASED COST is not exactly an accounting exercise but rather a methodology that produces a bill of activities that shows the cost buildup for individual products, services or customers.
Szychta(2010) revealed that ACTIVITY BASED COST (ABC) methods used in service units supply information on costs of provided activities and services are used for understanding the profitability of groups of customers and markets. Such information should provide a basis for the managing of customer profitability and improving customer relations.
Marx (2009) showed that the Traditional Costing (TC) methods are utilized as a one-figure volume-based cost driver. This is the reason why the old school product costing method alters the cost of products. He also added the ACTIVITY BASED COST (ABC) method is a different approach, which improves understanding and controlling of overhead by a cost/cause relation, which is activity and cost. He also concluded that ACTIVITY BASED COST (ABC) method obligate the manager to investigate fixed costs more closely. And this helps the management to identify areas of cost inefficiency as well as recognize the cost which we could have perceived as fixed but, which are in the fact, variable or even semi-variable to the production.
The past decades were characterized by local, regional and international developments and challenges in many aspects, which had a great influence on the economical units working in the Egyptian business environment. To face these developments, modern administration methods should be utilized to form radical changes in the method of administration because the Traditional Administration (TA) methods are no longer capable of dealing with such developments. The Activity Based Cost methods are regarded as one of the most important of these methods, where they began to be utilized during the end of the twentieth century by Cooper and Kaplan. They used this method in U.S.A because of the severe competition faced by the American companies where existing systems were not able to supply these companies with accurate costing information to enable them to plan and take monitoring decisions (Grasso,2005).
Noting that the Traditional Costing (TC) methods were not suitable to function in the current business environment even though these methods were suitable for work during the beginning of the twentieth century but not nowadays (Kaplan,1984 and Johnson,1987).
Needles et al.(1999) illustrated that the additional industrial costs before the last two decades in the past century were approximately 25% of the Total Product Costs (TPC). But changing the methods of production from manual, most of the costs took the form of direct wages and direct materials, to the mechanical production, resulted in an increase in the invested capital in the fixed assets and also led to the introduction of developed means in the manufacturing environment and consequently, an increase in the depreciation as one of the additional cost factors in addition to a reduction in value of fixed wages where large amount of labor force became dispersible and the additional industrial costs became representing 50% of Gross Product Costs (GPC).
Therefore, allocation of these costs according to non-logical methods including the direct labor hours which was the prevailing base for the allocation of these costs that resulted in wrong
Hence, the Traditional Costing (TC) methods do not succeed in dealing with the problem of allocating additional costs; and to avoid the deficiencies in these methods, the Activity Based Costing (ABC) methods came in hand to achieve costing characterized with high degree of accuracy of the product or provided service which resulted to an increase in dependence on these costing information.
Abbas (2009) concluded that the presence of the open environment and ease of communication between competitors was to increase the competition among enterprises which led to increased reliance on cost management to achieve competitive, advantage and the best proof of that is an entrance to some facilities accounting for the Activity Based Costing (ABC) system.
Tudose (2012) examined the research development on capital structure and enterprises performance. She stated that the effective analysis showed that the expert publications have been enhanced with theoretical powerful disputes. The actual research has provided significant analytical schemes for establishing, understanding and executing to identify enterprises performance policies and to quantify the impact of the financial structure of the enterprise’s performance. Also, the analysis revealed that anterior research has certain reservations that impose challenges for more investigation. She added that according to a summary (illustrative and decisive) concepts, levels, practices, approaches and tools associated with the study and theoretical or practical understanding of the effect of capital structure on enterprise achievement. The study suggested that there is noticed improvement in the scientific research and accordingly, in the application of the detailed techniques.
Ungureanu (2012) illustrated that according to the general perspective of globalization that is mainly based on information access, any corporation that ignores the advanced methods and wide-range technologies will have no place in such an intense aggressive competition environment. She added that principally the information access is accomplished by the accounts. So if the company has a powerful system of an integrated accounts, it can easily obtain a high level of decision making efficiency and reach a leading role in its specialized field.
She also stated that directors of enterprises should not ignore the important role of the financial and managerial accounting in influencing the decision making process, as professional accounting is not only used in the archiving process but also in providing information accurately and efficiently which guarantee a strong decision making system.
Bogdanoiu (2012) showed that in today’s market economy and the current requirements of the European Union (EU), management accounting has become a necessity for efficient pilot age of an organization that wants to remain competitive.
She also stated that her study, through the findings which will emerge from detailed analysis of the organization way of managerial accounting and cost calculation in a dairy products industry corporation, represents an alternative regarding concrete way that such an enterprise can improve their management and its leadership through costs.
Busan and Ciurlau (2012) mentioned that the ABC was accepted globally due to the dissatisfaction of the traditional systems of managerial accounting which led to the modeling of a new system to calculate relevant costs adapted to the corporation productions needs. With this procedure, the assignment, permitting a new vision in the corporation and cut cross vision, turn out to be the center of characterizing and modeling of entity and serves as an interface between the consumed resources and cost bears. They also added that by that mean you get real cost, based on strategic decisions by cutting out non creative actions and using the basis of allocation of costs it generates activity.
Hicks (1996) pointed out the importance of cost information usage by classifying the cost information users according to use type (table 1). From table 1, it’s obvious that managers use extensively most of cost information for decision making in businesses on daily basis. Other external users, like shareholders, tax officers and creditors mostly care about the income that is borrowed from their financials, capability to settle financial obligation and tax liabilities.

Table 1 : Cost information users.
Sr. No.UseUser type1Income and total inventory evaluation, sold product’s cost used for profit account.External.2Conformity with GAAPExternal.3Strategic plan.Management.4Capital budget.Management.5Operational plan.Management.6Operational budget.Management.7Cost control process.Management.8Cost & profitability of product.Management.9Product cost control.Management.10Financial analysis.Management.Source: Hicks (1996).
Sokda (2009) concluded that the ABC model structure provided a different preference objective in the excessiveness in particular posts and determined that gross salary isn’t the vital element to be taken in consideration. Information Technology, IT tools, telecommunication cost, post specific assets and other associated costs’etc. reformed the classification of excessiveness of these particular positions. He also showed that by allocating the overhead costs of by-products, in addition to the unit costs determination, the primary aim of the application was to demonstrate that while using the Activity Based Cost system (ABC), the cost management will increase and reach highest levels of performance. He added that the allocation procedure increased the cost information accuracy and improved the data base for the outcome decisions.
Johnson (2008) illustrated that on various business levels, the corporations management needs reliable information in order to lead the different tasks efficiently and decision making procedures decisively instead of founding crucial decisions on inaccurate data that weakens the corporation and ruin the long term strategies. That matter demonstrates the necessity of the board’s initiative to provide data and information and keep open-channels flow. He also reported that ABC system is considered valuable to most of the successful corporations as management accounting due to the fact that managing costs and earning awareness become internal competitive advantages.
Maiga and Jacobs (2003) pointed out that currently by studying the business world, it’s remarked that most of the corporations face various challenges such as deciding the most effective strategies and goals dealing with the limited resources and deciding the most convenient mean to obtain additional resources and how to distribute them to reach the optimal level of success. In addition, enterprises need to evaluate the link between the different inputs, goals and the related enhanced outcome in their procedures.
Divandri and Yousef (2011) stated that the ABC was established to bring better vision to how to distribute the overhead costs to the sole products or clients. Firm that uses Activity Based Costing system connects the resources expenses which are provided to the firm to the enterprise’s performed activities. By utilizing the ABC system, the expenses are distributed from the resources to the activities then to the outcome whether it’s product or service.
Neely (1999) showed that through the ABC process, firms receive better visions of effective and ineffective activities according to the clients preferences. Therefore, ABC method is considered a measuring tool for enterprises to produce income and provide a clearer vision for consumers best value. ABC is appreciated by many firms as it helps them to realize and measure their Matrics precisely.
El Gibaly and Diab (2012) mentioned that firms are now running in intensive competitive environment to make significant process improvements in areas such as productivity, information and quality because the customer expects more product choices , at lower prices, with faster delivery and higher quality. They added that is evident that firms , nowadays, timely and reliable financial and operational information to permit the managers to make effective strategic and tactical decisions about pricing, product mix, product line development, need more accurate, investment decisions, process improvements….etc. Also, they found out that there is a significant positive linear connection between ACTIVITY BASED COST method and performance improvement of some Egyptian companies also, the significant relationship between performance improvement and business efficiency is worth mentioning.
There is a close relationship among the cost systems and the environment in which it works. Whenever the cost systems succeed in expressing the nature of the events in the environment in which it works, its effectiveness increases in the service of the management through supplying it with the suitable information which reflects positively on taking the successful administrative decisions (Abd Al-Rahman,1996).
The costs system was developed over the following three stages:
The first stage was achieved during the half of the past century on year 1930 when the attention aimed at achieving the efficiency in the performance of the industrial operations and therefore the concentration was on determining the product costing where there was no importance in allocating the indirect costs (Mahmoud,1997).
The second stage started with the rise of the industrial revolution at the beginning of year 1950 where attention started with the principles of the standard costs to increase attention to monitoring (Ion,2012).
The third stage was achieved in the light of the fast technological developments where attention increased towards the problem of allocating the indirect costs as the consequence of increasing the large investments in the advanced technology (Stabus,1988). This resulted in indirect costs rate increase and the necessity to a better allocation of these costs (Mohamed,1996).
By early 1980, many criticisms were directed towards the deficiencies of the applied cost systems, which pushed the academic and applied researchers to search for new developed methods to match with these modern environmental variables and overcoming the deficiencies which happened to the Traditional Cost (TC) systems. Then, in America and Europe, cost allocating method on the basis of activities has appeared. But Japan, used some modern administrative philosophies such as the production philosophy Just In Time (JIT) and a group of methods for managing the costing, were developed in all stages of the product. According to what stated above, the justifications of the development in the costs system are represented in the changes emphasized in the modern manufacturing environment which were reconsidered in the familiarized cost systems to be evaluated and showing their efficiencies.
Those who follow the research and literature of the cost accounting and managerial accounting since the beginning of the eighties from the previous century, can witness in the last few years the birth of a new costing system which resulted in considering the previous costing system as an aging traditional system which does not match with what happened in the last three decades especially with the increase in the severity of the international competition as the consequence of the international orientation towards the liberation and the globalization of the economy.
The various types of firms faced several problems in the traditional methods for indirect costs allocation within the framework of large development in the information systems and the multiple activities and the complexity of the work procedures. This matter resulted in a change in the relative importance of the costs factors as a consequence of a reduction in the volume of the direct labor force resulted from the industrial development and the transformation of most of the manual work to a mechanical work and a weak existing relationship among the worker and the production unit and the aging of the costing reported and the unsuitability of their contents and the length of time for preparing these reports. Hence, the environment of the modern firms need instantaneous information to take spontaneous decisions which necessitates the speedy change to the costing systems supporting the administration activity and concentrating on the use of ABC system (Zaki, 2000).
El-Alkawy (2004) mentioned that the Traditional Cost (TC) method became unable to satisfy the administrative and technical needs in terms of information which assist it in making the decisions which are specific to these products and services; which resulted in the appearance of a new system in dealing with the costs based on activities especially in the United States of America and became widespread in various world countries including the Arab Countries.
Samy (2000) showed that the Activity Based Costing (ABC) method became an important tool used by the organizations to achieve their objectives, where this system attempts to discover a direct relationship between the activities performance costs in organization and the products, customers and those beneficiaries from those activities.
Witherite and Kim (2006) illustrated that the Activities Based Costing (ABC) method became recognized as a widespread system because it is a main method for allocation of indirect costs.
Abd El-Karim and El-Kakhn (1997) stated that the Traditional Costing (TC) methods remained in wide use until the year 1987 when the two researchers (Cooper and Kaplan) presented a new method for allocation which was defined later as ABC method which has good characteristics compared to TC method especially in the field of providing the information suitable for taking the operational and strategic decisions and consequently, this new method was approved by both the academic and managers and its use became widespread especially in the large industrial firms in America and Europe.
Oglesby (2008) stated that management’s resistance to ABC results from lack of understanding benefits associated with ABM and a failure to recognize the bottom line impact of ABM/ABC linkage. He also added that since his study involved a small group of not -for- profit agencies in Midwest. He recommended the study is to be replicated in a broader environment to determine adoption of ABC in other areas of the country.
The concepts of managerial accounting have not drastically changed since the 1920s. When Henry Ford introduced the assembly line for the Model T, there was a need for better cost control. He was reported to have detested cost accounting, but became a multimillionaire in spite of his continued antipathy toward cost control methods. The global environment has changed drastically since the Model T. Worldwide competition has forced U.S.A. manufacturing companies to examine their production systems. Some major U.S.A. industries will not survive unless they make pervasive changes in the utilization of both physical and human resources. Many business practitioners and some of their former professors have already joined forces to modify and adapt the managerial accounting practices to the needs of production system changes in response to worldwide competition. The U.S.A. dominated the industrial world for three decades after World War II. It also aided the war-devastated countries, particularly its enemies, to rebuild their industries for a world of peaceful trading partners. Not until the late 1970s did U.S.A. recognize that West Germany and Japan were producing high – quality products more efficiently (Lewis,1993).
There is an urgent need to use a financial accounting module for analyzing the financial firms position in order to determine their performance efficiency (Mates, 2004 ; Petrescu,2008 and Stefea,2008).
The factor analysis shows that the ABC concept consists of four aspects which are the total performance, the developed competence, the developed effectiveness and the strategic cost distribution process. The regression outcomes are compelling at 5% level which shows that ABC as a measurement tool of strategic cost distribution, developed competence, and developed effectiveness have important and positive impact on the total company’s performance (Zaman,2009).
There is a great need to illustrate the recent debate around empirical positivistic study in managerial accounting, the sound definition of the managerial accounting constructs, the closure of the gap among case studies and analyses in managerial accounting study, the appropriate use of statistical tools for assessing hypotheses in managerial accounting and the use of graphics to map theory-consistent empirical research (Kholeif,2011).
There is a lack of consideration describing the role of Management Accounting (MA) and MA systems (MAS) in valuing decisions (Laitinen,2011).
In the 1980s, Cooper and Kaplan (1988b) promoted the AB approach with concepts such as cost pools and drivers. The AB approach includes product, customer costing (and profitability), costing of distribution channels, budgeting, cost management, performance management and decision making. AB case studies and surveys have been conducted in many countries ‘ particularly in the 1990s and 2000s. Researchers have explored several topics relating to the AB approach, including measures of success, factors associated with success, diffusion (including demand and supply factors), power and politics and organizational culture, effects on financial performance, changing role of management accountants and manager’s views (Innes and Kouhy,2011).
Lana and Fei (2007) revealed that the application of the study of the ABC approach was primarily concentrating on companies in advanced or ‘more economically developed country’ (MEDC) rather than the ones in the economically developing countries which doubts the success of the implementation process.
Also, Attia (2006) illustrated that industrial firms is facing now new conditions are represented in severity of competition at Global class, particularly from Japanese and South east Asian firms, and technological complexity in the business environment, in addition to disappearance of the border among the countries in the light of communications revolution, GAAT and WTO regulations which made the world a small village. Also, this matter led to the industrial firms reconsider the concepts of control systems of costs improvement of production means in order to ensure survival. By taking a deep look at the future, it can easily predict how the future manufacturing firm will be characterized the type of cost accounting system inside this firm (Matei,2013).
On the other hand, Abou El-Enein et al. (2013) stated that building the best practice standard] By using a modern technology i.e. Clean-Room-Technology Assessment Technique (CTAT) [which can be used to improve performance and eliminate human errors.
Lewis (1993) and Dandago (2003) indicated the future factory will be established on a set of Computer-Integrated Manufacturing Systems (CIMS) will coordinate and control various flows of materials, laborers and overhead activities through the following sub-systems:
1- Computer Aided Design (CAD) systems:
These systems facilitate setup, design, engineering and planning processes.
2- Computer Automated Manufacturing (CAM) systems:
These systems include machines, process control tools, automated inspection for each machine and its components.

3- Flexible Manufacturing Systems (FMS):
By using these systems, all productive processes will be carried out automatically without any intervention of human elements and thus shortcut several manual activities which will become useless such as handling and setup.
4- Production and Inventory Management (PIM) systems:
These systems include inventory control methods such as Materials Requirement Planning (MRP) and Just-In-Time (JIT) systems.
With regard to Future Cost Accounting System (FCAS), it is a system which aligns with the future factory requirements.
The method of ABC is considered as an advanced method to perform allocation process approaching the justice and achieving the criterion of the Cause / and result where this method allocates costs through the following steps: 1) Determining the activities performed by the firm. 2) Determining the activities which cause the occurrence of costs. 3) Classify these activities according to the added value and getting rid of non- values added activities. 4) Then, the activities costing are distributed over the costing units where these costing units cause the occurrence of these activities (Baker, 1998 and Sand, 2012).
ACTIVITY BASED COST system was largely advocated by academic and practitioners. Mohamed (1991), Atkinson et al. (1997), Balakrishnan et al. (2013) , Stefea et al. (2013a), Abbas (2014b) and Kutac et al. (2014) agreed on that this system was developed from view point of the methods of allocating the indirect costs and will be developed through determining the costs drivers and the activities performed by the various managerial departments in the company which eventually lead to return each costing to the activity which could be used to fix the followed consequences in determining the products costing on the basis of consumed activities.
Mistrust the accuracy and transparency of the management accounting system leads to the ABC methods implementation (Cokins, 2014).
The Activity Based Costing (ABC) system provides qualitative, quantitative and economical information for the organizations especially those organizations which care about the continuous improvement and program the satisfying the customers needs. But the information provided by ABC system can not be considered the only type of information needed by the managers. They desire to get information about the process time, quality and costs of activities. Also, ABC system provides the activity costs from these required information and supports the accurate decision making , profitability analysis and it is considered an excellent method in cost calculations (Kaplan,1992 ; Cai and Yang, 2008 ; Khataie et al., 2011 ; Lutilsky and Dragija, 2012 and Austill, 2014).
So, the firm must know how integration occurs among the other information linked to the quality and the customers preferences…etc. The costing information are important to enable the managers to understand the practical economies and their outputs, but they do not represent the only appropriate measure and the ABC system doesn’t offer straight quality measures and the timing of the processes. On the contrary, the systems which evaluate time and quality, don’t illustrate the costs and the quantities of the utilized resources in the process (Norris, 1997 ; Raiborn and Kinney, 2010).
The first utilization of ABC approach concentrated on cost allocation dimension which aimed at increasing the efficiency of the measurement to reach determination a more accurate cost of the products. Soon afterwards, the use of ABC method was modified for reducing costs dimension which contributes in reducing the costs. Wherefore, in the light of previous views, there is a great necessity to determine the relationship among the ABC method and the other modern accounting concepts. Dutch, medium sized manufacturing companies mostly embrace and use ABC at balanced levels of product diversification rather than high levels. Also, the diversification of the product is undoubtedly associated to the ABC approach(Schoute, 2011).
The current method of cost calculation used in Romanian and Egyptian business entities, which causes a historical cost, used to settle post factual production costs and which allocates indirect costs according to some subjectively chosen basis, can not provide the management with the possibility of satisfying the need for information as well as the fact that in today’s changing technological conditions the calculated cost of production is not a real cost. Thus, it is required to adopt some methods of management accounting and cost calculation to enable a more rigorous allocation of indirect costs and to be operational in order to meet information needs of administration in decision making (Manea and Barbu,2012 ; Abbas,2013).
On the other hand, Khaled (2005) revealed that non industrial section, the predominant costs in the structure are the fixed overhead costs while the material-related costs and labor costs are insignificant which cause the ABC implementation in this kind of sector more questionable. Accordingly, the current research will concentrate on the industrial sector and since ABC is mostly applied by larger corporations.
Also, C”pu”neanu et al. (2011a) defend that the ABC application in small and medium enterprises (SME) in Romania will be an optimal solution for the coming future.
C”pu”neanu et al. (2011b) and Abbas (2013) mentioned that in the last ten years, many corporates in many countries including Egypt and Romania, made efforts to apply the Activity Based Cost method.
El-Dyasty (2006) stated that several researches indicated that there are many cost tools which are considered a main base for implementing the cost strategic management. There is a good chance to use these tools, in a single or integrated form for facing the challenges in the modern business environment such as ABC, TOC, RCA, ABM, TQM…etc.
Tobor (2013) proposed to bring a significant contribution to the wine sector in Romania by approaching a modern calculation method (ABC) and with favorable influences on the administration of costs but also a monitoring and performance measuring instrument such as Balanced Scorecard.
The second axis of development strategy in Egypt is to improve the business and investment environment. He added that Egypt strives to provide a good investment climate over the coming years (El-Sisi,2015).
Several studies showed the importance of utilization of an effective method for improving the business environment. These studies may be summarized as follows:
The selected Cost of Quality (CoQ) has to fit the status, the domain, the goal and the demands of the company to get an opportunity for a strong methodical system in a program of quality management (Schiffauerova and Thomas,2006).

In the generation that is based on technology and high competitive environment, executives are always stressed to find methods to mention their competing advantages. Also, there are many ways which have been enhanced to put together value to the essence of the company’s activities. ABCM is one popular way between firms. The ABCM helps executives to reach a better strategic vision that is necessary to the competing domain of the corporate. (Beheshti, 2004).
ABC tool may be a path to enhance the profits and cost management, further strict decisiveness of Romanian firms products cost in each growth level. They added that it’s very important for these firms to revise the actual cost system to insure their responsive adequacy to different modifications in rivalry and innovation (C”pu”neanu et al., 2011b).
As the Activity Based Costing method is suitable for the industrial domain, it’s as well suitable for services domains such as healthcare institutions, commercial businesses and governmental institutions (Chea,2011).
ABC tool can offer ways to find better effective cost bearing actions and to distribute costs fairly to each product. As company’s executives may allocate resources wrongly and mix products decisions (Tsai et al.,2010).
Activity Based Costing is not only a modern way to cost accounting, but also a precondition for a more quality and modern way of managing a company. They added that ABC method provides better business operations recognition and guidance and clearer cost framework, because of methodology adjusted to the company’s operations. Also ABC method gives an excellent ground to trace cost, management and analysis that require high quality strategic and operational decisions for the firm on the long-run. ABC, directly informs management about the possibilities of achieving competitive advantages not only based on low cost, but also based on value added as a result of effective expenditure incurred. It follows that ABC is a powerful tool whose use improves company competence in managing competitive advantage (Kalicanin and Knezevic,2013).
The Activity Based Costing has been considered a given tool to the management to provide precise cost of products. Also, the information acquired from the ABC system is useful for budgeting, planning and measuring performance. In addition, the ABC offered the organization total beneficial in the process of the decision making (Maelah and Ibrahim,2007).
Therefore, the objectives of the present research may be illustrated by covering the following items:
‘ Strategic cost management and its goals in light of contemporary business environment.
‘ A critical study for Traditional Costing (TC) method.
‘ Concept, notion and significance of ABC method.
‘ Motives of appearance ABC method and its supporting conditions for applying.
‘ Steps of proposed design of an applied ABC method.
‘ The components of ABC method.
‘ Levels of progress of ABC method.
‘ Requirements and obstacles of application ABC method in Egyptian enterprises.
‘ Role of ABC method in planning and decision making fields at the firms.
‘ Application methods importance of Activity Based Costing method in order to increase efficiency of business environment in the world and Egypt.
‘ Applied stages of ABC method in Egypt and other Countries.
‘ A comparative case of conformity and variance factors for ABC method with other modern accounting concepts.
‘ Characteristics of Future Cost Accounting System (FCAS) inside modern manufacturing firms.
‘ Test of proposal Tetra Dimensional Integrated Model (ABC, KAIZEN, TOC and RCA) by applying on manufacturing firms in Egypt.

1.1. Strategic Cost Management and its goals in light of contemporary business environment:
Strategic Cost Management (SCM) system works on the development of information because it includes all of the fiscal and non-fiscal information (Deaconu,2012). In the past, institutions focused on measures of financial performance such as: a) growth in profits, b) growth in sales, c) growth in market share, d) cash flow, and e) growth in the share price. But with the development of the environment and manufacturing technology and converting the environment into a dynamic – variable – volatile environment in terms of product variety and taste volatility of customers and increase competition, those financial criterions failed to meet the purpose of management and stakeholders at the same time. This matter led to search for appropriate standards for that environment. This concept steered the institutions towards strategic success measures that includes fiscal and non-fiscal criterions. The financial criterions are showing impact of policies and procedures institution on the financial situation of the institution and the rate of current yield to shareholders. On the contrary, the non-fiscal systems emerge impact on the current and potential competitive position of the institution. The non- financial criterions include three aspects as follows: customer criterions, internal process criterions and criterions of learning and innovation.
El-Dahrawi(2010) illustrated that the Strategic Cost Management may lead to accurate cost information for managerial use during the different stages of the cycle of strategic planning , which consists of the following stages:
1. Formulate strategies.
2. Connecting these strategies to all organizational units.
3. Development and implementation of strategies methods.
4. Development and implementation of control means for obtaining the top of the application steps, thus succession in achievement of planned targets.
He also showed that managerial accounting engaged in crucially in every stage of strategic planning. This type of accounting has been called SCM which is also known as the organizational benefit of data value for the previous cycle’s stages of strategic management. He also added that the Strategic Cost Management is associated with three methods of analysis:
1. Value Chain analysis,
2. Strategic positions analysis and
3. Cost drivers analysis.
These three methods represent a modern integrated framework which is quite different from the traditional concept of managerial accounting. With regard to the method of the value chain analysis, it represents a strategic dimension to the cost in term not only of cost analysis within the institution but also outside this institution beginning from suppliers to customers. Therefore the value chain represents the interdependence of activities which creates the value or benefits for the institution from the suppliers till the delivery of goods to customers and customers of customers. According to this concept of the institution is seen as an open system affects and is affected by the external environment.
As for the method of analysis of the strategic position, it is meant to achieve a distinctive competitive position either through excellence in product quality which is known as the strategy of differentiation or through a strategy of cost leadership or through a strategy of focus. On the other hand, cost driver’s method is intended to decide the purposes of cost by selecting a complex series of cost which is represented in the main and subsidiary activities.
The cost management may be considered as an information system which supports managerial functions such as strategic management and planning in the long term, operational decision making and control mechanisms. Thus it can differentiate between strategic management of the cost which supports strategic decisions such as the selection of products, mechanisms of production, distribution channels and operational management of the cost operational cost management and the strategic management which supports in the short term decisions such as production planning, pricing and incentive systems. So, the Strategic Cost Management use the cost information during all stages of strategic management (Determination of cost strategy, delivery strategy, collection and benefit of the necessary means in application of strategy and usage of control methods for determining the extent of success in achieving strategic objectives).
Some studies have pointed to the use of three tools for the application of Strategic Cost Management:
1 – Competitive advantage analysis,
2 – Cost drivers and
3 – Value chain analysis.
Indentifying the strategy requires linking two sets of activities:
a) Major activities which includes supply and logistics, Operations, Marketing, Sales and Services.
b) Supportive activities which include the infrastructure of the institution from human resources management, technology development and organizational structure.
El-Dyasty (2006) proposed an integrated framework to connect the tools of SCM in order to create a value institution and stakeholders. This framework represents an integrated information system for Strategic Cost Management and provides all data to achieve strategic objectives during all the stages of strategic management.
He added that the tools of Strategic Cost Management (SCM) which are proposed may be used in each stage of strategic management. These stages may be stated as follows:
1 ‘ Strategic analysis:
It is intended to identify the necessary factors of the success of institution by using Benchmarking and SWOT analysis.
2 – Determination of strategy:
In this stage, the institution determines the strategy which should be followed to keep the competitive advantage and on the basis of this strategy which will be followed by institution, the performance criterions will be determined by using the Balanced Scorecard system.
3 – The application of the chosen strategy and analysis of the value chain. At this stage value chain is divided into two types:
a – Internal value chain for measuring the cost during the Product Life Cycle Costing.
b- External value chain which represents foreign suppliers, customers and distributors. This chain requires creating a value for all parties, cooperation and coordination rather than competition.
Also, the proposed framework uses seven tools of Strategic Cost Management (SCM) namely:
1- Target Cost (TC):
It is used in the stage of the design and the production of the product through value reengineering and continuous improvement of the cost.
2 – Activity-Based Costing:
It is utilized in allocation of indirect costs for the products in light of technological development which led to increase the percentage of indirect industrial costs. This matter requires accurate more allocation of costs to help the managerial staff in pricing decisions making and composition of the products.
3 – Theory of Constraints:
It is used to determine choke points (constraints) which cause disrupting the operations and try to treat the causes of these chokes. Thus, it improves the flow of material between processes.
4- Just In Time (JIT):
It helps to reduce the unexplained investments in stock.
5 – Resource Consumption Accounting (RCA):
It realizes the optimal exploitation of the institution resources through determining, planning and actual cost on the basis of what are consumed resources to serve customers in the form of quantitative size. This cost flows from resource pools to cost objects (Activities, Operations, Products or Customers) taking into consideration that of overlapping relations among resources so that every resource may help another one. As there are some resources may be useful for the topic of cost measuring directly. Thus, RCA is an analysis based on supporting the nature of cost and illustrates to managerial staff the types of excess and idle capacities in the institution. This concept will support the competitiveness ability of the institution and help in the definition of the interests of suppliers, creditors and bondholders where this matter will show the extent of need for resources and how to finance them.
6 – Total Quality Management (TQM):
It aims to achieve customer requirements to earn their satisfaction and loyalty through the planning, implementation and quality control.
7 – Continuous Improvement (KAIZEN):
It’s applied for standards improvement and cost reduction quality at all stages of the value chain. Thus, this matter will support the necessary factors of success of institution and maintain the competitive advantage.
Many researchers stated that there are a lot of tools can be considered as the basis of the application of Strategic Cost Management and these tools can be used individually or in integrated manner to compete all difficulties of the modern commerce industry (El-Dyasty, 2006). These tools and their definitions can be illustrated in Table 2:
Table 2: Strategic Cost Management tools and their definitions.
No.ToolDefinition1Theory of Constraints (TOC)A way to improve the conversion rate of raw materials to the final product and the treatment of choke points.2Benchmarking (BM)The process of determining the necessary factors for the success of the institution and studying the best practices of competition institutions to improve operations and control of the market.

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