The Possibility of Applying the Costing System Based On Activities(ABC) In Service Companies . An Applied Study at The Iraqi General Railway Company

Abstract

Activity Based Costing is one of the most modern systems in which more accurate Cost data can be obtained than those provided by traditional system, resulting from the fair basis for allocating costs to products or services by identifying the main and group them into cost Pools and costs of each activity based on the consumption of those products or services from the formation of the various activities of the company, instead of the loading rates used by the traditional system and built on a single basis and thus obtain cost data for the service with more accuracy, appropriate, and fair Introduction:-The technical developments that the world witnessed during the 1980's have complicated production processes, and indirect costs have become a large part of the facility's expenses, as traditional costing systems do not meet the needs of decision users, which led to the need to use cost accounting systems that are based on Activities in order to avoid making wrong decisions and to assist them in setting an appropriate price policy for their products or services to reduce costs and maximize their profitability. From this point of view comes the importance of the research in dealing with the issue of cost on the basis of activity and the possibility of its application to service companies, and what it includes in achieving accuracy and justice in the distribution of indirect costs, and to achieve the goal of the research has been divided into four sections, the first topic was concerned with the research methodology, and the second explained the cost On the basis of activities ABC, the third topic included the practical application of preparing the cost on the basis of activities ABC, and the conclusion was the fourth topic, which discussed the most important conclusions and recommendations related to the topic of research .

Full text

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Abstract: Activity Based Costing is one of the most modern systems in which more
accurate Cost data can be obtained than those provided by traditional system, resulting
from the fair basis for allocating costs to products or services by identifying the main and
group them into cost Pools and costs of each activity based on the consumption of those
products or services from the formation of the various activities of the company, instead of
the loading rates used by the traditional system and built on a single basis and thus obtain
cost data for the service with more accuracy, appropriate, and fair
Keywords: Activity Based Costing; service companies; cost pool; activity
Introduction:-
The technical developments that the world witnessed during the 1980's have
complicated production processes, and indirect costs have become a large part of the
facility’s expenses, as traditional costing systems do not meet the needs of decision users,
which led to the need to use cost accounting systems that are based on Activities in order
to avoid making wrong decisions and to assist them in setting an appropriate price policy
for their products or services to reduce costs and maximize their profitability.
From this point of view comes the importance of the research in dealing with the issue
of cost on the basis of activity and the possibility of its application to service companies,
and what it includes in achieving accuracy and justice in the distribution of indirect costs,
and to achieve the goal of the research has been divided into four sections, the first topic
was concerned with the research methodology, and the second explained the cost On the
basis of activities ABC, the third topic included the practical application of preparing the
cost on the basis of activities ABC, and the conclusion was the fourth topic, which
discussed the most important conclusions and recommendations related to the topic of
research .
AMERICAN JOURNAL OF ECONOMICS AND BUSINESS MANAGEMENT
ISSN: 2576-5973
Vol. 5, No. 3, 2022
The Possibility of Applying the Costing System Based On Activities (ABC)
In Service Companies. An Applied Study at The Iraqi General Railway
Company
1Atheer Ali Abdulkadhim ,2 Mustafa Waleed Zghair and 3Zahraa falah jali
1 Accounting Department, Madenat Alelem University College, Baghdad, Iraq Atheer.ali@mauc.edu.iq
2Accounting Department, Al-Imam Jaafar Al-Sadiq University, Baghdad, Iraq mustafa.walid876@sadiq.edu.iq
3 Accounting Department, Madenat Alelem University College, Baghdad, Iraq Zahraa.F.jali@mauc.edu.iq

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The first topic / research methodology
1.1Research problem
:
Traditional methods of calculating costs suffer from shortcomings, inaccuracies and
unfairness in determining, allocating and distributing costs in a specific and appropriate
manner, which has become the need to find modern methods and tools to keep pace with
this progress in the systems to be based on scientific and practical foundations to avoid
continuing problems.
1.2. Research hypothesis:
The research suggests of applying the method of distributing costs based on ABC
activities on service activities to achieve accuracy and justice in distributing the costs of
the next period
1.3. research importance :-
The importance of the research stems from the importance of the ABC-based costing
method, as it works to re-allocate and distribute indirect industrial costs in a more
accurate, fair and correct basis based on the activities of the institution and this positively
affects the company’s activity and management performance for the purpose of improving
profitability, reducing costs and controlling based on the level of activity Rational decision
making by management.
1.4. Research objective:-
The research aims at the possibility of applying the costing method based on the
activity ABC in service institutions and to overcome the problems arising from the
application of traditional methods in the preparation of costs.
1.5. The research sample :-
The Iraqi State Railways Company was selected as a research sample.
1.6. search limits
Spatial boundaries: The General Company for Iraqi Railways
Time limits: 2018-2019 data were adopted.
The second topic / the theoretical side
Activity-Based Cost (ABC)
2.1The origins of the activity-based costing method:
In recent years, the world has witnessed a great revolution in the means, policies and
systems of production, which affected the cost systems. The traditional cost systems no
longer fit the requirements of this change, which led to the emergence of modern and
advanced systems and methods that correspond to this technological development,
including the activity-based costing method (ABC). Back to the history of the emergence
of this concept (ABC), where the term activity was used by the accountants of the
American company (GE) General Electrice in 1963, who are the first to use the term
activity to describe the work that causes costs, especially the indirect ones, which were
constantly rising trying to control them, which is Techniques similar to the (ABC) method
of cost tracking (Hilton, 2002: 166).
The first scientific study of the entrance to the activities cost system is due to the study
carried out by (Stoubus) in 1971 by studying the basic points on which the activity
accounting system is based. It dealt with a proposed framework for developing cost
accounting in line with the structure of the organization’s activities, which clarified the
activity center, cost objectives And the concept of cost and activity costs, through which
he explained that the use of the foundations of allocation in traditional cost systems (such
as direct labor hours) reduces the cost of the product because some products are charged

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with less than their own costs or more, and then link these activities to the products
through what is known as cost drivers(Staubus, 1971: 3-8).
As the writings on this method increased to address and discuss all its ideas and the
implications of its use, and (cooper, kaplan) mentioned in their article (Priorities of Profit
through Costs on the Basis of Activity) that companies have reduced their dependence on
traditional cost systems after developing cost management methods based on activities,
and managers began to look at the (ABC) method as a fair method for calculating product
costs, as the emergence of this method had an effective role in guiding management
towards switching directly to high profits, as this method is widely applicable through the
analysis of company functions (Muhalhal, 2013: 44).
Where Horngren defined it as the activity-based costing system as the best tools for
refining the costing system, as the costing system is being revised by focusing on activities
as basic cost purposes, and this system calculates the costs of these activities and then
allocates the costs of these activities to cost objectives such as products, services and
customers on the basis of The activities are required to produce each of these products and
services, as the philosophy of this system is based on the idea that activities consume
resources, and that products consume activities (Horgren, et., al 2012: 146).
2.2 The difference between traditional costing systems and the ABC method
Indicated each form (Drury, 2000:338), (Muhalhal, 2013: 44) to difference between
traditional costing systems and the ABC
(1) In terms of cost pools:
• Traditional costs : The accumulation of costs through departmental cost pools,
therefore, the costs of the cost pool are heterogeneous and are not affected by a
single element.
• ABC: Accumulation of costs through activity cost complexes, which are designed
to be consistent with the main activities and operational processes, and when
designing, the costs of each cost complex are affected by a single element called
the cost vector.
(2) In terms of the basics of personalization:
• Traditional costs: Reduce costs on products by using the basis of allocation related
to volume: number of units, direct labor, machine hours, value of sales..
• ABC: Allocate costs to products and services and any other cost objectives of the
activity cost pools on the basis of principles consistent with the cost vectors of
activity costs.
(3) In terms of the cost hierarchy:
• Traditional costs: It estimates the costs of all the organization on the basis of the
volume of production of goods and services.
• ABC: It allows the non-linear relationship in the organization because it
recognizes that these costs are not caused by the number of units produced.
(4) In terms of cost targets:
• Traditional costs: Focuses on estimating the cost of one unit of a product or
service.
• ABC: Focus on estimating costs for many cost objectives: units, batches,
production lines, operations, customers, suppliers.
(5) In terms of decision support:

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• Traditional costs: For its inability to use cost vectors besides the basis of
allocation, this leads to the occurrence of the problem of evaluating the cost is
higher or lower.
• ABC: Its ability to use the basis of allocation as well as cost vectors and thus
prepare accurate information to support administrative decisions.
(6) In terms of cost control:
• Traditional costs: Cost control is viewed on the basis of departmental testing, not
activities.
• ABC: Given that it provides a summary of the costs of organizational activities,
cost control is carried out through the activities and not the departments.
(7) In terms of system cost:
• Traditional costs: Low implementation and design costs.
• ABC: The costs of designing and implementing the system are relatively high.
2.3 Activity-Based Costing Objectives
There are many objectives that pertain to the activity-based costing system, and among
these objectives are the most common (Bahnub, 2010: 14-15) (Al-Khafaji 2014: 37)
(1) Presenting the costs of products fairly and on a correct basis for resource
consumption.
(2) More fair in reallocation of costs.
(3) Profitability improvement, analysis and strategic planning.
(4) Focusing on improving operational processes and reducing costs.
(5) A guide to investment analysis and planning.
(6) Presenting the baselines for internal and external benchmarking and comparing
improvement opportunities.
(7) Integration of operational control with performance measurement systems.
2.4 Benefits of an Activity-Based Costing System
The application of ABC has many benefits, including (Fichman and Kemerer, 2002:
141):
(1) Supporting the allocation of indirect industrial costs, which leads to the
identification of product costs accurately, and thus provide a basis for pricing and
determining the profitability of products.
(2) Availability of a basis for evaluation and improvement of productivity and
effectiveness of activities.
And there are other benefits to add which are (Zimmerman, 2009: 518):-
(1) Increasing the ratio of direct costs to product costs by tracking costs and linking
them directly to products.
(2) The ABC system provides an understanding of the consumption of costs by
activities, and the necessary activities in the production of products.
(3) Activity-based costing system focuses in the process of controlling the activity
level and product design level.
(4) Activity-Based Costing System Managers focus through cost control in activity
centers and reduce cost drivers.
2.5 Steps to implement the activity-based costing system
There are five main steps that can be used when implementing the activity-based
costing system:- (Al-Naeli, 2008: 53-61) (Noreen et al., 2011.241)

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Defining activities: It is the first step in implementing the activity-based costing
system and focuses on defining activities and it can be considered the main pillar in the
system. Determining may be difficult and take a long time and require a large amount of
decisions, which requires the company to form a team that interviews employees in the
company’s departments and inquires from them About the main activities These questions
result in a long list of activities and this leads to the emergence of the problem of an
increase in the number of activities and therefore these activities must be reduced by
combining homogeneous and similar activities in a coherent and appropriate manner. (Al-
Khafaji 2014: 72)
Allocating costs to pools of cost of activities: After defining the activities in the
company in the first step, the process of determining the level of aggregation of the totals
of costs (depleted resources) during the conduct of activities begins in this step. In which
costs are collected in cost pools. The cost aggregate is defined as the smallest center or
part in a company that performs a specific activity. The costs of the process of each
activity are recorded so that the cost of the activity is equal to the sum of the costs of the
operations that make up this activity. Whenever the activities are few in number, the costs
of the activities can be directed (using the special costs vector) directly to those activities
for each activity separately, but if there are a large number of activities, the activities can
be grouped into cost pools so that each group of costs contains A number of activities
where one cost engine is used for each group of activities. (Al-Moussawi 2014: 81-82).
Determining cost drivers: After identifying and diagnosing the activities well and
determining the costs associated with each of the mentioned activities, the process of
formulating the foundations for the initial loading of those costs on products or services
begins by choosing an activity cost driver, and choosing a cost driver depends on the level
of Grouping of similar activities called the main activity centers within the business unit.
The cost driver is defined as the factor that causes or drives the costs of a specific activity
and that this driver must be related to the activity. (Al-Moussawi 2014: 82).
Determining the charging rate for each cost container: The cost driver rate is
calculated by dividing the estimated costs of the activity by the total estimated cost driver
of the activity, according to the following equation (Weygandt, et al., 2012:150) .
Total estimated indirect industrial costs of the activity Indirect
manufacturing overhead rate= ـــــــــــــــــــــــــــــــــــــــــ ـــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــ
Total expected use of expected cost drivers
Allocation of indirect industrial costs to products using activity cost base loading rates:
It represents the last step of the activity-based costing system by allocating activity costs
to cost targets (products or services) as is the case in any other costing system, where
activity costs are allocated by multiplying the cost-benefit rate for each activity by the
product consumption of the activity cost driver (Lanen et al., 2011:322).
In addition to the steps for implementing the activity-based costing system, a final step can
be added to the previous steps, according to (Garrison et al. al.2008:324-325) which are.
Preparing management reports: The most common reports that are provided based on
the information provided by the costing system on the basis of activities are related to the
product and customer profitability .These reports help the company direct its resources

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towards growth opportunities and at the same time shed light on the most profitable
products and customers (Garrison et al. al..2008:324-325).
The third topic / the practical side
3.1 Introduction to the research sample
Transport by rail is one of the important and vital transport activities within the
transport sector, whether it is for passengers or goods, where transport by rail, especially
for goods, is characterized by the ability to transport long distances and at a relatively
reasonable cost compared to other means. In addition, transport using rail is an issue. It is
very necessary as it will contribute to a large extent in preserving the road network,
especially the highways, from damage as a result of heavy trucks passing over them .
The company's main activity is the transportation of passengers and goods, and from that
the company was divided into nine main lines for transporting passengers and goods,
which are:
(1) Baghdad - Mosul
(2) Mosul - Rabia
(3) Baghdad - stronghold
(4) Shuaiba - Umm Qasr
(5) Kirkuk-Baiji-Haditha/suspended due to the destruction of the Fateh Bridge
(6) Baghdad - Al-Qaim - Husaybah
(7) Al-Qaim - Akashat / to the Al-Qaim Phosphate Complex Transfer of phosphate ores
from Akashat mines
(8) Hit - leap
(9) Musayyib - Karbala
However, due to the poor security situation and terrorist acts, transport lines were stopped
and work only on the (Baghdad-Basra) line.
3.2
Implementation of the activity-based costing system
The activity-based costing system ABC is applied by reallocating and distributing the
indirect industrial costs (productive service cost) in the company to the activities, as
follows:
Table (1) shows activities and cost drivers
activity
cost-oriented
maintenance
Maintenance times
Stores
Number of passenger and freight trains
Transfer and operation
Transfer and playback times
beams
Travel Kilometers
Civil defense
Preparing the civil defense for the activity of
passengers and goods
police
Number of passenger and freight trains
The main activities carried out by the company were identified and linked to
appropriate cost vectors based on the cause-and-effect relationship between activities and
cost vectors. Six main activities of the company were identified, as shown in Table No.
(1), and six cost vectors related to the activity. After determining the main activities and
the cost vectors related to them, the cost of the cost wave for each activity is allocated to
the activity of passenger transport and the activity of transporting goods, according to the
cost wave of each activity, as shown in the table below.

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Table No. (2) Allocation of the cost of the cost wave to the activity of transporting
passengers and transporting goods.
Wave Cost
Passengers
Cargo
Total
1
Maintenance times
15,464
1768
17,232
2
Frequency of transportation and
operation of trains and wagons
12666
8250
20916
3
Travel Kilometers
139000000
45,000,000
184,000,000
4
Number of workers on the
Baghdad-Basra line
3236
3390
6626
5
Civil defense preparation
2850
500
3350
6
Number of paid passenger trains
and loaded cargo
1425
250
1675
Notes from Table No (2).
•The number of maintenance times for the passenger transport activity was 15464, and the
number of maintenance times for the goods transport activity was 1768 .
•The number of times of transportation and operation of trains and wagons for the activity
of passenger transport amounted to 12666, and the number of maintenance times for the
activity of transporting goods was 8250.
•The number of travel kilometers for the passenger transport activity reached 139000000,
and the number of maintenance times for the goods transport activity was 45000000.
•The number of workers on the Baghdad-Basra line and vehicles for passenger transport
activity amounted to 3236, and the number of maintenance times for goods transport
activity was 3390.
The number of maintenance times for the activity of transporting goods amounted to
2,850, and the number of maintenance times for the activity of transporting goods was
500.
• The number of paid passenger trains and loaded goods for passenger transport activity
reached 1425, and the number of maintenance times for goods transport activity was 250.
3.3 Allocation and distribution of costs of indirect activities
One of the steps of distributing the costs of indirect activities is to determine the
loading rate for each cost container. The loading driver rate is calculated by dividing the
estimated costs of the activity by the total cost drivers estimated for the activity, as shown
below.
3.3.1 Maintenance activity:
The number of maintenance times was chosen as a cost guide for this activity, and the
cost of this activity was distributed, which amounted to (17687492134) dinars, noting that
the total number of maintenance times for both the passenger transport activity and the
goods transport activity amounted to (17232) times, as follows::
Rate cost per time = dinars
Travelers
15464 x 1026432.9 = 15872758726
The goods
1768 x 1026432.9 = 1814733408
3.3.2 Warehouse activity
:

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The number of passenger and goods trains was chosen as a cost guide for this activity,
and the cost of this activity was distributed, which amounted to (606382467) dinars,
noting that the number of passenger and goods trains amounted to (1675) trains, and as
follows:
Rate cost = dinars
Travelers
1425 x 362019.38 = 515877621.2
The goods
250 x 362019.38 = 90504845.82
3.3.3 Transport and Operation Activity:
The number of times of transportation and operation was chosen as a cost guide for
this activity, and the cost of this activity was distributed, which amounted to
(2780321579) dinars, noting that the total number of transportation and operation times
for the activity of passenger transport and the activity of transporting goods amounted to
(20,916) times, and as follows:
Rate cost per time = dinars
Travelers
12666×132927.97 = 1683665764
The goods
8250 x 132927.97= 1096655815
3.3.4 The activity of the beams lab:
The number of travel and tonnage kilometers was chosen as a cost guide for this
activity, and the cost of this activity was distributed, which amounted to (291852407)
dinars, knowing that the total number of travel and tonnage kilometers for the activity of
passenger transport and the activity of transporting goods amounted to (184,000,000) km,
as follows:
Rate cost per km = dinars
Travelers
139000000×1.586154 = 220475459.6
The goods
45000000 x 1.586154= 71376947.36
3.3.5 Civil Defense activity:
The number of civil defense for both passengers and goods was chosen as a cost guide
for this activity, and the cost of this activity was distributed, which amounted to
(508,998,205) dinars, noting that the number of civil defense for both passengers and
goods amounted to (3350), and as follows:
Rate cost = dinars
Travelers
2850×151939.76 = 433028323.7
The goods

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500 151939.76= 75969881.34
3.3.6 Police activity:
The number of passenger and goods trains was chosen as a cost guide for this activity,
and the cost of this activity was distributed, which amounted to (58449252) dinars, noting
that the number of passenger and goods trains amounted to (1675) trains, and as follows:
Rate cost per mechanism = dinars
Travelers
1425 x 34895= 49725483.04
The goods
250 x 34895 = 8723768.955
Table No. (3) shows the cost wave for each activity and calculating the rate of charging
indirect costs
Table No. (3) The cost wave for the activity of passenger transport and the activity of
transporting goods and calculating the rate of charging indirect costs
activity
cost-oriented
Rate
Cost wave
for
passenger
activity
Cost
wave for
cargo
activity
Total
activity cost
maintenance
Maintenance times
1026432.9
15464
1768
17687492134
Stores
Number of
passenger and
freight trains
362019.38
1425
250
606382467
Transfer
and
operation
Transfer and
playback times
813292
12666
8250
2780321579
beams
Travel Kilometers
1.586154
139000000
45000000
291852407
Civil
defense
Preparing the civil
defense for the
activity of
passengers and
goods
1519397.6
2850
500
5089982050
police
Number of
passenger and
freight trains
34895
1425
250
58449252

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After determining the cost vectors for each of the activity of passenger transport and the activity of transporting goods, and calculating the
loading rate for each activity, the cost of each of the activity of passenger transport and the activity of transporting goods is determined as shown
in Table No. (4)
Table No. (4) Distribution of indirect costs to activities
Cost of cargo
3*5=7
Cost of
passenger
2*5=6
Rate
¼=5
Total Cost
wave
(2+3)=4
Cost wave for
cargo activity
(3)
Cost wave
for passenger
activity(2)
Total activity
cost
(1)
activity
1814733408
15872758726
1026432.923
17232
1768
15464
17687492134
maintenance
90504845.82
515877621.2
362019.3833
1675
250
1425
606382467
Stores
1096655815
1683665764
132927.9776
20916
8250
12666
2780321579
Transfer and operation
71376947.36
220475459.6
1.586154386
184000000
45000000
139000000
291852407
beams
75969881.34
433028323.7
151939.7627
3350
500
2850
508998205
Civil defense
8723768.955
49725483.04
34895.07582
1675
250
1425
58449252
police
3157964667
18775531377
21933496044
total
Table No. (4) shows a summary of the company’s costs, the direct costs of the activity of passenger transport and the activity of transporting
goods, and the indirect costs after applying the activity-based cost method (ABC), and calculating the cost of one unit for the passenger transport
service and the goods transport service as shown in Table (4 .)
Table No. (5) Summary of identifying activities, directions, production costs by the activity-based costing method
Identification of activities, drivers, production costs by activity-based costing method
cargo
passenger
cost wave rate
cost-oriented
cost- activity
activity
cost type
8879016702
17255426409
direct costs
indirect costs
1814733408
15872758726
1026432.923
Maintenance times
17687492134
maintenance
90504845.82
515877621.2
362019.3833
Number of passenger and
freight trains
606382467
Stores
1096655815
1683665764
132927.9776
Transfer and playback
times
2780321579
Transfer and
operation
71376947.36
220475459.6
1.586154386
Travel Kilometers
291852407
beams
75969881.34
433028323.7
151939.7627
Preparing the civil defense
for the activity of
508998205
Civil defense

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passengers and goods
8723768.955
49725483.04
34895.07582
Number of passenger and
freight trains
58449252
police
3157964667
18775531377
Total indirect
costs
4713817081
4351215767
The number of workers on
the Baghdad-Basra line
9065032848
administrative
costs
16750798450
40382173553
Total cost
372**
290*
Cost per unit
*290= 40382173553 / 139000000
**372=16750798450/45000000

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Fourth topic / conclusions and recommendations
4.1 Conclusions:
(1) The cost system used in the company is the traditional system in calculating service costs,
which does not reflect the real cost of the service (product) provided by the company.
(2) The cost system followed does not allocate costs on the service (activities) so that it helps in
determining the cost of the passenger and the cost of transporting the ton in an accurate and
fair manner.
(3) Due to the small number and experience of the functional staff in the costs division, there is
not enough time and experience to record and calculate all the cost data and thus become
incomplete and do not contain all the appropriate and appropriate data and information and
do not reflect the reality of the company.
(4) The company distributes the costs for the passenger and cargo activities equally on the areas
of the (Baghdad - Basra) line without taking into account the distance traveled for each area
on this line.
(5) The company adopts a single basis for allocating indirect costs to all activities without taking
into account the extent to which each activity benefits from the allocated resources.
4.2 Recommendations:
(1) We recommend reconsidering the cost system followed in the company and forming a
specialized committee to reach an appropriate cost system, in addition to the company's
attempt to reduce expenses and activities that do not add value.
(2) We recommend the use of the activity-based costing system in allocating and distributing
indirect costs to the beneficiary activities.
(3) We recommend reconsidering dividing the cost of the cost center equally on the areas of the
line (Baghdad - Basra) and taking into account the distance traveled for each area.
(4) The necessity of increasing the functional staff in the costs division, in addition to the
necessity of holding training courses for the accounting staff in order to increase the
efficiency and effectiveness of this staff and train them to process data and information
electronically to increase experience on the one hand and to give them sufficient time to enter
and process data.
(5) The need for the administrative levels to understand and be aware of the advantages of the
activity-based costing system (ABC) and the more accurate and appropriate cost data it
provides to them that help in the field of planning, control and making sound decisions.
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