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Ljubica Ranogajec1, Jadranka Dee1, Marijan Kari2


Due to big technological and market changes, traditional accounting systems have become unsuitable. They emerged in the time when direct work and material costs were the main production costs, and overhead costs were not high. (Kari, M., Ranogajec, Lj., 2000). Today the situation is different because of increased overhead cost percentage (20-30%), while material costs and direct work are lower.

Because of increasing overhead cost percentage, mistakes in their distribution could be a reason of bad decision making in business. To avoid that, managers need better information about the costs made and about what causes, moves the costs.

The goal of this work is to point to the possibility of introduction of modern ABC method in agriculture.


The method of simple relation-smooth implementation of the ABC method through determining two main matrixes is used in the work:

1. The EAD matrix (Expense-Activity- Dependence), which associates expanses with activities, that is, shows how much of certain cost (in percentage or money worth) is in a certain activity.

2. The APD matrix (Activity-Product-Dependence), which associates activities with products, that is, shows how much of certain activity (in percentage or money worth) is in the making of a certain product.

This method is based on following the basic 8 steps, (Roztocki, N., Valenzuela, J.F., Porter, J.D., Monk, R.M. and Needy, K.L. 1999) and they are:

1. determination of expense categories

1 Ljubica Ranogajec, University of J.J. Strossmayer, Faculty of Agriculture in Osijek,

Agroeconomics Department HR 31 000 Osijek, Croatia, [email protected] 2 Marijan Kari, University of J.J. Strossmayer, Faculty of Economy in Osijek, HR 31

000 Osijek, Croatia


2. determination of basic activities 3. association of expenses with activities through establishment of the EAD

matrix 4. exchange of marks with percentages in the EAD matrix 5. determination of money worth of every activity 6. association of activities with products through establishment of the APD

matrix 7. exchange of marks with percentages in the APD matrix, determination of

money worth of every product The structure of the ABC model (Tzong-Ru Lee, 2001) is illustrated in Fig. 1.

Process View

Figure 1 The structure of an activity based costing model

The horizontal flow in Figure 1 shows the process view and the vertical flow depicts the cost view.


Cost and income recording of one production line needs recording of every material and work cost used in that production. The biggest part of the income is


Resource Cost

Activities Cost Driver

Resource Driver

Performance Measure

Activity Cost Activity Driver

Cost Object


calculated directly through production lines. However, one part of the cost cant directly burden the account of any production line. These are overhead costs (energies, packing and packaging, equipment maintenance costs, cleaning maintenance costs, amortization cost, insurance premiums, water costs and similar), which are divided between different production lines with the help of some overhead costs division processes (most frequently according to ha).

The hardest task in calculating the production costs is determination of the real overhead costs value that has to burden every production line, that is, every product in agricultural production. There are three different approaches to dividing the overhead costs and they differ in the complexity level.

Level one is the least complicated, and means the application of a unique overhead cost rate, which is founded on direct work as the division criterion. The production lines differ a great deal technologically, which causes unequal work and work means investments, so this division process is unsuitable.

Level two uses instead of the unique rate an overhead costs division process in two phases: first at the costs place (divisions), and then from the costs places to certain production lines, that is, products. The enterprise can let off some divisions or lines, and the overhead costs will still exist. Their purpose is to make conditions for enterprise functioning on the whole, and not just some of its parts.

Level three, cost calculation on ground of activity, is the most complicated and is basically considered the most accurate of the three processes of overhead costs distribution. The application of this process is especially justified in situations when numerous products that differ in range, production complexity and quantity of direct work appear. The calculation means that the activities are those because of which we have costs and that products create activity demand. By calculating on ground of activity we determine the production costs using more different criteria - keys for activity costs distribution.

The results of the Activity based costing can be shown with the matrix of dependence of products and activities with keys for distribution and with distributed costs.

The Activity based costing system is a part of the whole concept of Activity based management. This contemporary approach to cost calculation offers numerous information for detecting inefficiency and needless activities in enterprise production and management) Cooper, R. Kaplan, R. S. 1991).

Resentment can happen on different levels of the enterprise because of following reasons: innovation introduction results in increased work and responsibility, which leads to change in workers behaviour; the possibility of inefficiency detection of


the used way of working and managing; fear of change in the management structure; the workers fear of losing the job.

In overcoming the possible resentment it is necessary for a new system to get all the key workers and enable a workers education program at all levels. The practical application of the Activity based costing is recommended to be induced in some smaller line of production as a pilot-project which will later serve as a model for other lines of farm production (Drury, C. 1997).

The results gained by TCA and ABC methods applied on the data obtained from an agricultural firm specialized in plant production are shown in the following table.

Nowadays it will not be sufficient to know WHAT TO DO and HOW TO DO. The introduction of modern methods in accounting of a farm production oriented firm will improve the organization of business processes, and it will eventually lead to the economy of costs. The chart of answers to set questions is presented a picture 15.

Figure 2 Activity base costing/management Source: Ranogajec, Lj. 2006






ACTIVITY BASED COSTING: Connecting resources costs through cost indicators with the products. Its purpose is to increase effectiveness.

COST MANAGEMENT: Balanced cost activities and establishing of possibilities to change the activities in the process. Its purpose is to increase profitability.

ACTIVITY BASED MANAGEMENT: Making operative and strategic decisions based on information on activities. Its purpose is to increase the competitiveness.


Table 1 Comparative measurements TCA and ABC methods (HRK)


per unit (TCA)

DIRECT COST per units product



Wheat 0,69 0,69 0,00 Oil seed rape 1,12 1,12 0,00 Maize - corn 0,48 0,48 0,00 Maize - silage 0,17 0,17 0,00 Maize - seed 1,66 1,66 0,00 Soybean 1,49 1,49 0,00 Sunflower 1,65 1,65 0,00 Sugar beet 0,23 0,23 0,00 Alfalfa - new 2,03 2,03 0,00 Alfalfa - old 0,78 0,78 0,00



per units product (TCA)

INDIRECT COST per units product



Wheat 0,28 0,08 -0,20 Oil seed rape 0,52 0,73 0,21 Maize - corn 0,20 0,30 0,10 Maize - silage 0,05 0,08 0,03 Maize - seed 0,66 1,05 0,39 Soybean 0,55 0,61 0,06 Sunflower 0,55 0,47 -0,08 Sugar beet 0,04 0,03 -0,01 Alfalfa - new 0,33 1,68 1,35 Alfalfa - old 0,21 0,53 0,33


per units product (TCA)

TOTAL COST per units product



Wheat 0,97 0,77 -0,20 Oil seed rape 1,64 1,85 0,21 Maize - corn 0,67 0,77 0,10 Maize - silage 0,22 0,25 0,03 Maize - seed 2,33 2,71 0,39 Soybean 2,04 2,10 0,06 Sunflower 2,20 2,12 -0,08 Sugar beet 0,27 0,26 -0,01 Alfalfa - new 2,36 3,71 1,35 Alfalfa - old 0,99 1,32 0,33



The contemporary approach of Activity-Based Costing enables:

- bases for calculating accurate production costs - the mechanism for overhead costs management - a more regular choice of new technologies - encouragement to making competition The nature of many of the overhead costs is changed, so that the costs that used to be considered overhead costs are now being connected to certain activities and in this way become directly transferable to particular products. The Activity-Based Costing recognizes inefficiency in production. This method needs organizational changes, changes in the way of thinking of the employees as their accepting of the method. It is recommendable in little farms because the risk of change from the traditional to the ABC method is smaller.


1. Tzong-Ru Lee, Jui-Sheng Kao (2001) Application of simulation technique to activity-based costing of agricultural systems: a case study, Agricultural Systems 67 (2001) 71-72 Elsevier.

2. Cooper, R. Kaplen, R. S. (1991): Profit Priorities from Activity Based Costing Harvard Business Review.

3. Drury, C. (1997): Management Accounting for Business Decisions, International Thomson Business Press, London.

4. Horngren, C. T., Sundem, G. L. (1993): Introduction to Management Accounting, Prentice-Hall, Englewood Cliffs, New Jersey.

5. Kari, M., Ranogajec, LJ. (2000): Raspodjela opih trokova i odluivanje u poljoprivrednoj proizvodnji, 36. znanstveni skup hrvatskih agronoma, Opatija.

6. Ranogajec, LJ. (2006): Obraun trokova na temelju aktivnosti u funkciji konkurentnosti poljoprivredne proizvodnje, Doktorska disertacija, Ekonomski fakultet u Osijeku, Osijek.

7. Roztocki, N., Valenzuela, J.F., Porter, J.D., Monk, R.M., Needy, K.L. (1999): A Procedure for Smooth Implementation of Activity Based Costing in Small Companies, ASEM National Conference Proceedings, Virginia Beach, October 21-23, pp.279-288.

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