Copyright © 2014 The Authors. Published by VGTU Press. This is an open-access article distributed under the terms of the Creative Commons Attribution-NonCommercial 4.0 (CC BY-NC 4.0) license, which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited. The material cannot be used for commercial purposes. B u s i n e s s, Ma n ag e M e n t a n d e d u c at i o n ISSN 2029-7491 / eISSN 2029-6169 2014, 12(2): 228–244 doi:10.3846/bme.2014.234 IMPLEMENTATION OF THE ABC MODEL IN A COMPANY DEALING WITH EXTRACTION OF RAW MATERIALS Radoslav BAJUS1, Lenka HUDÁKOVÁ STAŠOVÁ2 Faculty of Economics, Technical University of Košice, Nemcovej 32, Košice, 040 01, Slovakia E-mails: 1radoslav.bajus@tuke.sk (corresponding author); 2lenka.stasova@tuke.sk Received 20 October 2014; accepted 07 November 2014 Abstract. ABC method is a new system for accurate product pricing, cost analysis of the causes of individual products and their optimization. The prices of products are accurately taken into account according to all relevant overhead costs in their actual context and relationships. Except of product costs, ABC method follows costs regarding customers, suppliers, distribution, transport, manufacturing, opera- tional and security processes, management processes and other business activities. ABC method sees the company as a complex of interrelated activities and pro- cesses. ABC method represents more precise cost calculation for the product. The aim of the present article is to highlight the introduction of the ABC method to the enterprise and compare it with the traditional method. The result is to reduce costs by introducing ABC method to the enterprise. Keywords: ABC method, costs, costs management, overheads, implementation of then ABC method in the company, controlling instrument. JEL Classification: G32, G34, M11, M21. 1. Introduction Activity Based Costing (ABC) method provides a wide range of information about costs, operations, activities, outputs and cost objects. It is used primarily to calculate the costs of a particular cost object. Due to its characteristics, it is an important tool for cost management serving to reduce costs and optimize them. It seeks to reveal the real causes of costs. For this method, it is characterized by the connection of cost and process perspective for running of the business, where in both cases, activity plays such a central element method. From the cost perspective to ABC, resources are assigned to the first phase of defined activities and then they are defined and assigned to cost objects. From a procedural point of view, activities play an important role. (Popesko 2009a; Bogdanoiu, Mirea 2013). ABC is a system conferring concise information about the costs of individual prod- ucts, services, customers, regions, distribution channels, and so on. It is a tool for ABM. ABC is not a modification or improvement of the traditional model of labor overhead costs. It’s a fundamentally different view on the manner of costs. ABC is a methodology mailto:1radoslav.bajus@tuke.sk mailto:2lenka.stasova@tuke.sk 229 Business, Management and Education, 2014, 12(2): 228–244 that measures the costs and efficiency of cost objects, activities and resources. It uses causal relationships among cost objects and activities and among activities and re- sources (Staněk 2003; Bogdanoiu 2011a). ABC method can be characterized by three innovations: The first innovation: Assigning the costs to activities. Assignment is based on the measurement of resource consumption. Knowledge about the costs of activities are an important source for identifying assets with a high potential for cost reduction activities. The second innovation: Assigning the costs to cost objects. This method assigns activity costs to cost objects based on media activities that accurately measure the consumption of these activities. Medium refers to the measurement of consumption activities to cost objects. The third innovation: Improving information quality regarding the activities of non-expanding information about how activities are carried out. Factors that determine how much power range is required to carry out the activities are called carrier costs. Indicators of achievements are called performance indicators. In this way, ABC method combines non-financial and cost information for the benefit of the company manage- ment to improve business performance. (Bogdanoiu 2011b; Popesko, Tučková 2012). These issues are also involved in these authors Antlová (2009); Castellacci et al. (2005); Kádárová et al. (2013); Popesko (2008, 2009b); Siničáková (2013); Spišáková (2010). The basic structural elements of ABC method in terms of cost allocation are: − sources, − activities, − activity centers, − media sources, − cost funds activities − cost elements, − cost objects (Foltínová 2007; Popesko 2010; Závadská et al. 2013). ABC method focuses on indirect costs – overheads, and turns them into direct costs. The bottom line is that in the first step, direct costs are assigned to outputs and indirect costs are assigned to activities. In the second step, the activities assign to individual cost items according to the degree of difficulty for consumption activities necessary for their provision. The objective of the implementation of ABC method is to create a flexible business model of company operations. This model must be capable of using data from the accounts given accurate information about the need of business sources and their assignment to the right product. When implementing the method into a chosen company we follow generally defined steps of the implementation of this method: − preparatory phase, − specification of activities, − aggregation activity to activities, 230 R. Bajus, L. Hudáková Stašová. Implementation of the aBc model in a company dealing with extraction… − identification of sources, − first stage of allocation – costing of activities, − production of cost flow structure, − activity centres identification, − specification of the products, − second stage of allocation – costing of products, − evaluation of the results (Pataky, Stašová 2005; Mihaila 2011; Dejnega 2011). 2. Methods of research The use of the ABC method in business practice exists in two forms, either as a single model – e.g. the Strategic ABC Model or as an operating model for regular monthly or quarterly assessments, which are usually part of controlling. The single model is used to analyze a selected period, eventually a part of the com- pany (processes, products, customers) to verify the necessary contextual relationships. A typical example is obtaining the final product calculations for the selected period. In case of a single model, it is not necessary to solve the ABC data links with the other data sources and a special purpose simplification is used that has no significant impact on the result. Single models are mainly used in the final calculations, What-if analyses, occasional optimization of processes and in strategic ABC models and strategic plan- ning (Hunka 2013; Ivan et al. 2013; Zhou, Fan 2007; Vollmuth 2009; Anton, Constantin 2013). Operational models for the monthly or quarterly assessment are suitable for compa- nies with dynamically changing conditions (prices, discounts, quantity produced, costs of inputs). There, monthly calculations are usually required, therefore it is essential to systemically solve the ABC links with the primary registry in the IS modules. The created model must be detailed to take into account the specifics of cost occurence and their causes. Monthly calculations take place via specialized software (e.g. MonetABC), which represents an extension of a transaction system, and is generally connected with the former by data export and import. The implementation of the operational model takes longer, because of the usual ef- fort to automatize the monthly calculations as much as it is possible. These issues are also involved in these authors Janíková (2011), Krištofík, Kanderová (2009), Šoltés (2010), Szabo et al. (2013), Gavurová et al. (2014), Georgescu (2012), Popesko, Novak (2008). The ABC operational models are used primarily in the monthly calculations, as a support of staff motivation in relation to the guarding of processual costs, as the permanent process optimization, of the product and customer portfolio as an aid to business negotiations. 231 Business, Management and Education, 2014, 12(2): 228–244 The implementation of the ABC/M is divided into three stages. Stage 1 (one month): The analysis and establishment of a basic dynamic model connected to the accoun- tants to the business processes and activities, products, orders and customers. Refilling the model with numerical values for the selected period and comparison with existing information. Draft proposal of new registers for the needs of calculations and control- ling. Presentation of the company management solutions. Approval of the parameters of the target solution and further progress with the senior management. Stage 2 (one to four months): Incorporation of the comments into the system proposal. Detailed solution of the co- debooks and registers. Methodology for systematic collection and asessment of data. User training into the operation of the system. The created model is ready for regular monthly calculation of the processes, products and customers. Draft of the reports for management and decision-making. Stage 3 (one to two months/continuously): Automation of periodic reports. Cooperation in monthly asessment, adjustment, re- spectively, update of the system. Maintenance of the system in case it is necessary. Integrating the created controlling system into management – optimization, motiva- tion, economization of the management. 3. The introduction of ABC method into the company SILO enterprise is an enterprise engaged in the extraction of raw materials. We decided to introduce this ABC method into its action. We will make ourselves clear how the current situation seems. We will select major accounting costs (see Table 1). Table 1. The main accounting costs of SILO company in € (Source: own processing) Cost type Total MATERIAL 509 500 ENERGY 45 750 REPAIR 34 000 SERVICES 175 000 PERSONAL EXPENSES 537 465 AMORTISATION 90 000 TOTAL 1 391 715 For the analysis of the composition of the cost and understanding of the current costing model and to verify the calculation of overhead rate, we divide the costs of this Table 1 into two groups. 232 R. Bajus, L. Hudáková Stašová. Implementation of the aBc model in a company dealing with extraction… Table 2. The first group of costs-direct costs for material and services of SILO company in € (Source: own processing) Type of costs Total DIRECT COSTS 450 000 DIRECT SERVICES 125 000 TOTAL DIRECT COSTS 575 000 The first group consists of costs of direct materials and services (see Table 2) and the second group comprises other costs divided into production overheads and salaries and non-production costs (see Table. 3). Table 3. The second group of costs-other costs of SILO company in € (Source: own processing) Cost type Production overheads Material 52 500 Energy 45 750 Repair 34 000 Services 26 250 Personal expenses 408 021.75 Amortisation 90 000 Total 656 521.75 We can see that the total costs can be divided into direct costs of materials and services and other costs (personnel costs and overheads). Other costs are important for overhead rate. Therefore, we will verify the calculation of two overhead surcharges. One surcharge is a manufacturing overhead rate which covers direct wages together with manufactur- ing overhead. This surcharge is calculated as the sum of direct wages and production overheads per worker’s hour labor. Thus, classical overhead rate assuming the cause of creation and size of production overheads is direct labor. Calculation of overhead rate is shown in Table 4. 233 Business, Management and Education, 2014, 12(2): 228–244 Table 4. Calculation of the traditional overhead rate – production (Source: own processing) Direct wages and manufacturing overhead 656 521.75 € Number of direct labor hours 31 000 Overhead rate in € / hour. 21.178 € The second surcharge is non-productive overhead rate covering all other non-pro- duction overheads. This is calculated as a sum of the other non-manufacturing costs to € of total production costs. Total production costs are all costs of production without non-production costs (ie excluding the cost of direct materials, services, direct labor and manufacturing overhead). The calculation of this overcharge is shown in Table 5. Table 5. Calculation of the traditional overhead rate-non-productive (Source: own processing) Non-production costs 160 193.25 € Total production costs 1 231 521.75 € Overhead rate % to production costs 13% Now we look at the order of the SILO company, comparing the results of traditional procedures with the result of introducing ABC method. Profitability is under traditional model as follows (see Table 6). Table 6. Profitability of the order by the traditional method in the SILO company (Source: own processing) Revenues 60 625.65 € Direct material and cooperation 39 805.10 € Number of direct labor hours 580 Direct wages with production overheads 12 283.25 € Total production costs 52 088.35 € Non-production overheads as % of manufacturing N 6 771.50 € The total costs of the order 58 859.85 € Profit of the order in € (3%) 1 765.80 € In developing the model, sources, activities, cost objects and cost flow causes of consumption we will follow five stages. 1st Stage- update of accounting data The analyzed company is divided into 8 Centers: Purchasing, Production, Extraction, Expedition, Production Planning, Human Resources Management, Facilities Management, Marketing and Resort Management company. The total costs, of course, 234 R. Bajus, L. Hudáková Stašová. Implementation of the aBc model in a company dealing with extraction… except of the costs of direct material, direct services and co-operation are listed in the following Table 7. Table 7. Cost centers of SILO company according to accounting and kind in € (Source: own processing) Center Material Energy Repairs Services Personal N Amortization Total Purchase 1 500 5 000 27 500 34 000 Production 10 750 45 750 34 000 78 950 50 000 219 450 Extraction 25 000 2 500 110 800 5 500 143 800 Expedition 10 000 20 000 21 400 3 750 55 150 Production Planning 2 500 5 000 96 400 103 900 Human Resources Management 1 000 3 750 48 750 53 500 Facilities Management 1 000 8 750 21 750 30 750 62 250 Sales and Management 7 750 5 000 131 915 144 690 Total 59 500 45 750 34 000 50 000 537 465 90 000 816 715 2nd stage-design of activities and 3rd Stage-valuation of activities The next step is to analyze the work, to define the activities which individual em- ployees do. It turns out that the distribution of the main activities corresponds to about distribution centers. The theory is clear that some activities have a direct causal relation- ship to the cost items and some not. Due to the decision to introduce ABC method into SILO company means that while the definition of business activities will be measured and then according to the results of their analyzes will be corrected. The steps will be done separately so that the whole process is simple and then understandable. As supporting activities, we can define Facilities Management and Human Resource Management Center. Facilities Management is related to amortization and maintenance of corporate buildings, stores. Human Resources Management include s the costs for personnel management of subordinates in production and administration. We assume that the organizational division of the company is responsible for the Center’s main business activities. Because some activities take place at centers or more centers are involved in certain activities, we can abandon this assumption and can spec- ify individual costs. But now, we divide costs of the two support centers (activities) to other centers (activities). The result of redistribution of costs outreach appears as fol- lows: (see Table 8). 235 Business, Management and Education, 2014, 12(2): 228–244 Table 8. Cost operations after cost division supporting business activities in SILO company in € (Source: own processing) Center Expenses before correction Division of center buildings Costs after corrections Division of center Human Resources Management Costs after corrections Purchase 34 000 11 300 45 300 2 550 47 850 Production 219 450 18 250 237 700 13 375 251 075 Extraction 143 800 12 400 156 200 24 950 181 150 Expedition 55 150 9 550 64 700 4 750 69 450 Pre-production 103 900 6 250 110 150 2 500 112 650 Human Resource Management 53 500 1 475 54 975 –54 975 0 Building Management 62 250 –62 250 0 0 Sales and Management 144 665 3 025 147 690 6 850 154 540 Total Center 816 715 0 816 715 0 816 715 We can see that the total costs remain unchanged. The only thing that changes is a way of the flow of costs from resources to activities. Thereby, we will change the perspective from the particular cost types to ABC method. We will move from the per- spective of the material, services, wages as a cost to activities. Costs of the supporting activities of the Human Resources Management Center and Buildings Management Center are all assigned to activities that are supported. There left no costs in these cent- ers (activities). It may happen in some cases that one activity supports another one, or the activity supports each other altogether. Now we divide supporting activities of the Buildings Management Center. Then we divide Human Resource Management Center so that Buildings Management Center in terms of this support is omitted. Support of Human Resource Management Center activ- ities, which are provided by Facilities Management activities, is relatively insignificant. We determine Shopping Center activities as the other supporting activities. From discussions with the staff of SILO company, we learned that other effort requires the purchase of equipment, purchase of other components, purchase of external services and cooperation and administrative facilities and purchase of equipment. Thus, we divided the costs of the Center according to the effort that was spent on each activity. Therefore, we defined new activities such as buying new material, components and services. By the analysis of these activities, we found out that about 40% of the effort is spent on buying activity components. The reason is repeated searching of suppliers, negotiat- ing with suppliers and resulting administration, own transport and access control. Only 236 R. Bajus, L. Hudáková Stašová. Implementation of the aBc model in a company dealing with extraction… an absolute majority is needed for buying material such as buying components because assortment plays a major role, and the range is not as wide as relationships among sup- pliers that have already been run. In conclusion, we can say that there occur two distinct activities. Thus, we divided this center into two parts-the operation of machine setup and operation of own production. The Centre Preparation of Production also supports other main activities. What is carried out, we can mention mainly maintenance, production planning, material trans- fers, components, products. By analysis of resource consumption to supporting activi- ties, we- disjoin all the costs of the operation to supporting activities. Of course, also a part of the hidden activities in other modes in center Sales and other Management belongs to the supporting activities. We will keep the other costs in this activity and convert them into Sales and Administration. Let us now look at the newly created and renamed activities and disjoined cost sup- porting activities (centers) to the activities supported (see Table 9). Table 9. Costs for new and renamed activities in SILO company in € (Source: own processing) Activity / Center Pu rc ha se Pr od uc tio n In st al la tio n E xp ed iti on Pr e- pr od uc tio n M an ag em en t To ta l Material buying 10 000 8 200 15 450 33 650 Components buying 17 250 9 000 15 450 41 700 Services buying 13 000 9 750 15 450 38 200 Machine Setup 64 125 9 250 7 500 80 875 Own production 2 250 186 950 44 800 7 500 241 500 Extraction 181 150 13 725 7 500 202 375 Inspection, Packing and Shipping 69 450 1 450 1 125 72 025 Sales and Administration 5 350 16 475 84 565 106 390 Total in activities 47 850 251 075 181 150 69 450 112 650 154 540 86 715 Originally in Centers 47 850 251 075 181 150 69 450 112 650 154 540 86 715 237 Business, Management and Education, 2014, 12(2): 228–244 4th stage-definition of cost objects At this stage, we choose the cost objects. We use purchase as cost objects. We described these cost objects at the beginning. Then, we select business clients for cost objects. 5th Stage-valuation of cost objects Valuation of defined cost objects is last and difficult step. For valuation, we need to find the causes that provoke consumption of activities to specific cost objects. We need to determine why the consumption of activities changes by cost objects. For the first three activities, buying material, components and services, we decide for the cause-purchase price. Chosen cause for each purchase is known and it means we do not have to find any new information. For Machine Setup activity, we choose number of settings as the main cause. We assume that each setting takes and costs approximately equally. Then, we consider the reasons (eg, short and long setting). In this case, we obtain much more concise cost as far as all the costs of adjustment are included in manufacturing overhead and relate just to the cause of direct labor hours. We get to know how much the overhead cost for each purchase separately is. For Own Production activities, we can not say that every purchase lasts equally. Therefore, we must consider the cause related to time. Because of the machines operating with periodically unattended and staff serve a different number of machines, we will decide for the cause The Time Handling Machine. In contrast, extraction is mostly craftwork. Used tools are only a part of similar costs of production and therefore we keep direct labor hours as a cause of consumption. For activities Inspection, Packing and Shipping, we came to analogous conclusion to that of activity Setting. The differences in the time required for final inspection, packing and shipping for each order are not significant. Thus, we decide to establish activity the number of expeditions as the cause of the consumption. Arguments why the obtained information is more concise than overhead rate is described in activities Settings. The biggest problem occurred in the last activity Sales and Administration. We were able to reduce costs of the original center Sales and Management but this activity con- tinued to include many diverse activities. After consideration, we came to the conclusion that all the activities related to the amount of purchase in terms of internal costs for the construction purchase. They are related to all internal functions involved in purchase work. Thus, compared with the current method for allocating non-production overheads, our cause is created by total internal costs without external direct costs of material, services and cooperation. Let us now summarize valued activities and causes of these activities in Table 10. 238 R. Bajus, L. Hudáková Stašová. Implementation of the aBc model in a company dealing with extraction… Table 10. Valuation of activities and calculation of costs to the causes of SILO company in € (Source: own processing) Activities of companies Costs € Consumption cause Number od causes Price to one cause € 1 Material buying 33 650 The purchase price of the material 10 mil. 0.003365 2 Components buying 41 700 The purchase price components 6 mil. 0.00695 3 Services buying 38 200 The purchase price of services 4 mil. 0.00955 4 Machine Setup 80 875 Number of settings 400 202.1875 5 Own production 241 500 Number of machine hours 8 000 30.1875 6 Extraction 202 375 Number of direct labor hours 15 000 13.49 7 Inspection, packing and shipping 72 025 Number of expeditions 1 200 60.02 8 Sales and management 106 390 Total internal N 26 659 071 0.00399 Total 816 715 Instead of two original price overhead surcharges we will use the activity element and concise reasons for their consumption. Instead of surcharge which covers all manu- facturing overheads according to the number of paid hours of direct labor and surcharg- es according to the total production costs, we will use the the causes of these produc- tion and non-production overheads. 6 causes of consumption activities were chosen: purchase price, number of machine sets, number of machine hours, direct labor hours, the total the number of expeditions and total internal costs. Now consider the purchase of an analyzed company (see Table 11). Table 11. Total costs of a company on order by ABC model in € (Source: own processing) Activity of a company Number of causes Price to one cause € ABC costs € 1 Material buying 50 000 0.003365 168.25 2 Components buying 10 000 0.00695 69.50 3 Services buying 0 0.00955 0 4 Machine Setup 4 202.1875 808.75 5 Own production 80 30.1875 2415 6 Extraction 50 13.49 674.50 7 Inspection, packing and shipping 20 60.02 1 200.40 8 Sales and Management 299 700 0.00399 1 195.80 Total 6 532.20 Direct material and services 39 805.10 Total costs 46 337.30 239 Business, Management and Education, 2014, 12(2): 228–244 From the Table above, we can see that ABC costs are lower than in the traditional method. Results comparing the total costs are summarized in the following Table 12. Table 12. Comparison of order differences in both traditional and ABC model (Source: own processing) Purchace of the company Traditional model ABC model Revenues € 60 625.65 60 625.65 The total costs € 58 859.85 46 337.30 Order’s profit in € 1 765.80 14 288.35 Order’s profit in% of revenues 3% 23.75% It follows that the SILO company has greater profitability calculated by ABC model. This means that ABC model is to define the costs and causes of activities accurately. 4. Results and discussion Summarizing the theoretical knowledge of research problems, based on expert consul- tations and knowledge and skills gained studying the available literature in this area, drawing on practical applications, we can put a proposal methodological procedure: 1. analysis of financial data according to centers – analysis of a book account, analysis of the resulting cost accounts, 2. analysis of activities, their definition, processing expense by groups – naming and description of the main activities and processes of the organization which actually our company makes, who performs that activities, which major and key processes are, which ancillary processes are, what activities these processes consist of, 3. Valuation of assets – how much our company spends for each of the defined acti- vities, how much of our resources all activities include – the result is how much each activity costs, 4. definition of cost objects – why our company performs these activities as defined, 5. valuation of cost objects – how much our company spends on each customer, pro- duct or other cost object, how many activities are consumed just by the customer, for this product, at this vendor, etc.., 6. realization of the process, 7. monitoring, evaluation and improvement of the proces (Antošová et al. 2014; Dolejšová 2008). We can also conclude that the use of ABC method with so-called Pareto analysis is relatively simple, but very effective method for use in management practice. ABC analysis is historically based on the conclusions of a political scientist Vilfredo Pareto that could be defined as follows: − 20% of the population consumes 80% of national income, − 20% of workers makes 80% of the work, 240 R. Bajus, L. Hudáková Stašová. Implementation of the aBc model in a company dealing with extraction… − 20% of newspaper contains 80% of information, − 20% of the effort produces 80% effect, − 20% of the time taken enables to reach 80% of the results. For practical use of Pareto analysis, elements of the research object may be divided into two groups (A, B), in three groups (A, B, C) or into four groups (A, B, C, D). Distribution of frequency and significance when divided into two groups is obviously not accurate 20:80, as mentioned above, but there was a clear tendency towards the achievement of that relationship. The breakdown of the population into three groups may occur for example ratios of 15:65, 20:20 and 65:15. Analysis and Cost Control belong to important tasks of management. Correctly per- formed analysis allows to determine the current level of costs by cost types and accord- ing to other aspects, to compare benchmarking to competing products and then apply eg. value analysis to reduce costs in the key items. Using the Pareto principle allows to determine critical items at cost analysis that have the greatest impact on the total amount of costs. Result of this principle is to identify elements that are in a given system or process critical. By concentrating the efforts on the elements or processes better system functionality, improving performance, cost reduction can be achieved. These issues are also involved in these authors Jurásková, Macurová (2013), Michalik et al. (2013), Nedomová et al. (2014), Tuček et al. (2013), Rajnoha, Dobrovič (2011), Gál, Kresta (2014), Gavurová (2012), Popesko (2011). The ABC system can be beneficial for all sizes of companies and sectors of their business. In the following, we present the most common reasons for introducing the ABC method: − companies from rapidly changing industrial branches such as food processing, applied household chemistry, etc – they need operative final calculations, price modeling in relation to the quantities being taken and to the delivery terms and conditions, monthly profitability asessment of the customers and networks, moti- vating the salesmen not baccording to sales, but according to the profit they bring, − big successful companies with a broad portfolio of products, respectively custo- mers, which are capable of dynamic development – optimizing the range of the product and customer portfolio, as a too broad portfolio can reduce economic effi- ciency and it is not always true that large volumes bring big profits, − companies that reduce costs and overheads – they want to clarify the eligibility of costs in the processes, reveal inefficient and unprofitable activities, to achieve changes in the business and properly motivate the employees, − branches of foreign companies in Slovakia – need controlling not only to report to the parent company, but especially managerial process controlling for their home management, so that the Slovak branch would be managed demonstrably effecti- vely and thus would have its long-term future guaranteed, 241 Business, Management and Education, 2014, 12(2): 228–244 − holding structures – the owners want to have a unified methodology of monitoring the economic efficiency of the owned firms, they want to have access to the analy- sis of corporate activities, products and customers and have a tool for modeling the contribution of currencies, activelly, and thus have a guaranteed long-term future, − companies with powerful information systems – they need a flexible and affordable tool for modeling and rapid surveys for managers, but with more comfort within the routine processing, as provided by MS Excel. 5. Conclusions ABC method is a partial controlling instrument. In literature, it sometimes refers to a method of controlling overhead costs. An effective system of cost management is an inevitable condition for ensuring effective corporate governance. The system of cost management is an integral part of the controlling hand in all three areas of its activities (planning, accounting, computer science). ABC system is becoming the basis for reassessment products and business activi- ties. Based on the analysis conducted and the definition of the kind of problems we concluded that the proportion of overhead costs to total costs is an important factor that should be considered when undertaking any use of scheduling techniques in building costing activity-based (ABC). The higher the proportion of overhead costs to total costs in a company is, the greater uncertainty of allocating costs with the help of allocation base in the enterprise is. Companies can determine the cost of products more accurately than with conventional methods by implementation of the proposed ABC model. ABC method can be considered as a very important tool for cost management. It allows to allocate costs to activities and thereby based on the following inspection to assess the validity of a causal relationship to costs during the manufacturing process. The aim of introducing ABC method is to increase profit, reduce costs, outsourcing, motivation, improving the market position of the company and ultimately improve prices. Direct allocation of the cost of products or services does not reflect the true cost of business flow. Most of the costs are to be assigned to products based on the allocation base which do not reflect the real causes of cost. The results are distorted, which ad- versely affect the decisions of directors. From practical experience, just Activity Based Costing method appears to be the most effective tool of controlling. 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Courses taught: Corporate Finance, Financial Market, Dividend Policy, Taxes, Controlling. Research interests: Managerial Accounting, Corporate Finance, Financial Market, Costing, Controlling. Lenka HUDÁKOVÁ STAŠOVÁ. PhD – is the assistant professor at the Department of Finance, Faculty of economics, Technical university of Kosice, from 2000. Courses taught: Financial Account- ing, Managerial Accounting, Financial Control. Research interests: Managerial Accounting, Financial Accounting, Costing, Financial Control, Controlling.