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Investigating the Effect of Using Activity Based Costing (ABC) on Captive

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Int. J Sup. Chain. Mgt Vol. 8, No. 1, February 2019

Investigating the Effect of Using Activity Based

Costing (ABC) on Captive Product Pricing
System in Internet Supply Chain Services
Ghaith Hakim Malik1, Khalid Hasan Al Jasimee2, Gnan Abed Kachi Alhasan3
1
College of Computer Science and Information Technology, University of Al-Qadisiyah
[email protected]
2,3
College of Biotechnology, University of Al-Qadisiyah
2,3
[email protected]

Abstract- In this research, the impact of activity-based customers to a large number of suppliers, companies of
costing on captive product pricing strategies has been the age of e-business has faced very serious challenges
investigated. For a thorough examination, the important in terms of remaining in competition and even
indicators of the impact of activity-based costing, which maintaining its market share. [2] believes that Internet
have been mentioned in most studies, have been used and
supply chain service providers are good examples of
also some examples of research have been reviewed to
achieve the ultimate goal of the research. With regard to middleware e-commerce in the new era. The growing
the use of activity based costing (ABC), and also taking demand for high-speed Internet by users, on the one
into account the notion of compulsory pricing strategy, it hand, and the efforts of Internet supply chain service
can be concluded that secondary services in Internet providers to provide new ways to reach users on the
supply chain services companies, despite the compulsion Internet, promise long-term continuity of Internet
or dependence of the customer on secondary services and supply chain service providers and their customers. But
paying its fixed price, these pricing services are in tight despite the fact that these companies are leading the
competition among Internet supply chain service way in providing new services to customers, their
providers, and activity-based costing can help in better
downfall is much higher than other industries, which is
pricing and lead to competitive pricing for secondary
services. one of the competitive pricing grounds for fixed costs
for customers. In this research, the impact of activity-
Keywords: Internet supply chain Service, Activity Based based costing on the pricing strategy is compulsory. To
Costing, ABC, Captive Product Pricing better check out the important impact indicators of
activity-based costing that have been used in most
studies, as well as a few examples of research to reach
1. Introduction the ultimate goal of the study, have been reviewed.

Management Accounting began its evolution from the

mid-1980s. The pioneers of this development were 2. Theoretical foundations
Professor Robert Kaplan and his friends at his college. 2.1. Activity Based Costing
Kaplan and Cooper, by designing a cost-based activity- ABC is an allocation method that describes how a
based approach in the 80's, have actually had a big contractual method is used to allocate contract costs,
contribution to management accounting change. such as other allocation methods, but how it works,
Although the relationship between costs and activities how it works, and so try It increases the value of
since the 60's was raised by some accounting theorists, accounting in the decision making process [3].
including Solomons and Stabos, but with all these
interpretations, the main designers of this approach are 2.2. Captive Product Pricing
Kaplan and Desert. These two professors have argued The use of some goods requires the use of a sub-
that traditional accounting systems of the industry not product, or, in other words, these goods must be used
only do not meet the needs of management, but in in conjunction with other goods. Film photography
some cases lead to misleading misconduct. The main with inkjet printers (which the camera or printer
objective of using the ABC method is to improve the consumes without it) are considered as compulsory
operational costing methodology. The study of goods. In this case, the company introduces a low-
statistics and the study of specialized accounting papers margin product and puts the main benefit on the
has shown that the ABC technique has been product, as the customer is captured by the company's
successfully applied in many Western manufacturing product [4].
and service companies [1]. The advancement of
information and communication technologies and the
globalization of markets and the availability of

______________________________________________________________
International Journal of Supply Chain Management
IJSCM, ISSN: 2050-7399 (Online), 2051-3771 (Print)
Copyright © ExcelingTech Pub, UK (http://excelingtech.co.uk/)
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Int. J Sup. Chain. Mgt Vol. 8, No. 1, February 2019

3. Literature review educational and research activities. The University of

Leeds, which had major problems in identifying
One of the first studies in the field of educational overhead and seed costs, has used ABC for this
service costing was done by [2] in the United purpose. All of these universities, after implementing
Kingdom. Although the achievements of this activity this method, concluded that ABC's information was
have not been much addressed due to lack of financial helpful in identifying and controlling costs. [8] In
standards and costing in scientific circles. But the 1996, Newman made an ABC item at the University of
British government used it as the basis for decision the Australasia to identify the cost at this university.
making on allocating funds to these institutions. After This study showed that identifying and elaborate
this study, the National Committee for the Formulation costing to the cost objective, in addition to increasing
of Standards for American Educational Institutions, the cost of service cost calculation, creates the
[4], [5], [6] were among those who studied and studied opportunity to provide an overview of the effectiveness
There were numerous ways in identifying and of activities and costs between the university and other
analyzing university fees [5]. But in general, the universities. In other words, the cost of education in
interest of writers and academic circles in applying this country is lower than that of the English. Of
costing methods among educational centers dates back course, in terms of technical and operational fields, this
to the mid-1980s. In the meantime, [12] contributed is slightly higher due to the need for laboratory
more to others in developing and applying the concepts facilities [9].
of costing and identifying the costs of the education One of the most comprehensive studies around the
sector. These authors believed that the application of world in relation to the use of ABC in the education
management accounting concepts in universities could sector was conducted by the Australian Academy of
help them plan, monitor, and allocate optimal financial Sciences in 1998 in order to identify and select an
resources [6]. In 1988, the American Institute of appropriate costing and costing method. After
Financial and Audit (CIPFA) was the first practical examining the available information around the world
guide for implementing and operating the system and obtaining information on the current status of
designed financial information for universities in the education at Australian universities, the Institute
form of basic standards for costing and calculating the proposed ABC / ABM to calculate the cost of training
cost of training activities. The manual introduced a set students. To ensure the efficiency of Bin and to
of tools that would identify and classify the costs respond to the information they need to manage, they
associated with each faculty, as well as how to allocate used the Bam among the three universities of the
common costs based on a logical pattern. The results of country called the Charlotte Starter University, the
these standards were later used by other people, University of Mardo, and the Pacific University of
including Perth and Burke, in designing and designing Applied Sciences in 1999. More than 10 disciplines
costing and costing methods [7]. have been studied in the technical, business and
The effectiveness of costing methods and the medical groups for the implementation of this system.
application of management accounting concepts among In addition, in this study, in order to allocate costs in
universities has been largely addressed by [6]. The two each of the studied groups, enamel has been applied to
authors compared their universities in terms of costing this field. So that in the technical groups of the ten
and costing systems by conducting cross-sectional most mines in the commercial group of the 8th grade of
research in the UK over a five-year period (from 1990 the ninth, and in the medical group 12 bases of the
to 1995). The results of the study showed that nearly ninth has been used. It should be noted that in this
83% of these universities were not happy with their study, for determining the cost of cost-sharing enamel,
existing accounting system and were looking for a the multi-dimensional regression method and
suitable replacement for it. By 1993, more than 17% of correlation coefficient have been used [9].
these universities changed their costing system, and 38
were planning to change their system by [8] regarding
the use of the ABC system in the education sector,
although this system it was first proposed by [8] to
calculate the cost of products and services. But due to
its capabilities, many organizations still have used the 4. Research Method
system. One of the first studies on the use of the ABC
system in the education sector was carried out by [9] at In each research, the appropriate method for
a local university in the United States. With the conducting research is always chosen based on the
introduction of ABC's initial system at the university, goals of that research. In this research, a descriptive-
they discovered and categorized the unknown cost, library method has been used for theoretical approach.
which can provide information that is very useful in To gather information, refer to research published in
decision makers. [8] In the UK, universities Several valid citation databases.
ABCs have used their bills for costing and calculating
the cost of their services. In 1994, Tadjar University
used this benom for accurate cost identification. Wells
College used this Ben to classify and identify his
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Int. J Sup. Chain. Mgt Vol. 8, No. 1, February 2019

5. Activity Based Costing (ABC) System function-based cost-based pricing of product or service
price estimates.
In the ABC system, causing a causal relationship
between the activities required to provide services and
the amount of resources used, the cost of doing 7. Applying pricing based on activity in
activities is determined. In this approach, services, pricing
activities are consumed and activities are allocated 7.1. Integration of activities
resources, so that these costs are allocated to activities, Activities are a work or set of tasks that are performed
then allocate the costs assigned to the activities based for the output, and each set of activities ultimately
on the use of resources. (Figure 1). In fact, activity- forms part of a cost item. Some of the features of the
based costing is the way in which the cost of services activity are:
or products is taken as the sum of the costs of activities - Similar activities that may take place in multiple work
that are performed on their behalf [10] in terms of areas. - All human resources in the organization can be
allocating costs to the ABC system, activity As new classified as activities. - Activities usually have
items, costs are identified and classified, and overhead measurable outputs. - Activities can use human
costs are assigned to activities based on defined bases resources and inhumanity [14]. In the production and
called "cost drivers", then activities are considered as trading of any activity that is performed in order to
research areas and The costs assigned to them (cost produce, distribute and provide services and has a
areas) are assigned to the final cost target (curriculum repetitive nature in performing the above tasks, it is
units or training courses). Therefore, in this system, in called work or work [13]. In a manufacturing plant
addition to allocating direct costs to its own activities, with an organization, the number of activities is so high
it increases the accuracy of the allocation of indirect that the use of a separate activity stimulus for each
costs (overhead costs) [11], [12] In terms of the process activity is not economically feasible. In order to
in the ABC system, designing Costs are emphasized by overcome this problem, it was necessary to integrate a
the continuous improvement process. In this way, number of activities in each repository. Of course, it
identification of activities with value added and should be noted that with the increase in the number of
activities without value is emphasized and attempts to integrated activities, the ability to stimulate activity
eliminate activities without value added [11], [12]. will be reduced in the allocation of the correct cost of
resources spent on activities. The definition of
activities varies according to how they are used. In
6. Implementation of activity-based other words, the details of the activities should be
costing system models defined at a level where decision makers can use their
needs to analyze their needs. In strategic management,
Identifying product costs in activity-based costing is in costs are defined at a higher level, so that operations
fact the beginning of the work, and the information cover one or more parts.
obtained only identifies the actual recovery On the other hand, if the researchers want to examine
opportunities. After explaining the theoretical the goods and services offered at a more detailed level,
foundations, the structure and design of the activity- they should define the activities in more detail. In the
based costing system should be implemented. To cost reduction approach, the definition of activities will
implement this system there are two main models: be of great importance in analyzes. In this case,
Integration model and dedicated model (HV). emphasis on activity-based analysis will emphasize the
improvement of the efficiency of business processes
and the definition of the set of activities. To this end,
6.1. Integration model the definition of activities should be carried out at a
This model is applicable for a variety of applications level that allows understanding the shortcomings as
such as pricing, operational excellence, business and well as achieving the necessary methods to make the
business improvement. The goals set in these models necessary improvements. At this level of activities, it
are one year or more than a year and are more general should be used at a lower level than other levels of
and long-term. These models require senior managers' activity-based analysis. Other factors affecting the level
support and can be helped by performing methods such of activity definition are the different needs of different
as separating tasks, reducing conflicts, team parts of the organization. The activities of parts of the
participation, etc. organization that deal with customers with high
transaction volumes or are constantly engaging in
complex negotiations with their customers are less
6.2. Exclusive model standardized than organizational units with specific
This model requires less time, staff and less strategic daily tasks and activities and should be at higher levels
concepts, and is used for specific cost-based activity- It should also be noted that the definition of activities
based applications. This model does not require some provided must be clear and vague than ambiguity [14].
senior management's support, such as rewards, and
decisions are made at the middle and lower levels of
the organization [13]. We have followed up the
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Int. J Sup. Chain. Mgt Vol. 8, No. 1, February 2019

7.2. Cost of activities report the delivered inventory requires consideration of the
This step indicates that the combination used to report following:
the resources used by each activity is done. For
example, the cost of the resources consumed by the - When it comes to delivering the product to the
two integrated activities can be reported separately customer.
with the accumulated. Choosing the type of report of - Special delivery requirements for any type of
the resources consumed through each activity do not product
affect the reported costs for the product and only the - Is delivery part of the delivery stage with a
details of the report will be affected. special delivery for a customer?
- The amount of product delivered
- Number of deliveries
7.3. Identification of activity centers - Product Weight Delivered - Truck Load
The activity center is part of a separate production Capacity
process (or a support area) that the management wishes - Distance to customer
to report separately on the cost of the activities
performed. Product costs that are reported through the This activity may have several factors, each of which
system are not affected by the selection and selection is a reflection of one or more of the above factors, there
of the activity boundaries of the product and its only are no specific factors that are better than the other.
effect on how the product costs reporting. The ability [17] state that the regression methods used to
to report costs in terms of the activity center provides determine the cost factor are appropriate, but in most
better control over the activities of managers [15]. firms, previous observations of agents cannot be
extracted for all potential activity factors and
regression only serves the limited conditions.
7.4. Selection of system resource drivers
Activity-based costing allocates resource costs to the
cost repository in each activity center. Each cost 8. Conclusion
repository represents an activity (or a combination of
activities carried out at the center). The resource Based on the results of this study, the type of Internet
drivers used to allocate costs to the cost repository supply chain service in service companies is largely
determines the allocations allocated to each repository identifiable by the use of activity-based costing, and in
as well as the cost of the expenditure [15] The choice the provision of various services of these companies,
of the stimulus depends on two actions: first, it can the stability of the procedure can be present at a
measure the consumption of resources in the product relatively favorable level [19]. The research revealed
for a number of activities, and, secondly, it is related to that it is possible to identify the activities performed in
the changes in the activity center (the cause-and-effect each company to a satisfactory level and the amount of
relationship) [16]. documentation in the company can be effective in
costing. By applying various cost-based activity
models, as well as combining activities, the cost of the
7.5. Selection of activity stimuli finished product was reduced and the cost reduced.
Cost drivers are the characteristic of an event or Another point is the captive service pricing. With
activity that results in cost incurred [13]. This stage is regard to the review of the use of the activity-based
the last stage of design and after allocating the cost of costing system and also the concept derived from the
the resources consumed by the activities carried out in Captive Product Pricing Strategy, it can be concluded
each center to the repository, the cost of the activities that secondary services in Internet supply chain service
can be determined by the stimuli of activity. In companies, despite the compulsion Or customer
traditional systems, cost drivers were considered to be dependence on secondary services and payment of its
related to volumes, such as output, and direct labor cost, these services are priced in the tight competition
hours, and they were considered as the only cost- among the Internet supply chain service providers, and
trigger factors, but in the activity-based costing activity-based costing can help in better calculating the
method, cost-related activity incentives also had Are price and causing To provide competitive prices for
important. Selection of activity stimuli is the most secondary services [18].
important part of the design of the activity-based
costing system, and for this purpose the number and
type of stimuli used must be determined. The
definitions of the agents of activity are compounded by
the fact that many activities can achieve more than one
activity. This is due to looking at a potential factor in
the perspective of time, diversity, and cost savings
from scale, categories, weight, capacity, and distance.
For example, the definition of the operating agent for
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Int. J Sup. Chain. Mgt Vol. 8, No. 1, February 2019

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