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1、PhD. Ivana Drai LutilskyUniversity of Zagreb, Faculty of Economics and BusinessJ.F.Kennedy 6, 10000 ZagrebPhone:+3851-238-3184 Fax:+3851-233-5633E-mail address: idrazicefzg.hrM.Sc. Sanja Broz TominacUniversity of Zagreb, Faculty of Economics and BusinessJ.F.Kennedy 6, 10000 ZagrebPhone:+3851-238-323
2、6 Fax:+3851-233-5633E-mail address: sbrozefzg.hrACTIVITY BASED COSTING SYSTEM IN TELECOMMUNICATION INDUSTRYABSTRACTThe main objective of this paper is to prove that Activity Based Costing System would be very useful as a cost management tool in telecommunications companies. With the process of liber
3、alization at Croatian market competitiveness between telecommunication companies is rising. Along with other reasons, competitiveness was a good argument to cause consideration about better cost management in Croatian telecommunications companies. Telecommunications are primarily service oriented in
4、dustry which at the end is selling their services as a product. Main characteristic of telecommunication sector is dynamic environment with a lot of technological constant changes and because of those changes; structure of costs is also changing. Constant technological innovations and changes, autom
5、atization in business processes, digitalization, data mobility, enlargement in service assortment and more demanding customers is definitely led to increase costs in term of product development, sales, business control and other. Most of the costs in telecommunication companies are indirect cost, ev
6、en 80% of total cost, which arent easy to allocate on costs object and because of that the need for transparent cost management is appearing. There are lot of factors because of which it is important to find right allocation method of indirect cost which will reflect connection between occurred cost
7、 and rates for allocation of cost on cost object with revenues and product profitability. Those factors are: globalization and competitiveness, regulatory influence made by Government, quick substitution of old services with the new ones, etc. Traditional cost allocation methods arent managing to pr
8、ovide transparent and accurate informations about costs. Goal of effective cost management is to improve business processes by reducing those activities within the company which arent bringing any added value for the company or for the customers and to improve activity performance of the company to
9、save money and time. Key words: telecommunication industry, cost management, cost allocation, traditional methods, ABC method, product profitability1. INTRODUCTIONSince the early 1980s, telecommunications sectors in many countries have been opened for competition. In Croatia, that process has hapene
10、d later, around 2007. Because of competition it is important for Croatian regulator to assure the principles of transparency, equality and cost orientation of prices for telecommunication services, in the following manner if an operator with significant market power is:a) charging too high prices fo
11、r services;b) precluding market entry to other participants;c) restricting market competition by charging excessive or too low prices for services;d) providing unjustified benefits to certain users of services; ande) unjustified bundling of certain types of services.To assure equal participation of
12、all operators new Law on electronic communications(hereinafter: New Law), which came into force on 1 July 2008, takes over all relevant EUdirectives and recommendations, apply the following procedures:a) determine the maximum prices for services;b) regulate individual prices for services;c) impose c
13、ost orientation of prices for services; andd) determine prices for services pursuant to the prices on comparable markets.Because of those reasons Croatian legislation has entered obligation for Accounting Separation and Cost Accounting for Croatian operators which follows the principles of European
14、regulatory framework. 2. RELEVANT EU LEGAL FRAMEWORK2.1 Accounting separationAccording to article 11 of the Directive 2002/19/EC Directive 2002/19/EC of the European Parliament and of the Council of 7 March 2002 on access to, andinterconnection of, electronic communications networks and associated f
15、acilities (Access Directive) (hereinafter: Directive on access) National regulatory authorities are entitled to impose obligations for accounting separation in relation to specified activities related to interconnection and/or access.In accordance with Recommendation 2005/698/EC Commission Recommend
16、ation 2005/698/EC of 19 September 2005 on accounting separation and cost accounting systems under the regulatory framework for electronic communications(hereinafter: Recommendation) the purpose of imposing an obligation regarding accounting separation is to provide a much greater level of detail of
17、operating cost and financial results for different markets and services than that derived from the statutory financial statements of the Notified Operator. The imposition of the accounting separation obligation is a supplement to the transparency and non-discrimination obligations, as it specifies t
18、hat the statements delivered as a result of accounting separation are to reflect as closely as possible the performance of the parts of the notified operators business as if they had operated as separate businesses. Accounting separation shall also inhibit in case of vertically integrated undertakin
19、gs the discrimination in favour of their own activities and prevents unfair cross-subsidy. In accordance with article 11 of Directive on access it is required to ensure compliance with the above mentioned a vertically integrated company to make transparent its wholesale prices and its internal trans
20、fer prices. Furthermore, according to Recommendation, when the obligation of accounting separation is imposed on a notified operator it may cover not only the markets where it has SMP (significant market power), but also other markets where it does not have SMP, e.g. to ensure the coherence of data.
21、According to article 11 of Directive on access, the Regulator may specify the format and accounting methodology to be used by the operator having the obligations of accounting separation and cost accounting. In accordance with Recommendation accounting separation means the separation of costs, capit
22、al employed and revenues. According to article 13 of Directive on access, irrespectively of the supply of data under the accounting separation obligation the Regulator may also require ad hoc provision of accounting records to facilitate the verification of compliance with obligations of transparenc
23、y and nondiscrimination.Accounting separation and cost accounting are in close relationship with each other, both obligations serve to assist transparency and non-discrimination. Thus, any mandated cost accounting or accounting separation methodology used in particular as a basis for price control d
24、ecisions should be specified in a way that encourages efficient investment, identifies potential anti-competitive behaviour and should be in accordance with the Regulator policy objectives as set out in Directive 2002/21/EC Directive 2002/21/EC of the European Parliament and of the Council of 7 Marc
25、h 2002 on a common regulatoryframework for electronic communications networks and services (Framework Directive)(hereinafter: Framework Directive).In accordance with the Commissions recommendation of 19 September 2005 (2005/698/EC) it is recommended that Regulator requires the disaggregation of oper
26、ating costs, capital employed and revenues to the level required to be consistent with the principles of transparency and regulatory objectives mandated by national or Community law. Further, the allocation of costs,capital and revenue shall be undertaken pursuant to the principle of cost causation
27、(e.g. Activity-Based Costing, “ABC”), which can be used in cost accounting and also in accounting separation.Cost accounting and accounting separation systems of notified operators should be able to deliver regulatory financial information, which can verify the compliance with regulatory obligations
28、. It is recommended that this capability is measured against the following criteria:relevance, reliability, comparability and materiality. In accordance with the Recommendation the regulatory financial statement of Notified Operators need to be published and therefore audited annually to ensure that
29、 they are in compliance with the principles of the accounting separation obligation. In accordance with the Directive 2002/22/EC Directive 2002/22/EC of the European Parliament and of the Council of 7 March 2002 on universal service andusers rights relating to electronic communications networks and
30、services (Universal Service Directive)(hereinafter: Directive on universal service) audit shall be performed by a qualified body, independent of the notified operator. In case the Regulator has the necessary qualified staff, the audit may be carried out by the authority itself. A statement concernin
31、g compliance shall be published annually, paying attention not to include sensitive data of the notified operator.According to Recommendation, when the Regulator reviews the notified operators cost accounting system, it should pay special attention on the capability of the system to analyze and pres
32、ent cost data, in particular, that it is capable of differentiating between direct and indirect costs. Direct costs are those costs wholly and unambiguously incurred against specified activities. Indirect costs are those costs that require apportionment using a fair and objective attribution methodo
33、logy. 2.2.Cost accountingThe obligation of cost accounting is imposed to serve as a basis of tariff regulation. All the principles of accounting separation mentioned above shall also be applied to cost accounting. In the following the specifications of cost accounting are set down. The cost accounti
34、ng obligation is may imposed in both wholesale and retail markets:In accordance with Article 14 of Access Directive in situations where a market analyses indicates lack of effective competition Regulator may impose obligations on Notified Operator related to price control including cost orientation.
35、 In accordance with Article 4 of Directive on Universal Service Regulator shall ensure that where an operator is subject to retail tariff regulation or other relevant retail controls, the necessary and appropriate cost accounting systems are implemented. The Regulator may specify the format and the
36、accounting methodology to be used. National regulatory authorities shall enable operators to have a reasonable rate of return on capital employed, taking into account the risks involved, means that the cost of capital shall be calculated as a weighted average cost of capital. Further requirements of
37、 the cost recovery mechanism or pricing methodology are that they should promote efficiency and sustainable competition and maximize consumer benefits. While examining prices, national regulatory authorities may use benchmarks and may use their own cost accounting methods independent of those used b
38、y the undertaking.In case the cost accounting obligation has been imposed, the description of the cost accounting system has to be made publicly available, showing the main cost categories and the rules of cost allocation. These rules should be displayed at a level of detail that makes clear the rel
39、ationship between costs and charges of network components and services, and the basis on which directly and indirectly attributable costs have been allocated between different accounts should also be provided.In accordance with Directive on Access, where an operator has an obligation regarding cost
40、orientation of its prices, the operator has to prove the correctness of its pricing methodology.Therefore, the national regulatory authority may require an operator to provide full justification for its prices, and after reviewing the prices, it may require further adjustments of them. According to
41、Recommendation, compliance with the cost accounting system shall be verified by a qualified independent body, and a statement shall be published annually.As a part of cost accounting, the evaluation of assets can be carried out on the base of historical costs or current costs. The EU regulation does
42、 not specify that which of them shall be used. Though, in accordance with Recommendation when the notified operator evaluates its assets based on current costs, the use of a cost accounting methodology such as long run incremental costs (LRIC) may be appropriate. If the base is historical costs then
43、 it should be used ABC method under Fully Allocated Costing principle.3.COST ALLOCATION IN GENERALCost allocation is a process which is essential for every company, from their point of view also for the regulator for the reasons mentioned above. The procedure of allocating costs to defined costs obj
44、ects is one of the most important procedures. This procedure enables the significant information for qualitative business decision process. Cost allocation provides management with information regarding services profitability evaluation, segment evaluation and profitability evaluation which are need
45、ed for both strategic and operating decisions. (Horngren, Datar, 2003, 482) The basic purpose of cost allocation process is to determine the cost of a service. Besides that basic purpose, cost allocation is performing in order to enable the following purposes: (Horngren, Datar, 2003, 483)1. to provi
46、ded information for economic and non economic decisions;2. to motivate managers and employees;3. to justify costs or compute reimbursement;4. to measure performance for reporting to external parties.The first purpose is the most important one, because cost allocation process is mostly implementing f
47、or enabling economic decision such as pricing, capacity, forming the service mix, the implementation of new services, the acceptation of certain customer demands and etc. Cost allocation can contribute to motivate management and employees to design services that are simpler to provide. Finally, cost
48、 allocation is necessary for performance measurement for external reporting. (Horngren, Datar, 2003, 482) Since cost allocation is a difficult and complicated process which is hard to enforce, a certain activities are needed to be provided in order to make the cost allocation process possible. Cost
49、accounting system has to be designed in the way which it enables cost determination and cost classification. While cost determination is a process which is also required for the purpose of external reporting, cost classification is a process which is extremely important for internal management reporting and it is a basic assumption for the enforcement of cost allocation process in order to determine the
