Cost management changes in the economic resort of Czech and Slovak Republic.

Introduction

Economy in the Czech Republic but also in all middle Europe countries went in last 20 years through stormy development and we were witnesses of dramatic changes, which had an influence of European and also worldwide entrepreneurial environment. This was also thanks to the economy, which was accelerated by globalization and science-technology development in the new opened and developing economies of post-communistic countries (and not only countries from middle Europe, but also from Eastern Europe).

These changes forced new attitudes and accesses to the leadership of organization with the growth of quality requirements for management, their decisions and also firm's infrastructure. There is constantly growth of shares of companies, whose costs play the crucial role, especially as the output of pressure on the prices drop of goods and services, which is causes growth of competitiveness and aggregate supply.

The dropping prices of firm's output effects also unequal situation between suppliers and costumers, this is characteristic for some industries, such as car industry.

Without understanding of costs behavior, without understanding of causes, which start it, there is smaller probability for success in nowadays demanding environment (Stanek, 2003). This all is accelerated by the worldwide financial and economy crisis, which is negatively expressed also in the Czech, Slovak and middle Europe companies. This crisis came suddenly and affects almost every economic sector and all population buying power. The entrepreneurial subjects are pushed to solve challenges, for which they were not ready and they have to radically change their strategies including cost management. That is why there is a growth of cost management influence and the pressure for their constant bucking. This often brings contra productive effects. And not only for these reasons there is essential to increase awareness of costs, their management and constantly search for hidden reserves, which we will have never enough.

All activities, which goals are costs bucking and also with this connected effectiveness increase, are conditioned by the existence of utilizable tools, which are able to analyze relations between costs formation and company's wattages.

Considering meaningful changes in the costs structure, overhead activities range, which companies do and changes in the production structure ([double dagger]), traditional costs methods and systems do not suffice in the last years to satisfy manageress's demand for exact, relevant and accessible

cost information, which are concerned to solve decisions cases. These traditional cost systems often lost their ability to find exact information about costs for individual output, services and costumers, because they allocate growing shares of overhead costs according simply keys, most of the time proportionally according to the high of the direct costs.

It is essential to realize, that overhead costs consumption on the wattages causes are in every group of the costs different and it is not true, that the main reason is every time only the high of direct costs or direct wages. This is also why firms should apply new modern methods for costs management, which can eliminate these defects.

Aim and Methodology

That is why the aim of this paper is to bring near to the reader the main changes in the costs and all above the changes in companies' attitudes to the costs management in the last years and point out to the deficit of utilization of all modern costs management methods, which are currently offered to us.

In the paper there will be presented knowledge about level of costs management mainly in the production companies, which were work out in the researches made when executing scientific papers and practical studies. It is evident, that the problems are wide and it is not possible to include all problem aspects in one short article, but I will try to point out the main aspects of costs management.

First of all I will make a short summary of the changes in the entrepreneurial environment and in cost structure and cost management. Then I will introduce the research and its results performed within the scope of the research grant and my dissertation.

I am convinced that the discovered results and conclusions will point out the slack attention which is dedicated to costs problems, especially to overhead costs in the Czech Republic and all regions in the middle Europe.

Changes in the Entrepreneurial Environment in the 20th Century

In the second half of 20th century there were dramatic changes in entrepreneurial environment, which causes that used tools for cost management and costing in the previous traditional form gradually got out of use and lost their ability to give real information about high of costs per products.

In the first half of 20th century dominated production technologies from the first and second wave of technology development, which were typical by the high share of direct costs, sectors such as steel and heavy industry and simple manufactory were typical by the proportional high consumption of material, direct labor and other direct inputs. Utilized cost calculation methods were related with this trend. Direct production cost such as material and wages spent over 90% of all costs (Drury, 2001; Popesko and Novak, 2008). Traditional cost systems focused on these cost elements, used direct labor as overhead cost allocation component, that is why they were able to quantify production costs exactly. They used mainly absorbing costing, so called traditional cost systems, where were overhead costs allocated by the overhead rates, which reply mainly to the amount of spent labor by the individual goods.

The next problem, which appeared in the last two decades, was also lowering of the product life cycle. This leaded to the growth of cost intensity and to the heterogeneity of overhead activities. And this is the reason of overhead costs increase. The next factor influencing cost intensity is for example increase of requirements for the better quality of provided output. These all are called outstanding changes in the firm's cost structure. These changes made lowering of direct cost shares, material and wage costs, on the other hand they made increase of overhead cost shares (Cokins, 2001).

We can not apply these outputs of course generally and for 100 percent. There are sectors of economy, which were not targeted by these outstanding changes so radically; for example manufacturing industry and other, which are based on the basic material element. These sectors assign the predominant part of direct costs; overhead costs take about 20% maximum.

In the basis of above described text there is obvious, that one of the inner ways to the success is to understand well to our costs, know where they are from and which causes call them. Costs are one of the things, which are common for all organizations. It is also common, that money we need for realizations of our plans are never enough. That is because success goes closely with our costs. Maybe it goes more closely than is our willingness to admit. This was confirmed with the cooperation with companies and also in the research activities, when there were found many problems and deficits in cost management, which often stop development of companies.

On these problems are also focused next researches, which are run many years in the area of scientific works. During this time there were performed 3 follow-up researches and made a couple of practical analyses in the chosen companies mainly focused on production sector.

Results

Within the framework of executed researches was essential to ask ourselves a question from the beginning: what do we want to solve and where to target all researches. That is why there were defined main aims, which were put into the levels:

* to get to know basic facts about costs and their management in companies,

* to clarify, if there were some outstanding changes and moving comparing history,

* to specify, how is companies' approach to the overhead costs management,

* to find out, how is companies' approach to the utilization of new effective methods for cost management.

A part of the last research was also finding more details about concrete cost structure, about cost reduction possibilities, firm's strategies etc. therefore results of these researches do not have relevant predicative ability, because big unwillingness for participation of companies was again confirmed. It was also confirmed that companies do not want to discover details about their costs, which could competitively threat them. Therefore from the executed results we can make a picture about cost management in practice.

Within the framework of questionnaires research and case studies there were targeted questions put in a few sections in the way, that the broadly contains the basic information about costs in companies and individual sections of cost management.

The first part of questions was designated to get basic characteristics of organization, that we could manage companies and their evaluation according different criteria. The second part of questions was established for companies' cost structure discovery and there was the main goal to find out the basic information about costs and their information resources (for example direct costs rate, overhead costs development in the time, overhead cost structure etc.). The most comprehensive section was "costing and cost calculations", where the main object was to get data about tools for firm's management and cost management, such as:

* utilization of budgets and detailed costing,

* what are the types of budgets and how is the modern budget methods awareness,

* which calculation systems, types and methods of calculation are applied in companies,

* how are overhead costs allocated etc., how is the calculation formula structures etc.

The fourth and last part of questions was focused on the process cost management area and utilization of modern methods such as Activity-Based Costing/Management/Budgeting (ABC, ABM, ABB). With regard to lesser-known tools of cost management we were interested, if firms know about them and which information they have, if they know about their strengths, weaknesses etc.

Regarding to the postulated outputs there were examined mainly production companies from the Czech Republic and also from the Slovakia. These companies we can from 80% place to the middle companies (it means 50-250 employees with the turnover till 250 millions Czech crowns), 15% were big companies and only small part were small companies with less than 10 employees. There were over 100 companies, which went through the research. The most of these companies oriented their production as custom ([section]) and realize it as small scale production or big scale production. Only about 10% from custom production were oriented on project** production. It is mostly in the companies in car industry.

We were interested in every company also in their strategic focus, it means what they are stress on. While in the research in 2007 only about 30% of companies stress on increase of productivity and markets widening, in the beginning of the year 2009 were companies more oriented by their strategy for reducing costs--50% stated it in the questionnaire. The second place belonged to the increase of productivity. Amazingly there were no more important strategies, which should ensure increase of sales, what can be for example markets widening, increase of quality of goods or supporting services. According our estimation there are seen results of economic crisis.

What we consider as successful progress is increase of companies, which draw information about costs also from other resources than financial accounting. In the last ten years there comes evident moving from financial accounting data utilization, in nowadays more than half of companies use tools from ERP systems--in the basic or custom form--or draw information from separately created calculations and budgets from managerial accounting area. We can submit, that overwhelming majority of companies have overview about main types of their costs.

In despite of this positive fact is on the other hand essential to point out, that 1/3 of executed companies can give reliable picture about their costs from the perspective of object, in which every cost is put. This is clear symptom, that companies still not solve their costs from the perspective of effectiveness and if they were spent functionally or not. They cannot reliably allocate individual costs to the wattages or costumers, what was also mentioned in the research as main failure of the company. With this relates also next problems of company, what is mainly in allocation of overhead costs.

The necessity for effective cost management is also utilization of budgets and calculations. The last research again confirmed the results from last years that about 10 % of companies still do not assemble budgets and about 5 % of companies even do not assemble calculations (Novak, 2007). This statement unfortunately last out and there is no moving forward. We can state, that there is aversion to optimize the company to the changing conditions on the market. In connection with it there is essential to mark, that these problems are related mostly to the small companies.

If we look closely to the issue of budgets, there about 70 % of companies create budgets particular with the break up of costs to the individual cost centers. Therefore only 1/4 of companies have an overview about modern budget methods such as Activity-Based Budgeting (ABB), Zero Based Budgeting (ZBB) or Beyond Budgeting (BB). Let's take a look in detail for the used calculation methods. From the table 1 it is obvious, that the structure of calculations does not change much. The most extended methods are still Division costing together with the method of Standard Costing. Companies use a little bit more combinations of different calculations, mainly combination of Division Costing and Variable Cost Analysis.

From the data we can also see that the utilization of modern calculation methods such as ABC/ABM or Target Costing is stagnated and we should not wait for their mass expansion. The advantages have the traditional calculation systems, with them are not satisfied about 35% of companies. They think that these systems do not give competent and real picture about the high of costs with regard to cost objects.

In connection with it there are available two questions. The first one is sources of dissatisfaction from the side of companies, the second one is why companies do not try to do something or change this dissatisfaction. The question is why they do not use some of the modern available methods, which are described nowadays in detail.

The first question relates closely with this already described situation in the change of overhead cost share. Overhead costs went through outstanding changes mainly in post-communistic countries, when conditions on the markets were changed and call forth changes in the firm's behavior towards production, but also towards costumers. From the table 2 we can clearly see, there is small movement in the shares of direct and indirect costs, when the share of companies with more than 70 % of direct costs are slowly declining for the detriment of companies with the share of direct costs in the area between 50-69 % from all costs. Other costs we can call overhead, it means, that more than 2/3 of all companies generate overhead costs higher than 30 %. And this is the number, which we can not forget and that is why we should dedicate to the overhead costs appropriate attention. The positive fact is that almost all companies were able to indicate this data, what show us the relative good overview of responsible employees.

This conclusion verify also the fact, that more than 60 % of companies confirm small increase of overhead costs share. With this relates also the necessity of overhead cost allocation to the cost objects. The overwhelming majority solve this allocation by the overcharges or rates, which are from 70 % counted from the historical cost values. These executed allocations can negatively influence right allocation of overhead costs; if we consider increasing sizes and changing sales prices it can make outstanding loses.

So, why companies do not use the tools which would eliminate these problems? Here we can talk about historical momentum and fossilization of firm's management, when they see many problems in these changes from the managerial and financial point of view. As positive we can evaluate the fact, that in the most of companies were these modern methods at least particularly known, what was confirmed by 3/4 of companies, for example about the methods ABC/ABM. Therefore 70 % of companies have specified that with these methods have never deal with, what is confirmed by the previous findings about this problem (Popesko and Novak, 2007). Here is essential to point out, that with this phenomenon we meet especially at companies with domestic owner.

Conclusion

Executed researches provide wide view to the problems of cost management not only in the Czech Republic, but also in other middle Europe countries. On the base of executed data we can state, that even when the level of cost management is slowly increasing, we are still behind the Western Europe countries. This is seen especially in the small and middle size companies, which main attention is in other activities in the company management and the question of cost management is considered often as secondary. In the big companies is this situation much better, what is made by the higher costingness and higher claims for management. In these companies we can find compact and detailed executed systems of plans, budgets and calculations, with utilizing of complex management and ERP systems.

Not only from questionnaires research, but also from the experience and personal contacts with practice is still known, that for cost management are often responsible people, who do not dispose with enough professional knowledge about this problems in order that they could utilize modern methods and tools, which are available. In addition to this we can see that the Czech management is in the most cases constantly afraid to give more detailed information about their activities, despite of these data are not for companies strategically important and they can be markedly disadvantage in the competitive fight. That is why these companies often close the access to the new information and break their development.

We have to highlight, that in the current situation are companies under pressure of economic crisis and often access to the crisis solutions of these situations, which brings with this also the outstanding changes in cost management, and it is lying especially in a big limitation of costs. How will be the impact on the companies, we will get know with time interval, when all applied effects will be demonstrated. It is plain enough, that just in this time there is absolutely necessary to have detailed awareness about costs. Because headlong reduction of costs can make bigger losses than is expected benefit of these arrangements. Doyle (Doyle, 2006) introduces some examples, which can happen. For example excessive decline of costs can in the end damage the quality of product, discourage costumers and suppliers and give bad signal to shareholders and also to the society. Problems appear for example by the limitation of employees, when "lean management" often leads to the dismissing of nonproductive employees, but can break down also well educated and experienced employees etc. This can lead to final effect what is paradoxically the increase of costs size.

In the end we can state, that detailed knowledge of our costs, utilization of adequate tools for their management, as well as balanced reduction of our costs can gain for the company the competitive advantage and increase of their effectiveness.

References

Cokins, G. (2001), Activity-Based Cost Management: An Executive's Guide, John Wiley and Sons

Doyle, D. (2006), Cost control, a strategic guide. Prag: Aspi, a.s.

Drury, C. (2001), Management and Cost Accounting, Fifth Edition, Thomson Learning

Novak, P. (2007), The level of cost management of the enterprises operating in Czech economy. INTERCATHEDRA, Vol. 23 No., Poznan, Poland, pp 92-95

Popesko, B., Novak, P. (2008), Principles of Overhead Cost Allocation. E-book ISSUES IN GLOBAL BUSINESS AND MANAGEMENT RESEARCH, Universal Publisher USA

Popesko, B., Novak, P. (2007), Activity-Based Costing applications in the Czech republic. 1st International Online Conference on Business and Management, Collection of papers, Iran, Advanced Learning Approach Excellence Consulting Group

Popesko, B., Novak, P. (2007), Cost management tools in 21st century, Finance and the Performance of Firms in Science, Education and Practice, collection of papers, Zlin, UTB FaME

Stanek, V. (2003), Zvysovani efektivnosti procesnim rizenim nakladu, Prag:Grada Publishing a.s.

([double dagger]) Changes in the production structure become evident especially in the outstanding differentiation.

([section]) The production was split up for custom and predicated, when custom production is realized on the bases of concrete orders and predicated production is made "for the warehouse" on bases of plans.

** Project production--production oriented on one product, starting from development of product finishing by realization, mostly for concrete costumer (s)--for example projects for car industry, a few years ago till now.

Petr Novak

Tomas Bata University, Faculty of Management and Economics

Department of Enterprise Economics, Zlin, Czech Republic

Corresponding author

Petr Novak can be contacted at: [e-mail]

Table 1. Calculation methods used (source: own research)

# Costing Method            2007    2009

1 Division Costing           12%      9%
2 Absorption Costing         21%     30%
3 Standard Costing           29%     15%
4 Variable Cost Analysis     12%     10%
5 Target Costing              1%      1%
  Activity-Based Costing
6 ABC/ABM                     5%      6%
7 Combination (2, 3, 4)      12%     25%
8 Other Methods               7%      4%

Table 2. The share of direct cost on the overall company's costs
(resource: own research).

Percentual         Share in    Share in
interval of           %           %
direct costs         2007        2009

Till 20               6%          5%
20-49                24%         15%
50-69                35%         50%
70-89                30%         25%
90-and more           2%          2%
Not known             2%          3%