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European Journal of Economics, Finance and Administrative Sciences ISSN 1450-2275 Issue 38 (2011) © EuroJournals, Inc. 2011

The Ability of Application Activity-Based Costing System on the Air Line Companies: The Case of the Jordan Aviation Company

Ahmad Issa Alnajjar Master of Accounting, Department of Accounting Faculty of Economics & Administrative Sciences, Hashemite University, Zarqa, Jordan E-mail: [email protected] Walid Zakaria Siam Correspondence Author, Associate professor, Department of Accounting Faculty of Economics & Administrative Sciences, Hashemite University, Zarqa, Jordan E-mail: [email protected] Abstract This study aimed to illustrate ability of applying Activity-Based Costing (ABC) system in assisting managers in airlines in best making decisions, especially that airlines have a large amount of overhead expenses in addition to that ABC system contributes in allocating costs on their main centers based on related activities. To achieve the desired results, both of financial analysis and activities analysis tables were used. Therefore, all data gathered through MCS which shows details on flights such as kind of Aircraft, registration number, flights periods, departure country, arrival country and number of passengers. However, efforts made to analyze activities were based on the total number of flying hours for each customer. It is important to mention that cost driver was used to analyze and allocate all overhead expenses of Jordan Aviation (JATE) Company against activity centers while activity driver used to allocate activity centers against cost object which represent the main target of allocating overhead expenses. The most important results were the ability to successfully apply ABC system in the context of airlines especially that working on the charter flight such as this case study of (JATE). Keywords: Activity-Based Costing system, The Air Line Companies.

1. Introduction

There are many definitions for the accounting term, but one of the most comprehensive that proposed by Weygandt et. al. (2007) that accounting is the information system that identifies records and communicates events of an organization to interested users. On the other hand, due to individuals and organizations to make business comply and fit with their needs, different fields appear within accounting which the managerial is one demanded. Also, as it is the main framework that the Activity-Based Costing (ABC) system comes within and as a field in accounting, management accounting defined as a value-adding continuous improvement process of planning, designing, measuring and operating both nonfinancial information systems and financial information systems that guides management action, motivates behavior, and supports and creates the


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cultural values necessary to achieve an organization's strategic, tactical and operating objectives (Atkinson, et. al., 2007). The role of management accounting differs from another field of accounting and because that management accountants work at the "beginning" of the value chain, supporting decision making, planning and control. Therefore, management accountants are valued business partners, directly supporting an organization's strategic goals and so emphasizing on good internal controls and financial reporting (The Institute of Management Accountants, 2010). Today's organizations are increasingly interesting in robust competitiveness techniques particularly in areas that focus on decision making support and best utilization of available resources which in turn intend to get customer satisfaction. Therefore, in addition to what mentioned, ABC applying contributes to the following: 1. Managers at all organizational levels perceive ABC data as more accurate and reliable and so are willing to use ABC for decision-making and performance evaluation, by determine the additional cost that must add to the actual cost of flight. So this will help them to do the agreement with the customer by determine the best price for flying hour. 2. ABC handles overhead costs, which in most organizations constitute the main operating costs, general and administrative costs, so ABC makes it better to allocate overhead costs to object. 3. ABC implementation leads to a better understanding of the cost driver that generates these costs, thereby management attention on the way resources are consumed by activities and supporting effective management of these activities. The objectives of this study are to identify the benefits that the airlines will gain when implementing the ABC system, to examine the role of implementing the ABC system to assist the airlines to create budget, to identify the rule of adopting ABC system in making significant substantive changes in main activities of the air lines, and identifying the overhead expenses and facilitating its allocation to cost object, and consequently to identify the main department(s) in the air- lines that participate in overhead expenses in a step to minimize the non-added value activities.

2. Theoretical Background and Literature Review

a. Theoretical Background ABC can be defined as: ``A method for accumulating product cost by determining all costs associated with the activities required to produce the output". (Lewis, 1995). Many of business developed when the competition become seriously, therefore organizations improve products and services to achieve its goals. Therefore, ABC System was derived from management accounting, the origin of ABC system dated back to 1983-1984 (Kaplan, 1983), although the term of ABC system had not been coined yet. The origin of term grew out of dissatisfaction with the domination costing procedures at that time, variable costing and traditional full costing, with where argued to be obsolete in modern manufacturing environments (Cooper,1992). During 1987-1992 Robin Cooper and Roberts Kaplan ventured into a serious of "innovative action research cycles" (Kaplan, 1998) in which ABC was developed. Cooper and Kaplan initially searched for an improved full-cost product-cost calculation, the model grew in to more full-fledged costing system for hierarchies of activities and cost objects. The current state of the art of ABC is reflected in Kaplan and Cooper`s book "Cost and Effect" (1998) and supplemented with Time Driven (Kaplan and Anderson 2004). Efficient cost accounting systems are subject of interest for organizations to increase profitability and decrease costs, therefore different approaches appeared and are still being developed by numerous numbers of researchers. However, most of today's establishments are still implementing traditional cost accounting systems which mainly concern with both of job orders and processes. While job order costing system concerns with estimating costs of manufacturing products required for customer orders, process costing system concerns with estimating the costs of all units produced during


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the same time frame. On the other hand, other organizations are seeking to be pioneers in the market through implementing recent developed costing accounting systems. One of these systems is the ABC, which instead of using cost center for defining cost pools to accumulate and redistribute cost as the traditional costing system, adopts activity approach for accumulating cost (Atkinson, et. al., 2007). ABC system has helped many manufacturing and service organizations to improve their competitiveness by enabling them to make better decisions based on an improved understanding of their product cost behavior. Moreover, it facilitates both of classification of overhead or indirect costs and their allocation to end products or services based on the activities required to produce these products (Raz & Elnathan, 1999). According to Stapleton et. al. (2004), many of businesses appeared after the development of the ABC because of the numerous advantages it provides. These include: 1. ABC helps firms across the world to become more efficient by identifying the value added and non-value added activities and more effective by analyzing cost and implementing the improvement and realizing the benefit. 2. ABC provides a clear picture of where resources are being spent, customer value is being created and money is being made or lost. 3. ABC offers a better alternative to labor-cost-based product costing. 4. ABC identifies value-added activities. 5. ABC eliminates and reduces non-value added activities. ABC is being developed in different industries and one of them is the airlines which encountered by difficulties to determine and evaluate true cost of their operations and services. However, if used and implemented properly, ABC can be very helpful for airline companies to determine cost of their operations more accurately. During designing ABC System, managers should not ignore how accurate the data used are, because this can lead to the erroneous assumption that information is more exact than it really is. The assumptions underlying the design of an ABC system are that (Marx, 2009): 1. Activities in a business consume resources, 2. Producing products or servicing customers utilize activities, 3. The Business model is focused on consumption rather than spending, 4. Consuming company resources can have numerous causes, 5. A wide variety of activities can be identified and measured in any company, 6. Cost pools should be homogeneous, 7. And costs in each pool are variable (strictly proportional to activity) Taking into account what mentioned above, a model for designing ABC system can be introduced as illustrated in Figure (1).

Figure 1: ABC model phases

Source: Baykasoglu, A., & Kaplanoglu, (2008), Page 310


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b. Previous Studies Tsai and Kuo (2004) looks to apply ABC system in the concept of airlines company, This study illustrates how to calculate accurate costs, including the operating costs for individual airplanes and flights, It also identifies the main activity items and drivers of each airplane and flight. Additionally, it shows the details of direct costs and indirect costs (overheads), also it shows that no any different between the direct cost concept that used in traditional accounting system and ABC system. Roztocki (2001) shows that the ABC is useful to companies from the new Economy in establishing well-founded business strategies. The ABC analysis enables managers not only to more reliably measure costs associated with e-commerce, but also provides them with more of an understanding of how these costs are generated. Managers may then use the ABC analysis to investigate different methods of regulating their business. They can compare different options regarding their handling of customers, product lines, and distribution methods. Overall, it is expected that companies engaged in e-commerce will benefit from ABC implementation, specifically in the improvement of their overall business strategy. For many e-businesses, the ABC system is an important move from management-by-intuition to management by principles. In an emergent look for ABC application in transportation sector, Baykasolu and Kaplanolu (2008) presents how ABC system can be used for costing services of land transportation company. The obtained result was compared with traditional costing system to see if there is any difference. The observation showed differences between the current cost assignment procedure of the company and the result obtained by using ABC system showing that the proposed system will properly distribute overheads' company to its services. Charles and Hansen (2008) introduced a theoretical product cost framework independent of cost assignment concepts. The framework is used in conjunction with cooperative game-theory concepts to develop constructs for evaluating the accuracy of competing cost systems. It shows that, under certain conditions, ABC qualifies as a more accurate product-costing system than Functionalbased costing (FBC) in that Decision makers more rely on information provided by a cost system to make cost-based decisions such as pricing, product mix and make or buy decisions. Therefore, using more accurate product-cost information may impact decision quality; the more accurate information, the more increase in the quality of decisions. In an attempt to study the implications of ABC for operations management, Gupta and Galloway (2003) stated that traditional cost accounting methods, which allocate overhead costs on the basis of one driver (e.g. direct labor or machine hours) are inaccurate and misleading as these methods often allocate too much cost to one product and not enough to another. To address this problem, activity-based accounting was developed to provide a means to create a more accurate representation of how activities performed in the creation of a product or service actually impact its cost through which is called ABC/Management (ABC/M) systems. An ABC/M system can be used by any firm which is able to identify activities that drive costs and allocate those costs to its particular products or services. Rather than allocating overhead on the basis of one variable, such as direct labor, ABC/M systems use multiple cost drivers to present a more accurate foundation for overhead allocation.

3. Methodology and Data Description

a. Population of Study The population of the study consists of JATE as case study within Jordanian airline companies, the researcher choose JATE as a study population due to its importance in Jordanian airline sectors and because of the work as cost control in cost control department. b. Method of Collecting Data The researchers depend on two basic sources to collect relevant data as following:


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Primary sources: Collecting data through accounting system for the year of 2009 for JATE. Data regarding flight information collects through MCS program which show the details for flights such as departure time, arrival time, block hours, Etc. the meeting with managers also used to collect data. Secondary sources: Which include articles, relevant literature in order to collect the scientific contents of the theoretical framework of the study. c. Method of Analyzing Data During this study, a set of matrixes will be used to analyze data. These matrixes include ExpenseActivity-Dependence (EAD) which will be utilized to analyze data that collected from accounting system in terms of expense and activity. Furthermore, Activity-Product-Dependence (APD) matrix will be used to analyze activities in relation to cost object. d. Instrument Design In order to complete the cost assignment under ABC system, the below Figure (2) from Tsai and Kuo (2004) was implemented with some update to comply with the operation procedures for JATE. As shown in the flowchart the operating costs have two segments: the first one direct cost, the second one overhead costs. While direct cost contains direct variable cost and direct fixed cost, and overhead costs contain maintenance activity, planning activity, marketing activity, service activity. This case study is similar to the process of "determination the activities and process" with Tsai and Kuo (2004).

Figure 4: Flow chart of cost assignment under ABC system

Source: Tsai, Kuo. (2004), Page 273.


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4. Applying ABC System in Jordan Aviation Company

a. Overview about Jordan Aviation Company A privately owned Jordanian airline headquartered in Amman, Jordan, Jordan Aviation was established in 1998 as limited liability Company, with paid in capital of 2 JD million. Jordan Aviation obtained its Air Operator Certificate (AOC) in October 2000 and commenced its operation November 2000. Subsequently, Jordan Aviation was designed with the three letter code (JAV) by International Civil Aviation Organization (ICAO) and there after became a member of International Air Transport Association (IATA), and Arab Air Carriers Organization (AACO). Jordan Aviation is one of the youngest airlines that completed the IATA Operational Safety Audit (IOSA) in the year 2006 and re-audited in 2008 joining the words leading airline in their commitment to global safety and security. Jordan Aviation is the fast growing airline, committed to Quality Management System (QMS), Safety Management System (SMS) and Security Management System (SEMS) as part of its strategic decision. Continuous improvement is the primary objective for the company. Quality services are delivered through motivated and highly trained employees who are encouraged to work as a team with equal responsibility for the quality and safety of both the airline and passengers. The company main objectives include the following: · Operate and organize non scheduled business, carrying passengers and mails. · Acting as aviation agent and air navigation agent. · Travel, tourist and issuing air tickets. · Consulting services in air transport. · Aircraft maintenance. · Constructing, acquiring and managing hotels and resorts. · Aircraft wet and dry leasing business. b. Identifying Main Activities or Resources One of the most of important tasks in the developing of an ABC system is identification and design of the resources that should be included in the processes (Tatsiopoulos and Panayiotou, 2000). The initial step of ABC analyses is the identification of overhead categories, (Nachtmann and Al-Rifai 2004). Ben-Arieh and Qian (2003) designated ``identification of resources'' as the first step of ABC process. In many applications of ABC, the number of resources listed for ABC analyses is not so detailed. The cost of an extremely elaborate and expensive ABC system may outweigh the benefits it produces. (Baykasoglu, A., & Kaplanoglu, 2008). Ultimately, the best cost allocation system is the one that balances the cost of errors with the cost of measurement (Stapleton et al., 2004). This is kept in mind in determining and analyzing the activities of the company. In fact, if there are large numbers of resources are performed to produce the service or product. The identification of resources and the level of details of resources is a very important step in the design of an ABC system because the cost of the system and the accuracy of the product or service cost depend upon this step (Gunasekaran and Singh, 1999). Cost Assignment for an ABC System on JATE According to Tsai and Kuo (2004), the operating costs for individual airplanes and flights are divided into direct costs and indirect costs (overheads), as shown in the below Figure (2) flowchart of cost assignment for an Airline under ABC system. On the other hand, ABC system and traditional cost account system (TCA) require the same direct cost information (Tsai and Kuo, 2004). The new accounting system in JATE uses the below concepts that was clarified in Figure (2) that discuss the method of allocate direct cost under ABC system to cost object, else when the cost of individual airplane must allocate to individual fight; this can allocated as mentioned in Figure (2) by dividing the hours of each flight by total flight hours.


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Because of ABC system and TCA differ in assignment of overhead costs, therefore the concentrate of the study on the method of allocate the indirect costs (Overheads) to cost object by using activity driver. Overheads are divided into four main activities; planning pool, commercial and marketing pool, maintenance pool, service pool, as mentioned in Table (1).

Figure 3: Flow chart of cost assignment for JATE under ABC system


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The below Table (1) showing activity pools under ABC system and their main activities contents.

Table 1: Activity pools & main activity contents

Main Activity Contents · Salaries of indirect employees. · Hanger Costs / supplies/ purchasing aircraft spare parts. · Quality checking cost. · The cost of rent ground equipment. · Cost of rental / office equipment / supplies. · Costs of dispatching flights. · Cost of office equipment / supplies. · Salaries of employees. · Cost of office equipment / supplies. · Salaries of ground staff. · Cost of rental / office equipment / supplies.

Activity Pools Maintenance Pool

Planning pool Commercial & marketing pool Service pool

The Amount of Overheads in JD (Resources) The main objective in this case study is allocating the overhead expenses, so the identification amount of overhead expenses is very important and sensitive stage to continue in implementation ABC system, therefore the below Table (2) showing the main overhead expenses and its amount in JD for the year of 2009 for JATE. As it was mentioned in identification stage, in case if there are too small and insignificant expenses and it can to aggregation and combined in one expense this is the best to get more accuracy about identifying main expenses.

Table 2: Amount of Overhead Expenses in (JD) for the Year of 2009.

c. Defining Resource Drivers The step of selection resources driver consider as one of the difficult step of ABC (Goldsby and Closs, 2000), if the selection of resource driver was carefully selected that means this is the key to achieving the benefits of the cost system (Schniederjans and Garvin, 1997). There are many different approach of obtaining resources driver. Therefore the resource drivers determined by a brainstorming meeting with


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the department managers and vice president participate according to experiences in the airlines sector. According to Table (3) below shows activities, resources consumed, resources consumed rate. In the present work, the cost of building water, building electricity, building communications are grouped because of their similarity, also the cost of bank charges and interest are grouped, as shown in Table (2). On the other hand, the resources consumed rate can clarify for every resources and related activities as the followings: Water and electricity and communication: (maintenance pool) 0.01 Indirect HR support, 0.02 hanger costs, 0.05 quality checking, 0.09 cost of rental / office equipment, 0.03 the cost of rent ground equipment, (planning pool) 0.13 cost of dispatching flights, 0.15 cost of office equipments, (commercial and marketing pool) 0.21 rental / cost of office equipment, 0.04 salaries of employees,(service pool) 0.04 salaries of ground staff, 0.23 cost of rental office. Insurance expenses: (maintenance pool) 0.10 indirect HR supports, 0.22 hanger cost, 0.08 quality checking, 0.19 cost of rental office, 0.09 cost of rent ground equipment,(planning pool) 0.02 cost of dispatching flights, 0.07 cost of office equipment,(commercial and marketing pool) 0.10 rental / cost of office equipment, 0.004 salaries of employees,(service pool) 0.02 salary of ground staff, 0.12 cost of rental / office equipment. Consultancy expenses: (maintenance pool) 0.15 indirect HR support, 0.21 hanger cost, 0.24 quality checking,(planning pool) 0.15 cost of dispatching flights,(commercial and marketing pool) 0.05 cost of office equipment,(service pool) 0.03 salaries of ground staff, 0.17 office equipment / cost of rental. Bank charges and interest: (maintenance pool) 0.66 hanger costs,(service pool) 0.34 cost of rental / office equipments. Donation Expenses: (commercial pool) 0.20 salaries of employees, (service pool) 0.80 salaries of ground staff. Transportation expenses: (maintenance pool) 0.25 cost of rental,(planning pool) 0.10 cost of office equipment,(service pool) 0.65 costs of rental / office equipments. Entertainment expenses: (maintenance pool) 0.28 quality checking cost, 0.07 cost of rental office, (planning pool) 0.07 cost of dispatching flights, 0.08 cost of rental equipments, (service pool) 0.50 cost of rental / office equipment. Subscription expenses: (maintenance pool) 0.03 hanger cost, 0.07 quality checking, 0.05 cost of rental,(planning pool) 0.07 cost of dispatching flights, 0.33 cost of office equipment, (commercial pool)0.20 cost of office equipments / rental,(service pool) 0.25 salaries of ground staff. Cars and fuel expenses: (commercial pool) 0.30 cost of office equipments, 0.10 salaries of employees, (service pool) 0.15 salaries of ground employees, 0.45 cost of rental / office equipments. Cleaning expenses: (maintenance pool) 0.05 hanger costs, 0.21 cost of rental, 0.09 cost of rent ground equipments, (service pool) 0.10 salaries of ground equipments, 0.55 cost of rental / office equipments. Maintenance expenses: (maintenance pool) 0.25 cost of rental,(service pool) 0.75 office equipments/cost of rental. Consumable material expenses: (maintenance pool) 0.02 quality checking, 0.10 cost of rental,(planning pool) 0.25 costs of dispatching flights,(commercial and marketing pool) 0.15 cost of office equipments/ rental, (service pool) 0.48 cost of rental/office equipments. Advertising expenses: (planning pool) 0.10 cost of office equipments,(commercial and marketing pool) 0.47 cost of rental/office equipment, 0.08 salaries of employees,(service pool) 0.05 salaries of ground staff, 0.30 cost of rental/ office equipments. Rent expenses: (maintenance pool) 0.03 indirect HR support, 0.10 hanger cost, 0.08 cost of rental/ office equipments, 0.30 cost of rent ground equipment, (planning pool) 0.05 cost of office equipment, (commercial pool) 0.20 cost of office equipment, (service pool) 0.25 cost of rental. Training expenses: (maintenance pool) 0.29 quality checking cost, 0.05 cost of rent ground equipment, (planning pool) 0.05 cost of dispatching flights, (commercial and marketing pool) 0.30 cost


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of office equipments, (service pool) 0.25 salaries of ground staff, 0.33 cost of rental / office equipments. Traveling expenses: (maintenance pool) 0.03 indirect HR support, 0.06 hanger cost, 0.14 quality checking cost, (planning pool) 0.10 cost of dispatching flights, (commercial and marketing pool) 0.17 cost of office equipments, 0.03 salaries of employees, (service pool) 0.35 salaries of ground staff, 0.12 cost of rental / office equipments

Table 3: Resources Consumed Rate

d. Allocation Activity on Cost Pools (Cost Centers) The fourth step of ABC method is allocation of resources to activity cost pools after determining the resources consumed rate as mentioned in Table (3). On the other hand, Nachtmann and Al-Rifai (2004) made overheads allocation to cost pools with the help of an allocation matrix.


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According to Helberg et al, (1994) performed allocation by making use of a 100-scale. In this study, allocation of the resources to cost pools are performed with an allocation matrix (1-scale). Table (4) represent the allocation of the overhead expenses to cost pools. Eeach elements of Table (2) is allocated to the 11 different activity by using the coeffecients given in table 3. For exsample the cost consumption of the quality checking equal 0.05 x 354,721.15 +0.08 x 83,535.71 + 0.24 x 121,688.76 + 0.28 x 185,946.00 + 0.07 x 205,970.12 + 0.02 x 207,195.31 + 0.29 x 390,129.14 + 0.14 x 326,437.51 = 834,185.61 JD

Table 4: Allocation of the overhead expenses to cost pools

e. Allocating Cost Pools on Cost Object As one of the objective for JATE is operating and organizing non- scheduled business. There are three kinds of leases that determined in the study as cost object for JATE: The first one is dry lease: A dry lease is a leasing arrangement, lesser provides an aircraft without insurance, crew, ground staff, supporting equipment, maintenance, etc. There are generally two types of dry lease, an Operating Lease and a Finance Lease: 1. Operating Lease: generally a lease term that is short compared to the economic life of the aircraft being leased. An operating lease is commonly used to acquire aircraft for a term of 2-7 years. With an operating lease the aircraft doesn't appear on the Lessee's balance sheet. 2. Finance Lease: also known as a capital lease is defined when one of the following conditions is met: · At the end of the lease term the Lessee has the option to purchase the aircraft at an agreed price. · The lease payments are more than 90% of the market value of the aircraft.


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· The term of the lease is over 75% of the aircraft's usable life. With a finance lease the aircraft appears on the Lessee's balance sheet, as it is viewed as a purchase. (globalplanesearch , 2010) The second kind of leases is a wet lease: A wet lease is a leasing arrangement whereby one Airline (lesser) provides an aircraft, complete crew, maintenance, and insurance (ACMI) to another airline (lessee), which pays by hours operated. The flight uses the flight number of the lessee. A wet lease generally lasts one month to two years. A wet lease is typically utilized during peak traffic seasons or annual heavy maintenance checks, or to initiate new routes. They can also be considered as a form of charter whereby the lesser provides minimum operating services, including ACMI, and the lessee provides the balance of services along with flight numbers. In all other forms of charter, the lesser provides the flight numbers. Variations of a wet lease include a code share arrangement and a block seat agreement. (Wikipedia, 2010) The third kind of leases is a full charter lease: A charter airline, also sometimes referred to as an air taxi, operates aircraft on a charter basis that is flights that take place outside normal schedules, by a hiring arrangement with a particular customer. These flights are often more expensive, but allow the customer the convenience of flying at a more suitable time. Furthermore charter airlines frequently operate on routes, or to airports, where there is no scheduled service. On the other hand the economics of charter flights demand that the flights operate on the basis of near 100% seat occupancy. (Wikipedia, 2010) Although charter airlines typically carry passengers who have booked individually or as small groups to beach resorts, historic towns, or cities where a cruise ship is awaiting them, sometimes an aircraft will be chartered by a single group such as members of a company, a sports team, or the military. As shown in Figure (2), there are two segments for cost object to obtain the contents of ABC system under airlines concepts, the first one is the cost of individual airplane, and the second one is the cost of individual flight (Final cost object). That's mean, activity driver for maintenance pools calculated with different method because of it related with cost of individual airplane at first, then it allocated to the cost of flight as mentioned in Figure (2). So the below Table (6) describe the allocating of maintenance activities to the first cost object (cost of individual airplanes). During this step the maintenance activities will allocate to more than one Airplane according to their coefficients, That means maintenance cost pools that contains the salaries of indirect maintenance employees, hanger cost/supplies/purchasing aircraft, quality checking and maintenance cost, cost of rental / office equipment / supplies, cost of rent ground equipment, must allocate to aircrafts and then allocate to the flight. According to MCS programs the total maintenance flying hours are 155 and 55 minutes, the details shown in the below Table (5).

Table 5: Details of maintenance flying hours for Aircrafts

Maintenance hours 5:45 19:15 6:52 19:44 35:14:00 11:49 24:07:00 15:50 17:19 155:55 Ratio 0.037 0.123 0.044 0.127 0.226 0.076 0.155 0.102 0.111 1

Aircraft registration JY-JAX JY-JAP JY-JAO JY-JAN JY-Jal JY-JAH JY-JAG JY-JAC JY-JAB Total

According to the ratios that was clarified in Table (5) the below Table (6) shows the allocating of maintenance activities to individual airplanes by using the first activity driver.


Table 6:

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The allocating of maintenance activities to individual airplane

As the final step in ABC, allocate activity pools to final flights by using activity drivers, the activity driver in this step calculated by using the information that collected from MCS program that use to record every needed data for every aircraft operation, such as number of passengers, actual time arrival (ATA), actual time departure (ATD), route of operation (aircraft will leave from station... to station...), date of operation, flight number, type of aircraft, block hours (flying hours).


European Journal of Economics, Finance And Administrative Sciences - Issue 38 (2011) The total flying hours were 17275.10 Hours, the details for this total as below: · The total hours for wet lease are 8021.7166 hrs · The total hours for dry lease are 12.66 hrs · The total hours for full charter are 9240.7166 hrs. Therefore, the activity driver calculated by dividing total hours for every lease to total hours for all leases, as below: · Activity Driver for Wet Lease = 8021.7166 = 0.464351388 17275.10 · Activity Driver for dry Lease = 12.66 = 0.000733233. 17275.10 · Activity Driver for Full Charter = 9240.7166 = 0.534915379. 17275.1 So the below Table (7) showing the allocations of activities to the major cost object (Flights).

Table 7:

Allocation activities to cost object

The present situation for the overheads in JATE are same, that's mean no any allocation for the large number of overhead expenses to their related cost, as the result of ABC the amount of overhead


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expenses that should record on flight account participate to help the management as mentioned in GDM methodology to make the best decision regarding the additional cost in the price of flights. In other words the allocate of overheads can improve the decision making process in JATE through the information provided to decision makers regarding the cost of each service (wet lease, full charter, dry lease) that should take in consideration if any new contract will made to operate any type of aircraft. ABC system clarified that the allocation of indirect costs are very important in the airline company, and when the comparison between TCA system and ABC system, TCA involves collecting indirect costs from departments and then allocates it to services. On the other hand, ABC collects indirect costs of activities and assigns activity costs to cost objects. This produces some differences. ABC assumes an activity to be an activity cost pool with an activity driver, while TCA usually considers a department to be a cost pool with an allocation base. Additionally, the activity drivers of the ABC emphasize causality between activities and activity drivers, while the allocation bases of the TCA do not emphasize cost causality.

5. Conclusions and Recommendations

In this study, an application of ABC method in airline industry was presented. Matrixes were used to allocate resources to cost centers; cost pools, by using activity driver. They also were used to allocate cost pools against cost objects by using activity cost driver. Detailed explanations were presented to show how ABC approach can be used in airlines taking JATE as a case study. The study shows that ABC can be applied in the context of airlines. Moreover, ABC can improve the decision making process in airlines through the information provided to decision makers regarding the overhead allocation. That's mean ABC system can help the decision makers to determine the price of each service based on the allocation of overheads. ABC system will be useful in preparation of budget estimates and to reduce overhead expenses and equitable distribution to cost object. Finally, ABC was valuable in determining the organizational units involved in overhead expenses. Administration expenses department in JATE played this role in the case study. Recommendations of the Study: The study encourages service sector especially Airlines companies to adopt applying ABC system, because of ABC system plays significant role in improving and developing the main activities for airlines companies which involve huge amount of overhead expenses. Consequently, the effective cost system will assist this kind of companies to determine the actual position for its activities and actual cost. On the other hand it is very important to use effective cost system in such companies because the decision making process needs the accurate details and the ABC system participates to achieve this process.


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