Journal of Cost Management, May-June, 2007

French Cost Accounting Methods:

ABC and other Structural Similarities
Eric Cauvin, Ph.D.
Professor
EDHEC-Business School
Visiting Professor, Business School
University of Colorado at Denver

Bruce R. Neumann, Ph.D.

Professor and Director of Accounting Programs
Business School
University of Colorado at Denver

Introduction

The purpose of this article is to describe traditional French cost accounting methods and to
compare these methods to Activity-Based Costing (ABC). It is important to understand these
differences before conducting (or contemplating) business in France or the EU. Business
persons working with French firms should be aware of some of the costing methods and terms
described in this article. It is also an important contribution to the ABC literature to show how
and why ABC is being adopted (or not) in France. We analyze the relative failure of
traditional French costing methods to provide relevant and reliable information. We show that
while the architecture of the French method is comparable to Activity-Based Costing, the
assumptions on which it is based on are now invalidated. We argue that the French cost
accounting methods and ABC are structurally similar but, because they were not designed
during the same period, in the same economic context, the assumptions they are based on are
different.

French cost accounting methods were born under the pressure and influence of industrial
engineering associations participating in the Scientific Management movement. They carried
their ideas forward under the auspices of the Commission Gnrale dOrganisation
Scientifique du Travail (CEGOS) organized by a federation of businesses. The main purpose
of the method was to homogenize the cost calculations in the industry sectors. Out of their
first report, published in 1927, and compiled by Lieutenant-Colonel Rimailho (1937), Une
mthode uniforme de calcul des prix de revient: Pourquoi? Comment? (A Uniform Method
of Cost Calculation: Why? How?). The implementation of cost accounting systems was done

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Journal of Cost Management, May-June, 2007

independently from the financial accounting processes. Thus, management accounting and
financial accounting were explicitly decoupled (i.e. based on a dualist accounting systems
view).

Corner-stone of French cost accounting method

Concerning financial accounting, the French Accounting Plan (Plan Comptable Gnral)
requires that costs have to be reported by their inherent nature (e.g. depreciation costs,
material costs, labor costs, etc.). Costs are not assigned to products or to departments (e.g.
production function, administration function, distribution function, etc.). Thus, the French
income statement has a macroeconomic orientation which does not allow manufacturing
companies to collect or disclose prime cost data (i.e. direct materials, direct labor,
manufacturing overhead, etc.). One would not expect to see a French company report Cost of
Goods Sold or Selling and Administrative Expense.

In contrast, cost accounting methods have to deal with two different purposes: costing for
inventory valuation (i.e. historical full costing) and costing for pricing in using the fullest
costing as possible (i.e. all the costs even the non-manufacturing costs). But it is also
compatible with variable costing and standard costing.

The French cost accounting method: the Mthode des Sections homognes

Definitions
In France, cost accounting is traditionally called Comptabilit Analytique dExploitation
(literally Analytical Business Accounting). Cost accountings purposes are provided in the
French Accounting Plan: On one hand, it serves to:
- identify the cost of the various functions performed by the firm,
- provide a basis for the valuation of certain elements on the balance sheet,
- explain the economic result (income) by calculating costs of products (goods and services)
and comparing them to corresponding selling prices.
On the other hand, it serves to:
-forecast the various costs and incomes (standard cost and budgets, for example),

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Journal of Cost Management, May-June, 2007

-identify and explain variances between forecast and actual (cost control and budget control,
for example).
And, it serves to:
- provide all the information which could facilitate decision making.
In order to achieve these purposes, the analytical business accounting system must be
strictly adapted to the organizational structure of the firm and to the specific business it is
involved in.

Cost is defined by the French Accounting Plan as accumulated charges1 charged to a product
or a responsibility center. It can be calculated at any stage of the creation of a product. The
final cost of a product is the Cot de Revient (previously called Prix de Revient2). It includes
all charges incurred including the sales and distribution charges.

Method
The method is a two-stage process; the firm is viewed as a sequence of stages or sections
called Sections Homognes (Uniform Sections)3 through which material moves as it is
processed into a finished product. These sections, modeled on the production process, are
called the Main Sections when they contribute directly to the manufacture of a product.
Accordingly, the Main Sections gather Purchasing, Production and Distribution functions of
the firm. They are complemented by Auxiliary Sections (e.g. administration, etc.) that
contribute indirectly to the manufacture of a product. This hierarchical vision is based on
Fayols work4 who defined the firm as a set of functions (See Figure1 below).

1
Charge is the monetary value of goods or services acquired by the firm for the purpose of using them in its
business cycle (e.g. purchases, salaries, interest expense, etc.).
2
In the 1930s, because of the weak weight of the market on the price, the cost internally calculated by
companies could be used directly to set selling price. It is the reason why the final cost of a product was named
final price (prix de revient).
3
Nowadays named Centres dAnalyse (Centers for Analysis).
4
Mainly his book published in 1916, Administration Industrielle et Gnrale.

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Figure 1: Functional view of the Homogeneous Sections Method

Indirect resources

Step # 1 Step # 2 Step # 3

Purchasing Manufacturing Distribution

A B C A B C A B C

Cost of Cost of Cost of

Product X material products goods sold
purchased manufactured

More resources are consumed

These sections represent cost pools. They can be considered to be Responsibility Centers
although they are not defined on the basis of the responsibility itself but on the basis of their
output (uvre).

Accordingly, each Main Section is described by a unit of measure (unit duvre) of its
service or output. It is important to emphasize that the sections activity is assumed to be
uniform or homogeneous in term of that unit of measurement. Therefore, a section is
uniform if it is characterized by one activity or if the different activities performed in the same
section can be explained by the same unit of measurement. To choose a relevant unit
duvre firms generally use correlation ratios. They seek the unit (or rate) which
consumption is more correlated with the consumption of the resources.

The method looks at the charges by destination: that is, the purpose for which they are
incurred. These resources can be used either by the products for the direct charges or by the
sections for the indirect charges. These last ones, not directly attributable to a product, are

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Journal of Cost Management, May-June, 2007

attached to the section that can be deemed to be the existences cause of the charge. Some
charges are directly related to one section, others require an allocation in using a rate (cl de
rpartition) based on physical unit of input (e.g. square meters, etc.). This stage is called
Primary Repartition. Figure 2 below provides a general view of the French method.

Figure 2: General view of the Sections Homognes Method

Resources

Direct resources Indirect

resources

Repartition

Sections

Allocation

Cost objects (products, services, etc.)

Once all charges have been either attached to a product or to a section, the physical output
(uvre) of each section must be defined. Indeed, the resources a section consumes are
supposed to be dedicated to the production of an output. Therefore, the users of the output
must be charged for the outputs quantity they consume. The outputs measure (unit
duvre) is almost always expressed in physical units (e.g. number of machine hours, number
of direct labor hours, etc.). The cost per unit duvre is the unit cost charged to the user for
each unit duvre physically consumed.

This process can be used to classify the sections into two categories:
- The Main Sections when the sections user is a product,
- The Auxiliary Sections (or Secondary Sections) when the sections user is another section.
The term secondary refers to the fact that the service provided by such a section is related to

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Journal of Cost Management, May-June, 2007

the end-product or customer in the second degree only. The cost of such a section is first
allocated to the Main Sections (consuming department) before being eventually allocated to
products by way of the unit duvre of the Main Sections. The allocation of the Auxiliary
Sections to the Main Sections is called Secondary Repartition.

The Primary Repartition, the Secondary Repartition and the cost of the units duvre are
gathered in a unique table named the Indirect Costs Repartition Table. This document
discloses important information to the company because it valuates firstly the indirect cost of
the sections where: the materials are purchased, the products are manufactured and sold, and
secondly the cost for each unit duvre expected to reflect the main cost drivers in the
company.

The example below shows how the Indirect Costs Repartition Table is used to compute
production costs.

The Scapin Co. example is based on 2 Auxiliary Sections (Maintenance and Computer
Service) and 3 Main Sections (Purchasing, Manufacturing and Sales). The repartition of the
auxiliary sections is:

Sections Purchasing Manufacturing Sales

Maintenance 20% 60% 20%
Computer Service 40% 30% 30%

For the activity of April, the General Ledger gives this Primary Repartition:

Sections Maintenance Computer Service Purchasing Manufacturing Sales

Costs 1,000 2,000 5,000 8,000 4,000

To manufacture its two products A and B, Scapin uses two materials X and Y. For April,
Merlin purchased 100 kg of X and 500 kg of Y. Scapin consumed 300 machine hours for
producing A and 700 for producing B. Finally, Scapin sold 10,000 A (@ $1,000/unit) and
20,000 B (@ $500/unit).

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Journal of Cost Management, May-June, 2007

The Indirect Costs Repartition Table

Auxiliary Sections Main Sections

Elements Maintenance Computer Purchasing Manufacturing Sales

service
Primary 1,000 2,000 5,000 8,000 4,000
Repartition
Repartition of the (1,000) 200 600 200
auxiliary sections (2,000) 800 600 600
Total after the 0 0 6,000 9,200 4,800
Secondary
Repartition
Kg of material Number of Sales
Unit duvre purchased machine hours (in K$)
Number of U/O 600 1,000 20,000
Cost of the U/O $10 $9.2 $0.24

The Indirect Costs Repartition Table shows that Scapin Co. is organized on three Main
Sections which costs $6,000 for Purchasing one, $9,200 for Manufacturing one, and $4,800
for Sales one. It also discloses the unit cost of each of these sections activity. Then, the cost
of the U/O for the Manufacturing Section indicates that for each machine hour used
(dedicated to product A or B), the section spends $9.2 of indirect cost. In our example,
Product A will bear $2,760 of Manufacturing Indirect costs ($9.2 x 300) and Product B will
bear $6,440 ($9.2 x 700). This allocation is expected to be fair while the activity of the
Manufacturing Section is explained (or driven) by the Number of machine hours used. Thus,
the more a product consumes machine hours, the more it must bear manufacturing indirect
costs.

Although the French cost accounting method is a sophisticated and traditional way to allocate
costs in a firm, the assumptions it is based on can be considered today to be mostly

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Journal of Cost Management, May-June, 2007

invalidated. Indeed, until the 70s the markets the firms dealt with was protected, their main
function was the Production, the organization was top-bottom only and the main purpose
was to produce as much as possible standardized products (mass-production). The end of this
era and the birth of Activity-Based Costing is a tremendous challenge for the French cost
accounting method.

Challenges for the French cost accounting method

The French cost accounting method is based on a hierarchical (functional) vision of the firm.
Because most of the firms must deal with hyper-competition they need to be more reactive
and to become more flexible. Moreover, offering an increasing number of products or services
to their clients, the companies develop much more new activities and processes. Therefore,
the information the method discloses is often inappropriate to make decisions in cross-
functional companies.

The French cost accounting method, in attaching the auxiliary sections to the main ones
emphasizes the manufacturing activities of a firm at the expense of the support activities.
Because the support activities are not directly related to the products, their resources are
allocated to the manufacturing activities considered as the main users. The competitiveness of
most of the companies today is also based on the support activities (Research and
Development, Communication, Advertising, etc.). It is therefore useful to trace these costs in
order to allocate them accurately to their final consumers.

The French cost accounting method is too aggregated. The homogeneity assumption is
unfortunately invalidated today. A section regroups several different activities which costs
behave differently. Generally the rates chosen are volume based. It is another strong
assumption of the French method: the volume produced can explain the costs existence. This
assumption is often invalidated; other causes can be investigated to understand the costs
behavior (the complexity, the diversity, etc.). These misunderstandings generate cross-
subsidizations among the different products or services depending on their production
volume.

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The French cost accounting method assumes demand exceeds supply and production capacity
is used in full. This logical assumption until the mid sixties is today invalidated. Whereas the
method does not take into account the distinction between the fixed and the variable costs
creating bias in their allocation. The increasing weight of the fixed costs, the use of volume
based rates to allocate the indirect costs and the higher instability of the activity involve
companies to deal with under-activity or over-activity situation of its sections5. To reduce this
bias a variant of the regular French cost accounting method was proposed: the Imputation
Rationnelle des Charges Fixes (the Rational Allocation of the Fixed Costs). It is based on the
same process of the regular model, but the allocation of the indirect costs takes into account
costs behavior (variable vs. fixed). The fixed costs are allocated to the products based on the
following ratio: Actual Activity/Standard Activity. The fixed costs become variable costs
the objective being to avoid charging the cost of the activitys variation to the products. The
idea is interesting but the implementation remains difficult because the definition to the
Standard Activity in a company is often hazardous.

Although the French cost accounting method shows important contextual weaknesses, it is
utilized by the majority of the French companies. A research study conducted in France in
2000 shows that the rate of adoption of Activity-Based Costing method is around 20%
(Bescos and Cauvin, 2000; Bescos et al., 2002).

Activity-Based Costing in France

The population surveyed was the 2,500 members the Association des Directeurs Financiers et
Contrleurs de Gestion (DFCG - Association of Financial Directors and Management
Accountants).

The figures in Table 1 are relatively balanced: 45.9% of companies have implemented or plan
to implement ABC and 54.1% have definitively decided against such a project. In general, the
results indicate a gradual spreading over time of ABC, with its emergence in the United States
and France. This can be explained by a context of economic crisis and the creation of a tool to

5
A section is under-activity when the standard activity is higher than the actual activity. On the other hand, a
section is over-activity when the standard activity is lower than the actual activity.

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Journal of Cost Management, May-June, 2007

deal with it. As different countries took the necessary steps to deal with problems related to
globalization, companies progressively considered ABC.

Table 1: Level of implementation of ABC

Levels of Implementation of ABC France
1. ABC has been adopted 23
2. We are examining the possibility of adopting ABC 22.9
3. We studied the possibility of adopting ABC but decided against it 11,9
4. We have no intention of studying the possibility of adopting ABC 42.2
Total 100

Table 2 then examines the goals of ABC. The figures of each category are the average scores
based on a scale from 1 (not important) to 5 (very important) concerning the objectives.
Pricing remains the most important and effective use of ABC. This can be explained by a
practice of price setting that is less oriented toward the market than in other countries. French
companies more often use internal factors such as full cost calculation when pricing products.

Table 2: The uses of ABC

Uses of ABC France
Cost reduction 4
Pricing 4.5
Budgeting 4.3
Client profitability analysis 4.3
Creation of financial statements 3.6
Average 4.1

Table 3 outlines the reasons why companies, which have studied the possibility of adopting
ABC have decided against using it. In general, the table demonstrates that the biggest
obstacles to adoption of ABC are managerial cultural (items 2, 4 and 5). Technical obstacles
(items 1 and 3) ranked second.

Table 3: Reasons for non-adoption (in %)

Adoption studied but then later refused France
1. The organization has doubts about the effectiveness of ABC 10
2. Costs for adoption and implementation of ABC were perceived as too high 25
3. The organization thought that there was a problem to calculate costs using 5
ABC
4. Top management did not agree to adopt ABC 25
5. Middle managers were not interested in ABC 15
6. Other 20
Total 100

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Journal of Cost Management, May-June, 2007

Apart from those companies, which studied the feasibility of adopting ABC and then later
refused it, there are other companies that have no intention of examining this system for the
reasons cited in Table 4. The information in the table indicates that the companies do not
intend to study the adoption of ABC because of preconceived ideas related mainly to their
current information system (items 1, 3 and 4). Once again, we can see that managerial-cultural
reasons (items 2 and 5) create a barrier to adoption (as observed in Table 3 on the resistance
of management to adopt ABC).

Table 4: Reasons for non-examination of ABC (in %)

No intention to examine adoption of ABC France

1. The ABC approach is inadequate 9.5
2. We believe that the costs associated with adoption and implementation of 12.2
ABC are too high
3. Our present cost calculation and management accounting (or cost 24.3
accounting) system is adequate
4. There are no advantages to improving accounting information 5.4
5. The culture of our organization does not favor change 20.3
6. Other 28.4
Total 100

This reason for not adopting ABC in France is evident in the comments collected and
summarized in Table 5.

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Journal of Cost Management, May-June, 2007

Table 5: Perceived advantages and disadvantages of not adopting ABC by French companies
which have not implemented ABC
Advantages Disadvantages

Accuracy, aids in decision making Complicated and difficult to

implement (choice of activities,
Allows for a more thorough profitability
choice of drivers, etc.)
analysis
Potential time bomb
Pragmatic approach to understanding
costs Need for a powerful information
technology system
Better interpretation of total costs
Differing points of reference on
Better analysis of the sources of profit
the part of users
for the company
Difficult to collect information
Better visibility
Difficult to change mentalities,
De-compartmentalization favored
behaviors, and existing
Better visibility of the process information systems.
A good tool to manage profitability
Quick and clear decision making on the
development or stoppage of an activity
Combining of accounting and financial
principles with operational and
management strategy principles
Compatible with a quality approach
Possibility to mobilize personnel and
involvement of management

Activity-Based Costing process: a way to challenge and improve the French cost
accounting method

Cultural obstacles explain mostly the quite low implementation rate of Activity-Based
Costing method in France. Some companies guess that the American method is too complex
for their business; others think that it is comparable to the French one. Actually, Activity-
Based Costing model, compared to the French cost accounting method, has the same
architecture: a full cost process and a two-stage process. Nevertheless, the assumptions, the
two methods are based on, are different (see Table 6, below). This can be easily explained by
the different economic context when each method were developed. Sections Homognes
method remains an efficient basis for a company to implement an Activity-Based Costing
model in providing the sections which have to be spread out in activities, themselves merged

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Journal of Cost Management, May-June, 2007

in processes. The main challenge remains to define accurately and objectively the allocation
rates explaining the cost behavior in each activity.

Table 6: Different assumptions for a same architecture

The French Cost Accounting Method
Company is viewed as a set of aggregated
and independent sections
e.g. Purchasing Section.
Products consume resources
e.g. Supervisors salary is allocated to
Product X.
The Activity-Based Costing
Company is viewed as a sequence of
disaggregated and interlinked activities
giving processes
e.g. Selecting the suppliers,
Ordering,
Reviewing invoices.
Activities consume resources, products use
activities
e.g. Supervisors salary which is a cost,
If 50% of this time is spent to control the
production department,
Then, if Product X uses 10 minutes of the
supervisors control activity,
The relevant ratio is charged to Product X.

Indirect costs are allocated based on Activities cost is allocated based on rates
volume rates reflecting the complexity of production
e.g. Number of direct labor hours. processes
e.g. Number of components, Batch size.

Conclusion

We have described traditional French cost accounting methods and compared them to
Activity-Based Costing (ABC). The knowledgeable business professional will now
understand these differences in order to better relate to French colleagues or French business
interests. Specific costing methods and terms used in France will now be more familiar. We
have also shown how and why ABC is being adopted in France and we have described some
possible reasons why ABC is not being widely embraced in France. We noted how the
architecture of the French costing methods is comparable to Activity-Based Costing, and we
discussed why the assumptions on which it is based on are now invalidated. In summary, the
financial manager working in France, or with French colleagues, should be better equipped to
engage in meaningful discussions about alternative costing methods and suggest possible
adjustments to these costing methods.

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References

Bescos P-L., Cauvin E. and Gosselin M. (2002), Activity-Based Costing and Activitity-
Based Management: A Comparison of the Practices in Canada and in France, Comptabilit-
Contrle-Audit, (International issue), May.

Bescos P-L. and Cauvin E. (2000), LABC/ABM: o en est-on actuellement? (The

ABC/ABM Method in France: How Far Have we Got?), Echanges, N168, July.

CEGOS (1937), Une mthode uniforme de calcul des prix de revient: Pourquoi? Comment?
(A Uniform Method of Cost Calculation: Why? How?), Paris: CEGOS.

Fayol H. (1916), Administration industrielle et gnrale (Industrial and General

Management), Dunod and Pinat, Paris.

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