Modeling Effective Budgeting and Production For Sustainable Competitive Advantage: Evidence from Kufa Cement Factory, Iraq

Traditional costing systems are no longer effective in the resource management or the preparation of budget for the economic units. The latter task depends on the historical data which might mislead at times. The modern cost and administrative accounting techniques resolve these issues based on time-driven activity with an aim to allocate the cost, resources, and time as per the prediction. To raise the efficiency and performance of the economic units, a dynamic costing system is required that meets the increasing complexities in production processes and the business environment. Since the activity-based costing (ABC) activities brought several problems, Kaplan and Anderson developed a new costing technique, that is, time-driven activity-based costing (TDABC) in early 2000s, from which the TDABB technique has emerged.

According to Kaplan and Anderson, TDABB is the exact opposite of TDABC. TDABC starts its application from practical energy represented by time, energy costs, required resources, products, and cost to customers. On the contrary, TDABB identifies the customer requests and determines the energy required to fulfill the requirement. The same methodology has been applied by various scholars in different manners to bring the economic unit to target profitability (Özyürek, 2015). TDABB can be defined as budget preparation in parallel with TDABC in an inverse manner, that is, starts from the expected sales volume based on which the resources, required to support the production plans, cover the volume of sales (Blocher, et al., 2019).

The current study defines TDABB as a modern technology that assists the economic unit in cost management, finance control, dissemination of appropriate information about value-adding and non-value-adding activities, effective decision-making, and providing dynamic scenarios for the changing business environment through volume planning. The TDABB technique provides appropriate information required for the administration to plan and implement various functions. This is accomplished by integrating or bridging the resources and time-oriented activities for products/services. Thus, it analyzes the cost of each resource to avoid missing any idle resource that may inflate the cost of the product/service. Furthermore, TDABB is an iterative process in which different scenarios are considered for the budget period based on the results of the development process. The predictions are changed from time to time until the results are satisfactory, especially in achieving the targeted profits. Kadhim (2019) listed the following advantages of TDABB:

The technology further reduces the costs incurred in developing the budget amounts, increases the budget’s stability, positively impacts the innovation, continuously improves the budget criteria, and determines the amount of idle/excess staff. Time-driven activity is important in budgeting to achieve competitiveness and continued profitability. So, the budget planned is leveraged to achieve the goals, production, and revenue at calculated costs and time. Following is the step-by-step implementation of TDABB model as per the literature (Kaplan and Anderson, 2007; Öker and Adigüzel, 2010):

forecast the sales and production quantities and determine the time vectors;

The CP concept was first conceived in 1987 to fulfill the current generation’s requirements without compromising the needs of future generations. However, sustainable development for product manufacturing is a challenging concept for implementation to achieve sustainable development (Terefe, 2018). The CP concept has drastically changed in the past three decades in terms of scope and content and has shifted from pollution reduction to innovative production methods for less environmental impact and greener lifestyle. In addition to the basic framework, resource efficiency and three more dimensions of sustainability (such as social, economic, and environment) have been added, individually as well as synergistically. CP is defined as the technology that leverages the natural resources without causing harm and in the most efficient manner at all the stages of a product’s life cycle. CP is understood from two aspects such as inputs and the whole production aspect (inputs–processes–outputs). While the former focuses on optimal usage of the resources and energy to reduce waste and emissions, the latter is a comprehensive and integrated preventive approach to reach zero pollution levels while maintaining high-quality products (Ismail, 2014). Two main conditions must be met for CP, such as enhanced economic performance and improved environmental performance. Furthermore, the management must be convinced about the importance of environmental systems management since this approach reduces the costs and also improves the environmental conditions simultaneously. Thus, it achieves sustainable development and provides competitive advantage for the economic unit (Abdullah and Fadel, 2018; Allawi, 2021). The interdependence of both concepts, that is, CP and environmental costs, leads to continuous improvement in the work environment, legal adherence, sustainability, innovations, mitigation of emissions, and the creation of environmental, economic, and social benefits for the economic unit. This CP approach starts with the implementation of environmental policies for costs, production, human resources, and finance (Al-Ajibi, 2021). Improving quality means low cost and high customer satisfaction, thus producing high market returns (Kazem and Abdel-Wahhab, 2013). Environmental auditing (green accounting) correctly calculates the costs to achieve sustainable development and maintain a positive relationship with society by using optimal and efficient alternatives for production and adopting green technologies. This process is key to achieve environmental progress, save costs, and increase the competitiveness.

Environmental measures must include processes for sustainable production and consumption practices. Many institutions started adopting greener production practices as classified in Figure 1. (Ismail, 2014; Doorasamy, 2016; Al Shabasi, 2017).

Figure 1.

Cleaner production practices

(Source: Authors’ own research)

The term "sustainable competitive advantage" denotes leveraging the opportunities for an economic unit to achieve continuous sales in the market. Competitiveness enhances the position of the economic unit with profits and distinguishes the economic unit from its competitors in various fields. Sustainable competitive advantage can be defined as a driving force or a clear basic value of an economic unit to meet the needs of its customers in a better manner against its competitors.

Industrial progress and sustainable development concepts should be integrated into economic unit, failing which environmental degradation is inevitable. Loss of competitiveness and unsustainable use of natural resources ultimately lead to the collapse of the industry. Salma and Naima (2018) indicated that the competitive advantage achieved upon environmental management is an opportunity to improve and exploit new markets. Al-Al-Sultani (2020) showed that the CP technique and production processes, when integrated, provides multiple benefits listed in Figure 2. and outweighs the competitors.

Figure 2.

The benefits of CP technique and production processes

(Source: Authors’ own research)

Traditional accounting management is outdated now (Kazem, 2020), while the new techniques have control over short- and long-term forecasts. Abdel-Aal (2013) adds that budgets may not support cost-cutting processes, a drawback in today’s business environment. The recent development in preparing the budgets based on time-oriented activity adopts continuous improvement and distinct activities of the economic unit. It gets rid of non-value-adding activities and unplanned use of resources, defines practical/actual production capacity, and benefits from idle energy and the knowledge of capabilities. Thus, the novel method identifies the strengths and weaknesses to achieve the objectives and its performance. The time-based budgeting technique positively reduces the cost and produces the highest quality product at a competitive price that outweighs the competitors.

Traditional budgets and pollution treatment techniques involve supervision based on administrative centralization, adherence to legislation, inward closure, and short-term orientation. At the same time, the current economic units have become highly decentralized, innovative, intelligent, and flexible to remain competitive using modern techniques. The TDABB technique determines the processes and resources for products and services through time equations, while CP excludes the pollution before it occurs. Thus, the two techniques share a proactive method that improves the productivity to achieve a competitive advantage based on low-cost strategy and/or a differentiation strategy. In this context, Shanabi and Bin Lakhdar (2017) specified that sustainable competitive advantage is a product of resources and activities that contribute to the formation of this advantage. Mahdi and Nassar (2021) He stressed that the economic unit that implements the value creation strategy enjoys a competitive advantage.

The integration of both the techniques focuses on leveraging the product redesign practices, minimal usage of natural resources, prevention of mixing hazardous waste with nonhazardous waste, and adjusting the machinery and equipment to reduce emission. Furthermore, the role of cost management process is to be increased in product pricing decisions. This integration can be called as “sustainable budgeting” or “clean activities-based budgeting” as illustrated in Figure 3.

Figure 3.

Sustainable budgeting

(Source: Authors’ own research)

Through optimal use and allocation of resources/costs, the production process gets improved and its activities are tracked with various tools, thus achieving a sustainable competitive advantage.

It can be said that by integrating both the techniques, a sustainable competitive advantage can be achieved.

To address the research questions, a basic hypothesis is developed as follows: "The integration between the time-driven activity-based budgeting and cleaner production leads to achieving a sustainable competitive advantage in light of the competitive and environmental strategies in line with requirements of the contemporary business environment." For the current study, Kufa Cement Factory, an Iraqi General Cement Company that falls under the Iraqi Ministry of Industry and Minerals was considered. Its cost accounting system is based on dividing the cost centers and classifying them into two main groups, that is, production centers and service centers.

Based on primary and secondary data analyses, the expected sales and production for the next year, 2022 AD, using time- and production-driven activity-based budgeting technique was 1,000,000 tons/year. This would help the factory to reduce the costs and selling price and increase the sales and accordingly the market share too. The CP team members can be chosen from five departments, namely furnaces, production management, quality, environment, and technical along with finance. These members constantly follow-up, study the available opportunities, and evaluate possible measures to reduce the cost and quality to achieve sustainable development.

Identification of resource groups and planned costs for various groups is crucial as it falls under direct and indirect costs. Table (1) shows the planned costs for each department.

Cost management and clean energy techniques are vital. Various activities are performed in this stage, such as interviewing the factory engineers, controlling waste generation through recycling, optimal energy utilization, industrial process modification, and introduction of advanced systems. These procedures bring important developments for product manufacturing as briefed in Figure 4.

Figure 4.

Industrial process modification and introduction of advanced systems

(Source: Authors’ own research)

The implementation of CP practices avoids or reduces the costs identified earlier. This step automatically improves the revenues and profitability of the factory, thus giving it a sustainable competitive ability toward competitors.

A step-by-step procedure is given below:

Recycle/reuse Cement kiln dust (CKD) (0%-15%) in cement production increases its porosity, reduces the cracking strength, and reduces the need for new raw materials. The cost of CKD emitted from the precipitators includes the cost of raw materials (stone, sand, soil, etc.), that is, 12,392 dinars/ton and the cost of getting rid of deposits, that is, 1700 dinars/ton. So, the total planned cost for CKD/ton is 14,092 dinars/ton. The expected cost savings by switching from black oil to dry gas amounts to 19,250 dinars. The dry gas flaring system will improve the quality of the product, the production process, and the supply chain, while reducing resource depletion, costs, and environmental emissions damage compared to the black oil flaring system.

Thus, this innovation will save huge costs, reduce the flying dust, and increase the working efficiency. The other advantages include stable final product and safe environment for the workers with a possibility of early detection of a fault at its occurrence.

In this step, the planned energy cost (cost per unit time) is calculated for each department of the factory by dividing the total planned cost of direct and indirect activities by the practical energy required for every department, and its outcomes are validated based on the application of CP practices. In this regard, scientific and applied research indicates that the approved percentage as practical energy from the theoretical energy is 80%. Furthermore, the survey with factory professions reflects the possibility of reaching this percentage if contemporary cost management techniques are applied. The theoretical capacity calculation is done based on the number of workers in each department and their working hours for all the activities during many stages in the production processes related to the cement industry as follows:

theoretical energy of the activity = number of workers × number of days in the month × number of working hours × number of minutes per hour × number of months in the year

Practical energy of the activity = 80% of the theoretical energy of the activity

In terms of practical energy, the cost per unit of time of the planned activity can be calculated by applying the following equation:

planned activity time unit cost = total planned activity cost/activity operational energy

Accordingly, the above equations were applied for every activity of the factory departments to reach theoretical and practical energy values, while the cost per unit time of the planned activity was calculated as follows. Table (2) shows the theoretical and practical capacity of the activities of the quarry department.

Table (3) shows the planned unit time cost for various production departments.

In this step, the time vectors are identified for the events of each factory activity as they are the engines that drive or direct the time spent on the activity. All the cement production activities, their Time Driven, and the planned times that we obtained on conducting the field survey and interviews with the heads of production departments/divisions are listed. Tables 4, 5, 6, 7, 8, and 9 show the time vectors for the activities at quarry, rubber conveyor, raw materials mills, cement mills, and mobilization departments.

The time-driven budgeting technique, discussed earlier, emphasizes the need to identify and measure the level of energy required for each department/resource. This process leverages the available resources through efficient exploitation of the idle energy, which in turn allows making short- and long-term decisions for increased productivity and growth.

The cost and percentage of idle energy for each department in the industry are calculated and tabulated in Table (10) based on the planned practical energy.

The planned product cost can be calculated by collecting the costs of resource groups (departments) after CP technique implementation by multiplying the amount of time required for each activity event and for each department by the time cost required for that event.

Table (12) shows the planned cost of the quarry department.

Similarly, as Table (12) shows, the planned cost is calculated for rubber conveyor, raw materials mills, kilns, cement mills, and packaging. When calculating the planned costs for each department, the total planned cost is arrived at, as shown in Table (13).

After calculating the total planned costs of the product, the final cost per ton was calculated, as shown in Table (14), by adding the costs of the improved production process, exploitation of the idle capacity by creating a new production line, and excluding the costs of activities that do not add value and pollute the environment.

The integration of two techniques helps in overcoming the obstacles, consolidating the strengths, achieving efficient use of available resources, and keeping pace with competition challenges. The traditional products currently in force amounted to 63,207 dinars/ton, according to the proposed integrated systems, which is consistent with the research hypothesis, that is, "The integration between time-driven activity-based budgeting and cleaner production leads to achieving a sustainable competitive advantage in light of competitive and environmental strategies in line with the requirements of the contemporary business environment."