Introduction
Activity-Based Costing (ABC) is a management accounting technique developed to assign specific resource costs to the different products offered by the organization. It helps management by ensuring a better understanding of customer cost, the product, and profitability. It is very useful in developing strategic decisions especially in aspects of outsourcing and pricing as well as identifying and measurement of initiatives meant to improve the production process. A concept that engages the use of cost drivers is used to determine the utilization of a shared activity by the different products.
Some of the most important uses of the ABC include the identification of departments, products, and activities that are inefficient and contribute to poor performance. Secondly, ABC aids in channeling more resources to the better performing activities, departments, and products to boost performance even further. It also assists in the cost control process both at the individual as well as functional level. This is fundamental in ensuring better efficiency in production processes. In addition, ABC uses scientific reasoning to fix product prices. This not only eliminates arbitral price-fixing but also ensures that the prices set are as accurate as possible by taking to full consideration the cost and other price-determining factors. This paper conducts a literature review on ABC. It considers five research papers and comprehensively discusses why the paper was developed, how the research was carried out and which findings were arrived at.
Activity-based costing in the U.K.’s largest companies: a comparison of 1994 and 1999 survey results
The paper was developed by John Innes, Falconer Mitchell, and Donald Sinclair. It analyzes the results of two surveys involving the use of ABC in the largest companies in the UK. The two surveys offer an opportunity to assess the changes which have occurred over the past few years in the manner in which the ABC model has been adopted. The paper offers crucial comparative information on aspects such as the specific nature of the ABC system being used and the different functions to which the system has been utilized. It also gives information on the design of the ABC system in use, the importance attached to the system by its users, and more importantly, the success attributable to the systems (Innes, Mitchell and Sinclair, pp3-9).
The study utilized questionnaires that were availed to the finance directors as well as company secretaries, staff in the accounting department as well as other business staff. 54 respondents were registered in the finance directors and company secretaries’ category, 102 respondents were recorded in the accounting staff category, and 21 respondents were in the other business staff category. The overall response rate was 44.9%. There was a requirement that all respondents are well versed with the organization’s operations and, on average, the respondents had an average of 9.4% years as employees in their organization.
A series of different findings were observed from the analysis of the surveys conducted in 1994 and 1999. As concerns changes in adoption rates, it was clear that there was no significant increase over the five years. The proportion of ABC users and those considering applying the system was falling from 21% and 29.5% in 1994 to 17.5% and 20.3% respectively. Again, there was a slight rise in the number of companies rejecting ABC. Overall the ABC adoption rate and the distribution of those companies which considered applying the system however showed no difference. It was also clear that firms in the financial sector and other big corporations maintained higher rates of adoption during the period.
In design and implementation, there was observed consistency for the period. In-house accountants remained the most dominant consultants as they participated in over half the adoptions made. Other disciplines’ role in adoption was notably on the decline. The respondents exhibited a variety of software in implementing the ABC. There was however an increase in the proportion of companies utilizing specialized commercial packages.
The use of the ABC systems had few changes during the five years. Almost all systems in use had multiple purposes. The most common application included pricing, cost-cutting, performance improvement, and modeling of costs. These were applied by over 60% of ABC system users. The overall rating of success of the system stood at an average of 3.9 when measured on a 5 point scale with 5 indicating success and 1 unsuccessful for the year 1999. For the year 1994, the rating was 3.8.
These papers also gave an analysis of some information from the nonadopters which were categorized into three. The first category was comprised of those who had made a deliberate effort not to employ the system. The total number was 27. About 74% of these claimed that the ABC system presented some administrative as well as technical complexities which caused the implementation costs to surpass the benefits derived from the application of the system. The second category was comprised of those considering applying the system. The total number was 36 and a majority of them quoted cost constraints as the most important factor hindering implementation. The third category consisted of those who have never considered the ABC system. The total number recorded in the surveys was 83. Most of them quoted a lack of requisite resources to conduct credible assessments.
Towards explaining activity-based costing failure: accounting and control in a decentralized organization
This research paper was developed by Teemu Malmi to contribute to the ongoing discussion on the successes as well as failures in two main ways. First, the paper questions the dominant perspective adopted in the assessment of both the success as well as failures of ABCs. This is about works developed by other authors such as Simons (1990) on how senior management use controls as well as presenting a case where the management of decentralized firms develops interactive cost accounting through the introduction of ABC in a single sub-unit. The argument presented is that the ABC system is a success in consideration that it served the purpose to which the management intended. Assessment f success or failures of accounting systems are in consideration of the diversity of use. Consequently, some of the failures are not failures but rather results of appreciation by the users which may be partial (Malmiu, p3-6).
In addition, because some ABC projects do fail, the study is aimed at improving the understanding of the level as well as the reasons which lead to resistance to ABC systems. Political cultural and rational motives towards resistance are evaluated.
The research involves explanatory case analysis. This means that the study is not aimed at deriving hypotheses and determining their correctness. Rather, it is aimed at explaining why ABC failure occurred in a specific setting. It aims at demystifying the ABC failure as a phenomenon.
The study then goes ahead to describe two case studies one which is successful while the other is a failure. In the successful case, the ABC system helped reduce uncertainties in the process of strategic decision making while in the failed case the project was abandoned due to shortages in personnel time and reduced need for the control system in the face of excess capacity. Informal interviews, company results, memos, and company history were utilized in the 10-month study of the two companies. A longitudinal case study explained the failure in ABC.
Two main findings for the failure of ABC are arrived at in the study. First, applying ABC directed senior management‘s focus to strategic uncertainties which at times led to unnecessary decisions. Secondly, there were very diverse origins of resistance as most depended on contextual issues.
The improvement of the quality management by the activity-based costing
This paper was developed by Michalska and Szewieczek both from the division of materials processing technology from the Silesian University of Technology in Poland. This paper was developed with the aim of the application of ABC in analyzing costs in an elaborate production process. It also points out the difference between the traditional system and the ABC systems. The paper argues that ABC is based on two perspectives namely the processes perspective and cost perspective. In the costs perspective, cost objects refer to the reasons why costs are accounted for. They could be products, services, contracts undertakings, or even customers. The most important is the product. Activity costs are attributed to supplies and are repetitive as well as homogeneous (Michalska and Szewieczek, pp3-7).
The study details research conducted in one coal mine in the Silesian Region. The research involves analysis of costs using the ABC method using the basic costs as the base in mechanical processing of coal. This entailed first identifying the basic tasks towards the development of the final product. Secondly, the tasks are broken down into finer details. In coal extraction, 18 activities were identified. Then, the costs for each activity are defined.
Breaking down of activities enables a more detailed analysis which can be very useful in the detection of useless costs by ensuring accuracy and reliability. This being the case, the ABC system is much more efficient in comparison to the traditional costing methods mainly as it enables exact analysis. Traditional costing techniques are many generalized approaches and in most cases may not bring out the weaknesses in the production process.
The effect of strategy and organizational structure on the adoption and implementation of activity-based costing
The paper was developed by a researcher called Maurice Gosselin. It focuses on the effect of the structure of the organization as well as the implementation of activity management in the production process. ABC in this study is seen as a level in the overall process of activity management which has two more levels namely activity analysis and activity cost analysis. ABC is the centermost level among the three.
Information for the study was collected using the mail and concerning issues on adoption as well as the implementation of strategy posture, adoption as well as the implementation of innovations in the process of cost management. The mail survey enabled researchers to reach a much bigger sample of the population of companies at a low cost. Three variables were used in the measurement. First, there was a categorization of companies in terms of whether they adopt activity management or not. A value of 1 was attached to those who adopted the ABC and a value of 0 was adopted for those not adopted. Most firms surveyed were Canadian manufacturing firms numbering up to 1555 (Gosselin, pp2-6).
The results of the survey indicate that decisions to adopt and implement AM approaches are influenced by strategy and the organizational structure. Competitive strategy is crucial as it presents the need to develop systems that generate adequate information to be used in enhancing competitiveness. The structure of the organization is also an important factor in the diffusion of innovation processes. It greatly influences the choice of activity management employed. Organic organizations employ informal systems while mechanistic organizations employ formal systems. In addition, the organizational structure is an important influence in the implementation process.
Activity-Based Costing An Emerging Foundation for Performance Management
The paper was developed by Peter Turney the president of Cost Technology Inc. This paper seeks to dig into the historical aspect of the ABC system. This is in consideration of the fact that the technique has been in use since the mid-1980s. It seeks to answer three fundamental questions. The first is concerned with how the method has evolved over the entire life cycle. The second question seeks to establish the lessons learned during the entire period of evolution of the system. The third question is about establishing what has been achieved through the changes which make the current ABC superior to the ABC systems applied two decades ago. These queries are answered by conducting a thorough examination of the process of ABC evolution parallel to the product lifecycle. It starts by availing a summary of ABC’s history as it fits in the different phases of the cycle, giving some important details over the 20 years and outlining the expansions in the system (Turney, pp4-9).
Different phases are identified over the period. The first phase is referred to as the technology trigger. This covers the period between the years 1984 and 1987. It is the start of innovations in cost accounting. ABC was first put in operation in Japan as the need to become more competitive in the western world rose especially in the automotive and electronic industry. The increased competitiveness caused problems among the western companies with some alleging unfair competition while others strived to adopt the systems. Others developed other costing techniques which were to later be combined to develop ABC.
The second phase spanned over the period between 1987 and 1991. It was named the peak of inflated expectations. This period was characterized by extensive information on the applicability of ABC which excessively raised the manager’s expectations of the ABC. Software and consulting firms sprung up and international conferences and publications rolled out as people realized the diagnostic abilities of ABC in solving most of the problems she was facing.
The third phase spanned through the period between 1991 and 1995 and was called the trough of disillusionment. This period was characterized by the burst of the bubble. Sustainability issues and heightened confusion and some very visible failures of the system abruptly lowered people’s expectations and other management methods started gaining attention. The most important misunderstanding which led to collapsed expectations is the notion that ABC could be used in the daily operations of the organization. Indeed the method was developed for periodical and not a daily application as this would make it too cumbersome. The most important lesson in this phase was that critical comments could diminish the application of the method by reducing user interest, especially for such an immature technology. It is however clear that the ABC system has been able to considerably maintain relevance even in the face of other costing techniques through continued learning and development.
The next phase occurred in the period between the years 1995 and 2000 and ushered in the second generation. It was called ‘climbing the slope of enlightenment. This period was marked by higher market penetration and improved technology. ABC was now applicable in areas outside cost accounting. Even the industries which previously did not utilize the system developed ways of successfully adopting the system. Another face named ‘plateau of productivity was experienced in the period between year 200o and 2006. In this period the most important lesson was the direct effect of advancement in technology as well as learning on the balance of cost and benefits for ABC.
The final phase is called Post Plateau and is in the period since 2006 to date. In this period, ABC has become an integral part of modern performance management. The solutions range from measurement as regards the management of profits, performance, human resources, and other longer-term aspects such as sustainability.
Conclusion
The five articles can be seen to develop different aspects of the ABC system. ABC has proven to be a formidable cost accounting technique applicable in the modern-day. The two surveys studied in the first article depict not only consistency in user interest in the ABC system but also the fact that perceptions are an important aspect in the acceptance of ABC methods. This is consistent with the historical analysis of the ABC system since the 1980s as there are periods where the impact of ABCs was overrated as well as periods when the system failed to reach expectations and experienced a collapse in confidence. Throughout these periods, publicity was an important element.
On the other hand, Organizational structure remains an important determinant to the success of the implementation of the ABC. Again success is highly determined by the acceptance of the system by the top management. This assertion resonates with the argument that ABC is not for daily management but rather for periodic analysis. Top management relies on periodic assessments rather than data on daily operations.
The evolution of ABC presents a case of a management technique that has undergone a series of improvements to continually meet the standards of the modern-day demands in issues such as profitability management as well as other performance management. The system has offered a competitive advantage to numerous companies starting in Japan where the application in companies such as Toyota made them global leaders in their industry. The system can now be effectively applied in numerous other industries not envisioned during its development.
Works Cited
Gosselin Maurice. The Effect of Strategy and Organizational Structure on the Adoption and Implementation of Activity-Based Costing. Accounting, Organizatfons and Society, 22(2). 1997. Web.
Innes John, Mitchell Falconer and Sinclair Donald. Activity-based costing in the U.K.’s largest companies: a comparison of 1994 and 1999 survey results. Management Accounting Research. 2000. Web.
Malmiu, Teemu. Towards explaining activity-based costing failure: accounting and control in a decentralized organization Management Accounting Research, 1997. Web.
Turney, Peter. Activity-Based Costing An Emerging Foundation for Performance Management. 2000. Web.
Michalska, Szewieczek. The improvement of the quality management by the activity-based costing, 21(1). Journal of Achievements in Materials and Manufacturing Engineering. 2007. Web.