Activity-Based Costing ( ABC ) Essay

Activity-Based Costing ( ABC ) Essay

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Activity-Based Costing ( ABC )

Summary

The business environment in the 1990s is markedly different from that
of the past when conventional cost accounting procedures were
established. Activity-based costing (ABC), pioneered in the late
1980s, offered a new costing approach consistent with the changed
environment. However, ABC did not diffuse rapidly into the business
community. This article demonstrates why adopting ABC is important by
documenting the potential of ABC in supporting contemporary managerial
decision making.

Introduction

Everything happens faster in business today. Even new management tools
(some say "fads") follow a meteoric path. For example, the ink on new
articles describing activity-based costing (ABC) was hardly dry before
consulting firms had integrated it into their slick brochures and
presentations. All they needed was someone to use it. To illustrate,
Romano identified only 110 installations by August 1990, nearly two
years after the procedure was developed, with 77 percent of these in
two major firms [13]. Perhaps this phase, in the process of
introducing the new procedure, could be called "the period of wild
over-promise." However, even by the mid-1990s, ABC has not spread
widely throughout the industry and "even in large firms, widespread
success of ABC is not obvious" [16].

According to Ness and Cucuzza, "thousands of companies have adopted or
explored the feasibility of adopting ABC. However, (they) estimate
that no more than ten percent of companies now use activity-based
management in a significant number of their operations" [11]. A survey
conducted by the Institute of Management Accountants' cost management
group found that only 29 percent of companies used ABC instead of
traditional systems, but this was an increase from 25 percent in the
previous year [10]. Among reasons cited for low adoption were employee
resistance and major organizational changes required with the use of
ABC [11]. Some trace the source of slow adoption of ABC to technical
as well as cultural issues [5]. Others feel that ABC would be more
widespread in industry if it were marketed better by the cost
accounting profession itself [1].

As the dust has settled, ABC has turned out to be less a revolutionary
technique than a useful refinement to proven systems. The costs of
products and services must be accurate, or management can be misled.
Decisions...


... middle of paper ...


...8. Lewis, R.J. "Activity-Based Costing for Marketing." Management
Accounting, November 1991, pp. 33-38.

9. Lofgren, G.Q. "Quality System Registration: A Guide to Q90/ISO 9000
Series Registration." Quality Progress, May 1991, p. 37.

10. "More Companies Turn to ABC."Journal of Accountancy, July 1994, p.
14.

11. Ness, J.A. and T.G. Cucuzza. "Tapping the Full Potential of ABC."
Harvard Business Review, July/August 1995, pp. 130-131.

12. Port, O. "Custom-Made, Direct from the Plant." Business Week,
November 18, 1994, p. 158.

13. Romano, P.L. "Trends in Management Accounting." Management
Accounting, August 1990, pp. 53-56.

14. Roth, A.V., C. Gaimon, and L. Krazewski. "Optimal Acquisition of
FMS Technology Subject to Technological Process." Decision Sciences,
Vol. 22, No. 2, Spring 1991, pp. 308-334.

15. Schonberger, R.J. and E.M. Knod Jr. Operations Management:
Continuous Improvement. Richard D. Irwin, 1994, p. 44.

16. Selto, F.H. and D.W. Jasinski. "ABC and High Technology: A Story
with a Moral." Management Accounting, March 1996, pp. 37-40.

17. Smith, R.B. "Competitiveness in the '90s." Management Accounting,
September 1989, pp. 24-29.

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