Activity-Based Costing Management: A Growing Practice

By Sharman, Paul A.; Armitage, Howard et al. | CMA - the Management Accounting Magazine, March 1993 | Go to article overview
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Activity-Based Costing Management: A Growing Practice


Sharman, Paul A., Armitage, Howard, Nicholson, Ron, CMA - the Management Accounting Magazine


More than just a way for management accountants to derive cost information, activity-based management allows managers to change activities and processes to make their organizations more competitive.

When this magazine published its first article on activity-based costing (ABC) three years ago, the subject was brand new. Practical examples were limited to a handful of experimental projects, conducted by a few hardy management accountants. Time after time in these cases, ABC produced very different results from costing systems based on generally accepted accounting principles. High-volume products and customers proved more profitable than previously believed, for example, while low-volume, specialty products were often unprofitable. Accountants obtained new insights into the costs of activities, processes and drivers. Not only did ABC produce new cost information, but the information itself caused managers to change their activities and processes.

According to a recent survey, use of ABC by Canadian companies is growing. Many organizations beleaguered by the current recession have turned to the practice in order to gain more financial, strategic and operational information -- information that will be central to their competitiveness in the '90s and beyond. No longer is ABC considered a consulting gimmick. Rather, it has become a tool for management accountants to help their organizations become more profitable and more effective.

With each application of ABC, accountants' understanding of the tool has increased, and the method of implementation has been refined. In fact, many American corporations, including IBM and AT&T, refer to the concept not just as activity-based costing but "activity-based cost management," (ABCM) or simply, "activity-based management." Smaller companies, such as specialty sock producer ThorLo(1) based in North Carolina, are integrating ABC systems into routine management reporting, and evaluating their processes in order to eliminate non-value-added activities, reduce cycle time and increase profits. By simulating operational changes, sales mix and cost changes, ABC helps managers identify the costs of possible alternatives before making decisions. On its own, ABC provides better cost information. But its most effective use is in a framework of change and continuous improvement, usually involving process re-engineering and performance measurement. Activity-based management means integrating activity-based costing information into an overall management process.

Following are findings from ABCM case studies of eight organizations -- including five manufacturers, and one company each from financial services, energy and distribution -- published by the Institute of Management Accountants(2):

* More than a cost system, activity-based cost management is a management process. ABC information enabled managers to oversee activities and business processes by giving them a cross- functional, integrated view of the firm.

* ABC information supported both strategic and operational decisions in such diverse functions as product lines, market segments, customer relationships and process improvements.

* ABC models can supplement traditional costing systems.

* ABC did not translate directly into improved profits and operating performance. In order to capitalize on the insights provided by ABC analysis, management must institute a conscious process of organizational change.

How to get started

For many Canadian organizations, implementing ABCM is now the biggest hurdle. It generally falls to senior financial managers to champion the process within the organization. But senior operating personnel must act as sponsors. As most of the information used in ABCM is non-financial, the entire organization must be involved in collecting it. For its results and information to be accepted by the organization, operations and marketing people must completely understand and embrace the process from the beginning.

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