Sorting out the Clutter: As Management Accountants and Financial Managers You've Been Besieged by Three-Letter Acronyms Touting the Latest and Greatest Strategic Costing Methods to Help Manage Your Business Operations. Do They Really Help? How Would You Know?

Article excerpt

Can you guess the year of these magazine quotes: "Survey results: ABC is worth the investment"; "Nine steps to implementing ABC"; "Is ABC suitable for your company?"; "Managing your ABC system ... not a panacea for what ails businesses"; "ABC: It doesn't work all the time"? If you guessed 2005, try again. One more clue: At IMA's 75th Anniversary Annual Conference in New York City, the eminent Prof. John K. Shank of Dartmouth College said, "Traditional accounting is at best useless and at worst dysfunctional and misleading." Suffice it to say, the audience was stunned. Shank went on to describe the imminent "sea change" that would occur in management accounting, explaining how cost management would be to the current decade what total quality management was to the previous one.

By now, you know the decade is the 1990s, and, if you're really good, you know the year is 1994. That's the same year one of us documented the first successful telecommunications implementation of an Activity-Based Costing (ABC) process.

But this article isn't about guessing games, nor is it just another look at history or ABC. It's about strategic costing. Our definition of strategic costing is "an integral part of a broader management accounting process that converts usage quantities to monetary units utilizing a costing methodology for purposes of resource allocation, pricing, and profitability around products, customers, distribution channels, etc."

What exactly is the clutter that we say exists? It's the barrage of terms that purport to being the best way to help you run your business. We'll attempt to sort out the clutter and put forward an initial set of best practices that you should use when selecting and deploying a strategic costing process (notice we said process, not technology). This set of best practices is based on our years of practical experience in this area. Later this year, we intend to launch research (surveys and field studies) to refine the strategic costing best practices. Our strategic costing universe for this article includes: Standard Costing, Activity-Based Costing, Resource Consumption Accounting, Target Costing, and Theory of Constraints. We aren't covering other methods such as Lean Accounting and Kaizen.


ABC clearly was part of the sea change John Shank predicted. Using it as an example, over the past 10-15 years, there have been a dizzying number of case studies and articles touting ABC success stories, and even more have proclaimed that ABC is at best a disappointing failure. Thomas Johnson and Robert S. Kaplan at first hailed ABC as the answer to "relevance lost," but Johnson later called it "pure snake oil" as a tool to improve the competitiveness of a business.

To put ABC in perspective, let's examine a successful but ultimately unsustainable application and discuss reasons why it wasn't sustainable.

The focus of our attention was a $30 million telecommunications billing center (annual expense--labor and nonlabor, management, and union) responsible for all functions associated with billing high-end business customers who were purchasing a bundle of telecommunications services. These billing functions included a billing control office (monitoring billing process records, editing checks, validating data, and correcting service order and other errors) and a bill print center (printing, sorting, and dispatching invoices for the bundled service offerings). The center was experiencing severe customer dissatisfaction and financial problems related to inaccurate bills, late bills, lost bills, and spiraling costs. The CFO team brought in a consultant to help them deploy ABC in the billing center. The goals were simple: Understand the drivers of cost so that intelligent resource allocation decisions could be made to lower the cost of delivery and significantly improve customer satisfaction (as opposed to the death spiral--slash the "wrong" costs, which only adds to the customer satisfaction problems). …