Academic journal article Management Accounting Quarterly

The Selection of Actionable Cost Objects for an Activity-Based Costing System: The Authors Discuss the Actionable Cost Object Selection Criteria They Have Developed as a Result of Supervising Approximately 60 Activity-Based Costing Studies over the Past Nine Years

Academic journal article Management Accounting Quarterly

The Selection of Actionable Cost Objects for an Activity-Based Costing System: The Authors Discuss the Actionable Cost Object Selection Criteria They Have Developed as a Result of Supervising Approximately 60 Activity-Based Costing Studies over the Past Nine Years

Article excerpt

For several years, we have team-taught an MBA module that integrates marketing, operations management, and management accounting. The module involves a practicum in which the students work in project teams to develop a business plan for a small business of their choice. The business plan focuses primarily on a coordinated operations strategy and marketing strategy for the small business. As part of the practicum, however, the project team supplements the traditional accounting system of the small business with an activity-based costing (ABC) system. The team is encouraged to use the information from the ABC system as a basis for coordinating the operations and marketing strategies in the business plan.

In the early years of this integrated module, the project teams would choose the company's various products or services as the cost objects and develop their ABC information systems to determine the profitability of each product or service. The business plans that focused on the products or services were often less than satisfactory because of the highly competitive environment in which the companies operated.

As one might expect, the ABC information system often revealed that some products or services were unprofitable. From the project team's viewpoint, the obvious solution to enhancing the company's profitability was to increase the prices of those products or services; but the owners of the small businesses were quick to point out that the price is determined by the market and that their businesses were "price takers," not "price makers." This was especially true of products or services that were like a commodity. If the business owner were to raise the price above the market price, unit sales would drop off considerably.

After supervising several project teams working with small businesses during the early years of the module, we realized that the proper selection of the cost objects could make a positive difference in the extent to which the resultant business plan could guide the small business owners to enhanced profitability.

This article attempts to expand the definition of "cost object" in a manner that is meaningful to both operations and marketing management as they seek to make better use of activity-based cost information to enhance profits. The article also offers real world examples to support our arguments related to the selection of "actionable" cost objects. An "actionable" cost object is one that, when used in conjunction with ABC, yields information that permits management to make decisions that enhance company profits.

TRADITIONAL COST OBJECTS

When it was first introduced in the mid-1980s, ABC was touted as a cost assignment method that would result in more accurate product costs. Robert S. Kaplan wrote many Harvard Business School cases in which he demonstrated the power of ABC to get more accurate product costs in situations where the various products used activities with differing intensities. Even though the focus of many of the ABC cases was on product cost and product profitability, Kaplan and others made it clear that ABC could provide more precise cost information for any cost object. (1)

Other than products, the cost object featured most often in the Harvard Business School cases was the customer. (2) The overwhelming majority of the ABC literature has focused on using either a company's various products or services sold or the cost of serving the customer as the cost objects. There is only limited discussion in the literature about using cost objects other than product or customer.

SELECTING ACTIONABLE COST OBJECTS

In our instructions to the project teams in recent years, we have stressed the need to be creative in specifying the cost objects selected as the focus of the ABC information system. We encouraged the project teams to think beyond the obvious products or services of the small businesses and to look to couple a product or service with service elements related to the product or service. …

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