Academic journal article Management Accounting Quarterly

Are ABC and RCA Accounting Systems Compatible with Lean Management?

Academic journal article Management Accounting Quarterly

Are ABC and RCA Accounting Systems Compatible with Lean Management?

Article excerpt

COMPANIES SUCH AS TOYOTA THAT USE A SO-CALLED LEAN PRODUCTION AND COSTING SYSTEM HAVE SHUNNED BOTH ACTIVITY-BASED COSTING AND RESOURCE CONSUMPTION ACCOUNTING.

As many U.S. firms faced severe competition in the 1980s, mostly from Japanese companies, some managers at U.S. manufacturing companies looked to their accounting systems for information to help them confront the competition but found the systems lacking. Accounting systems designed to support financial reporting were providing data about processes that were too aggregated and information about products and services that was distorted and too late to support management's planning and control decisions.1

At the time, Robin Cooper and Robert S. Kaplan had introduced activity-based costing (ABC). It was seen as a path to regain relevance for cost systems, and U.S. companies began developing ABC systems. Case studies chronicling these adoptions reported astonishing differences in reported product costs. Managers' views of their products were turned upside down. Changes in product pricing, promotion, and mix decisions based on ABC costs led to dramatic improvements in profitability and competitiveness for some U.S. firms. At the same time, many of the companies at the forefront of the competitive onslaught on U.S. manufacturers were socalled "lean" companies. By using the term "lean," I am not referring to "lean and mean" companies that slash costs to achieve short-term financial goals-often without regard to the effect on customer value and other long-term consequences. Rather, I am referring to companies that continuously eliminate waste by adopting a particular type of management and production system, such as the Toyota Production System or some variant of it. Waste is any resource or activity that does not provide value the customer is willing to pay for. A lean production system continuously eliminates waste, flexibly providing value that customers are willing to pay for.

Rather than producing to a forecast and seeking to maximize utilization of "fixed costs" like equipment, companies with lean systems strive to achieve onepiece flow through the value stream-the entire series of processes that deliver value to customers-and produce to actual customer demand. These companies did not use activity-based costing in their management accounting systems. Nor did they adopt ABC as it developed further, and their competitiveness laid bare the irrelevance of U.S. management accounting systems.

Today, ABC systems have evolved and spread beyond manufacturing. These cost management systems emphasize process improvement as well as product and service costs. But global competition in many industries is increasingly severe, and many managers remain dissatisfied with the information from their management accounting systems, including ABC.

But why? After almost a generation of ABC systems, has increased competition rendered the early ABC systems obsolete? The truth is that many companies have not adopted ABC, and many companies that have tried ABC have abandoned it. Paul Sharman cited one study reporting that 80% of responding companies in the United States are still using traditional cost allocation systems.2 He also cited a study showing that of the 60% of U.S. companies that have tried ABC, as many as twothirds have abandoned it.

Sharman suggests Grenzplankostenrechnung (GPK) as an alternative to ABC.3 GPK is a German system usually translated in the United States as flexible margin costing. Anton van der Merwe and David E. Keys go one step further to propose resource consumption accounting (RCA), which they characterize as a blend "of the robust German cost management system with activity-based costing," as an improvement over existing ABC systems.4 Articles explaining or advocating GPK or RCA have been appearing with increasing frequency in Strategic Finance, Management Accounting Quarterly, and other accounting publications.

This article examines the reasons why companies that use lean systems have not adopted ABC systems and the implications of lean-oriented companies developing RCA, an emerging GPK-based system. …

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