Activity-Based Costing Implementation and Adaptation

By Lindahl, Frederick W. | Human Resource Planning, June 1997 | Go to article overview

Activity-Based Costing Implementation and Adaptation

Lindahl, Frederick W., Human Resource Planning


Over the course of the last decade, a management tool called "activity-based costing" (ABC) has become one of the more widely embraced of new management methods. While its core lies in cost accounting, it has attracted the attention of business managers in general, and has been the subject of articles in the Harvard Business Review, Fortune, and elsewhere in the business press. And not only is it a major theme in business, it has been adopted in parts of government, for instance, the IRS and the Department of Defense.

What began as essentially an "accounting" matter has spread to the point where it affects nearly every aspect of an organization, from production to marketing. In the early literature about ABC, the focus was on the underlying concepts - essentially "theory development." As the theory began to be implemented, farther-reaching consequences were developed for instance, the need to reshape performance evaluation measures to reflect the new economics revealed by ABC. As these extensions of the basic theory started to affect organizations, academic researchers came to recognize that profound implementation issues were arising. This in turn has given rise to a segment of the ABC literature on organizational change. It is that literature this paper surveys.

The focus of the paper is that part of the "organizational change" literature that has some theoretical foundation. I will not attempt to survey comprehensively a large number of teaching cases, nor accounts of ABC installations in the practitioner literature - articles along the line of "In a DoD Environment Hughes Aircraft Sets the Standard for ABC" (Haedicke and Feil 1991). These cases and descriptions have had an important influence on the more "academic" papers by providing a rich field from which to examine successes and failures. The paper is generally restricted to ABC. Although there are surely many common lessons and conclusions that might be extracted from implementations of TQM (Jensen and Wruck 1994) or JIT (Klein 1989), I will not attempt in this paper to make those connections.

Finally, I note that this is quite a new, and accordingly rather small, literature. Only in about 1990 did rigorous study of ABC implementation become part of our literature. Moreover, there are those (e.g., Hopwood 1983) who believe that the whole area of studying accounting in the contexts in which it operates is underdeveloped.

The next section gives a description of ABC. The third section is the review, and the final section concludes.


This section outlines the basic ideas of ABC and how the basic ideas have spread to other areas of management.

An explicit aim of cost accounting has always been to use an accounting system that assigns to products a dollar amount that reasonably reflects the value of resources actually consumed to create that product - whether a good or a service. Some resources are fairly easy to account for, like the paper in a book. The greater challenge lies in allocating resources where the connection between the resource and a unit of the final product is indirect, unobservable, and imprecise, like industrial engineering services.

In recent years, the challenge in allocating indirect resources has increased greatly, for several reasons. (1) Indirect cost as a fraction of total cost has increased; e.g., automation: the substitution of machines (indirect) for direct laborers (easily traced). (2) Increasing proliferation of product models and types, where complex production scheduling, parts inventories, etc. add to indirect costs; e.g., automobile models and options. (3) Decreasing reliability of the "base" which has traditionally been used to allocate direct costs: direct labor time. This changing manufacturing world has led to the need for better methods of assigning costs. The key idea of ABC is that activities cause costs; products do not cause costs. The design of an ABC system rests on identifying the relationship between an indirect resource and the "activity" that consumes it. …

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