Activity-Based Costing: Is It Still Relevant?
BY WILLIAM O. STRATTON, PH.D., CMA; DENIS DESROCHES; RAEF A. L AW S O N , P H . D . , C M A , C PA , C FA ; A N D T O B Y H AT C H
POPULARITY OF ACTIVITY BASED COSTING -
GREW RAPIDLY DURING THE
IN THE FOLLOWING DECADE, MANY SURVEYS REPORTED USAGE RATES OF PAST
50%. OVER THE
HOWEVER, THERE HAS BEEN DEBATE ABOUT THE
OVERALL RELEVANCE OF THIS COSTING METHOD. TO INVESTIGATE THE CURRENT IMPORTANCE OF WIDE.
ABC, WE OUR
MANUFACTURING AND SERVICE COMPANIES WORLD-
RESULTS INDICATE THAT
CONTINUES TO OFFER ORGANIZATIONS
SIGNIFICANT VALUE FROM STRATEGIC AND OPERATIONAL PERSPECTIVES.
ver the past several years, consultants, practitioners, and academic investigators have noticed that activity-based costing (ABC) methods, developed to improve decision support and the accuracy of cost- and profit-measurement systems, too often have yielded less than the desired results. For example, Robert S. Kaplan and Steven R. Anderson state, “Many companies abandoned activity-based costing because it did not capture the complexity of their operations, took too long to implement, and was too expensive to build and maintain.”1 Further criticism of ABC appeared elsewhere. “Straightforward in theory, ABC proved notoriously difficult in practice. It involved defining ‘activities’ and trying to judge (often subjectively) how much overhead each used. And it had to be done regu-
larly. Companies got fed up, and many abandoned it. From 11th position in the 1995 annual survey of the most widely used management tools (Bain), it fell to 22nd place (in 2002).”2 Studies of ABC use have reflected this dissatisfaction with the technique. The Bain & Company annual tools surveys in 2003 and 2005 reported use of activity-based management (ABM) at 50% and 52%, respectively, with associated satisfaction scores below the average for all tools used. Similar results were reported in the SUNYAlbany, Hyperion, and Pepperdine Study (SHAPS surveys): During the same period, they found a decline in the perceived value of ABC compared to its usage.3 Despite the negative results of these studies, there are many case studies and anecdotal reports of organizations that have adopted ABC methods and reported sat-
M A N A G E M E N T A C C O U N T I N G Q U A R T E R LY
SPRING 2009, VOL. 10, NO. 3
isfaction with the value they provide. These companies consider their ABC methods an investment worth the time and resources committed to them. One motive for conducting this research was to seek an answer to the question: “What distinguishes successful implementations of ABC methods from those that have not succeeded?” B R AG S U R V E Y
Demographics of Survey Respondents
North America Europe Middle East Asia Africa South America 52.1% 13.9% 12.8% 12.1% 6.8% 2.4%
By geographic region:
In order to study the use of ABC methods (and other issues related to the design and use of costing and profitability methods), we formed the Business Research and Analysis Group (BRAG) and conducted a survey sponsored by the Institute of Management Accountants (IMA®) and other professional associations.4 Table 1 shows the distribution of survey respondents by region, type of unit, and business sector. Of the 348 survey respondents, slightly more than half were located in North America. The survey was completed most frequently from the perspective of the respondent’s organization as a whole. Fifty-four percent of the respondents were in the service sector, and 40% were from manufacturing. The positions held by respondents were fairly evenly distributed among executives (16%), directors (13%), senior managers (16%), analysts (19%), managers (23%), and others (14%). C O S TAND
By organizational level: Whole company Group/division Department Subsidiary Plant Unit Branch Other By business sector: Services...
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