ACC 560-Managerial Accounting
Dr. Lotfi Geriesh
Activity-based Costing (ABC) Hunter Company, 1
Over the past two decade’s adoption of Activity-Based Costing ABC has been tossed around like a hot potato by every size and type of organization. It was adopted by organizations ranging in size from huge multi-national companies like General Motors to the much smaller Alexandria Hospital. (Lanen, Anderson, & Maher, 2011) Some companies began the initial processes but stopped short of actual implementation when they discovered more time and resources were needed to effect the change so management ran from it just as they had run from quality improvement concepts from the seventies and eighties. (Romano, 1990) Was this because ABC was not a good fit for the organization or was there a deeper issue? These organizations knew they were not adequately capturing the costs of activities yet they final cost could be. T.J Rodgers who founded Cypress Semiconductor wrote: “The seeds of business failure are sown in good times, not bad…Growth masks waste, extravagance, and inefficiency. The moment growth slows, the accumulated sins of the past are revealed all the way to the bottom line.” (Clemmer, 1992) Given the competitive nature of business today organizations both big and small cannot long afford to ignore the 900 pound gorilla in the room. The goal of this paper is to discuss Time-driven ABC cost system can be implemented and how it has benefited some companies such as Hunter Company. The system was not widely accepted in the beginning, but ABC has play major role in cost accounting today and has help some managers to combat corporate resistance to change when trying to implement it. Operating managers have known for many years that while the traditional costing approach was inaccurate; and archaic it was close enough. Today, because of the global and high speed
Activity-based Costing (ABC) Hunter Company, 2
nature of the business environment, the errors of conventional costing are systematic and can affect too many decisions. Time-driven ABC is not a hypothetical improvement to traditional ABC analysis. It has been applied in dozens of companies, helping them to deliver significant profit improvements quickly. The Hunter Company (disguised name of actual company), a large, multinational distributor of scientific products with over 20 facilities, 300,000 customers, and 460,000 product SKUs, processes more than one million orders each month. Hunter already had an existing activity-based costing model that had been built with the assistance of an external consulting team. The insights revealed from the model were extremely informative but many in the company questioned if the view was worth the climb. Their main complaints can be summarized as follows:
• The model had been cumbersome to build and maintain. With more than 1,000 activities, the monthly survey of department staff of where they had spent their time was complex and costly. Also, tracking the driver quantities for each activity and customer was difficult. • The model did not reconcile with actual financials since activity cost driver rates had not been updated recently. • Despite the already large number of activities, the model was still not considered accurate or granular enough. It did not reflect several important differences between orders. To increase accuracy, more activities would have to be added, and employees would have to be re-interviewed. Also, an additional data extract to track the quantities of the new cost drivers would be required. The existing ABC approach was not easily maintainable, and thus not sustainable. The company called in a software and consulting company to help it implement the time-driven ABC approach. The time-driven approach led to the following changes: For a department, such as the inside...