Cooper and Kaplan

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Activity-Based Systems: Measuring the Costs of Resource Usage Robin Cooper and Robert S. Kaplan
Robin Cooper is a Professor at the Claremont Graduate School and Robert S. Kaplan is a Professor at the Harvard Business School.

This paper describes the conceptual basis for the design and use of newly emerging activity-based cost (ABC) systems. TVaditional cost systems use volume-driven allocation bases, such as direct labor dollars, machine hours, and sales dollars, to assign organizational expenses to individual products and customers. But many ofthe resource demands by individual products and customers are not proportional to the volume of units produced or sold.^ Thus, conventional systems do not measure accurately the costs of resources used to design and produce products and to sell and deliver them to customers. Companies, including those with excellent traditional cost systems,^ have developed activity-based cost systems so that they can directly link the costs of performing organizational activities to the products and customers for which these activities are performed.

ments.^ The following equation, defined for each major activity performed by the organization's resources, formalizes this relationship: Activity Availability = Activity Usage + Unused Capacity A simple example illustrates the difference between the cost of resovirces supplied and the cost of resources used to perform activities.

I. ABC SYSTEMS AS RESOURCE USAGE MODELS
Activity-based cost systems estimate the cost of resources used in organizational processes to produce outputs.^ Many people have attempted to interpret activity-based costs using their more familiar fixed versus variable cost framework, an interpretation inconsistent with an ABC system's measurements of resource usage costs. The conventional fixed versus variable cost cleissification arises from an attempt to classify the likely change in spending or supply of a resoxirce. The measiirement of unused capacity provides the critical link between the costs of reso\ux;es used, as measured by an ABC model, and the costs of resources supplied or available, as reported by the organization's periodic financial state-

y versions of the transactional demand for resources appeared in J. Miller and T. Vollman, "The Hidden Factoiy," Harvard Business Review (September-October 1985), 142-150, and Robin Cooper and Robert S. Kaplan, "How Cost Accounting Systematically Distorts Product Costs," Management Accounting (April 1988), pp. 20-27. A more comprehensive explanation of the impact of diversity and complexity on indirect costs was presented in the series (k Journal dfCoat Management articles by Roltnn Cooper, "The Rise ofActivity-Based Cost Systems: Parts I-IV" (Summer 1988, Pall 1988, Winter 1989, and Spring 1989). ^See, for example, Robert S. Kaplan, "John Deere Component Works (A) and (B), HBS Cases # 9-187-107 and -108; Robin Coc^r and Karen H. Wnic^i, "Siemens: Electric Motor Works (A)," HBS Case # 9-189-089. ^ e will use the term "outputs" to refer generically to products, services, customers, projects, fadlides or any object tlmt creates a demand for < r benefits from orn ganizational activities. Activity-based cost ^stems asagn tiie organization's operating expenses to outputs based on the activities performed for these outputs. '^We have adqpted the terminology of unused capacity, as suggested by Alan Vercio of Texas Instruments, rather than our initial term of "excess capacity." Not all "unused" capacity represents "excess" capacity. Many helpful and constructive comments on a previous draft were made by our colleagues including Anthony Atkinson, Tbshiro Hiromoto, Jean-Francds Manzoni, Falconer Mitchell, Eric Noreen, Krishna Palepu, William Rotch, Keith l^lliams, and, especially, G. Peter Wlson.

Accounting Horizons/September 1992

Consider a purchasing department in which the equivalent of 10 full-time people [the resource supplied] are committed to processing purchase...
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