The Activity-Based Costing Method: Development and Applications Gregory Wegmann*
This paper analyzes the management accounting applications, which try to improve the Activity-Based Costing (ABC) method. First, the paper describes them using the Strategic Management Accounting (SMA) stream. Then it presents the main features of these applications. Second, the paper examines in detail two of these features: the widening of the analysis perimeter and the relevant level of details to analyze the costs. Subsequently, it analyzes several proposals, such as Customer-Driven ABC, Interorganizational Cost Management (IOCM), Resource Consumption Accounting (RCA) and Time-Driven ABC (TDABC). Finally, it describes an experience observed in the IT supply European division of an international group. This group experiments, what we call an ‘Activity-Based Supply Chain Costing Tool’ to manage its interorganizational relations.
The Activity-Based Costing (ABC) method is the most well-known management accounting innovation in last 20 years. Since the early stages of this method, the Anglo-Saxon scholars have tried to develop specific applications and extensions. In France, the ABC method and its main managerial development, Activity-Based Management (ABM), are quite famous.1 But the numerous developments based on the ABC method are neither very well-known nor discussed. The ABC method was designed in the US during the 1980s (Cooper and Kaplan, 1988).2 It is a refined cost system which enables classifying more costs as direct, to expend the number of indirect cost pools and to identify cost drivers. ABC favors better cost allocation using smaller cost pools called activities. Using cost drivers, the costs of these activities are the basis for assigning costs to other cost objects such as products or services. Since, the work of Johnson and Kaplan (1987) on Management Accounting, the Anglo-Saxon scholars have been very dynamic. The majority of management accounting * Associate Professor, Department of Business Administration, University of Burgundy, France. E-mail: Gregory.Wegmann@u-bourgogne.fr 1
Even if a recent study (Bhimani et al., 2007, p. 16) shows that the lowest rate of ABC implementation is in France (10.8%) and that “… the French responding organizations revealed the highest rate of perceived usefulness”. According to Bouquin (2006, pp. 85-86), General Electric experimented with a kind of ABC during the 1960s. 7
The Activity-Based Costing Method: Development and Applications © 2009 The Icfai University Press. All Rights Reserved.
developments are based on the Strategic Management Accounting (SMA) stream.3 With the historical research of Johnson and Kaplan, we understand the context from which ABC arose. Looking for management accounting methods which could clarify the decision-making process, Johnson and Kaplan suggest, first, to analyze more deeply the organization’s activities and processes, and second, to link the strategic and the operational management together. These proposals announce the development of the Balanced Scorecard (Kaplan and Norton, 1996) and of a strategically-oriented ABC. This paper presents the ABC method showing that it belongs to the SMA movement since its early stages and then describes a global panorama of ABC applications. Subsequently, the paper examines more closely several ABC developments which emphasize on two factors—the widening of the analysis perimeter and the relevant level of details to analyze the costs.
The Strategic Management Accounting Approach: A Theoretical Foundation for the ABC Method Here, we want to show that the ABC developments are founded on the SMA stream. The conventional approach to management accounting (Johnson and Kaplan, 1987) discloses an opposition among the processes of strategic management, management control and operational control. There has been a growing interest in SMA4 since the early 1980s (Simmonds, 1981). In a firm, an SMA...
References: 1. Antos J and Brimson J A (1999), Driving Value Using Activity-Based Budgeting, John Wiley & Sons, New York.
20 The Icfai University Journal of Accounting Research, Vol. VIII, No. 1, 2009
2. Argyris Ch and Schön D A (1978), Organizational Learning, Readings, Addison-Wesley Publishing Company. 3. Bhimani A, Gosselin M, Ncube M and Okano H (2007), “Activity-Based Costing: How Far Have We Come Internationally?”, Cost Management, Vol. 21, No. 3, pp. 12-17. 4. Bouquin H (2006), Comptabilité de Gestion (Management Accounting), 4th Edition, Economica, Paris. 5. Brickley J A, Smith C and Zimmerman J (1997), Managerial Economics and Organizational Architecture, Irwin, Chicago. 6. Brimson J A (1998), “Feature Costing: Beyond ABC”, Journal of Cost Management, January-February, pp. 6-12. 7. Bromwich M (1990), “The Case for Strategic Management Accounting: The Role of Accounting Information for Strategy in Competitive Markets”, Accounting Organization and Society, Vol. 15, pp. 127-146. 8. Cokins G (2002), “Integrating Target Costing and ABC”, Journal of Cost Management, July-August, pp. 13-22. 9. Cooper R and Kaplan R S (1988), “Measure Costs Right: Make the Right Decisions”, Harvard Business Review, September-October, pp. 96-103. 10. Cooper R and Kaplan R S (1999), The Design of Cost Management Systems, Prentice Hall, New Jersey. 11. Cooper R and Slagmulder R (2004), “Interorganizational Cost Management and Relational Context”, Accounting, Organization and Society, Vol. 29, pp. 1-26. 12. Everaert P and Bruggeman W (2007), “Time-Driven Activity-Based Costing: Exploring the Underlying Model”, Cost Management, Vol. 21, No. 2, pp. 165-178. 13. Hamel G and Prahalad C K (1990), “The Core Competence of the Corporation”, Harvard Business Review, Vol. 68, pp. 79-92. 14. Horngren C T, Datar S M and Foster G (2005), Cost Accounting: A Managerial Emphasis, 12th Edition, Pearson Education, Upper Saddle River, New Jersey. 15. Horvath P, Gleich R and Schmidt S (1998), “Linking Target Costing to ABC at a US Automative Supplier”, Journal of Cost Management, Vol. 12, No. 2, pp. 16-24. 16. Jensen M C and Meckling W H (1992), “Specific and General Knowledge and Organizational Structure, Contract Economics”, in Jensen M C (1988) (Ed.), Foundations of Organizational Strategy, Harvard University Press. 17. Johnson H T and Kaplan R S (1987), Relevance Lost: The Rise and Fall of Management Accounting Systems, Harvard Business School Press, Boston. 18. Kaplan R S and Anderson S R (2004), “Time-Driven Activity-Based Costing”, Harvard Business Review, Vol. 82, pp. 131-138.
The Activity-Based Costing Method: Development and Applications 21
19. Kaplan R S and Anderson S R (2007), Time-Driven Activity-Based Costing: A Simpler and More Powerful Path to Higher Profits, Harvard Business School Press, Boston. 20. Kaplan R S and Norton D P (1996), The Balanced Scorecard: Translating Strategy into Actions, Harvard Business School Press, Boston. 21. Keys D E and van der Merwe A (2002), “The Case for RCA: Understanding Resource Interrelationships”, Strategic Finance, Vol. 83, No. 11, pp. 41-47. 22. Kuchta D and Troska M (2007), “Activity-Based Costing and Customer Profitability”, Cost Management, Vol. 21, No. 3, pp. 18-25. 23. La Villarmois O de and Levant Y (2004), “Georges Perrin and the GP Cost Calculation Method: The Story of a Failure”, Accounting, Business and Financial History, Vol. 14, No. 2, pp. 151-181. 24. Lebas M (1991), “Comptabilité asnalytique basée sur les activités, analyze et gestion des activités (Activity-Based Costing, Analysis and Management of the Activities)”, Revue Française de Comptabilité (French Accounting Review), Vol. 226, pp. 47-63. 25. Lebas M (1999), “Which ABC? Accounting Based on Causality Rather than ActivityBased Costing”, European Management Journal, Vol. 17, No. 5, pp. 501-511. 26. Mevellec P (2005), Les systèmes de coûts (The Costs Systems), Dunod, Paris. 27. Penrose E (1959), The Theory of the Growth of the Firm, Oxford University Press, UK. 28. Roslender R and Hart S J (2003), “In Search of Strategic Management Accounting: Theoretical and Field Study Perspectives”, Management Accounting Research, Vol. 14, pp. 255-279. 29. Shank J and Govindarajan V (1989), Strategic Cost Analysis: The Evolution from Managerial to Strategic Accounting, Burn Ridge Inc., Illinois. 30. Simmonds J (1981), “Strategic Management Accounting”, Management Accounting, April, pp. 26-29. 31. Tomkins C and Carr C (1996), “Reflections on the Papers on this Issue and a Commentary on the State of Strategic Management Accounting”, Management Accounting Research, Vol. 7, pp. 271-280. 32. Zimmerman J L (1997), Accounting for Decision Making and Control, 2nd Edition, McGraw-Hill, New York. Reference # 09J-2009-01-01-01
The Icfai University Journal of Accounting Research, Vol. VIII, No. 1, 2009
Please join StudyMode to read the full document