Research on Activity-Based Costing by gvl14091

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									      Activity-Based Costing

          Shannon Anderson
Jesse H. Jones Graduate School of Management
                Rice University
      Activity-Based Costing:
   A response to “irrelevance,”
a preamble to strategic alignment

          Shannon Anderson
Jesse H. Jones Graduate School of Management
                Rice University
   New Beginnings:
       Cost management in the new manufacturing setting
       Lessons from the field
       Articulation of the ABC model

   The Trajectory of ABC Research
       Investigating the economic model of ABC
       Implementing ABC
       Using ABC: Activity-based management
         Field Work and Cases:
 Accounting Lag: The Obsolescence of Cost
           Accounting Systems
                 (Kaplan, 1985)

“… to learn how firms are modifying their
  accounting and control systems to help
  them manage in the new manufacturing
  environment, I visited a select set of
  innovative firms.”
   One Company reorganized manufacturing to create a
                                      One cost pool
    smooth production flow, but…
       benefits from reorganization were impossible to quantify… the
        accounting system accumulated only total project costs… there
        was no way to compute productivity measures or unit costs for
        items being produced using the new manufacturing philosophy

   Two Companies implemented JIT and total quality
       But continued to use a standard costing system that allocated all
        costs based on often obsolete direct labor costs, even though
        direct labor represented less than 10 percent of total
        manufacturing cost.                         cost driver
“I had hoped to be able to document the incidence
   and value of innovative accounting and control
   systems for the new industrial competition…”

“I found that changes in accounting lag far behind
   changes in the real production phenomena they
   are supposed to represent.”
              Field Work and Cases
   Defining the Contours of Cost System Design that Bob is
                                          Did you know
                                                         ranked #8 in all time
       Mayers Tap (Cooper, 1984)                      cumulative case unit sales
       Seligram, Inc. (Turney and Ittner, 1988)         with 1.5 M units sold?

       Bridgeton Industries (Bost and Cooper, 1990)

   Identifying Activity-based Costing in Use
       Union Pacific (Kaplan, 1985)
       Schrader Bellows     (Cooper & Wiess, 1985)

       John Deere Component Works (March & Kaplan, 1987) [#3 most popular case]
       American Bank (Kallapur and Kaplan, 1987)
            New Beginnings:
 The Design of Cost Management Systems
             (Cooper and Kaplan, 1991)

“The previous academic approach
emphasized cost analysis for isolated, well-
specified decisions…

The new approach of this book emphasizes
principles of cost systems design.”
                Activity-based Costing

   Assign costs to ACTIVITIES that are associated with
      the production of particular products

      the delivery of particular services

   The COST DRIVERS used to assign costs reflect the
    underlying unit of variability of the cost --- costs often
    vary with activity level rather than production volume

   Costs often vary in a hierarchical fashion as compared to
    unit production volume:
         e.g., unit, batch, product, facility-sustaining
 Traditional vs. ABC Costing
                                      Some products use no special
               Overhead Costs: tooling and require no advanced
        e.g., Salaries, Utilities, Toolingengineering support…

 Overhead costs
                        = 1000%
 Direct Labor Costs

      Product A Cost per unit What does direct labor have to do
       Direct Material $ 20      with overhead costs in an
                               automated setting with diverse
       Direct Labor    $ 50             processes?
       Overhead          $500 ($50 x 1000%)
      Total             $ 570
Traditional vs. ABC Costing
                                                        Multiple, manageable
         Overhead Costs: e.g., Salaries, Utilities, Tooling activities

       Process A              Process A               Design Engineering
     Setup activity         Running Costs              Support Activities

   Proc A O/H costs        Proc A O/H costs      Eng’g O/H costs
   No. of Setups           No. of Mach. Hrs.  No. Eng’g changes

                                             Appropriate cost drivers:
                                             - variability: unit, batch, etc.
                                             - measurement: frequency,
                                                duration, direct charge
              Extensions & Refinements

   Assign costs to activities that are associated with new
    cost objects
       the operation of particular processes
       the support of particular customers
       the use of particular suppliers

   Time-driven ABC:
       to reduce the cost of system implementation and maintenance
       to reflect the cost of unused capacity

   Use cost accounting data to affect future costs rather
    than simply reflecting past costs… activity-based
             Field Work and Cases
   Beyond Products – e.g., costs of customers
       Kanthal (Kaplan, 1989) [Bob’s #1 most popular case]
       Cooperative Bank (Datar & Kaplan, 1995) [#4 most popular]
       Dakota Office Products (Kaplan, 2001)
       Owens and Minor (Narayanan & Brem, 2002)

   Beyond Costing – Activity-based Management
       Texas Instruments      (Ittner & Kaplan, 1988)

       Indianapolis City Services       (Kaplan, 1996) [#7 most popular]
        ABM: Using ABC for Performance
Manage costs
     Continuous Improvement (Kaizen)
     Radical Redesign of Products or Processes (Target
      costing, Business Process Re-engineering)

             - Reduce the usage of the cost drivers
             - Reduce the cost per unit of the driver

Set prices relative to competition and value
Eliminate unprofitable business
    Articulation of the ABC model
   One cost system isn’t enough (Kaplan, HBR 1988)
   Measure costs right: Make the right decisions       (Cooper and
    Kaplan, HBR 1988)

   Contribution margin analysis: No longer relevant/
    Strategic cost management: The New Paradigm (Kaplan,
    JMAR 1990)
   Profit priorities from activity-based costing (Cooper and Kaplan,
    HBR 1991)
   Activity-based systems: Measuring the costs of resource
    usage (Cooper and Kaplan, AH 1992)
The Influence of ABC on
 Accounting Research:

   Investigating the
   Economic Model
       Investigating the Economic Model
Cost drivers and the cost hierarchy: Empirical Research
      Manufacturing overhead cost driver analysis   (Foster & Gupta, 1990)

      Costs of product and process complexity (Banker et al. 1990)
      Simultaneous estimation of cost drivers (Datar et al. 1993)
      Are overhead costs strictly proportional to activity? Evidence
       from hospital service departments (Noreen & Soderstrom, 1994)
      Measuring the impact of product mix heterogeneity on
       manufacturing overhead cost (Anderson, 1995)
      An empirical analysis of manufacturing overhead cost drivers
       (Banker, Potter & Schroeder, 1995)
      The activity-based cost hierarchy, production policies, and firm
       profitability (Ittner, Larcker & Randall, 1997)
      A field study on the limitations of ABC when resources are
       provided on a joint and indivisible basis (Maher & Marais, 1998)
       Investigating the Economic Model
Cost drivers and the cost hierarchy: Theory Research

      Cost driver optimization in ABC   (Babad & Balachandran, 1993)

      A perspective on cost drivers (Dopuch, 1993)
      Aggregation, specification and measurement errors in product
       costing (Datar & Gupta, 1994)
      Product costing and pricing (Banker & Hughes, 1994)
      Allocations of sunk capacity costs and joint costs in a linear
       principal-agent model (Hemmer, 1996)
      On the efficiency of cost-based decision rules for capacity
       planning (Balachandran, et al. 1997)
      Activity-based costing systems and incremental costs             (Bromwich &
       Hong 1999)
       Investigating the Economic Model
Cost management with hierarchical cost structure and
  committed resources ≠ resource usage
      Strategic Cost Analysis: The evolution from managerial to
       strategic accounting (Shank & Govindarajan, 1989)
      Manufacturing configuration, capacity and mix decisions
       considering operational cost (Karmarkar & Kekre, 1987)
      Relevant costs, congestion and stochasticity in production
       environments (Banker, Datar & Kekre, 1988)
      Explaining plant-level differences in manufacturing overhead:
       structural and executional cost drivers in the world auto industry
       (Ittner & MacDuffie, 1995)
      Direct and indirect effects of product mix characteristics on
       capacity management decisions and operating performance
       (Anderson, 2001)
      Are selling, general, and administrative costs "sticky"?   (Anderson,
       Banker & Janakiraman, 2003)
      Predicting earnings using a model based on cost variability and
       cost stickiness (Banker & Chen, 2006)
The Influence of ABC on
 Accounting Research

  Implementing ABC
                         Implementing ABC
ABC Implementation as Organizational Change
     A Behavioral Model for Implementing Cost Management Systems
      (Shields & Young, 1989)
     Implementing an activity-based cost system (Cooper, 1990)
     Implementing New Knowledge: The Case of Activity-based
      Costing (Argyris & Kaplan, 1994)
     A Framework for assessing cost management system changes:
      The case of ABC implementation at General Motors, 1986-1993
      (Anderson, 1995)
     An empirical analysis of firms’ implementation experiences with
      activity-based costing (Shields, 1995)
     Towards explaining ABC failure: accounting and control in a
      decentralized organization (Malmi, 1997)
     Cost and Effect: Using integrated cost systems to drive
      profitability and performance (Kaplan and Cooper, 1998)
     Product diversity and costing system design choice: field study
      evidence (Abernethy et al. 2001)
                  Implementing ABC
ABC Implementation: an International Phenomena

     A Survey of ABC in the U.K.’s largest companies   (Innes & Mitchell,
     Diffusion and accounting: The case of ABC in Norway       (Bjornenak,
     National culture and ABC systems (Brewer, 1998)
     ABC costing diffusion across organizations: An exploratory
      empirical analysis of Finnish firms (Malmi, 1999)
     ABC in the U.K.’s largest companies: A comparison of the 1994
      and 1999 survey results (Innes et al., 2000)
     Note on a New Zealand replication of the Innes et al. U.K. ABC
      survey (Cotton et al., 2003)
     Managers divided: Implementing ABC in a Portuguese
      telecommunications company (Major & Hopper, 2005)
                       Implementing ABC
Evaluating the Impact of ABC Implementation
Case and Field studies
     The impact of contextual and process factors on the evaluation

      of activity based costing systems (Anderson & Young, 1999)
     Factors influencing the performance of activity based costing

      teams (Anderson, Hesford & Young, 2002)
Large sample: surveys and archival financial data
     Measuring the success of activity-based cost management and

      its determinants (Foster & Swenson 1997)
     The association between activity-based costing and

      manufacturing performance (Ittner, Lanen & Larcker, 2002)
     The impact of ABC techniques on firm performance (Kennedy &
       Affleck-Graves, 2001)
      The association between ABC and improvement in financial
       performance (Cagwin & Bouwman, 2002)
The Influence of ABC on
 Accounting Research

Using ABC in decision-making:
 Activity Based Management
     Using ABC in decision-making: ABM
   Implementing Activity-based Cost Management: Moving from
    Analysis to Action (Cooper, Kaplan, Maisel, Morrissey & Oehm, 1992)
   Flexible budgeting in an ABC Framework (Kaplan, 1994)
   New Roles for Management Accountants (Kaplan, 1995)
   Cost and Effect: Using integrated cost systems to drive profitability
    and performance (Kaplan & Cooper, 1998)
   Measuring and managing customer profitability (Kaplan & Narayanan, 2001)
   The incidence, perceived merit and antecedents of customer
    accounting (Guilding & McManus, 2002)
   The value of ABC in competitive pricing decisions (Cardinaels et al., 2004)
   Interorganizational cost management and relational context (Cooper &
    Slagmulder, 2004)
   The adoption of total cost of ownership for sourcing decisions (Wouters
    et al., 2005)
     Using ABC in decision-making: ABM
Cognitive Effects of ABC on Decision-making
   An experimental investigation of the effect of cost information and
    feedback on product cost decisions (Gupta & King, 1997)
   Fairness, Ethics and the effect of management accounting on
    transactions costs (Luft, 1997)
   The effects of alternative types of feedback on product-related
    decision performance (Briers et al. 1999)
   Cost knowledge and cost-based judgment performance (Dearman &
    Shields, 2001)
   Avoiding accounting fixation: Determinants of cognitive adaptation
    to differences in accounting method (Shields, 2005)
    Current Research Issues in ABC and
             Cost Management
   Economics of modern production (and service)
       Increased infrastructure costs
       Cost behavior (e.g., “stickiness”)
       Interorganizational (boundary of the firm) cost
        management: transaction costs, trust and intangible
       Risk management: managing uncertainty and
        volatility of costs
   Managerial Behavior
       Cognitive bias and other behavioral influences on
        cost management decisions
       Agency issues in cost management
“I had hoped to be able to document the incidence and value of
    innovative accounting and control systems …”
“I found that changes in accounting lag far behind changes in the real
    production phenomena they are supposed to represent.”

  “Effective managerial accounting systems must
       reflect the value-creating activities of
    companies: in operations, in marketing and
         sales, and in product and process
               development…” (Kaplan, 1985)

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