ACTIVITY BASED COSTING (ABC

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Historical Development
Activity-based costing (ABC) is a costing approach that assigns resource costs to cost objects such as products, services, or customers based on activities performed for the cost objects. The premise of this costing approach is that a firm’s products or services are the results of activities and activities use resources which incur costs. Costs of resources are assigned to activities based on the activities that use or consume resources (resource consumption drivers), and costs of activities are assigned to cost objects based on activities performed for the cost objects (activity consumption drivers). ABC recognizes the causal or direct relationships between resource costs, cost drivers, activities, and cost objects in assigning costs to activities and then to cost objects. ABC assigns factory overhead costs to cost objects such as products or services by identifying the resources and activities as well as their costs and amounts needed to produce output. Using resource consumption cost drivers, a firm determines the resource costs consumed by activities or activity centers (activity cost pools) and calculates the cost of a unit of activity. The firm then assigns the cost of an activity to products or services by multiplying the cost of each activity by the amount of the activity consumed by each of the cost objects. Traditionally cost accountants had arbitrarily added a broad percentage of expenses into the indirect cost. In addition, activities include actions that are performed both by people and machine. However, as the percentages of indirect or overhead cots rose, this technique became increasingly inaccurate, because indirect costs were not caused equally by all products. Consequently, when multiple products share common costs, there is a danger of one product subsidizing another. Instead of using broad arbitrary percentages to allocate costs, ABC seeks to identify cause and effect relationships to objectively assign costs. Once costs of the activities have been identified, the cost of each activity is attributed to each product to the extent that the product uses the activity. In this way ABC often identifies areas of high overhead costs per unit and so directs attention to finding ways to reduce the costs or to charge more for costly products.

Steps in Developing Activity Based Costing System:
Developing an activity-based costing system entails three steps: (1) identifying resource costs and activities, (2) assigning resource costs to activities, and (3) assigning activity costs to cost objects. Step 1: Identify Resource Costs and Activities The first step in designing an ABC system is to conduct an activity analysis to identify the resource costs and activities of the firm. Most firms record resource costs in specific

utilities. placing purchase orders. • . Examples are setting up machines. conducting inspections by batch etc. • A product-level activity supports the production of a specific product or services. and receiving. and engaging in engineering changes to modify products. a firm may use a single factory supplies account for all supplies in its operations that include several manufacturing operations. purchasing. incurring factory property taxes etc. warehousing. managing the plant. Costs to complete a purchasing order may be spread over several accounts including accounts for warehousing. The required activity varies in proportion with the quantity of the cost object. observations. special effort most likely will be needed to determine appropriate resource costs for activity-based costing because generally several different resource costs may be recorded in a single account or the costs for an activity may be recorded in several accounts.accounts in the accounting system. Through activity analyses a firm identifies the work it performs to carry out its operations. Because activities drive the cost of resources used in operations. equipment. For example. performing maintenance of general purpose machines. batches. Examples of these accounts include supplies. direct labor-hours. A unit-level activity is volume-based. These activities are not caused by products or customer service needs and cannot be traced to individual units. or interviews of key personnel. buildings. and inspecting every unit. Activity analyses include gathering data from existing documents and records. a firm classifies all activities according to the way in which the activities consume resources. as well as collecting additional data using questionnaires. Step 2: Assign Resource Costs to Activities Activity-based costing uses resource consumption cost drivers to assign resource costs to activities. These activities are also called as business or infrastructure sustaining activities. A unit-level activity is performed on each individual unit of product or service of the firm. • A facility-level activity supports operations in general. Levels of Activities To identify resource costs for various activities. or products. furniture and fixtures. inserting a component. materials handling. purchasing. • A batch-level activity is performed for each batch or group of units of products or services. and salaries and benefits. office expenses. scheduling production. A firm incurs a batch-level activity for each batch or group of units of products or services scheduled to be processed together. administering parts required for products. Examples of unit-level activities include direct materials. However. rather than for each individual unit of the cost object. Examples include providing security and safety. Examples of product-sustaining activities include designing products. a firm should choose resource consumption cost drivers based on cause-and-effect relationships.

Typical resource consumption cost drivers include the number of (1) labor hours for labor intensive activities. leading to more accurate product and customer profitability measurements and to better-informed strategic decisions about pricing. and setups and manufacturing cycle time. payments. and (6) square feet for general maintenance and cleaning activities. however. Among the major benefits of activity-based costing that many firms have experienced are: Better profitability measures: ABC provides more accurate and informative product costs. many firms adopt activity-based costing to reduce distortions in product costs often found in their volume-based costing systems. ABC clearly shows the effect of differences in activities and changes in products or services on costs. or business units. outputs also can include customers. Benefits of Activity Based Costing: Since the 1980s an increasing number of firms have adopted the activity-based costing system. Direct tracing requires measuring the actual usage of resources by activities. . (5) machine-hours for machine repair and maintenance. Benefits Initially. Better decision making: ABC provides more accurate measurements of activity-driving costs. Step 3: Assign Activity Costs to Cost Objects The final step is to assign costs of activities or activity cost pools to cost objects based on the appropriate activity consumption cost drivers. projects. parts stored. and market segments. Process improvement: The ABC system provides the information to identify areas where process improvement is needed. direct labor-hours. product lines. inspection reports or hours. and fostering value enhancement projects. These firms adopt ABC because of the benefits it offers. Outputs are the cost objects for which firms or organizations perform activities. generate product or service costs bearing little or no relationship to activities and resources consumed in operations. (3) setups for batchrelated activities. helping managers to improve product and process value by making better product design decisions. machine-hours. receiving reports. Typical outputs for a cost system are products and services. department managers and supervisors need to estimate the amount or percentage of time (or effort) employees spend on each identified activity. (2) employees for payroll-related activities. (4) moves for materials-handling activities. better customer support decisions. Typical activity consumption cost drivers are purchase orders. Firms use activity consumption cost drivers to assign activity costs to cost objects. Volume-based costing systems. The cost of the resources can be assigned to activities by direct tracing or estimation. Activity cost drivers should explain why the cost of a cost object goes up or down. When direct tracing is not available.

and effects of ABC system maturity. or by differences associated with the maturing process. but a need for companies that want to excel. The first approach would make possible a more thorough investigation of the influence of firm-specific contextual variables on dispersed implementation sites. For recent implementations. Also separating the sample into mature and recent implementations of ABC leads to significantly different models.For mature ABC systems. Mark Young In the face of ABC implementation failures. 1. The research indicates that models of ABC system evaluation vary with time and our inability to distinguish between several explanations for this. Finally. Although the coefficients of particular variables differ somewhat between firms and respondents. however. by real unmeasured differences between sites that self-selected into the early implementation group. S. moreover the differences are concentrated in the portion of the model related to use of ABC data. Improving the implementation process may ease the indirect effect of the contextual environment acting through the implementation process. THE IMPACT OF CONTEXTUAL AND PROCESS FACTORS ON THE EVALUATION OF ACTIVITY-BASED COSTING SYSTEMS Shannon W. and efficiently and effectively increase their Sustainable Competitive Advantage (SCA). . Specifically. the research design did not permit us to distinguish whether differences are caused by a change in respondents’ uncertainty about the costs and benefits of ABC implementation. two opportunities exist for the researcher who can enlarge the research sample by either including more firms while retaining multiple sites at each firm. removing the constraint that the model coefficients are identical across sub-samples improves model fit more than could be expected by chance.From the above discussion it should be evident that not only is ABC useful and powerful to any organization. use depends on management support and the reward environment. Although ABC systems that are used for cost reduction are likely to be viewed as accurate. it will not affect the direct association between the contextual environment and evaluations of the ABC system. An experimental research approach is only able to disentangle these effects. The second approach would allow to disentangle the effects of role involvement in the ABC project and the evaluator’s level in the organizational hierarchy. In many cases the impediment may be the contextual environment. the attainment of accuracy is not a su fficient condition to ensure use. use is more closely tied to the ABC development team. practitioners have focused on improving the process by which ABC is implemented. or by including a broader cross-section of employees at each site. Anderson. Another contribution of the paper is investigation of three forms of model instability: firm effects. respondent effects.

and to consolidate tasks in providing services and conducting business. and financial and estate planning. As an example. Often.2. more cost-effective approach to providing services. Mehmet C. most demand deposit accounts are priced and measured based on monthly activity and usage. and payment applications. to seek efficiencies. Similarly. and returns on assets and equity.3 ABC also forces a company to consider its activities. The customer benefits from a higher level of customer service. ABC is a natural fit for the banking industry because there are easily identifiable cost drivers that can be measured and priced per event. . banks and bank management have moved aggressively and often blindly into new market areas such as insurance. In attempts to appease shareholders and stock analysts with continued record growth in earnings. and the bank benefits from a streamlined. Some key benefits of the ABC approach are to change the way an organization thinks about its costing system and to revitalize the bank's penetration strategies and processes. and improvements in efficiency. In light of the wide changes in bank product mix and corporate strategies. new products are enormously expensive to set up. A business is charged a certain cost for each check that is written and for each item that is deposited into the business checking account. research was conducted on a sample of commercial loans held at Indiana Bank (name changed for confidentiality purposes) to compare the reported profit from the traditional income model to the calculated profit from an activity-based costing model. Considering this action for the banking industry immediately shows that this is a win-win scenario in all circumstances. account maintenance requests. The bank's motive is to find other products that impact earnings but require fewer resources. IMPLEMENTING ACTIVITY-BASED COSTING (ABC) TO MEASURE COMMERCIAL LOAN PROFITABILITY Kocakulah. thus returning to core profitable activities and departing from becoming caught up in the industry trend of expand or perish. and they may be either unprofitable or may not yield to senior management's long run earnings goals. the concept can be applied to commercial lending transaction activities from the initial loan review and setup to the myriad of advance requests. Diekmann. brokerage. The thought process behind this comparison centered on the Bank's better understanding of the true costs of its core operations. Douglas The banking industry is one that has experienced a great amount of change in the last 20 years.

In the case of planning. Furthermore. Green accounting or environmental accounting is interlinked with two basic functions of management accounting: planning and data collection. THE ADOPTION OF ACTIVITY-BASED COSTING IN THAILAND Wiriya Chongruksut ‘In today’s world of automation and intense competition. 4. such as administrative costs. which includes activities. the structured interviews with a selfselecting sub-sample were conducted to supplement the survey data. reporting. generating a 34. 101 questionnaires were returned. They also believed that it had played a part in helping their firms to survive in the changed environment on the grounds that they perceived many key areas of ABC benefits that supported their firms to be able to cope with the crisis. products and customers (Krumwiede and Roth 1997). ABC had received substantial interest from Thai firms and seemed to be considered one of their alternatives in this turbulent time.59% response rate. This study was conducted to examine the relationship between the adoption of ABC by firms based in Thailand and the Thai economic crisis (1997) through theoretical models of organisational learning and the relationship between the implementation of ABC and the philosophy of organisational learning. green accounting uses prevision analysis to measure future impacts on environment. Thus. much literature claims huge benefits from ABC. assistance in cost reduction. encouragement of commitment to quality and continual improvement and increase in profitability. Most user firms perceived that ABC was very important and necessary in the current environment. cost control improvement. ABC is a mainstream topic in the management curricula at universities and a management innovation for Thailand at the current time. An activity-based costing (ABC) system was developed and was paid extensive attention because it does not allocate only manufacturing costs to products like the traditional cost systems. surpassing those of the traditional cost systems. increase in competitive capability. but also assigns other costs. better performance measurement. The quantitative data were processed using a SPSS program and the qualitative data gathered from the interviews were analysed using content analysis. A mail questionnaire survey was considered an appropriate method for this study. marketing costs and so on. The benefits claimed were more accurate product/service costs. 12 agreed to be interviewed. The sample was selected from firms listed on the Stock Exchange of Thailand (SET) that operate in the Bangkok region (292 firms). such . Out of 101 questionnaire respondents. to cost objects. more accurate cost allocations are needed’ (Krumwiede and Roth 1997).3. IMPLEMENTATION OPPORTUNITIES OF GREEN ACCOUNTING FOR ACTIVITY-BASED COSTING (ABC) IN ROMANIA Sorinel Capuneanu Green accounting observes the specific principles of the Activity-Based Costing method.

teaching. Observing the basic principles of Activity-Based Costing method (ABC). The application of the ABC method principles is recommended for prompting environment improvement results. In the second case. Green accounting which observes ABC method principles helps measure saving costs as a result of reducing raw materials cost during the recycling or reusing period. McPhee. many radiology department managers rely on information from a cost system that was designed for a simpler technologic age when competition was local rather than global. and research and to . green accounting completes the terminology and dictionary of terms used by the ABC method. ABC or ABM method provide that understanding approach and those target areas for considering the opportunities of designing costs of the main environmental activities. La and Robert P. To develop a methodology for an activity-based cost (ABC) analysis in an academic radiology department. Today. ACTIVITY-BASED COST ANALYSIS: A METHOD OF ANALYZING THE FINANCIAL AND OPERATING PERFORMANCE OF ACADEMIC RADIOLOGY DEPARTMENTS Mervyn D. As a consequence. The traditional subsidization of research and teaching by clinical profits is no longer sustainable because these profits are disappearing. Hawes. as well as the end of a product’s useful life cycle. The aim of green accounting is the acknowledgement and attempt to identify ways of diminishing the negative effects of activities and systems on the environment. such as the design terms of de-assembling a product. and when speed. New management concepts such as mission-based management and balanced scorecard management necessitate a new level of accounting sophistication. far more precise cost estimates are required to bid successfully on managed care contracts. Managers of academic departments must determine the true costs of their teaching and research missions and the effect the pursuit of these missions has on the competitiveness of the clinical enterprise. teaching. Gary D. Hutchins. Cohen. 5. William D. when products and services were standard rather than customized. quality. The environmental cost design represents the concept that refers to the design of an environmental target costoriented product or constraints. Fallon In the face of declining collections per relative value unit (RVU). In addition. The usefulness and advantages of activity-based costing method can be revealed by green accounting. Donald R. Recycling design refers to the product design concept that emphasizes the facility of de-assembling and recycling. environmental data collection and its reporting to management is based on an efficient analysis of data for substantiating decisions. and performance were less critical for success. to test the hypothesis that the business of academic radiology can be separated into three distinct businesses clinical activity.as target costing or life cycle method. and clinical activity. academic radiology departments must understand in much greater detail the relative costs and profits associated with their lines of business—research. Michael B.

and clinical reads (23%) are the single largest departmental cost element. A MATHEMATICAL PROGRAMMING APPROACH FOR SUPPLIER SELECTION USING ACTIVITY BASED COSTING Zeger Degraeve and Filip Roodhooft Vendor selection is an important problem in today's competitive environment. research. 6. This analysis identifies opportunities for improved quality of service. multi-period approach for vendor selection based on activity and cost driver information. She concludes that Activity Based Costing represents an important opportunity for purchasing. Activity Based Costing permits to analyze activities and determine cost drivers for the different activities defined. and clinical activity. Additional internal costs can be defined on these levels. In this research we develop a mathematical programming model for this purpose using an Activity Based Costing approach. There exists an important literature dealing with possible applications of the system· such as customer profitability analysis. In this approach we recognize a hierarchical structure in activities with respect to the purchasing decision: (1) the supplier level.determine the effect of the current teaching paradigm on clinical productivity. Key findings included the following: Faculty spends 72% of time in clinical activities. cost management and pricing decisions. the application of Activity Based Costing ideas to the vendor selection problem has received little attention. Moreover. Ellram (1995) studied the total cost of ownership approach based on 11 case studies. and clinical—and provide a detailed understanding of the cost structure of each. ABC costing provides a successful understanding of the relative costs of each of the businesses of teaching. They assign additional purchasing costs to products. While suppliers are an important part of the total value chain analysis. multi-item. The system computes the total cost of ownership. thereby increasing the objectivity in the selection process and giving the opportunity for different kinds of sensitivity analysis. (2) the order level and (3) the unit level activities. ABC analysis can separate academic radiology into three businesses teaching. Critchfield and Castellano (1992) discuss the use of the system in a purchasing department. The analysis of costs throughout the extended value chain of a company is an important topic in today's management accounting literature (Shank and Govindarajan 1992). productivity. research is the most expensive service per direct activity hour. performance management. It also provided the departmental costs of performing the separate activities typical of each business. Decisions involve the selection of vendors and the determination of order quantities to be placed with the selected vendors. Roehm. but not to suppliers. . a multi-vendor. and cost within each business. it allows the analyst to objectively evaluate alternative purchasing policies due to the underlying analytic and rigourous decision model. She also states that the supplier selection decision is one of the three major uses of these models. Ellram and Siferd (1993) and Benett (1996) give an overview of possible activities and cost drivers that can be used to calculate supplementary internal costs caused by the suppliers. research. Management accounting is a system that provides information to decision makers inside the company in order to make better decisions.

When the commercial managers were asked whether the difficulties in obtaining accurate and punctual data affected their use of ABC. When making investment decisions they just used the latest ABC data. Portugal Telecom (PT). The most proactive interests in the process of adopting a new cost accounting system were those of top directors and commercial managers. Pressures for greater efficiency came from several constituencies. provoking complaints by commercial managers of the lateness of cost data to support pricing strategies and investment decisions. Replacing Marconi’s MAS by an ABC system resulted from the convergence of first. . there were concerns from public and society (including Marconi’s new competitors) that Marconi/PT might not base interconnection prices on accurate and reasonable costs when interconnecting new operators to their telecommunications network. These reasons were the most decisive ones. Adopting apparently sophisticated MAS. they argued that ABC provided more accurate cost information than Marconi’s previous MAS. cost accounting demands made by the regulator. second. This was because data was needed to support investment decisions in cable submarines and to support other commercial decisions. such as ABC could enable Marconi to demonstrate that they were improving efficiency and competitiveness. though they were critical of ABC providing delayed data. following the liberalisation of the Portuguese and European telecommunications industry. They seemed unperturbed by this situation. When establishing prices they usually took the latest available ABC cost data. Marconi’s ABC system did not generate cost data on time. particularly the Portuguese telecommunications regulator (ICP). EXTENDING NEW INSTITUTIONAL THEORY: A CASE STUDY OF ACTIVITY-BASED COSTING IN THE PORTUGUESE TELECOMMUNICATIONS INDUSTRY Maria Major and Trevor Hopper a Portuguese telecommunications company Marconi .adopted an activity-based costing system (ABC) in 2000. From its beginning. From the beginning of the 1990’s. the information demands of managers following market liberalization. and its parent company.7. ABC gave more and better costing information to Marconi’s managers. together with information on the pricing strategies of competitors. However. As result of this the management accountants frequently received inputs into the ABC system late. the company’s managers. and third. the European Union (EU). PT and ICP were also very important factors in choosing the cost accounting model format. Marconi came under considerable pressure to improve its management and cost accounting system (MAS). stock exchange requirements following privatisation. Apart from this pressure.

Easy computed ratios explain their wide appeal although interpretation is problematic. An ABC system was formulated separately for each of these main operations. Cheng built a method to measure inefficient companies in shipping industry through identifying the waste and causes.The supply chain of the forest industry has increasingly been adjusted to the customer’s needs for precision and quality. forwarded. A good ratio analysis management is critical for successful business. However. especially when two or more ratios provide conflicting signals. remarkable changes have occurred in the timber procurement that is based on mechanised cut-to-length (CTL) harvesting. Heikki Korpunen and Jori Uusitalo In the last ten to fifteen years. Costs were traced to individual stands and to timber assortment lots from a stand. . Supplying timber is divided into three main processes: cutting. This has changed the operative environment both in the forest and on the roads. during the late 1970s and early 1980s. As the total removal of timber is increasingly divided into more log assortments. especially when two or more ratios provide conflicting signals. The cost object of the system is thus a lot of timber that makes up one assortment that has been cut. this has thus increased the harvesting costs. their interpretation is problematic. forest transport. the methodology of ratio analysis was considered suspect. based on the cut-to-length (CTL) method. APPLYING THE ACTIVITY-BASED COSTING TO CUTTO-LENGTH TIMBER HARVESTING AND TRUCKING Tuomo Nurminen. Application of the ABC principle to timber harvesting and trucking was found to be relatively easy. the extra assortments have made harvesting work more difficult and affected the productivity of both cutting and forest transport. the lot size of each assortment decreases and the time consumed in sorting the logs increases. in which the logistic costs are assigned to timber assortments and lots. shipping industry needs much resource and cost-down to maintain operation efficiency. which in part explains their wide appeal. 9. especially by the advocates of the strong form of the efficient market hypothesis. FINANCIAL STATEMENT ANALYSIS AND ACTIVITYBASED COSTING ANALYSIS FOR SHIPPING INDUSTRY: A DATA ENVELOPMENT ANALYSIS APPROACH Wen-Cheng LIN and Chin-Feng LIU Ratio analysis is a commonly used analytical tool for verifying the performance of a firm. The method developed gives estimates that are realistic to actual figures paid to contractors. The foremost use for this type of costing method should be as a tool to calculate the efficiency of an individual activity or of the whole logistic system. An activity-based cost (ABC) management system is introduced for timber harvesting and long-distance transport. While ratios are easy to compute. and long-distance transportation.8. and transported from the forest to the mill. However. In this respect.

there is a need to combine and integrate two separated but widely used models for measuring costs and efficiency performance. For example. an organization’s cost/benefit analysis is often dominated by unknown risk factors making an adoption decision difficult. In its most recent iteration. ABC emerged as a tool for profit improvement and ABM was adapted for use in the extended value chain and multiple industries. 10. unpublicized period of steady growth in adoption rates and functionality. quality management and control. predictive cost measurement. Early in the cycle there is little practical knowledge about the technology. Turney The hype cycle is a graphic representation of the maturity. ACTIVITY-BASED COSTING AN EMERGING FOUNDATION FOR PERFORMANCE MANAGEMENT Peter B. financial statement analysis and ABC analysis. Another lesson is that the developments of ABC are sometimes misunderstood. ABC is a multi-faceted algorithm and database of financial and organizational information. The results show that a better operation management of the shipping industry. Therefore. It has now reached maturity and acceptance in the marketplace for management ideas and methods. process design and improvement. Intense interest at the beginning of its life gave way to criticism and lowered visibility. As knowledge accumulates over the cycle risks reduction occurs facilitating more informed judgments regarding adoption. An overall operation management without ABC cannot reveal specific activity areas. including product planning and design.Activity-Based Costing (ABC) is an information system developed in the 1980s to overcome some limitations in traditional cost accounting and enhance its usefulness to operation management. and enhanced for resource and capacity planning. It supports performance management systems where business users can access ABC-derived decision relevant information from their desk top. Data envelopment analysis (DEA) is a handful method for evaluating DMU’s activities. and work force management. capacity planning. could achieve cost reduction and improve efficiency while integrated DEA. and this may lead to confusion and rejection. adoption and business application of a technology.B. It reflects differences in human attitudes to the technology as knowledge increases and risk decreases over its development and deployment cycle1. Thus. resource planning. ABC’s life cycle is marked by changing attitudes and increasing diffusion into the marketplace over time. Understanding the cost-effectiveness of today’s ABC is important to assessing its value as a strategic tool in today’s hyper competitive and volatile global economy. performance measurement and other analyses. It will result in a different answer if the focus is on ABC as a process-based resource and capacity planning tool. Like most technologies. ABC evolved greatly over more than two decades. One lesson is that ABC is an integrated family of analytic costing methods. assessing the value of ABC in lean accounting will result in one answer if the assessment focuses on the first generation ABC costing method. Evolving from early experiments in costing. followed by a longer. A single ABC model can support historical cost measurement. Assessing yesterday’s ABC against today’s .

Cost Accounting Management-International (CAM-I) defines ABM as `a discipline that focuses on the management of activities as the route to improving the value received by the customer and the profit achieved by providing this value’. comfort. activity analysis and performance measurements. safety and fuel consumption of today’s automobile based on a study of the Model T Ford. This discipline includes cost drivers analysis. and (iii) increases occur in the diversity and complexity of individual orders. R. and the difficulty of maintaining and updating the model as (i) processes and resource spending change. Rather. it is a process of relentless and continuous improvement of all aspects of a business.requirements is akin to assessing the power. Mcneil and D. Anderson The traditional ABC model has been difficult for many organizations to implement because of the high costs incurred to interview and survey people for the initial ABC model. The analysis of activities to identify valueadded and non-value-added activities and benchmarking at the activity level direct improvement efforts in the right direction. ABM draws on activity-based costing (ABC) as its major source of information (Berliner and Brimson 1988). drive or support improvement e€ orts. It is important to realize that managing activities is not a custodial task. 11. A time-driven ABC model: . Time-driven ABC requires estimates of only two parameters: (1) the unit cost of supplying capacity and (2) the time required to perform a transaction or an activity. Gunasekaran. channels and customers. ABM makes this cost and operational information useful by providing a value analysis. and hence to improve the decisionmaking processes. The costing at part level or subassembly level helps the management in a make or buy decision. The goals of ABC can be achieved by managing the activities. Singh The analysis and cost of activities provide financial and non-financial information which is the basis for activity based management (ABM). ABC systems produce a large amount of information that is used by the ABM. handling. This involves a continual search for opportunities to improve which in turn involves a careful and methodical study of activities (Kaplan 1984). TIME-DRIVEN ACTIVITY-BASED COSTING Robert S. cost drivers and performance measures to initiate. ACTIVITY-BASED MANAGEMENT IN A SMALL COMPANY: A CASE STUDY A. Management practices and methods have been changed over the last decade. the use of subjective and costly-to-validate time allocations. (ii) new activities are added. and organizations are moving from managing vertically to managing horizontally. ABC provides accurate cost information and ABM uses this information to initiate improvements. environmental impact. Activitybased costing and activity-based management provide cost and operating information that mirror the horizontal view. Kaplan and Steven R. 12.

average and complex orders − defined for each activity. there still is no significant body of empirical evidence to validate the alleged benefits of ABC (Shim and Stagliano 1997. and resource costs can be data fed from transactional ERP and CRM systems can be validated by direct observation of the model’s estimates of unit times can scale easily to handle millions of transactions while still delivering fast processing times and real-time reporting explicitly incorporates resource capacity and highlights unused resource capacity for management action exploits time equations that incorporate variation in orders and customer behavior without expanding model complexity. Despite managers’ insistence that management accounting systems pass the cost-benefit test. Examples of duration drivers are setup hours. Empirical research is needed to document the (financial) consequences of ABC implementation (McGowan 1998).058 internal auditors. Turney 1992. Although ABC has found rapid and wide acceptance. order variety. enjoyed rapid and significant profit improvements. so cost system designers have typically used transaction drivers whenever they reasonably approximate resource demands by each occurrence of an activity. ABC information is now also widely used to assess continuous improvement and to monitor process performance. of course. The resource costs then have to be assigned to the three types of order-handling activities. which estimate the time required to perform the task. In addition. 13. The heterogeneity in transactions can be handled in two ways by the ABC system. The approach is simple to adopt and companies that have implemented the approach.• • • • • • • can be estimated and installed quickly is easily updated to reflect changes in processes. into say handling a simple order. While duration drivers are generally more accurate than transaction drivers. material handling time. the cost system can use duration drivers. One is to expand the number of activities. Ray and Gupta 1992). and a transactions driver − number of simple. Confirmatory factor analysis and structuralequations modeling using LISREL8 (Joreskog and Sorbom 1993) are used to test a model hypothesizing the conditions under which there is a positive association between (time- . Alternatively. regarding the efficacy of ABC (McGowan and Klammer 1997). claimed to be knowledgeable and unbiased in the assessment of cost systems (Tanju and Helmi 1991. Cooper and Kaplan 1991). an average order. The research instrument is a cross-sectional mail survey of 1. as Kaplan (1990) predicted. and. they are also more expensive to measure. however.THE ASSOCIATION BETWEEN ACTIVITY-BASED COSTING AND IMPROVEMENT IN FINANCIAL PERFORMANCE Douglass Cagwin Activity-Based Costingi (ABC) has been promoted and adopted as a basis for making strategic decisions and for improving profit performance (Kaplan and Norton 1992. and a complex order. direct labor hours and machine hours. there is significant diversity of opinions. McGowan and Klammer 1997).

Thereafter. Activity-Based Costing depends on the analysis of the activities participating in an organization. Thus. Thus. the Public Sector aims at the continuous improvement of quality of the provided services. can resolve all the deficiencies of Public Sector. This research can be used as a pilot in any attempt of implementing Activity-Based Costing in Public Sector. with all the organized divisions and departments. the resources of each activity or function (a number of activities). for the decision making.impacted) use of ABC and change in financial performance. but also analyses all the elements regarding the time. In addition. the advantages of this method were pointed and then. this study tests the association between improvement in financial performance and previously used measures of ABC efficacy. supposing that these activities create-consume cost in order for the products or services to be produced. when implemented in complex and diverse firms.. in order to obtain the cost information needed. The use of this method with the cooperation of new technologies and new methods of management. the way. TQM.g. 14. At first. so as citizens and companies will be better served. Control is provided for the moderating effects of concurrent use of other strategic management initiatives (e. ACTIVITY-BASED COSTING IN THE PUBLIC SECTOR Athanasios Vazakidis. the processes of activitybased costing and whether this costing method can be applied in the Public Sector. and when there are limited numbers of intracompany transactions. and under what conditions the use of ABC is associated with improved financial performance. Results show that there indeed is a positive association between ABC and improvement in ROI when ABC is used concurrently with other strategic initiatives. as suggested by Foster and Swenson (1997). extent of ABC usage. follow the application in a specific Department of the prefecture where the results were delivered to the Administration of department under review. detailed information with regard to the cost of services is essential along with capable management to take advantage of this information. and enabling conditions identified by prior research. In addition. Ioannis Karagiannis and Anthi Tsialta In the modern economic environment. the new method of cost accounting is analyzed as mentioned in the international bibliography. It refers to the structure of a Greek Prefecture. Conclusion: Having analyzed the department of the prefecture. Confirmatory factor analysis and structural equation modeling are used to investigate if. Internal auditors furnish information regarding company financial performance. where the need for precise cost estimating information increases continuously. The study discusses the basic beginnings. the management can depend on the results to comment on the study done and decide on future plans. when used in environments where costs are relatively important. and enabling conditions that have been identified in the literature as affecting ABC efficacy. . JIT). measures of success of ABC used in prior research appear to be predictors of improvement in financial performance. this method not only notes the activities.

Despite these changes. the frequent attachment of nonproduction overheads to output in proportion to their production cost remains a widely used unitization method. organization support. This study investigates the status of ABC adoption among manufacturing organizations in Malaysia. The factors that influence ABC adoption are decision usefulness of accounting information. In addition. For instance. ABC has also been studied from various perspectives for quite some time in many countries. Many organizations still use the traditional cost accounting methods in dealing with overhead costs. and the factors influencing its adoption. practitioners. Unfortunately. The study found that ABC adoption in Malaysia is at infancy stage. structure of product cost in many contemporary businesses had changed substantially with production and non-production overhead costs growing in relative size and importance. Both of these bases relate fairly closely to production volume and their use therefore rests on the assumption that overhead incurrence is output driven. as overhead incurrence may often bear no close relationship to their production cost. organizations encounter various challenges that require them to adapt effectively in order to remain competitive. During that period. Since then ABC has gained its popularity and has received substantial attention from various parties including the academicians. on the other hand. The validity of this practice is questionable. with 36% adoption rate. The questionnaires were directed to the accountants or heads of accounts of selected manufacturing organizations. . and internal measures of performance. In the 1980’s much criticisms were raised regarding the ability of traditional cost accounting to provide relevant. FACTORS INFLUENCING ACTIVITY BASED COSTING (ABC) ADOPTION IN MANUFACTURING INDUSTRY Ruhanita Maelah and Daing Nasir Ibrahim Today’s business environment. and accurate information to the management. traditional accounting system has remained unchanged throughout the period. had shrunk dramatically due to increased automation. Direct labor. Mail survey questionnaires were distributed to manufacturing organizations throughout the country using purposive judgment sampling. In traditional cost accounting system. direct labor and machine hours have persisted as major bases of production overhead absorption by products.15. studies have found that the level of ABC adoption is still considered low. ABC has emerged as one of the management accounting tools that recognizes such concern. and industries. timely.

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