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Integration of Process Management Tools to Support TQM Implementation:

ISO 9000 and Activity-based Costing

Article  in  Total Quality Management and Business Excellence · March 2007

DOI: 10.1080/14783360601053434

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Total Quality Management
Vol. 18, Nos. 1 –2, 201 –207, January –March 2007

Integration of Process Management

Tools to Support TQM Implementation:
ISO 9000 and Activity-based Costing

PAUL D. LARSON & STEPHEN G. KERR

 
University of Manitoba, Winnipeg, Canada; University of Nevada, Reno, USA

Introduction
A variety of process management tools are available to support continuous improvement
efforts in quality and/or productivity. Activity-based costing (ABC) and ISO 9000 are
among these promising tools (Armitage & Chai, 2001; Brimson & Antos, 2004). Many
steps involved in the achievement of ISO 9000 registration are also required to implement
ABC. Thus, it is logical to assume that these techniques are complementary. If ISO and
ABC are complementary, firms could ‘kill two birds with one stone’ by implementing
both tools concurrently, more quickly and at less expense. Complementary imple-
mentation could also facilitate integration of functional areas (e.g. accounting, logistics,
marketing, quality control) within a firm. However, it is also possible that different tech-
niques compete for scarce resources and managerial attention. If ISO and ABC are not
complementary, separate implementation and administration structures could increase
time and cost of implementation – and erode any benefits.
Based on review of the literature, there appears to be an opportunity to implement and
use ISO and ABC in integrated fashion. Using case study methods, this paper looks at
whether these two tools are implemented together as complementary initiatives, kept
administratively separate, or considered competitors for scarce organizational resources
(money, time and talent). The first case study completed found that managers of a logistics
company viewed ISO 9000 and ABC as separate initiatives. The quality systems group led
the charge to ISO registration; finance and accounting implemented the ABC model. The
firm did not attempt to exploit complementary aspects of the two tools. Rather, the ABC
and ISO 9000 initiatives competed for managerial attention.

Correspondence Address: Paul D. Larson, University of Manitoba, 678 Drake Centre, Winnipeg, R3T 5V4,
Canada. Email: larson@cc.umanitoba.ca

1478-3363 Print=1478-3371 Online=07=1–20201–7 # 2007 Taylor & Francis

DOI: 10.1080=14783360601053434
202 P. D. Larson & S. G. Kerr

Literature Review
The literature review is focused on ISO 9000 and activity-based costing (ABC). These two
tools are described in general, their common characteristics are noted, and their impact on
performance is discussed.

ISO 9000:2000 Standards

ISO 9000 is administered by the International Organization for Standardization (ISO).
Established in 1947, ISO is a non-governmental, worldwide federation of national stan-
dards bodies from over 130 countries. ISO is a word, derived from the Greek isos,
meaning ‘equal,’ the root of the prefix ‘iso-’ that occurs in terms such as ‘isometric’ (of
equal measure or dimensions). The name ISO is used around the world to denote the
organization, avoiding the many acronyms arising from translation of ‘International
Organization for Standardization’ into different languages, e.g. IOS in English, OIN in
French (from Organisation Internationale de Normalisation).
ISO 9000 is a series of international standards on quality management and assurance,
developed to help organizations effectively document quality system elements to be
implemented to maintain an efficient quality system. As a ‘generic’ system, ISO 9000
addresses the ability of an organization to satisfy customer needs and regulatory require-
ments, and to achieve continual improvement, rather than focusing on a specific industry,
product, or service (www.iso.org/, accessed April 28, 2005).
Originally published in 1987, the ISO 9000 standards underwent major revision in 2000.
The standards now include ISO 9000:2000 (definitions), ISO 9001:2000 (requirements),
and ISO 9004:2000 (continuous improvement). These new standards are based on the fol-
lowing eight principles: (1) customer focus; (2) leadership; (3) involvement of people;
(4) process approach; (5) system approach to management; (6) continual improvement;
(7) factual approach to decision making; and (8) mutually beneficial supplier relationships.
(http://www.asq.org/, accessed April 28, 2005).
The trade press presents many benefits of ISO registration, including: increased sales
and customer loyalty; reduced internal costs, customer complaints and returns; greater
management control, employee motivation, and ability to correct problems (Goodman,
1998). ISO 9000 can also help firms create better training and utilize employee expertise
(Brack, 1999). A recent survey reports the following benefits of ISO 9000 (by these
percentages of respondents): better documentation (88%); greater employee quality
awareness (83%); higher customer perceived quality (83%); competitive advantage
(70%); enhanced internal communication (53%); and, increased operational efficiency
(40%). The survey also reported average annual savings of $117,000 due to ISO regis-
tration (Zhu & Scheuermann, 1999).
Simmons & White (1999) argue that ‘the specific empirical relationship between ISO
9000 registration and business performance has not been established.’ They identified
63 ISO registered companies from the electronic and other electrical equipment industry
(SIC code 36). Of these firms, 35 were ISO 9001 registered and 28 were 9002. Using finan-
cial data from Standard & Poor’s COMPUSTAT, these researchers compared the ISO
firms with 63 non-ISO registered firms, in terms of performance. They found ISO compa-
nies to be significantly more profitable than non-ISO companies, but no significant
 Integration of Process Management Tools to Support TQM Implementation 203

difference between the groups in terms of sales/equity ratio. ISO firms were also
significantly larger than non-ISO firms (Simmons & White, 1999).

Activity-Based Costing (ABC)

Johnson & Kaplan (1987) discuss cost allocation in their book, Relevance Lost. They use
product costing to illustrate problems posed by traditional cost accounting allocation
schemes. Traditional cost accounting drove companies to emphasize low volume and
complex products because insufficient overhead was allocated to them (Sharman, 1990).
ABC was developed as a way to reflect overhead in complex environments. ABC can
also help firms understand costs associated with capacity, and facilitate capacity manage-
ment (Cooper & Kaplan, 1992).
ABC can be defined as ‘the tracing of overhead and direct costs to specific products,
services or customers.’ Tracing is a two-stage process. Stage one assigns resource costs
based on the amount of each resource consumed in performing specific activities. Stage
two assigns activity costs to products, services or customers based on actual consumption
of the activities (Pohlen, 1994). Prior to performing the two-stage ABC tracing process, an
organization must identify its resources and map its processes.
The theoretical development of ABC led to active discussion on ways accountants can
encourage and support quality improvement. Anderson & Sedatole (1998) argue that ABC
can help designers and product managers understand the costs of capacity and product fail-
ures. In other work, on target costing, ABC was used to identify costly steps that could be
eliminated through more robust product and logistical designs (Cooper, 1995). A result of
the attention given to ABC was a significant number of manufacturing firms adopting the
technique as an alternative to traditional costing techniques.

ISO AND ABC: SYNTHESIS

ABC is similar to ISO regarding an emphasis on documenting and managing activities.
Both initiatives are aided by process mapping and can facilitate corrective action (see
Figure 1). However, few authors have mentioned both ABC and ISO on the same page.
An ABI/INFORM electronic library search on citation and document text was conducted,
using the following search terms: ‘ISO 9000’ and ‘activity-based costing.’ Only five

Figure 1. ISO and ABC implementation processes

204 P. D. Larson & S. G. Kerr

articles were found from 2000 to 2005. An earlier exception presents a case study of
quality and financial troubles at Crossley Carpets. It describes the adoption of both ISO
and ABC as separate initiatives. A very positive turnaround occurred but the researcher
observed little confluence of purpose between the two initiatives (Dzinkowski, 1998).
ABC facilitates evaluation of the cost to serve a certain customer, profitability of a
particular product, or whether a function should be outsourced. Like ISO, ABC forces
firms to understand and map the activities they perform. ABC requires recording of
basic activities, how often they are performed, and how long it takes to perform them.
This is strikingly similar to documentation of processes in ISO 9000. According to
Grieco & Pilachowski (1995), ISO 9000 ‘forms a good foundation upon which companies
can initiate efforts to obtain ABC results.’ One leading cost management text notes the
benefits of combining ABC and ISO. The authors state: ‘many companies have sought
and achieved ISO 9000 certification, which requires thorough documentation of an organi-
zation’s processes. It can be relatively straight forward to recycle this documentation into
an activity list’ for ABC (Hilton et al., 2000, p. 157). In other words, they regard ISO and
ABC as complementary initiatives.
In practice, ISO and ABC initiatives have been implemented concurrently (Sampson &
Cotton, 1993), discussed in consecutive management guidebook chapters (Kolodny, 1996)
and offered as separate courses in a ‘world-class’ training program (Garrison, 1998). Tools
available to support ‘continuous improvement (CI)’ include activity based costing and ISO
9000 (Dwyer, 1999). Based on interviews with practicing logisticians, a link has been pro-
posed between ISO certification and ‘good cost analysis’ by warehousing firms (Johnson,
2000). Finally, according to Dickeson, ‘ABC is . . . vital in progression toward ISO 9000
certification’ (Dickeson, 1999). According to Sayle (2005), activity-based costing comple-
ments the process and task element approach adopted by ISO 9000. ABC allows quality
professionals to analyze the real nature of costs and create a picture of opportunities,
showing which projects will yield the best return in a business improvement program
(BIP). The following proposition is inspired by this literature.
P1: ISO 9000 and activity-based costing (ABC) are complementary.

Case Study: XYZ Corp. (Name Disguised)

The literature review leads to the proposition of complementarity between ISO 9000 and
ABC. In search of greater understanding on the potential but unexploited synergy between
these two performance enhancing tools, several qualitative research interviews were
conducted at a third-party logistics (3PL) provider using both techniques.
The mission at XYZ is ‘to provide a tradition of excellence in logistics services in the
spirit of partnership and dedication to quality.’ The firm offers integrated logistics ser-
vices, centered on warehousing and transportation through its carrier partners. With five
warehouse facility locations, it can provide 90% of the US population with 2-day delivery.
It also operates a foreign trade zone (FTZ), and handles shipping to Canada, Mexico and
beyond. XYZ’s information systems include automated order processing/inventory
control modules, and electronic data interchange (EDI) capabilities.
XYZ’s quality policy includes a strong commitment to teamwork and continuous
process improvement, toward providing quality services that meet or exceed customer
expectations. Implementation of this policy includes ISO 9000 certification, initially
achieved in 1998. During the summer of 2000, the firm hired a new Quality (Systems)
 Integration of Process Management Tools to Support TQM Implementation 205

Manager (QM). Equipped with an accounting background, and considerable experience in

ISO 9002 implementation, certification and maintenance, the QM’s mandate was to
continue the firm’s ‘ISO 9002 tradition of success.’ While ISO is currently used for train-
ing purposes, the firm plans to utilize ISO increasingly as a continuous improvement tool
in the future.
The firm developed its ISO documentation internally, through teams, rather than by
buying and using a commercially-available package. Its ISO documentation tends to be
broad and generic, rather than deep and finely tailored. An exception to this rule is the
creation of customer/account specific documentation. Since operating procedures vary
by customer, customer service representatives (CSRs) at XYZ are working toward
account-specific ISO documentation. Such account-specific documentation links quality
to marketing/sales (see Figure 2), since this helps the company serve its current custo-
mers. The capability can also be promoted to potential customers, to facilitate the
bidding and negotiation process.
To receive a rate and service proposal from XYZ, potential customers complete a three-
page online questionnaire. This instrument covers product characteristics, storage require-
ments, inbound shipments, outbound orders, and clerical requirements. These data serve as
input to the activity-based costing model. In December 1999, XYZ hired a new Vice
President, Finance. Among the VP’s early priorities was creation and implementation
of an easier yet more complete (ABC-like) costing model. Accounting has relieved
sales of its former rate-making function, as the limited costing model developed by
sales is no longer adequate.
The role of Finance/Accounting now includes sharing (ABC) cost information with
Sales/ Marketing (see Figure 2). This information sharing generates more internal discus-
sion prior to ‘making deals’ with customers, and helps the firm achieve its margin objec-
tives. Profit-and-loss statements are now prepared for each key customer account, rather
than only for each facility. Customers are the critical ABC cost objects at XYZ.
In the XYZ case, both ABC and ISO initiatives have been effective. ABC gives the firm
a much better understanding of costs to serve specific customers, and ISO facilitates
customer service improvement. Management states that ABC helps maintain margin

Figure 2. ISO, ABC and inter-departmental relations

206 P. D. Larson & S. G. Kerr

objectives, but the specific impact on financial returns is confidential. Similarly, order
accuracy and cycle times have improved following ISO implementation, but the
numbers are confidential. Both programs also yield a key interface with Sales/Marketing.
While the Quality group shares account-specific ISO work procedure documentation
with Sales/Marketing, Finance/Accounting shares customer-level ABC information.
However, despite a common customer focus, and Sales/Marketing interfaces, the two
programs were implemented and are utilized as separate tools within XYZ. Key managers
at this 3PL see the potential for complementarity, but are unsure how to exploit it.

Summary and Implications

The literature suggests that underlying processes required to implement ABC and ISO
9000 are similar. Thus, the researchers hypothesized that ISO and ABC are comple-
mentary performance improvement tools. The complementary nature of ISO and ABC
was studied using a case study at a third-party logistics (3PL) service provider.
At the case company, ISO 9000 and activity-based costing were implemented by
separate functional departments. ISO was implemented by the Quality group, reporting
to Operations; ABC was implemented by Finance/Accounting. Implementation and
administration structures for the two programs remain separate, housed within functional
silos. Perhaps duplication of effort, and a dual administration structure, erodes some
benefits of multiple programs. At 3PLs, Sales/Marketing may be the key area linked
with other organizational sub-units, such as Quality Systems and Finance/Accounting,
involved in the implementation and operation of ISO 9000 systems and ABC models.
Both tools provide valuable information to Sales/Marketing.
Are ISO 9000 and ABC complements or competitors? While there is potential for
complementary implementation of ABC and ISO, the case study reveals organizational
sub-units building separate systems for ISO and ABC, to facilitate conduct of their specific
functional responsibilities. This may make ISO 9000 and ABC initiatives compete for
scarce funding and managerial attention. While management accounting and logistics
management texts stress the cross-functional role of their respective practitioners, this
study reveals that the challenges of working across functional lines are non-trivial.
More interviews and multiple cases could enrich our understanding of possible comple-
mentarity between ISO and ABC.

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