Activity-Based Costing ( ABC ) Essay -- Essays Papers

Activity-Based Costing ( ABC ) Summary The business environment in the 1990s is markedly different from that of the past when conventional cost accounting procedures were established. Activity-based costing (ABC), pioneered in the late 1980s, offered a new costing approach consistent with the changed environment. However, ABC did not diffuse rapidly into the business community. This article demonstrates why adopting ABC is important by documenting the potential of ABC in supporting contemporary managerial decision making. Introduction Everything happens faster in business today. Even new management tools (some say "fads") follow a meteoric path. For example, the ink on new articles describing activity-based costing (ABC) was hardly dry before consulting firms had integrated it into their slick brochures and presentations. All they needed was someone to use it. To illustrate, Romano identified only 110 installations by August 1990, nearly two years after the procedure was developed, with 77 percent of these in two major firms [13]. Perhaps this phase, in the process of introducing the new procedure, could be called "the period of wild over-promise." However, even by the mid-1990s, ABC has not spread widely throughout the industry and "even in large firms, widespread success of ABC is not obvious" [16]. According to Ness and Cucuzza, "thousands of companies have adopted or explored the feasibility of adopting ABC. However, (they) estimate that no more than ten percent of companies now use activity-based management in a significant number of their operations" [11]. A survey conducted by the Institute of Management Accountants' cost management group found that only 29 percent of companies used ABC instead of traditional systems, but this was an increase from 25 percent in the previous year [10]. Among reasons cited for low adoption were employee resistance and major organizational changes required with the use of ABC [11]. Some trace the source of slow adoption of ABC to technical as well as cultural issues [5]. Others feel that ABC would be more widespread in industry if it were marketed better by the cost accounting profession itself [1]. As the dust has settled, ABC has turned out to be less a revolutionary technique than a useful refinement to proven systems. The costs of products and services must be accurate, or management can be misled. Decisions... ...8. Lewis, R.J. "Activity-Based Costing for Marketing." Management Accounting, November 1991, pp. 33-38. 9. Lofgren, G.Q. "Quality System Registration: A Guide to Q90/ISO 9000 Series Registration." Quality Progress, May 1991, p. 37. 10. "More Companies Turn to ABC."Journal of Accountancy, July 1994, p. 14. 11. Ness, J.A. and T.G. Cucuzza. "Tapping the Full Potential of ABC." Harvard Business Review, July/August 1995, pp. 130-131. 12. Port, O. "Custom-Made, Direct from the Plant." Business Week, November 18, 1994, p. 158. 13. Romano, P.L. "Trends in Management Accounting." Management Accounting, August 1990, pp. 53-56. 14. Roth, A.V., C. Gaimon, and L. Krazewski. "Optimal Acquisition of FMS Technology Subject to Technological Process." Decision Sciences, Vol. 22, No. 2, Spring 1991, pp. 308-334. 15. Schonberger, R.J. and E.M. Knod Jr. Operations Management: Continuous Improvement. Richard D. Irwin, 1994, p. 44. 16. Selto, F.H. and D.W. Jasinski. "ABC and High Technology: A Story with a Moral." Management Accounting, March 1996, pp. 37-40. 17. Smith, R.B. "Competitiveness in the '90s." Management Accounting, September 1989, pp. 24-29.