Activity-Based Costing (ABC)

General Readings - Activity-Based Costing

Ali, Hamdi F., A Multicontribution Activity-Based Income Statement, Journal of Cost Management, F94, pp. 45-54.

The author outlines the development of an ABC based income statement. The multicontribution income statement reflects the individual contribution by product, product line, operations and facilities. The ABC based income statement attempts to incorporate contribution margin analysis into the income statement - making the income statement a more valuable management tool. [I]

Ames, B. Charles and James D. Hlavacek, Vital Truths About Managing Your Costs, Harvard Business Review, January-February 1990, pp. 140-147.

The authors discuss four truisms that apply universally to all businesses: 1) In the long run, you must be a lower cost supplier than all others providing equivalent products or services, 2) Inflation-adjusted costs of production must continuously decrease (the experience curve), 3) The true cost and profit picture for each product must be known and 4) Cash flow is as important as profit. The "cycle of decay" (when cost cutting efforts lead to competitive decay) is typically begun when management uses financial accounting data, not control data, for decision making. Costs are classified as bedrock fixed (very few qualify as this), managed fixed, direct variable and shared costs. Most costs qualify as managed, and therefore are controllable in the long run. [I]

Beaujon, George J. and Vinod R. Singhal, Understanding the Activity Costs in an Activity-Based Cost System, Journal of Cost Management, Vol. 4, No. 1, Sp90, pp. 51-72.

The authors identify three elements of an ABC structure that have a natural interpretation as activities: 1) activity centers, 2) cost drivers and 3) resource categories. Examples based on an ABC system at General Motors are given. Guidelines for designing ABC systems whose results can be easily and correctly interpreted are provided. Examples of activities and cost drivers are provided in detailed exhibits. [I]

Benke, Ralph L., Teaching Activity-Based Costing, Management Accounting, Vol. 74, August 1992, pp. 61-62.

Recent developments in cost accounting have created a problem for accounting educators. New techniques, such as ABC, JIT, TQM and others, must become part of the curriculum if students are to enter the workforce with realistic skills. Suggestions on how to incorporate ABC into the curriculum are given. [B]

Blaxill, Mark F. and Thomas M. Hout, The Fallacy of the Overhead Quick Fix, Harvard Business Review, July-August 1991, pp. 93-101.

Overhead cost can only be controlled by examining and redesigning the processes that contribute to overhead. Too many companies have decimated their ability to compete by indiscriminately cutting expenses in order "to cut costs". ABC is not mentioned in the writing, but the concepts addresses complement the overall goal of ABC - identification of activities and their costs so that the activities can be better managed. [I]

Clemens, James D., How We Changed Our Accounting System, Management Accounting, February 1991, pp. 43-46.

The accounting manager for Digital Audio Disc Corporation, a maker of CDs, discusses how the company revised its accounting system. The rapid growth of the industry and increased competition mandated better accounting in order to be competitive. [I]

Cokins, Gary, Alan Stratton and Jack Helbling, An ABC Manager's Primer, Montvale, NJ: Institute of Management Accountants, 1993.

This concise, easy-to-read resource is directed towards readers who are already aware of their own organizations' costing shortcomings. The authors also assume that the reader has a basic understanding of ABC theory. The authors' intent is "to take the mystique out of activity-based costing". Individual chapters address the rise of ABC, ABC system design, activity-based management, business process redesign, ABM benchmarking and customer profitability. [I]

Cooper, Robin, ABC: A Need, Not an Option, Accountancy, September 1989, pp. 86-88.

This writing is based on Cooper's The Rise of Activity-Based Costing - Part One: What is an Activity-Based Cost System? article that appeared in the Summer 1988 issue of the Journal of Cost Management. [I]

Cooper, Robin and Robert S. Kaplan, Activity-Based Systems: Measuring the Cost of Resource Usage, Accounting Horizons, Vol. 6, No. 3, September 1992, pp. 1-13.

ABC systems are not models of how expenses or spending vary in the short-run. ABC systems estimate the costs of resources used to perform activities for various outputs. ABC systems model how activity usage varies with the demands made for these activities. Management must reduce unused capacity by either supporting a higher volume of business or reducing spending on resources. [I]

Cooper, Robin, and Robert S. Kaplan, How Cost Accounting Distorts Product Costs, Management Accounting, April, 1988, pp. 20-27.

While academic accountants have preached that product decisions are short term in nature (and therefore require variable costing), most practicing accountants view product decisions as long term. They, therefore, examine "fixed" costs in additional to variable costs when making product decisions. This had led to a misclassification of some variable costs as "fixed" - because they cannot be changed within the short time frame as defined by the academics. Existing cost systems blur the relationship between these fixed (really variable) costs and product activity. Allocation of these costs to products using a volume related allocation base will only further distort product costs. [I]

Cooper, Robin and Robert S. Kaplan, Measure Costs Rights: Make the Right Decisions, Harvard Business Review, September-October, 1988, pp. 96-103.

Virtually all of a company's activities should all be considered product costs - especially for decision making purposes. The costs of excess capacity and R&D (for new products and lines), however, should not be assigned to products in an ABC system. Just because an ABC system indicates that a particular product is unprofitable does not imply that it should immediately be dropped from the product line. There may be other strategic reasons for carrying an unprofitable item. [I]

Cooper, Robin and Robert S. Kaplan, Profit Priorities from Activity-Based Costing, Harvard Business Review, May-June 1991, pp. 130-135.

ABC can help managers find the places in their organizations where improvement is likely to have the greatest financial payoff. Fully exploiting ABC's benefits requires a conceptual break from the traditional cost system and a willingness to act on ABC's insights. ABC analysis also explains how and why advanced manufacturing and design philosophies already adopted are so profitable. [I]

Drury, Colin, Activity-Based Costing, Management Accounting (UK), Vol. 67, No. 8, September 1989, pp. 60-66.

Drury outlines the benefits of both an ABC system itself and the extension of ABC into ABM. These is some comparison of ABC practices in the US and the UK. [I]

Dugdale, David, The Uses of Activity-Based Costing, Management Accounting (UK), October 1990, pp. 36-38.

The author reviews the historical development of the ABC technique, the place which ABC occupies in management accounting theory and the conflicts which can arise when ABC is applied in practice. Dugdale characterizes ABC as a valuable addition to the armory of techniques available to management. [I]

Fraser, Jill Andresky, Accounting: The New ABC, Inc., December 1993, p. 175.

This article highlights the use of ABC at Transparent Container, a small manufacturer of plastic containers. An activity-based software program helped the vice president of finance to realize that they "were failing to consider all kinds of corporate expenses in our pricing model". He recommends ABC Plus as a prepackaged software package. [B]

Hiromoto, Toshiro, Another Hidden Edge - Japanese Management Accounting, Harvard Business Review, July-August 1988, pp. 22-26.

The management accounting systems at many Japanese manufacturing companies reinforce a top-to-bottom coe between US and Japanese systems. [I]

Hirsch, Jr., Maurice L. and Michael C. Nibbelin, Incremental, Separable, Sunk and Common Costs in Activity-Based Costing, Journal of Cost Management, Vol. 6, No. 1, Sp92, pp. 39-47.

Several problem areas exist with ABC systems: 1) the handling of incremental, separable and sunk costs, and 2) the handling of common costs. These problems affect traditional cost systems also. Therefore, the same caution should be used in interpreting ABC results as you would use in interpreting costs generated by traditional systems. [I]

Innes, John and Falconer Mitchell, Activity Based Costing Research, Management Accounting (UK), May 1990, pp. 28-29.

The authors summarize the findings of their review of the ABC literature and preview a further study of ABC implementation at a UK-based engineering company. [I]

Jeans, Mike and Michael Morrow, The Practicalities of Using Activity-Based Costing, Management Accounting (UK), November 1989, pp. 42-44.

The practicalities of applying ABC are discussed. There are analyses of several Harvard Business School cases: Siemens Electric Motor Works, Tektronix Portable Instruments Division and John Deere Component Works. [I]

Johnson, H. Thomas, It's Time to Stop Overselling Activity-Based Costing, Management Accounting, September 1992, pp. 26-35.

ABC is not the panacea for all ills. If flawed accounting data is used in an ABC system, the system will simply repeat past errors. ABC is a useful tool for some types of decisions - but not all decisions. There is a good explanation of the development of ABC theory which highlights the problems of ABC when applied to certain applications. This article is adapted from the author's book, Relevance Regained: From Top-Down Control to Bottom-Up Empowerment. [I]

Johnson H. Thomas and Robert S. Kaplan, Relevance Lost, Boston, MA: McGraw-Hill, 1991.

The authors explore the business environments of the nineteenth and early twentieth centuries that influenced cost system design during these periods. Advancement in cost measurement appears to have ceased during the 1920s - while business environments have continually changed. The influence of Taylor's Scientific Management school on cost systems is discussed. The emergance of vertically and horizontally integrated companies and their contribution to early cost systems is also examined. Finally, the last portion of the book addresses the "lost relevance" of these old systems to new business environments. [I]

Jones, Lou F., Product Costing at Caterpillar, Management Accounting, February 1991, pp. 34-42.

The different activities pools used at Caterpillar are discussed. These include the logistics activity pool, the manufacturing activity pool and the assembly activity pool. The author emphasizes that cost systems are tools - no more, no less. It is how these costs are used that determines the value and success of a particular system. [I]

Koehler, Robert W., Triple-Threat Strategy, Management Accounting, October 1991, pp. 30-34.

A combination of ABC, direct costing and contribution margin approaches to management accounting offers companies a true overview of the entire cost picture. ABC is most useful in the planning stage of strategic decisions. ABC does not eliminate the need for direct costing and contribution margin analysis. [I]

Mathews, Ryan, ABC Made Easy, Progressive Grocer, September 1994, pp. 37-39.

Ernst & Young has developed an ABC Primer for Wholesalers and Retailers for the Food Marketing Institute. The author presents an abbreviated version of the primer which is designed to be used in conjunction with a program developed by the ECR Performance Measure Operating Committee: Performance Measures: Understanding Value Chain Analysis in the Grocery Industry. [B]

McConville, Daniel J., Start with ABC, Industry Week, September 6, 1993, pp. 33-36.

ABC and ABM are perhaps the most important concepts since the introduction of TQM. Both complement TQM by providing quantitative data on improvements made as a part of a TQM program. ABC systems at Amoco Performance Products, Transparent Container Co. and Fellowes Mfg. Co. are discussed. [I]

Merz, C. Mike and Arlene Hardy, ABC Puts Accountants on Design Team at HP, Management Accounting, September 1993, pp. 22-27.

The ABC system at Hewlett-Packard's Boise Surface Mount Center has been in place since 1989. Since then, HP employees have improved the system by tinkering with it continuously. The authors review how the system has evolved over the four years it has been in place and what changes the ABC system has caused in the way different departments function at BSMC. For example, the engineering department now takes an active role in developing cost drivers and the accounting department now has input into initial design decisions. [I]

Metzger, Lawrence M., The Power to Compete: The New Math of Precision Management, The National Public Accountant, May 1993, pp. 14-16.

ABC is used to improve CVP (cost-volume-profit) analysis in multi-product firms.

ABC improves the determination of variable costs and fixed costs for the CVP analysis. [I]

Montgomery, Leland, Cost Control: Tektronix, Financial World, Vol. 161, No. 19, September 29, 1992, p. 54.

ABC helped management focus on product-line profitability. ABC was implemented in 1986 after a benchmarking study found that Tektronix's printed circuit board division was "the worst in the industry" in terms of processes and profitability. By pinpointing costs and profit margins, ABC also allowed Tektronix to expand beyond its captive market to outside customers. A 1990 benchmarking study found that Tektronix had become the best in the industry. [B]

National Center for Manufacturing Sciences, Strategic Management Accounting Offers American Manufacturers a Strong Global Competitive Advantage, Focus, September 1993.

This issue "focuses" on strategic managerial accounting in industry. The integration of ABC systems with TQM must be a critical progression in American corporations, according to Peter B. B. Turney. Harley-Davidson's implementation of ABC and ABM in the mid 1980s (following a manufacturing restructuring in the early 1980s) is discussed. Statistics from a NCMS survey are also presented. [B]

Noreen, Eric, Conditions Under Which Activity-Based Cost Systems Provide Relevant Costs, Journal of Management Accounting Research, Vol. 3, Fall 1991, pp. 159-168.

This is a mathematically dense treatment of ABC. The author proposes to clearly identify the assumptions typically made about the nature of the links between output and activities and activities and costs. The conditions under which an ABC system will provide relevant information are derived. [A]

Paré, Terence P., A New Tool for Managing Costs, Fortune, Vol. 127, No. 12, June 14, 1993, pp. 124-129.

ABC-generated benefits are highlighted at a variety of companies: Dana, AMD, Chrysler, Hewlett-Packard and GE Medical Systems. [B]

Pattison, Diane D. and Carrie Gavan Arendt, Activity-Based Costing: It Doesn't Work All the Time, Management Accounting, April 1994, pp. 55-61.

A failed attempt at ABC is explored, and the underlying reasons for the failure are discussed. Ultimately, the original ABC system was modified and this system was accepted by the company. [I]

Piper, J. A. and P. Walley, ABC Relevance Not Found, Management Accounting (UK), March 1991, pp. 42-54.

The authors respond to Robin Cooper's critique (Explicating ABC Logic in the November 1990 issue) of their article Testing ABC Logic. The authors remain convinced that the ABC model is logically flawed and the case for its application is both questionable and unproven. [I]

Piper, J. A. and P. Walley, Testing ABC Logic, Management Accounting (UK), September 1990, pp. 37-42.

The authors question the fundamental assumption on which ABC is based: that activity causes cost. The authors critique the article, The Practicalities of Using Activity-Based Costing, by Jeans and Morrow which was published in the November 1989 issue of Management Accounting (UK). [I]

Raffish, Norm, How Much Does That Product Really Cost, Management Accounting, Vol. 72, March 1991, pp. 36-39.

Finding out how much that product costs may be as easy as ABC. The author discusses the shortcomings of traditional cost systems and proposes ABC as an alternative. The author states that ABC is not a panacea for all the product costing ailments or shortcomings in manufacturing. Raffish surmises that as ABC gains acceptance, it may very well become "the" cost system in place of traditional systems. [I]

Ruhl, Jack M., Activity-Based Variance Analysis, Journal of Cost Management, Vol. 8, No. 4, W95, pp. 38-47.

Traditional variance analysis is a product of traditional cost systems. Variance analysis has a place in ABC systems. Capacity variances based on a hierarchy of cost levels can help managers increase productivity and reduce costs. The calculation of these variances is examined. [I]

Ruhl, Jack M., and Trina A. Bailey, Activity-Based Costing for the Total Business, CPA Journal, February 1994, pp. 34-38.

The authors provide an example of ABC to illustrate how ABC can serve as a management tool with each of three cost areas: upstream (product design, materials sourcing, product emphasis), manufacturing, and downstream (marketing and distribution). [I]

Schiff, Jonathan B., ABC at Lederle: A Cost Management Group Feature, Management Accounting, August 1993, p. 58.

The author interviews William A. Harrel, manager of business analysis for Lederle Laboratories Manufacturing in Pearl River, NY about the company's effort to implement a site-wide ABC management system. Schiff inquires about the initial focus of the project, implementation, the wins and disappointments of the project and the expectations and biases about the pilot project. This is an excerpt from an article which appeared in Cost Management Update, an IMA focus newsletter. [B]

Schwan, Edward S., Activity-Based Costing: Something Old, Something New, Mid-Atlantic Journal of Business, December 1994, pp. 295-298.

The "something old" refers to the search for appropriate cost drivers. Management accountants have always preferred to use appropriate cost drivers when allocating overhead. It is only the recent developments in manufacturing that have rendered previously acceptable drivers obsolete. The "something new" refers to the inclusion of non-factory costs into product costing. All activities consumed by the product, whether manufacturing, marketing or distribution, are included in the product cost under ABC. [B]

Shank, John K. and Vijay Govindarajan, Chapter 11: Product Line Complexity as a Cost Driver - Activity-Based Costing, Strategic Cost Management, New York: Free Press, 1993, pp. 167-185.

The authors demonstrate how traditional cost systems and ABC systems yield dramatically different product costs in a multi-product environment. The limitations of ABC when used as an ongoing cost system are discussed. The authors argue that the likelihood of achieving strategic benefits from ABC is inversely proportional to the extent that ABC is incorporated into the company's accounting system because incorporation into "the books" reduces the probability that the insights provided by ABC will be acted upon. [I]

Shank, John K. and Vijay Govindarajan, Chapter 12: Using and Abusing the ABC Concept, Strategic Cost Management, New York: Free Press, 1993, pp. 186-202.

Two published case studies concerning Electric Motor Works of Siemens AG are analyzed. The authors conclude that the useful insights that emerge from the ABC analysis go largely unused because of Siemens' view of ABC as an alternative cost system and not as a strategic tool. [I]

Smith, Malcolm, Managing your ABC System: Activity-Based Costing, Management Accounting, April 1994, pp. 46-47.

ABC is a management tool that can expose information that previously was hidden. There have been no conclusive studies to suggest that ABC generates bottom-line improvements in profitability. ABC is a means to an end, not an end in itself. [I]

Stratton, W. O., ABC: An All-Purpose Solution for Financial Reporting, Management Accounting, May 1993, pp. 44-49.

The author proposes replacing existing traditional cost systems with ABC systems because ABC generated costs comply with GAAP. In addition, using only one system eliminates conflict that occur when ABC systems suggest a strategy contrary to the "official system". [I]

Turney, Peter B. B., Common Cents: The ABC Performance Breakthrough, Portland, OR: Cost Technology, 1993.

If you want to look at only one resource for ABC, this is the one. Turney begins with why you need to change your cost system, moves to why ABC is the solution and moves through the steps necessary to design an effective ABC system. An accounting background is not necessary to understand the material as Turney presents it. [I]

Turney, Peter B. B., How Activity-Based Costing Helps Reduce Cost, Journal of Cost Management, Vol. 4, No. 4, W91, pp. 29-35.

The author explains how ABC can be used to simulate the effects of continuous improvement on costs. Four ways in which continuous improvement can affect cost are identified: 1) activity reduction, 2) activity elimination, 3) activity selection and 4) activity sharing. The advantages of ABC over traditional cost systems in reporting product cost and information are demonstrated. [I]

Wizdo, Al, Activity-Based Costing: A Methodology for Costing and Profitability, Industrial Management, September 1993, p. 17.

Changes in the manufacturing environment (from labor intensive to fully automated) have necessitated a new approach to product costing. ABC requires information sharing across a range of business functions. ABC provides relevant information for strategic decisions concerning products, services and prices. [B]

Yakhou, Mehenna and Boubekeur Rahali, Integration of Business Functions: Activity and Life-Cycle Accounting, APICS - The Performance Advantage, January 1993, pp. 36-37.

Activity accounting points management attention to functional interdependencies in order to reduce costs and increase quality, productivity and flexibility. [B]

Introduction to ABC

Awasthi, Vidya N., ABCs of Activity-Based Costing, Industrial Management, July 1994, pp. 8-11.

This is a good introduction to the practical use of ABC. Although it is written by an accountant, non-accountants will find it easy to understand. Awasthi explains how costs can be better managed by value-added analysis - identifying those activities that do not add value and either eliminating or reducing these activities through process redesign. He emphasizes the trade-off associated with improved costing systems: the increased cost. [I]

Baker, William M., Understanding Activity-Based Costing, Industrial Management, March 1994, pp. 28-30.

An example of a company manufacturing and selling two grades of the same product is given. The author stresses that ABC does not find the "true cost" of the product. There is no true cost figure. What ABC does do is allocate indirect costs in a more equitable manner among dissimilar products. ABC is often accepted by top management who are, at the same time, reluctant to implement new production methods. The existing cost accounting system is a product of a by-gone era. [I]

Barnes, Frank C., IEs Can Improve Management Decisions Using Activity-Based Costing, Industrial Engineering, September 1991, pp. 44-50.

The author provides a general explanation of ABC, why it is needed and what is involved in implementing an ABC system. Several examples of cost drivers for specific cost centers are given in an illustration. Brief highlights of various ABC implementations (Siemans Electric Motor Works, John Deere, Tektronix, Northern Telecom, Hewlett-Packard) are presented. [B]

Bruns, William J., Activity Accounting - Another Way to Measure Costs, Harvard Business School, 9-193-044, Rev. April 26, 1993.

The objective of this teaching note is to introduce the fundamental concepts of ABC. Two HBS cases are recommended for studying the basic techniques used in ABC systems. Bruns characterizes ABC as one of the most exciting events in the development of cost accounting during this century. [B]

Compton, Ted R., Using Activity-Based Costing in Your Organization - Part 1, Journal of Systems Management, March 1994, pp. 32-40.

The author describes the major steps for implementing an ABC system. Factors to consider when planning an ABC system are also discussed. Suggestions for "selling" the ABC idea to the organization are given. This is a good introduction to ABC for non-accountants. [I]

Cooper, Robin, The Rise of Activity-Based Costing - Part One: What Is an Activity-Based Cost System?, Journal of Cost Management, Vol. 2, No. 2, Sm88, pp. 45-54.

The author analyzes the distorted product costs that a traditional volume-based cost system produces when multiple, dissimilar products are produced. Diversity in production volume, product size, production complexity, material usage and machine setup all lead to misstated costs if only one volume-based allocation base is used to allocate costs among the various products. [A]

Hardy, John W. and E. Dee Hubbard, ABC Revisiting the Basics, CMA Magazine, November 1992, pp. 24-28.

The traditional cost system is compared to an ABC system. Advantages and disadvantages of each method are presented. [B-I]

Sharman, Paul A., Activity-Based Costing: A Practitioner's Update, CMA Magazine, July/August 1991, pp. 22-25.

The most significant change in ABC is the way in which ABC information is being used. This is a general introduction to ABC. [B]

Vasilash, Gary S., A Brief Look at Activity-Based Costing, Production, May 1994, pp. 54-56.

The author presents a non-technical introduction to ABC and ABM. The behavioral aspects of change are stressed because of the perceived threats that ABC implementation presents to some people in the organization. Vasilash recommends that a middle manager in operations be the ABC team leader because this person has some influence with "the people in the offices" as well as some knowledge of what's happening "on the floor". [B]

History of ABC and its Evolution

Aiyathurai, Gerald, W. W. Cooper and K. K. Sinha, Note on Activity Accounting, Accounting Horizons, December 1991, pp. 60-67.

The authors compare today's ABC theory with an earlier attempt at "activity accounting" employed at the Tennessee Valley Authority in the 1940s. This system was implemented after the controller concluded that the existing cost system was inappropriate for TVA's specialized operations. The authors then highlight some of the issues that modern activity-based systems must not neglect. [I]

Dugdale, David, Costing Systems in Transition: A Review of Recent Developments, Management Accounting (UK), January 1990, pp. 38-41.

The author reviews the developments in costing systems through 1990. The concept of "different costs for different purposes" is emphasized throughout the article. The author also surmises that many of the difficulties encountered in costing systems are educational and social in nature. [I]

Kaplan, Robert S., In Defense of Activity-Based Cost Management, Management Accounting, November 1992, pp. 58-63.

The author discusses the developments in activity-based cost management and attempts to explain why so much controversy has developed about ABC. The article is structured as a "dialogue" between a colleague who poses questions and Kaplan who answers and expands on the questions. The wide ranging uses of ABC and the potential impact that ABC can have on operations and decision making are discussed. [I]

King, Alfred M., The Current Status of Activity-Based Costing: An Interview with Robin Cooper and Robert S. Kaplan, Management Accounting, September 1991, pp. 22-26.

Cooper and Kaplan review the background of ABC, some of its effects on business, ways in which ABC's focus has changed and ABC's future prospects. [I]

Mecimore, Charles D. and Alice T. Bell, Are We Ready for Fourth-Generation ABC? Management Accounting, January 1995, pp. 22-26.

This article tracks the evolution of ABC from its birth as a revolutionary product costing system to its current state (third generation ABC). First generation ABC focuses on product costing. Second generation ABC extends the concept to processes and performance evaluation. Third generation ABC focuses on the business unit and the value the unit can add to the product. The fourth generation is a more macro approach to ABC - applying ABC to the relationship between separate units in the chain. The authors provide several informative examples for the various generations which illustrate real and fictional applications of ABC techniques. [I]

Troxel, Richard B. and Milan G. Weber, Jr., The Evolution of Activity-Based Costing, Journal of Cost Management, Vol. 4, No. 1, Sp90, pp. 14-22.

The authors classify the evolution of ABC into three phases: 1) Phase I - more complex and sophisticated versions of traditional cost accounting systems , 2) Phase II - ad hoc, individualized systems developed as alternatives to traditional cost accounting systems, and 3) Phase III - development of ABC systems as strategic decision making tools, not replacements for existing cost accounting systems. The authors contemplate that the next phase of will consist of ABC integration with performance measurement. [I]

Does Your Company Need ABC?

Cooper, Robin, ABC: The Right Approach for You?, Accountancy, January 1991, pp. 70-72.

Cooper discusses three factors that should be considered to determine whether the benefits of an ABC system will exceed its implementation and operating costs: 1) the sophistication of the company's existing information systems, 2) the cost of errors and 3) the diversity of the company's products. This writing is based on Cooper's The Rise of Activity-Based Costing series that appeared in the Su88 to Sp89 issues of the Journal of Cost Management. [I]

Cooper, Robin, The Rise of Activity-Based Costing - Part Two: When Do I Need an Activity-Based Cost System?, Journal of Cost Management, Vol. 2, No. 3, F88, pp. 41-48.

The author states that it is impossible to generate a set of simple decision rules to answer the question "Do I need an ABCS?". It is possible to define the conditions under which an ABC system is likely to be justified. If the existing cost system was designed when 1) measurement costs were high, 2) competition was weak and 3) product diversity was low, and current conditions include 1) low measurement costs, 2) fierce competition and 3) high product diversity, it is probable that a new cost system will provide benefits that exceed its cost. The cost of errors includes making poor decisions because of misstated product costs. [A]

Cooper, Robin, You Need a New Cost System When..., Harvard Business Review, January-February, 1989, pp. 77-82.

You need a new cost system when....your system indicates that a hard-to-make product produces large profits, operational managers want to drop "profitable" products, functional managers have their own cost systems, etc. Your present system may be obsolete if your operations have changed (increased automation, a move to or from low volume production, introduction of JIT, etc.). Cooper stresses that the mere presence of some symptoms doesn't automatically mean that the cost accounting system is obsolete. The symptoms could be caused by external factors, but their presence bears investigation. [I]

Eiler, Robert G., Walter K. Goletz, and Daniel P. Keegan, Is Your Cost Accounting Up to Date, Harvard Business Review, July-August, 1982, pp. 133-139.

The authors present a list of symptoms that an aging cost system may exhibit. These are categorized into those that are visible to top management (problems determining a product's profit margin), those that are less visible but easily detected (great relief when a physical inventory does not result in inventory adjustments) and those that are visible only through detailed analysis (poor analysis of variances). The article does not specifically address ABC because it pre-dates most of the ABC literature. However, it provides a good explanation of the cost accounting problems that ABC attempts to correct. [I]

Estrin, T. L., Jeffrey Kantor and David Albers, Is ABC Suitable for Your Company, Management Accounting, April 1994, pp. 40-45.

The authors present a wide ranging list of mediating factors which determine the extent to which ABC could give substantial improvements over existing traditional costing systems. The ten broad factors addressed include: 1) product diversity, 2) support diversity, 3) common process, 4) period cost allocation 5) rate of growth in period costs, 6) pricing freedom, 7) period expense ratio, 8) strategic considerations, 9) cost reduction and 10) analysis frequency. The factors are weighted and the resulting factor indicates the level of need for an improved ABC system. [I]

Grady, Michael W., Is Your Cost Management System Meeting Your Needs, Journal of Cost Management, Vol. 2, No., 2, Sm88, pp. 11-15.

Traditional cost accounting systems were developed to value inventory and close the financial books each month. These two objectives are no longer the most important objectives of a modern cost system. What should the objectives be? Eight objectives are identified: accurate product costing, pricing and cost estimation, operations performance management, profitability measurement, cost reduction management, management of automation, reporting of problem areas and integration with inventory and manufacturing control systems. [I]

Kaplan, Robert S., One Cost System Isn't Enough, Harvard Business Journal, January-February, 1988, pp. 61-66.

Kaplan argues that one cost accounting system is insufficient for the greatly varying needs of cost information. He identifies three different functions of cost accounting systems: 1) inventory valuation for financial and tax purposes, 2) control of operational processes and 3) individual product cost measurement for strategic decision making. The three functions require different levels of accuracy and timeliness. In addition, the time frame of each determines whether costs are treated as all variable (long term) or a combination of fixed and variable (short term). ABC methodology is not specifically addressed, but the themes are consistent with those behind ABC. [I]

Weisman, Dennis L., How Cost Allocation Systems Can Lead Managers Astray, Journal of Cost Management, Vol. 5, No. 1, Sp91, pp. 4-10.

Business decisions can be no better than the information on which they are based. Traditional cost systems are incapable of providing managers with the information they need to make good business decisions because they fail to distinguish between unavoidable "sunk" costs and avoidable costs. [I]

ABC System Design

Cooper, Robin, Five Steps to ABC System Design, Accountancy, November 1990, pp. 78-81.

Cooper provides five design steps that must be addressed in order to provide the most benefit possible at the lowest overall cost. The complexity of the design will depend on management's objectives for the ABC system and the diversity of the company's product mix. This article is based on Cooper's four part series The Rise of Activity-Based Costing in the Journal of Cost Management (Su88 to Sp89). [I]

Cooper, Robin, The Rise of Activity-Based Costing - Part Four: What Do Activity-Based Cost Systems Look Like?, Journal of Cost Management, Vol. 3, No. 1, Sp89, pp. 38-49.

System design, from very simple to very complex, is examined. The complexity of ABC systems reflects the objectives that management has for the system. The diversity of the products/services also contributes to system complexity. Five existing systems (at Tektronix Portable Instruments, Siemens Electric Motor Works, John Deere Components Works, Hewlett-Packard's RND, and Schrader Bellows) are discussed. Each one supplements the volume based cost drivers (held over from the old cost system) with new non-volume related drivers. Although each of the systems examined is in a manufacturing environment, the concepts about system design are relevant to any ABC system. [A]

Cooper, Robin and Robert S. Kaplan, The Design of Cost Management Systems, Englewood Cliffs, NJ: Prentice Hall, 1991.

Each chapter contains cases and readings (reproduced in their entirety) to supplement the text. Many of the readings are the major articles that have been written about ABC over the years. Although designed as a textbook, this resource is easily read outside of a formal classroom environment. [I-A]

Howard, Patrick, Architecture for an Activity-Based Costing System, Journal of Cost Management, Vol. 8, No. 4, W95, pp. 14-21.

System architecture for ABC systems is explored. The architecture influences the way ABC data is manipulated - from the data entry stage to the user interpretation stage. An ABC system must be effectively structured in order to provide timely data - data that users will use. The article explains four guidelines to consider in developing the architecture for an ABC system. [I]

Kaplan, Robert S., The Four-Stage Model of Cost Systems Design, Management Accounting, February 1990, pp. 22-26.

The author responds to critics of his article One Cost System Isn't Enough. Many readers responded by saying that it would be unfeasible to use separate cost systems for different purposes. Kaplan modifies his argument by presenting a four-stage model of cost systems. Ideally, modifications to the cost system will ultimately be incorporated into a multi-purpose system. However, until then, separate cost systems must be allowed to develop as prototypes of an integrated system. [I]

MacArthur, John B., Activity-Based Costing: How Many Cost Drivers Do You Want?, Journal of Cost Management, Vol. 6, No. 3, F92, pp. 37-41.

A decentralized approach to designing ABC systems is advocated by the author. He characterizes the question "What ABC system do you want" as a bottom-up, participatory approach to system design. In contrast, the question "What ABC system do you need?" is characterized as a top-down, autocratic approach to system development. The decentralized approach is the one Deere & Co. and Fisher Controls took in expanding ABC to their various locations. Divisions were free to adopt either a modified version of the corporate model or a self-designed system. [I]

Reeve, James M., The Impact of Continuous Improvement on the Design of Activity-Based Cost Systems, Journal of Cost Management, Vol. 4, No. 2, Sm90, pp. 43-50.

The author discusses how continuous improvement programs and ABC systems interrelate and complement each other. Continuous improvement programs reduce the scope for improving product costs because improvements typically decrease the amount of overhead that must be distributed to products. As improvements are made, the ABC system should be redesigned by the use of different cost drivers. [I]

Turney, Peter B. B., What an Activity-Based Cost Model Looks Like, Journal of Cost Management, Vol. 5, No. 4, W92, pp. 54-60.

The ABC model contains a costing dimension and a process dimension. The cost dimension contains cost information about resources, activities and products. The process dimension contains performance information about why and how well work is performed in the organization. The process dimension uses financial and non-financial information to form a complete look at the company's operations. It is with the process dimension that the future of ABC and ABM lie. [I]

Modifications to Basic ABC Design

Christensen, Linda F. and Douglas Sharp, How ABC Can Add Value to Decision Making, Management Accounting, May 1993, pp. 38-42.

The authors recommend two modifications to the ABC model. These modifications will enhance the model's ability to produce relevant information for short-term decision-making as well as long-term strategic planning. [I]

Sharp, Douglas and Linda F. Christensen, A New View of Activity-Based Costing, Management Accounting, Vol. 73, September 1991, pp. 32-34.

ABC should incorporate the concept of attributable cost (any cost that could be eliminated if a particular activity were discontinued) for more effective managerial decision making. Current ABC models track the full cost of a particular activity. In doing so, they ignore the fact that not all resources consumed by an activity are avoidable if that activity is discontinued. [I]

Walker, Mike, ABC Using Product Attributes, Management Accounting (UK), October 1991, pp. 34-35.

The author proposes extending the ABC concept to include product attributes (qualities of the product such as weight and size). Purdue Chicken, both before and after Frank Purdue began running the business, is given as an example. [I]

Woods, Michael D., Completing the Picture: Economic Choices with ABC, Management Accounting, Vol. 74, December 1992, pp. 53-57.

The author suggests refining the basic ABC model by keeping fixed and variable costs separate. Mixing the two types of costs can lead to suboptimal decisions. Separating fixed and variable costs isolates the relevant (marginal) costs that are vital for managerial decision making. [I]

Yang, Gilbert Y. and Robert C. Wu, Strategic Costing and ABC, Management Accounting, May 1993, pp. 33-37.

The authors identify and discuss four costing methods: 1) traditional costing, 2) simple ABC, 3) capacity ABC and 4) strategic ABC. Capacity ABC refers to an ABC model with capacity utilization incorporated. Strategic ABC refers to a variation of capacity ABC (using the desired capacity utilization over a set time). The strategic ABC model enables the user to calculate a close approximation of true long-term costs and to plot its strategic advantages in the marketplace. [I]

Cost Drivers

Babad, Yair M. and Bala V. Balachandran, Cost Driver Optimization in Activity-Based Costing, Accounting Review, July 1993, pp. 563-575.

The authors present an optimization model for use in selecting cost drivers for an ABC system. The model balances savings in information processing costs against a loss of accuracy. The authors show how to determine the number of drivers needed and how to identify the representative cost drivers. [A]

Cooper, Robin, The Rise of Activity-Based Costing - Part Three: How Many Cost Drivers Do You Need and How Do You Select Them?, Journal of Cost Management, Vol. 2, No. 4, W89, pp. 34-46.

The author explores how many and what types of cost drivers should be used in an ABC system. The number of drivers desired is affected by product diversity, volume diversity and the relative costs of activities in total. The particular drivers used are affected by the cost of measurement (ease of obtaining data for that driver), the correlation between consumption as implied by that driver and actual consumption, and the behavioral effects of using that driver. The level of desired accuracy will determine the measurement cost. The advantage of ABC over traditional cost systems is the use of multiple non-volume related allocation bases, but there is a limit to the cost effectiveness of multiple drivers. [A]

Dopuch, Nicholas, A Perspective on Cost Drivers, Accounting Review, July 1993, pp. 615-620.

The authors argue that too many of the ABC studies seem to be focused on merely providing "better" cost information to managers. This "better" information is assumed to follow automatically from the premise that a selection of additional cost drivers and overhead cost pools will move the researchers closer to the "true" cost numbers. The author suggests that this is not the kind of perspective that should guide serious research in the area. [I]

Novin, Adel M., Applying Overhead: How to Find the Right Bases and Rates, Management Accounting, March 1992, pp. 40-43.

Regression analysis is recommended to ascertain the relationship between costs and cost drivers. The strength of the relationship will determine whether the cost driver is appropriate for the costs being considered. [I]

Roth, Harold P. and A. Faye Borthick, Are You Distorting Costs by Violating ABC Assumptions, Management Accounting, Vol. 73, November 1991, pp. 39-42.

ABC systems will provide no more accurate costs if certain assumptions are violated. The costs in each pool must be driven by homogeneous activities and the costs in each pool must be strictly proportional to the activity. Picking the right cost drivers is crucial to an ABC system. Regression analysis will determine the degree of correlation between activities and drivers. [I]

Sharman, Paul, Activity and Driver Analysis to Implement ABC, CMA Magazine, July 1994, pp. 13-16.

This resource builds on a nine-step implementation framework discussed in the March, 1993 issue of CMA magazine. Step 4, activity and driver analysis, is highlighted in this article. Activity analysis begins with an extensive interviewing process. The author identifies key questions that must be answered. Once the key activities are identified, these are compiled into a process flow diagram. Again, the author cautions the reader on the potential shortcomings of the process flow diagram. This is a good "nuts and bolts" resource for the planning stage of ABC implementation. [I]

One Cost System or Several?

Colley, J. Ron, Mark A. Segal, and Ara G. Volkan, The ABCs of Allocating Inventory Cost, The National Public Accountant, July 1990, pp. 26-29.

The costs assigned to products in an ABC system are similar to the costs that must be capitalized under the IRS inventory capitalization (UNICAP) rules. The similarities between the two systems make it desirable to consider the feasibility of implementing a dual-purpose ABC/UNICAP system. If the initial design is undertaken with the UNICAP rules in mind, the ABC system will serve both purposes at little additional cost. [I]

Roth, Harold P. and A. Faye Borthick, Getting Closer to Real Product Costs, Management Accounting, May 1989, pp. 28-33.

The authors recommend an off-line, spreadsheet based ABC system as a supplement to the formal accounting system. Companies do not have to commit their entire accounting system to ABC to use ABC. [I]

Thilmony, Hal, Product Costing: One Set of Books or Two?, Journal of Cost Management, Vol. 6, No. 4, W93, pp. 37-44.

Are two product costing systems necessary? How does a company manage the conflicts that invariably will occur when the two systems report different product costs and suggest two different courses of action? The author proposes that one well designed system can meet both decision making and external reporting needs. The flexibility to modify (i.e. adjust, aggregate or decompose as necessary) the ABC generated costs for different users must be built into the system at the design stage. ABC based systems can be used to value inventory and calculate variances. [A]

Vercio, Alan, What Organization Are You Accounting For?, Management Accounting, December 1993, pp. 39-42.

Business dysfunction can result when the accounting method used is not appropriate. Three different organizational structures exist within a large company: 1) the product organization, 2) the functional organization and 3) the business process organization. Generally accepted accounting principles (GAAP) serve the functional organization. The other two organizations need an accounting method that matches activities with products: ABC. [I]

Implementation

Brausch, John M., Selling ABC, Management Accounting, February 1992, pp. 42-46.

New cost systems can flounder if they're not marketed. Selling top management on the need for a new cost system is an arduous task - especially if they're more at home with the ledger than with marketing strategies. Selling top management on a new system involves three considerable hurdles: 1) admitting that the current system is inadequate, 2) proving that a new system will do better than the old system and 3) justifying the sometimes tremendous implementation costs. Two ABC implementations, one successful and the other not, are compared. Reasons why one was successful and the other was not are discussed. [I]

Brinker, Barry J (editor), Chapter B2: Implementing Activity-Based Costing, Handbook of Cost Management, Boston, MA: Warren, Gorham, and Lamont, 1992, pp. B2-2 - B2-32.

The authors set forth "a plan" for implementing ABC. This is a first rate source of information about the objectives and considerations that must be addressed in an implementation. [I]

Cooper, Robin, Implementing an Activity-Based Cost System, Journal of Cost Management, Vol. 4, No. 1, Sp90, pp. 33-42.

A structured approach to ABC implementation is analyzed. What design questions must be addressed before implementation? Cooper identifies at least six major decisions: 1) stand alone or integrated system, 2) simple or complex design, 3) level of precision desired 4) historical or future orientation, 5) "ownership" of final system and 6) whether a formal design plan should be used. These decisions will affect the time and cost of the ABC implementation. The steps used in successful implementations are also identified and discussed. These include ABC education, design meetings, data gathering, progress meetings and results meetings. [A]

Cooper, Robin, A Structured Approach to Implementing ABC, Accountancy, Vol. 107, June 1991, pp. 78-80.

This writing is based on Cooper's Implementing an Activity-Based Cost System article that appeared in the Spring 1990 issue of the Journal of Cost Management. Cooper presents, in a nutshell, the design questions that must be answered up front and the steps that ensure a successful implementation. [I]

Cooper, Robin, Robert S. Kaplan, Lawrence S. Maisel, Eileen Morrissey and Ronald M. Oehm, Implementing Activity-Based Cost Management: Moving from Analysis to Action, Montvale, NJ: Institute of Management Accountants, 1992.

This is a one-stop resource for implementation information. Chapters are devoted to ABC implementations at Advanced Micro Devices, Farrall, Inc., Williams Brothers Metals, ARCO Alaska, Monarch Mirror Door Company, Steward & Company, Slade Manufacturing, Inc. and Kraft USA. One chapter addresses organizational barriers to ABC implementation and another addresses research methodology. An appendix contains fundamental implementation steps. [I-A]

Greene, Alice H. and Peter Flentov, Managing Performance: Maximizing the Benefit of Activity-Based Costing, Journal of Cost Management, Vol. 4, No. 2, Sm90, pp. 51-59.

An effective set of performance measurements evaluates the activities that a business must perform well. Traditional financially oriented measurements do not measure the critical activities of the company. Significant performance improvements can be realized through ABC and ABM implementation - but new performance measurements must be determined and the old measurements must be abandoned. [I]

Institute of Management Accountants, Practices and Techniques: Implementing Activity-Based Costing, Statements of Management Accounting, Statement No. 4T, September 30, 1993.

This publication provides an overview of the process of designing and implementing an ABC system. Although written specifically for management accountants, non-accountants will find the information easy to understand. [I]

Kleinsorge, Ilene K. and Ray D. Tanner, Activity-Based Costing: Eight Questions to Answer Before You Implement, Journal of Cost Management, Vol. 5, No. 3, F91, pp. 84-88.

The authors present eight questions to companies contemplating ABC implementation. Most of these are behavioral in nature (is top management outwardly committed to ABC?, do performance measures help you manage the "forest" or the "trees"?, is the firm ready for a change?, etc.). The authors emphasize that the primary issues in ABC implementation are management issues, not costing issues. [I]

Miller, John A., The Best Way to Implement an Activity-Based Cost Management System, Corporate Controller, Vol. 3, No. 1, September/October 1990, pp. 8-13, 32.

ABC implementation is examined from the controller's point of view. Eight general steps are identified for implementation. The author recommends a three to six person implementation team and time frame of four to six months for implementation (regardless of the size of the business). The author also plots an implementation schedule. Behavioral issues are also discussed. [I]

Miller, John A., Designing and Implementing a New Cost Management System, Journal of Cost Management, Vol. 5, No. 4, W92, pp. 41-53.

The author discusses how to plan, design and implement a new cost management system. Two goals for new cost management systems are as follows: 1) the gathering of financial and operating information that reflect the performance of activities and 2) supplying management with relevant information for planning, managing, controlling and directing business activities to improve processes and products, reduce waste and execute strategies. [I]

Morrow, Michael and Tim Connelly, Practical Problems of Implementing ABC, Accountancy, January 1994, pp. 76-80.

The lessons learned from others' mistakes (failed ABC implementations) are the subject of the authors' attention. The practical problems associated with ABC implementation fall into five categories: 1) behavioral, 2) project focus, 3) commitment, 4) data availability and 5) consistency of approach. As an example, the authors caution against using outside consultants (in lieu of committing company hours) for the activity analysis and data gathering because the company itself must "own" the project. Lack of "ownership" becomes a commitment problem. [I]

Norkiewicz, Angela, Nine Steps to Implementing ABC, Management Accounting, April 1994, pp. 28-33.

ABC implementation at Pennsylvania Blue Shield is examined. The corporate culture at Pennsylvania Blue Shield ("slow to move or change") presented an obstacle to change. Management found it difficult to accept the new ABC information as valid, even though it was more relevant than the old information. Based on PBS's experience, the author outlines nine steps for a successful ABC implementation. [I]

Turney, Peter B. B., Ten Myths About Implementing an Activity-Based Cost System, Journal of Cost Management, Vol. 4, No. 1, Sp90, pp. 24-32.

Ten myths concerning ABC are identified, explored and refuted. Most of the basic ideas are true - but only under certain limited conditions. When applied to ABC systems at large, they become myths. The myths fall into four thematic categories: 1) ABC systems are too difficult to use, 2) Improving our existing system will provide the same benefits, 3) Our product costs are accurate enough for our needs and 4) Cost systems are of limited benefit. [I]

Implementation - Case Studies

Berlant, Debbie, Reese Browning and George Foster, How Hewlett-Packard Gets Numbers It Can Trust, Harvard Business Review, January-February 1990, pp. 178-183.

The accounting department at H-P's RND division redesigned its cost accounting system to make it more responsive to the needs of its users (accounting, marketing, manufacturing, and design). They contemplated designing separate cost systems for each function but chose to design one system instead. The production manager had been keeping his own cost system on a PC - and this system allocated costs according to production complexity. This became the nucleus of the new system. The accountants stress that they are continually modifying the system to improve the relevance of process (and product) costing. [I]

Chaffman, Beth M. and John Talbott, Activity-Based Costing in a Service Organization, CMA Magazine, December/January 1991, pp. 15-18.

ABC is applied to a service organization (E & A Services Company) that historically allocated on a direct labor dollar basis all costs not directly chargeable to a project. Because costs for different offices were not segregated, there existed the potential for one office to subsidize another office's costs. Previous cost containment efforts led to the use of cheaper, lower quality labor which impaired the company's level of service. The authors advocate the use of ABC within the variable contribution margin approach. The use of absorption costing complicates the ABC allocation process. [I]

Drumheller, Jr., Harold K., Making Activity-Based Costing Practical, Journal of Cost Management, Vol. 7, No. 2, Sm93, pp. 21-27.

The controller of a small manufacturing company (Tycos) describes how ABC was implemented at the company. Simplicity was required for the managers to accept the system's output. In addition, as many assumptions as possible were removed in order to increase the relevance of the information. The original goal was merely to produce relevant information - it was not incorporated into the reporting system and inventory was not valued using ABC costs. After implementation, management began using ABC in many more facets of operation such as capital budgeting, target costing and process costing. This is a valuable look at theory turned into practice. [I]

Eiler, Robert G., and John P. Campi, Implementing Activity-Based Costing at a Process Company, Journal of Cost Management, Vol. 4, No. 1, Sp90, pp. 43-50.

This article outlines the steps that Chemical One took in its implementation of an ABC system. It begins with a preliminary diagnosis (why we don't feel like our current system is adequate for decision making) and continues to the business profile obtained through activity analysis. Conceptual cost flows are developed through cost driver analysis, and value-added and non-value-added activities are identified. There are several easily understandable graphics used to illustrate the process. [A]

MacArthur, John B., Zero-Base Activity-Based Costing, Journal of Cost Management, Vol. 6, No. 4, W93, pp. 45-49.

A small manufacturer implemented a PC-based ABC system as its first cost system. Prior to this, the company had relied on ad-hoc, seat of the pants cost information. Prices were determined by external market forces. The company, Bertch Cabinet Mfg., Inc., had grown rapidly from a single product firm to a multiproduct firm. Two divisions were selected as pilot studies. The objectives of the ABC system were to identify non-value-added activities and to provide relevant information for long-term profitability analysis of products. [I]

Mangan, Thomas N., Integrating an Activity-Based Cost System, Journal of Cost Management, Vol. 8, No. 4, W95, pp. 5-13.

Mangan presents an example of a real-life implementation of an ABC system at Harris Semiconductor Sector (Harris Corporation). This ABC system was fully integrated into the company's operations as an official system, not as a separate, off-line management tool. Although the article documents the implementation in a manufacturing environment, the concepts presented could easily be adapted to a different environment. Especially valuable is a list of "lessons learned" from the implementation. [I]

Rupp, Alan W., ABC: A Pilot Approach, Management Accounting, January 1995, pp. 50-55.

Implementation of ABC got off to a slow start at the Chemicals Products Division of the Lord Corporation: senior management listened, studied the plan, and decided it was an unnecessary accounting exercise. The author explains, in hindsight, why the pilot project failed to get off the ground. With their lessons learned, they tried a pilot project at another division and were successful. ABC models are maintained on Excel spreadsheets and are used for strategic decision making. [I]

ABC Use in Functional Areas

Analyzing Customer Profitability

Anderson, James C., and James A. Narus, Capturing the Value of Supplementary Services, Harvard Business Review, January-February 1995, pp. 75-83.

Are you giving away services just to get the business? How much are these services actually costing you? Do you know how to value ancillary services? The authors stress the strategic value of product related services and suggest ABC as a method to value these services. With a cost and value identified for each separate transaction, these transactions can then be combined in packages that your customers value - in a cost effective manner. This is a thought provoking look at how the services provided by a company can become competitive advantages. [I]

Brinker, Barry J (editor), Chapter B5: Customer-Driven Costs Using Activity-Based Costing, Handbook of Cost Management, Boston, MA: Warren, Gorham, and Lamont, 1992, pp. B5-2 - B5-29.

Using ABC to analyze customer-driven costs provides significant insight into which customers are profitable. Once these customers are identified, the company can then target these customers, develop more effective customer service policies and learn to cut costs without sacrificing customer service. The customer-driven ABC system is very similar to a manufacturing ABC costing system. [I]

Howell, Robert A., and Stephen R. Soucy, Customer Profitability - As Critical as Product Profitability, Management Accounting, October 1990, pp. 43-47.

ABC analysis can be applied to customers as well as to products. Determining customer profitability (by comparing the total cost associated with that customer to the revenue stream produced by that customer) is as important as determining product profitability. The article proposes a model called Resource Costing to analyze customer profitability. This model is really ABC in disguise. [I]

Kanal, Vijay, Which Customers Are Profitable?, US Distribution Journal, March 15, 1992, pp. 12-14.

Distribution firms that rely on outdated methods to calculate profits and costs are putting themselves at a serious disadvantage. The inability to identify profitable and unprofitable customers is damaging their ability to compete. Traditional accounting systems are ill equipped to assign costs to customers who buy different products in different amounts with differing frequencies at different locations. With ABC, it is possible to assign costs to customers - and determine their profitability. [B]

Antitrust Litigation

Committe, Bruce E. and D. Jacque Grinnell, Predatory Pricing, The Price-Cost Test, and Activity-Based Costing, Journal of Cost Management, Vol. 6, No. 3, F92, pp. 52-58.

The application of ABC methodology to antitrust litigation is explored in this article. Antitrust statutes prohibit predatory pricing as an attempt to monopolize. The price-cost relationship is examined by the courts to determine if predatory pricing exists. This relationship is relied on by all courts to varying degrees. The federal circuit courts have become increasingly aware of the need to establish an appropriate measure of cost for the price-cost test. ABC is proposed as the most accurate measure of cost. [I]

Business Process Re-engineering (BPR)

Briody, L. Patrick, Going From Cost-Plus to `Sink or Swim' Can Be as Easy as ABC, Electrical World, August 1994, pp. 10-11.

ABC can be used by electric utility companies that are making the transition from regulated industry to free competition. The ABC system at Carolina Power and Light was implemented in conjunction with re-engineering efforts. [B]

Cokins, Gary, Finding the Crossroad to Change, Bobbin, August 1994, pp. 66-74.

ABC's role in BPR is examined. ABC identifies business processes that are non-value-added and can be either reduced or eliminated. This is the heart of BPR. Many companies attempt BPR after finding that slash and burn cost reductions merely reduce their ability to compete. [B]

Moravec, Robert D. and Michael S. Yoemans, Using ABC to Support Business Re-Engineering in the Department of Defense, Journal of Cost Management, Vol. 6, No. 2, Su92, pp. 32-41.

ABC is a key component of the corporate information management program created at the DoD because it provides relevant information for various efforts to achieve process improvements. The objective of the program is to change the way people work in the DoD. A pilot project on the in-house individual job order process and the lessons learned from the pilot project are discussed. [I]

Porter, Thomas F. and Joseph G. Kehoe, Using Activity-Based Costing and Value Analysis to Take the Pain Out of Downsizing at a Naval Shipyard, National Productivity Review, Winter 1993/1994, pp. 115-125.

A changing worldwide military environment has led to the restructuring of the Charleston, SC Naval Shipyard. During the Cold War, quality and speed of ship overhauls were emphasized with little regard to cost, Now, quality and speed are still emphasized, but the customer (the government) demands much lower costs. After personnel had been trimmed as much as possible, ABC was used to streamline its support operations. ABC turned a very subjective procedure into a data-driven, objective discussion of structure and staffing. There is also a decision tree for value added analysis (to determine whether an activity is value-added or non-value-added). [I]

Sharman, Paul A., Frame Breaking, Management Accounting, Vol. 74, September 1992, pp. 52-55.

ABC's and management accountants' contributions to reengineering are examined. An ABM implementation at Thor*Lo Socks is highlighted. [B]

Efficient Consumer Response (ECR)

Cahill, Jim, ECR: The Vision, the Reality, Beverage World, (supplement), April 1995, pp. 16-17.

This article presents a concise overview of the process redesign inherent in Efficient Consumer Response (exchange of POS data through EDI, transition to "pull" replenishment from "push" replenishment, increased variety in transportation, reduced inventory, etc.) ECR is the buzzword the grocery industry has assigned to the developments in the supply chain distribution for the industry. [B]

Freedman, Julian M., IMA's CIC Supports ECR's Use of ABC, Management Accounting, May 1993, p. 70.

Five guiding principles of ECR, as developed by the grocery industry with consultants Kurt Salmon Associates, Inc., are outlined. These principles are within the assessment benchmarking approach planned for IMA's Continuous Improvement Center (CIC). [B]

Valero, Greg, Do You Know Where Your Costs Are?, US Distribution Journal, April 15, 1994, pp. 21-24.

The author identifies ABC as the "very foundation" of Efficient Consumer Response. There are some interesting examples cited from the implementation of ABC at Shrivner, Inc. and Wetterau (grocery wholesalers). [B]

Government

Haedicke, Jack and David Feil, In a DoD Environment: Hughes Aircraft Sets the Standard for ABC, Management Accounting, February 1991, pp. 29-33.

An ABC project at Hughes Aircraft is increasing cooperation between contractor and the federal government. Recent changes in DoD procurement policies have increased competition for contracts. Future contract winners will be the companies with the lowest costs and the highest quality. The ABC implementation at Hughes is discussed. [I]

Harr, David J., How Activity Accounting Works in Government, Management Accounting, September 1990, pp. 36-40.

As a result of implementing ABC as budgeting and financial performance measurements, the Naval Supply Systems Command reduced its operating costs without losing the timeliness and quality of its services. ABC was implemented at eight locations. The implementation at the Jacksonville, FL facility is discussed. [I]

Harr, David J. and James T. Godfrey, Making Government `Profitable', Management Accounting, February 1992, pp. 52-57.

Since governmental agencies do not operate in a profit seeking environment, which cost-based financial performance measures as used in the private sector should be used in governmental environments? A survey was conducted of private sector organizations and the results are examined and summarized. [I]

Musso, Francis, J., Activity-Based Costing for Defense Contractors, The CPA Journal, Vol. 62, May 1992, pp. 79-83.

A defense contractor faces ABC implementation obstacles that a commercial enterprise does not. Defense contractors must follow Cost Accounting Standards (CAS). These standards mandate that a change in accounting practice (i.e. a change to ABC) must be disclosed to the federal government. If ABC results in higher costs being charged to a particular project, the government reserves the right to either increase payment or not. If ABC results in lower costs being charged to a particular project, the government will adjust payment downwards. The Truth in Negotiation Act may also discourage defense contractors from adopting ABC. [I]

Information Systems

Compton, Ted R., Using Activity-Based Costing in Your Organization - Part 2, Journal of Systems Management, April 1994, pp. 36-39.

ABC application in an computerized information systems environment is discussed. The use of ABC allows the computer support group to focus on value-added activities of the information system. Identifying those activities that add value to customer service is an essential component of continuous improvement and TQM programs. [I]

Menzano, Ralph, J., Activity-Based Costing for Information Systems, Journal of Cost Management, Vol. 5, No. 1, Sp91, pp. 35-39.

As information systems evolve from centralized facilities to networked computer systems, the costs of providing information become blurred. ABC can be applied to the area of information technology to analyze and identify the costs of providing diverse information to many different users. [I]

Just-in-Time (JIT)

DeLuzio, Mark C., Management Accounting in a Just-in-Time Environment, Journal of Cost Management, Vol. 6, No. 4, W93, pp. 6-15.

The management accounting system must change in a company that adopts JIT. Traditional accounting measurements typically fail to measure the things that are important in a JIT environment and often promote dysfunctional behavior in a JIT environment. The author explains how traditional accounting systems conflict with JIT and suggests ways to improve management accounting systems so that they work with, and not against, JIT. [I]

Foster, George and Charles T. Horngren, Cost Accounting and Cost Management in a JIT Environment, Journal of Cost Management, Vol. 1, No. 4, W88, pp. 4-14.

The impacts of JIT on cost accounting, cost management and management accounting are explored. The article is based on discussions with managers of domestic and foreign organizations that have adopted JIT. Discussions with public accounting firms and consulting firms engaged by organizations adopting JIT also form part of the article's basis. [I]

Green, F. B., and Felix Amenkhienan and George Johnson, Performance Measures and JIT, Management Accounting, February 1991, pp. 50-53.

Traditional cost systems tend to impair JIT implementation because of their reliance on standards, emphasis on variances, preoccupation with direct labor and their inappropriate measures of performance. The authors recommend overhead allocations bases other than direct labor (because frequently there is no direct labor attributed to the product in JIT environments). Bases should be revised to reflect the actual causes of the overhead cost. Examples of allocation bases for one JIT location are given. Revised performance measures are based on revised costs generated by the ABC style system. [I]

MacArthur, John B., The ABC/JIT Costing Continuum, Journal of Cost Management, Vol. 5, No. 4, W92, pp. 61-63.

The author proposes the use of ABC for companies with heterogeneous products (i.e. companies that may not be able to implement full blown JIT purchasing and production systems). For companies with homogeneous product groups, JIT may prove the superior method. [I]

Redman, Perry M., Cost Accounting Changes Used to Increase Cost Reporting Response, Journal of Cost Analysis, Spring 1994, pp. 125-134.

Traditional cost systems are no longer acceptable for corporations seeking to increase the speed and accuracy of reporting cost changes in a JIT environment. ABC can help to improve cost system communications. The author addresses some techniques that can be used to increase the responsiveness of cost reporting systems. ABC, even with the limitations identified by the author, is an effective method of tracing costs to their associated drivers. [I]

Tyndall, Gene R., Just-in-Time Logistics: Added Value for Manufacturing Cost Management, Journal of Cost Management, Vol. 3, No. 1, Sp89, pp. 54-59.

ABC is not specifically addressed in this article. Instead, the principles of JIT logistics are discussed. JIT requires either 1) improved customer service at the same cost or 2) current levels of customer service at lower cost. JIT strives to eliminate waste in operations, and ABC analysis can be used to identify this waste. [I]

Logistics

Andel, Tom, Get Fit for the Future: Warehousing Does Have a Future. Learn What It Will Take to Be a Part of It, Transportation & Distribution, January 1995, pp. 83-87.

The author does not explore the technicalities of ABC costing in the warehousing function. Rather, he stresses the importance of process redesign to the survival of the warehousing function. Key to the success of redesign are upgraded information systems and a quality workforce. Good source of background information on developments in the distribution area. [B]

Andel, Tom, Ready....Fire...Aim!, Transportation & Distribution, July 1993, p. 54.

What are the costs of operating a warehouse? Many managers have a good grasp of the overall costs - the cost of labor and space - but few have a good grasp of the transactional costs. ABC can be used to determine order and customer profitability by determining the costs of product movement and storage. [B]

Auguston, Karen A., Activity-Based Costing Adds Up to Big Benefits, Modern Materials Handling, June 1993, pp. 57-59.

MMH interviews Dr. Thomas Cullinane of Northeastern University. Cullinane, an expert on engineering economy, advocates the use of ABC to quantify "non-financial" benefits that result from material handling projects. ABC measures, in additional to the standard financial measures, could increase the chances of a project being approved. [B]

Datar, Srikant, Sunder Kekre, Tridas Mukhopadyay and Eric Svaan, Overloaded Overheads: Activity-Based Cost Analysis of Material Handling in Cell Manufacturing, Journal of Operations Management, Vol. 10, No. 1, January 1991, pp. 119-137.

The authors discuss the results of their field study which illustrates the use of ABC to quantify the benefits of cell manufacturing and synchronized process flows. The area of materials handling within cell manufacturing was identified as a promising area for ABC analysis. As expected, the ABC system supported the improvements made in moving to cell manufacturing. Although the material flow examined is manufacturing oriented, many of the concepts can easily be transferred to distribution material handling. [I]

Donnelly, Harrison, Still Struggling on Supply Chain Improvements, Stores, March 1995, pp. 56-57.

A study prepared by Anderson Consulting indicates that mass merchandisers, long thought to be the pioneers in supply chain management, still face numerous opportunities to reduce costs and enhance customer service. Many of these businesses are hampered by incompatible information systems between supply chain links and an overabundance of information that is not fully utilized. Vendors are frustrated by the difficulties in complying with "the Wal-Mart way, the K-Mart way and the Target way". The use of ABC is suggested as a way to identify which link in the supply chain is the most efficient provider of a particular service. Information is given on how to obtain a copy of the Anderson report. [B]

Drucker, Peter F., The Information Executives Really Need, Harvard Business Review, January-February 1995, pp. 54-62.

Drucker advocates managing a business as a part of the entire economic chain. The shift from cost-led pricing to price-led costing, in his opinion, will force companies into economic chain costing. The company must know the costs of the entire value chain and recognize which link in the chain is able to perform a given function more efficiently. ABC can be used to identify whether an activity needs to be done and, if so, where is it best done. History has shown again and again that a company which enjoys a cost advantage (by identifying the costs of the entire value chain and managing these costs) overtakes the established leaders in a market segment. [I]

Gooley, Toby B., Finding the Hidden Cost of Logistics, Traffic Management, March 1995, pp. 47-53.

ABC exposes the hidden costs of selling to customers - particularly when they demand LTL shipments, special labeling, direct delivery to retail outlets and last minute order changes. ABC analysis identifies opportunities for cost reductions to improve profit margins on sales to difficult customers (those who demand the above activities). Illustrations are provided for the order fulfillment function. [I]

Henkoff, Ronald, Delivering the Goods, Fortune, November 28, 1994, pp. 64-78.

The tone of this article can be summarized with the following quote: "Logistics, long an unsung, operations-intensive area, has suddenly become very strategic". The author examines several companies who've found operating opportunities in the logistics area after applying ABC techniques to capture the costs of particular activities. These companies include Compaq, National Semiconductor and Saturn. As a contrast, the grocery industry is also profiled. Not much detail on ABC but an interesting article for background. [B]

Herr, John D., Managing Logistics Costs as a Business Investment, Emerging Practices in Cost Management, Barry J. Brinker, ed., Boston, MA: Warren, Gorham & Lamont, 1990, pp. 219-224.

Understanding the comprehensive and true costs of logistics and using this knowledge to improve the distribution chain can lead to improved performance and profitability. A well-designed logistics function supports the company's overall strategy and adds value above and beyond its cost. [I]

Houlihan, John B., International Supply Chain Management, International Journal of Physical Distribution and Materials Management, Vol. 15, No. 1, 1985, pp. 22-38.

Competitive pressures and changes in the economic climate have forced management of international companies to re-evaluate the operation and structure of international supply chains. The concepts underlying new approaches to managing change in international chains are described. Also discussed are the barriers that need to be overcome and some of the lessons learned from implementation. [I]

Institute of Management Accountants, Practices and Techniques: Cost Management for Freight Transportation, Statements of Management Accounting, Statement No. 4I, June 1, 1989.

The intent of this publication is to assist management accountants in improving the way in which costs associated with the transportation of freight are identified, measured and managed. The intended audience consists of accountants and other people not necessarily familiar with logistics. [I]

Institute of Management Accountants, Practices and Techniques: Cost Management for Logistics, Statements of Management Accounting, Statement No. 4P, June 30, 1992.

The intent of this publication is to assist management accountants in improving the way in which logistics costs are identified, measured and managed. The intended audience consists of accountants and other people not necessarily familiar with logistics. [I]

Institute of Management Accountants, Practices and Techniques: Cost Management for Warehousing, Statements of Management Accounting, Statement No. 4K, September 7, 1989.

The intent of this publication is to assist management accountants in improving the way in which costs associated with warehousing goods are identified, measured and managed. The intended audience consists of accountants and other people not necessarily familiar with logistics. [I]

Kanal, Vijay, Which Customers Are Profitable?, US Distribution Journal, March 15, 1992, pp. 12-14.

Distribution firms that rely on outdated methods to calculate profits and costs are putting themselves at a serious disadvantage. The inability to identify profitable and unprofitable customers is damaging their ability to compete. Traditional accounting systems are ill equipped to assign costs to customers who buy different products in different amounts with differing frequencies at different locations. With ABC, it is possible to assign costs to customers - and determine their profitability. [B]

La Londe, Bernard J. and Terrance L. Pohlen, Researchers Identify Implications of ABC Implementation for Transportation Industry, Transport Topics, October 4, 1993, pp. 13-14.

The authors apply ABC to the transportation function. Research performed by the Transportation and Logistics Research Group at Ohio State University indicates that most firms initially implemented ABC in order to compute more accurate product costs or to improve performance measurement. However, most also identified increased competitiveness as an unexpected benefit. ABC can be used to evaluate the performance of parties in the supply chain. ABC based information will also affect carrier evaluation process. [I]

Magnet, Myron, The New Golden Rule of Business, Fortune, February 21, 1994, pp. 61-64.

Close customer-supplier relationships help trim costs in today's predatory world economy. Improved quality, design and speed result from such relationships. A well-maintained relationship yields benefits for both supplier and customer. ABC identifies costs, such as marketing and sales, that are unnecessary in a maintained relationship. The customer pays for only the services it gets. [B]

Manning, Kenneth H., Distribution Channel Profitability, Management Accounting, January 1995, pp. 44-48.

The author applies ABC methodology to the distribution channel. Customer demands on the channel and the choice of channels itself are identified as cost drivers in the ABC system. Costs are aggregated into three types: product related costs, channel related costs and customer related costs. The approach is outlined as a easily understood four-step process. ABC has historically focused on product related costs, but the approach transfers easily to customer service, transportation, analysis of outsourced products/activities, etc. [I]

Orgel, David, Spartan Takes Re-engineering Up a Notch, Supermarket News, September 19, 1994, pp. 1-2.

Spartan Stores is in the process of implementing ABC in its transportation function as a pilot project. The company has completed interviews with transportation associates and has collected the relevant cost data. Spartan's objective is to use ABC as a decision making tool. [B]

Partridge, Mike and Lew Perren, Cost Analysis of the Value Chain: Another Role for Strategic Management Accounting, Management Accounting (UK), July/August 1994, pp. 22-24.

Traditional cost systems are ill equipped to provide relevant information for analysis of value chain costs. ABC, with its focus on activity analysis, is a natural choice for value chain analysis. The authors provide an attribute cost model which demonstrates the collection of information necessary for value chain activity analysis. There is also a comparison of traditional cost systems and value chain cost analysis which highlights the shortcomings of traditional systems. [I]

Pendlebury, John and Richard Platford, The Heavy Hidden Cost of Materials Handling, Journal of Cost Management, Vol. 2, No. 1, Sp88, pp. 4-8.

Storage has usually been treated as a free resource and materials handling either as an unavoidable port of direct labor or fixed factory overhead. However, increased competition has forced companies to streamline costs and processes. Although ABC is not mentioned in this article (it appeared prior to the explosion of ABC literature), the author points out that the lack of understanding about distribution costs is a result of a lack of analysis - due to the difficulty of collecting the information in a traditional cost setting. [I]

Pohlen, Terrance L., Applications of Activity-Based Costing Within Logistics: Who is Using Activity-Based Costing and Where?, 1993 Proceedings of the Annual Conference of the Council of Logistics Management, Washington, DC.

The results of a survey performed by the Transportation and Logistics Research Group of The Ohio State University are presented. Eleven organizations participated in a case study analysis. The objective of the case studies was to obtain in-depth information regarding how and where the eleven organizations had used ABC to support logistics decision-making. Possible future directions of ABC implementation within logistics are discussed. [I]

Pohlen, Terrance L. and Bernard J. La Londe, Implementing Activity-Based Costing (ABC) in Logistics, Journal of Business Logistics, Vol. 15, No. 2, 1994, pp. 1-24.

The accounting of and control over logistics costs will become increasingly important to firms seeking competitive advantages. ABC provides logistics firms with a more accurate system for costing activities and measuring performance. Logistics costs typically are buried in a company's overhead, and logistics managers often do not have control over costs they haven't identified. The level of ABC sophistication necessary is based on the firms' objectives, ongoing capability to track activity information, the proportion of indirect costs, and the diversity of products, services, customers or supply channels. The results of a survey polling ABC use in logistics areas are discussed. [I]

Quillian, Lawrence F., Curing "Functional Silo Syndrome" with Logistics TCM, CMA Magazine, June 1991, pp. 9-14.

Key elements of Total Cost Management are ABC, process value analysis and performance measurement. TCM can act as a catalyst for integrating isolated logistics functions, leading to substantial improvements in costs, cycle times, inventories and levels of customer service. [I]

Rogers, Dale S. and Timothy M. Vaio, The Application of Activity-Based Costing to Distribution Systems, Unpublished Working Paper, University of Nevada, Reno.

The authors apply ABC to the distribution function. Bar coding is suggested to improve both the quality and collection costs of the cost data. An ABC model developed for a large semiconductor firm is discussed. There is a good graphical representation of the model which identifies the cost drivers used in the ABC model. [B-I]

Roth, Harold P., and Linda T. Sims, Costing for Warehousing and Distribution: Using ABC in a Warehouse Can Affect the Bottom Line, Management Accounting, Vol. 73., No. 2, August 1991, pp. 42-45.

ABC is applied to the warehousing function. Examples of activities and cost drivers are given. [B]

Shank, John K. and Vijay Govindarajan, Strategic Cost Management and the Value Chain, Journal of Cost Management, Vol. 5, No. 4, W92, pp. 5-21.

The author explains how to construct and use value chains. A case study in the airline industry reveals that traditional management accounting approaches fail to provide relevant information about the value chain. The author examines how ABC and similar cost management tools can be usefully accommodated within the value chain concept. [I]

Thomas, Jim, As Easy as ABC, Chilton's Distribution, January 1994, pp. 40-41.

ABC use at Nabisco Foods Group is discussed. The enormous diversity in products and distribution channels makes ABC a superior method of allocating overhead costs for this company. [I]

Tyndall, Gene R., Analyzing the Costs and Value of the Product Distribution Chain, Journal of Cost Management, Vol. 2, No. 1, Sp88, pp. 45-51.

Costs are the driving force behind major changes in distribution channels. A fundamental issue is assessing the costs and value of various distribution channels for different products and different markets. The methodology suggested by the author is a form of ABC. [I]

Tyndall, Gene R., Logistics Cost and Service Levels: Evaluating the Trade-offs, Emerging Practices in Cost Management, Barry J. Brinker, ed., Boston, MA: Warren, Gorham & Lamont, 1990, pp. 211-217.

Increased service levels can increase logistics costs significantly. Finding the proper level of service given the costs requires an organization to identify, measure and evaluate the trade-offs among logistics activities. [I]

Tyndall, Gene R., Obtaining Better Information to Control Freight Costs: Some Guidelines, Journal of Cost Management, Vol. 2, No. 2, Sm88, pp. 55-61.

A key to managing freight costs is having the right information available at the right time and in the right format for supporting decisions about carrier selection, routing and scheduling. The author presents practical guidelines for obtaining the appropriate information. ABC is not addressed in the article, but it is clear that ABC has the capability to provide the needed information as identified by the author. [I]

Outsourcing Decisions

Chalos, Peter, Costing, Control and Strategic Analysis in Outsourcing Decisions, Journal of Cost Management, W95, pp. 31-37.

Empirical evidence suggests that companies do not always realize the expected benefits of outsourcing. One explanation points to the underestimation of transaction and coordination costs. Another explanation points to the fact that accounting costs (with arbitrary fixed cost allocations) are often used in outsourcing analyses. [I]

Purchasing

Ellram, Lisa M., Activity-Based Costing and Total Cost of Ownership: A Critical Linkage, Journal of Cost Management, Vol. 8, No. 4, W95, pp. 22-30.

ABC and TCO are compared and contrasted with a focus on the purchasing function. The author also lists potential cost drivers for purchasing activities. [I]

Porter, Anne Millen, Tying Down Total Cost, Purchasing, October 21, 1993, pp. 38-43.

ABC and ABM are applied to the purchasing function. ABM reveals the upstream costs/benefits from poor/good purchasing decisions. ABC provides the mechanism to evaluate purchasing's performance on a company-wide basis. ABC's relationship to the total cost of ownership is also discussed. [I]

Roehm, Harper A., Melissa A. Critchfield and Joseph F. Castellano, Yes, ABC Works with Purchasing, Too, Journal of Accountancy, November 1992, pp. 58-62.

The authors tested the feasibility of applying ABC to purchasing. ABC worked well when used to analyze a purchasing department, and the information it provides is especially helpful when establishing a product's price and in determining its contribution to profit. [I]

Service Industries

Canby, James B., Applying Activity-Based Costing to Healthcare Settings, Healthcare Financial Management, February 1995, pp. 50-55.

ABC is applied to a healthcare setting. The discussion of ABC is fairly non-technical but there are several examples given from the healthcare application. [I]

Crane, Michael and John Meyer, Focusing on True Costs in a Service Organization, Management Accounting, February 1993, pp. 41-45.

Fireman's Fund took a "snapshot" of its operating expenses to develop a clearer picture of its product, customer and activity costs. Sampling techniques were used to derive the activity analysis because it was particularly difficult to measure employees' time spent on a given activity. ABC generated costs confirmed what intuition had suspected: small accounts were more expensive to process than large accounts. Fireman's Fund redesigned processes to incorporate this new information. [I]

Pirrong, Gordon D., As Easy as ABC: Using Activity-Based Costing in Service Industries, The National Public Accountant, February 1993, pp. 22-27.

Incorrect cost allocations to jobs in service firms will result in the firm not being competitive when bidding jobs. Performance measurement will also be negatively affected. ABC can readily be adapted to use by labor intensive service industries. [I]

Rodgers, Jacci L., S. Mark Comstock and Karl Pritz, Customize Your Costing System, Management Accounting, May 1993, pp. 31-32.

Management of a printing company tailored ABC to meet their particular need: a quick method of calculating accurate bid estimates. The company had been operating at full capacity and losing money. The ABC based system incorporates machine constraints in calculating bids. Prior to the new bidding system, jobs were bid without knowledge of which press (with its related costs) would run the job. [I]

Rotch, William, Activity-Based Costing in Service Industries, Journal of Cost Management, Vol. 4, No. 2, Sm90, pp. 4-14.

Can ABC be applied in a service setting? It can be - with some difficulty, depending on the industry and product. Defining output is usually more difficult due to the many intangible qualities of "service", and since services are not inventoriable, unused capacity is often an unavoidable cost. Systems designed for two railroads (freight and passenger), a data processing company and a hospital are discussed in general terms. [I]

Target Pricing

Brausch, John M., Beyond ABC: Target Costing for Profit Enhancement, Management Accounting, November 1994, pp. 45-49.

The author walks his audience through a process redesign at Culp, Inc. that was precipitated by a conversion to target costing. Analysis of the "current" product costs revealed that the vast majority of manufacturing costs (80%) were established during the product design stage. All previous efforts at cost management had focused on the 20% of costs not dictated by product design. The design process was revised so that costs were minimized up front. This, in turn, led to the ability to meet customer dictated target costs. [I]

Shim, Eunsup, and Ephraim F. Sudit, How Manufacturers Price Products, Management Accounting, February 1995, pp. 37-39.

The authors examine the relationship between product cost and product price. They identify a shift towards target costing (the cost the customer will accept) from full costing (full cost plus markup). If costs are not currently allocated to multiple products using appropriate methods in a full costing system, the use of ABC may reduce distortion in product cost (and price) under the cost-plus approach. Herbert Simon's "satisficing" model is analyzed as a compromise between the economic "marginal cost = marginal revenue" profit maximization model and true variable costing. The authors arrive at their conclusions by comparing the results of surveys conducted in 1983 and 1993. [I]

Total Cost of Ownership (Life-Cycle Costing)

Carr, Lawrence P. and Christopher D. Ittner, Measuring the Cost of Ownership, Journal of Cost Management, Vol. 6, No. 3, F92, pp. 42-51.

Many cost systems motivate managers to select suppliers based solely on quoted price. Total cost of ownership theory assesses purchasing department and supplier performance on a "total cost of doing business" basis. This includes the purchase price plus the costs of purchasing, the costs of holding, the costs of poor quality and the costs of delivery failure. Traditional cost systems tend to bury all but the purchase price in overhead accounts. This leads to decisions based solely on quoted price. An ABC system can support a TCO approach by identifying and highlighting these buried costs. [I]

Ellram, Lisa M., Activity-Based Costing and Total Cost of Ownership: A Critical Linkage, Journal of Cost Management, Vol. 8, No. 4, W95, pp. 22-30.

ABC and TCO are compared and contrasted with a focus on the purchasing function. The author also lists potential cost drivers for purchasing activities. [I]

Goldenberg, Charles B. and Donald H.Turner, Cost of Ownership: As Easy as ABC?, NAPM Insights, September 1991, pp. 10-11.

Companies are now using ABC data to model the cost of business processes. These analyses are critical to developing cost-of-ownership measurements. ABC is gaining acceptance as more companies use these techniques to determine the impact on costs from various suppliers during design, manufacture and service. [B]

Total Quality Management (TQM)

Armitage, Howard and Grant Russell, Activity-Based Management Information: TQM's Missing Link, CMA Magazine, March 1993, p. 7.

Quality programs do not give adequate consideration to cost and do not drive accountability for bottom-line performance deep into the organization. The lack of accountability at operator levels is a major omission of most TQM programs. Individuals are unaware of the impact their improvements have on the profitability of the organization. ABM attempts to correct this deficiency. [I]

Beheiry, Mohammed F., New Thoughts on an Old Concept: The Cost of Quality, CMA Magazine, June 1991, pp. 24-25.

The role of ABC in achieving quality objectives is discussed. ABC quantifies additional costs of non-conformance to requirements by focusing attention on the activities that consume the majority of costs. [B]

Carlson, David A. and S. Mark Young, Activity-Based Total Quality Management at American Express, Journal of Cost Management, Vol. 7, No. 1, Sp93, pp. 48-58.

The author illustrates how ABC contributes to improved quality and more accurate product costing at American Express Integrated Payment Systems (IPS). [I]

Pieper, Chris M., Closing the Circle on Quality, White Paper, Beaverton, OR: ABC Technologies, Inc., 1993.

The author characterizes the three critical issues in a quality program as cost, quality and time. TQM initiatives have focused on quality and time with little or no verifiable emphasis on cost. Pieper proposes a new approach, TQM Plus, which adds ABC methodology to the TQM concept. Four implementation steps are discussed. There is a matrix showing the different costs of quality (prevention, appraisal, internal repair and external repair costs) in various functions (engineering, purchasing, manufacturing, customer service and R&D). [I]

Steimer, Thomas E., Activity-Based Accounting for Total Quality, Management Accounting, Vol. 72, No. 4, October 1990, pp. 39-42.

ABC is perfectly suited to TQM because it encourages management to analyze activities and determine their value to the customer. The author examines ABC in the context of the services performed by the "home office" for multiple business units. ABC prices these services and allows unit managers control over allocations of administrative costs. [I]

Theory of Constraints (TOC) and ABC

Holmen, Jay S., ABC vs. TOC: It's a Matter of Time, Management Accounting, January 1995, pp. 37-40.

The author examines the apparent conflict between the ABC and TOC approaches to managerial decision making. Proponents of each theory dismiss the other theory as irrelevant. However, the author reclassifies the conflict to one of time horizon: ABC is a long term approach whereas TOC focuses on the short term. TOC's recognition of constraints is a valid approach in short term time frames when an assumption is made that the constraints are fixed. ABC's focus on consumption, not spending, is more appropriate to longer time frames during which management can adjust spending levels to reflect consumption. The article provides a concise list of assumptions for each theory. [I]

MacArthur, John B., Theory of Constraints and Activity-Based Costing: Friends or Foes?, Journal of Cost Management, Vol. 7, No. 2, Sm93, pp. 50-55.

TOC and ABC are seen as complementary approaches to continual process improvement. TOC focuses on short term maximization of constrained resources for maximizing "long-run profit". ABC measures the long-run cost of activities. Both seek to identify non-value-added activities (ABC) and waste activities (TOC) with the goal of eliminating them. Both systems provide management with information that can be used for strategic purposes. [I]

Spoede, Charlene, Emerson O. Henke and Mike Umble, Using Activity Analysis to Locate Profitability Drivers, Management Accounting, May 1994, pp. 43-48.

The activity analysis performed as part of the ABC implementation provides detailed information about the capacity of individual resources. This information is utilized in the Theory of Constraints model to determine appropriate product mixes given set resource constraints. It is the TOC model, not the ABC model, that accurately determines optimal product mix. [I]

Survey Results

ABC Beats Old-Style Costing Survey Finds, Accounting Today, June 6, 1994, p. 14.

A survey conducted by the Institute of Management Accountants indicates that more and more companies are abandoning their traditional cost accounting systems and are using their previously off-line ABC systems as their primary cost accounting systems. [B]

Innes, John and Falconer Mitchell, ABC: A Survey of CIMA Members, Management Accounting (UK), October 1991, pp. 28-30.

The findings of a UK survey conducted in September 1990 are discussed. Almost half of the respondents had considered implementing ABC. At the time of the survey, most were still assessing the value of ABC to their organizations. Among the firms who had implemented ABC, the feedback was predominantly positive. [I]

Jayson, Susan, Fax Survey Results: ABC Is Worth the Investment, Management Accounting, April 1994, p. 27.

Survey results indicate that most companies undertook an ABC implementation in order to obtain 1) more accurate product costs, 2) more relevant information for decision-making, and 3) improved performance measurements. Some respondents reported that ABC has provided less than desirable results for a variety of reasons. [B]

Book and Article Reviews

Borden, James P., Review of Literature on Activity-Based Costing, Journal of Cost Management, Vol. 4, No. 1, Sp90, pp. 5-12.

The body of ABC literature to date is reviewed by the author. The emphasis is on product costing in a manufacturing environment. [I]

Ferrara, William L., Implementing Activity-Based Cost Management: Moving from Analysis to Action, Accounting Review, October 1993, pp. 959-960.

The author reviews the named book by Cooper, Kaplan, Maisel, Morrissey and Oehm. Ferrara would prefer to see fewer cases with more detail each. This would assist practitioners in implementing ABC on their own. [B]

Freedman, Julian M., CAM-I Meeting Features IMA's ABC Study, Management Accounting, February 1993, p. 69.

Freedman reviews the activities during the fourth quarter meeting of the Cost Management Systems (CMS) program of CAM-I (Computer Aided Manufacturing - International). [B]

Freedman, Julian M., Primer Simplifies ABC, Management Accounting, April 1993, p. 68.

An IMA publication, ABC Primer, is reviewed. Freedman sees ABC Primer as a natural companion to the IMA's research study Implementing Activity-Based Cost Management: Moving from Analysis to Action (Cooper, Kaplan, Maisel, Morrissey and Oehm). The primer results from work done by CAM-I, the Consortium for Advanced Manufacturing - International. [B]

King, Alfred M., Relevance Regained: From Top-Down Control to Bottom-Up Empowerment, Management Accounting, July 1993, p. 70.

The author reviews the named book by H. Thomas Johnson. He recommends that companies still trying to decide whether to invest in ABC should read this book immediately. [B]

McGaffic, Robert W., Activity-Based Costing for Small and Mid-Sized Businesses: An Implementation, Management Accounting, July 1993, pp. 70-71.

The author reviews the named book by Douglas T. Hicks. Hicks has scaled down ABC for small and medium size businesses - a welcome relief from the ABC implementations in large businesses usually profiled by other authors. Hicks recognizes that small and medium sized businesses typically do not have the financial resources to support a massive ABC system. [B]

Activity-Based Management (ABM)

General Readings - Activity Based Management

Antos, John, Activity-Based Management for Service, Not-for-Profit and Governmental Organizations, Journal of Cost Management, Vol. 6, No. 2, Sm92, pp. 13-23.

ABM implementation in a medical malpractice insurance firm, an oil exploration and production firm and the federal government (state reimbursements for food stamp claims and social security disability claims) are examined. Also examined are implementations in a hospital accounts receivable department, a uniform laundering and delivery service and the fund-raising activities of a health and welfare organization. [I]

Beynon, Roger, Change Management as a Platform for Activity-Based Management, Journal of Cost Management, Vol. 6, No. 2, Sm92, pp. 24-30.

Ignoring the impact of employees' reaction to change is a sure way to doom the success of a ABM program. Ten key actions are presented to improve the chances of a successful ABM implementation. The article also explores behavioral resistance to change. [I]

Brinker, Barry J (editor), Chapter B4: Using Activity-Based Costing to Improve Performance, Handbook of Cost Management, Boston, MA: Warren, Gorham, and Lamont, 1992, pp. B4-2 - B4-26.

The key to improvement is using ABC generated information to change the organization and support continuous improvement. This is the foundation of ABM. Several examples are given to illustrate the potential benefits of using ABC information to improve operations. [I]

Campi, John P., It's Not as Easy as ABC, Journal of Cost Management, Vol. 6, No. 2, Sm92, pp. 5-11.

ABC is only one of the many components of ABM. ABM is the umbrella structure for the cultural change that US businesses must undergo in order to compete internationally. Other components include TQM, JIT, total customer satisfaction and employee empowerment. The historic focus on short term results (mostly financial) has undermined American business' competitiveness. Quality, customer satisfaction, time to market, etc. have become the global measurements of success. [I]

Clark, Alex and Alexander Baxter, ABC + ABM = Action: Let's Get Down to Business, Management Accounting (UK), June 1992, pp. 54-55.

ABM, the logical extension of ABC, is a tool that accountants can use to step outside their narrowly defined role (by others) and participate in the management of the business. Through ABM, the accountant's focus will shift from looking backwards to looking forwards. [B]

Cooper, Robin, Robert S. Kaplan, Lawrence S. Maisel, Eileen Morrissey and Ronald M. Oehm, From ABC to ABM: Does Activity-Based Management Automatically Follow From an Activity-Based Costing Project?, Management Accounting, November 1992, pp. 54-57.

Eight implementations of ABC (five manufacturers, a financial services company, a finance department and a distribution company) are discussed. The companies found that one of the first benefits was the mapping of the organization's expenses from functional categories to processes. Resources devoted to the implementation at each site are examined. Interestingly, many of the companies had not acted on the findings generated by the ABC study. This leads the authors to conclude that ABM does not automatically follow ABC. [I]

Greenwood, Thomas G., and James M. Reeve, Activity-Based Cost Management for Continuous Improvement: A Process Design Framework, Journal of Cost Management, Vol. 5, No. 4, W92, pp. 22-40.

The authors present an ABC framework that can be used to support process analysis, product costing, process modeling and planning, and high-order cost driver relationships. [A]

Keys, David E., Tracing Costs in the Three Stages of Activity-Based Management, Journal of Cost Management, Vol. 7, No. 4, W94, pp. 30-37.

Three methods are assigning costs are discussed: 1) direct tracing, 2) cause and effect cost assignment and 3) cost allocation. Previous ABC literature has discussed a two stage assignment of costs: 1) the assignment of costs to activities and 2) the assignment of activities to products or services. The author suggests that a third stage of cost assignment should be addressed even before these two stages: the assignment of costs to the correct year. Assigning costs to years in accordance with GAAP (a traditional costing approach) often leads to costs being assigned to the year of occurrence, not the year of benefit. [I]

Lamond, Stewart, Activity-Based Management: An Australian Perspective, Journal of Cost Management, Vol. 6, No. 2, Su92, pp. 42-46.

ABM at three Australian companies (Parke Davis, ICI Film Products and Comalco Rolled Products) is discussed. ABM is becoming a major force in management accounting in Australia. [I]

Raffish, Norm and Peter B. B. Turney, Glossary of Activity-Based Management, Journal of Cost Management, Vol. 5, No. 3, F91, pp. 53-63.

The primary objective of the glossary is to standardize and, where necessary, develop a set of terms about activity-based management. The glossary has been prepared by the Computer Aided Manufacturing-International, Inc. (CAM-I) Cost Management System program. The glossary should be required reading for anyone researching ABM. [I]

Ray, Manash R. and Theodore W. Schlie, Activity-Based Management of Innovation and R&D Operations, Journal of Cost Management, Vol. 6, No. 4, W93, pp. 16-22.

ABC and ABM can be used for purposes other than product costing (the original focus). These other uses include design for manufacturability, process design, overhead value analysis and performance measurement. A feasibility study should be completed prior to implementation to assess the potential benefits of ABM systems in the areas of innovation and R&D. [I]

Shephard, Nick, Economics of Quality and Activity-Based Management: the Bridge to Continuous Improvement, CMA Magazine, March 1995, p. 29.

This article examines the relationships between total quality management (TQM), quality systems and activity-based costing. TQM is characterized as a pervasive philosophy permeating all business activities. Quality systems are the building blocks on which TQM is built. The previously hidden costs of quality are identified through the use of an ABC system. The article provides a nice conceptual introduction to the applicability of ABC to quality concerns.

Soloway, Lewis J., Using Activity-Based Management Systems in Aerospace and Defense Companies, Journal of Cost Management, Vol. 6, No. 4, W93, pp. 56-66.

The experiences of aerospace and defense contractors with ABM systems (and the DCAA) are discussed. [I]

Turney Peter B. B., Activity-Based Management: ABM Puts ABC Information to Work, Management Accounting, January 1992, pp. 20-25.

The real key to success is putting ABC information to work to identify appropriate strategies, improve product design and remove waste from operating activities. This is the heart of ABM. The ABC model has two parts: the cost assignment view and the process view. The process view identifies improvement opportunities. Guidelines for activity analysis are given. The elements of an effective performance measurement system that fosters improvement are also outlined. [I]

Turney, Peter B. B., Beyond TQM: With Workforce Activity-Based Management, Management Accounting, September 1993, pp. 28-31.

Turney identifies three crucial elements of workforce ABM: 1) ABC information, 2) a group process, and 3) focus. The organization must be focused on process improvement in order for ABM to work. All employees participate in WABM - from the janitor up. This leads to employee ownership of improvements and greater acceptance of their implementation. WABM integrates ABC into the world of work teams and TQM and goes far beyond what either ABC or TQM can accomplish separately. [I]

Turney, Peter B. B. and Alan J. Stratton, Using ABC to Support Continuous Improvement, Management Accounting, Vol. 54, No. 3, September 1992, pp. 46-50.

ABC implementation efforts at National Semiconductor Corp. are discussed. The authors explain how a two-dimensional ABC model using micro and macro activities supplies the information necessary to support continuous improvement. [I]

Implementation

Player, R. Steven and David E. Keys, Lessons From the ABM Battlefield: Getting Off to the Right Start, Journal of Cost Management, Vol. 9, No. 1, Sp95, pp. 26-38.

First installment in a three article series. This article addresses problems (mostly behavioral) that may arise in ABM implementations. Examples of the pitfalls include lack of top management buy-in, lack of clear objectives, etc. The executive summary itemizes ten common pitfalls, the problem symptoms of each, and some recommended treatments. [I]

Player, R. Steven and David E. Keys, Lessons From the ABM Battlefield: Developing the Pilot, Journal of Cost Management, Sm95, pp. 20-35.

Second installment in a three article series. This article addresses problems (mostly technical) that may arise in ABM implementations. Examples of the pitfalls include too much detail collected, unavailability of detailed operational data, etc. The executive summary itemizes ten common pitfalls, the problem symptoms of each, and some recommended treatments. [I]

Player, R. Steven and David E. Keys, Lessons From the ABM Battlefield: ????????, Journal of Cost Management, F95, p. ???.

Third installment in a three article series. Not published yet

Schiff, Jonathan B., How to Succeed at Activity-Based Cost Management, Management Accounting, Vol. 73, March 1992, pp. 64-65.

The key to success at ABM is understanding and focusing on the needs of your internal customer - the users of cost information. Several key points that are considered crucial to the success of an ABM implementation are presented. Several questions to consider before beginning an ABM implementation are also presented. [I]

Sharman, Paul A., Activity-Based Management: A Growing Practice, CMA Magazine, March 1993, pp. 17-22.

The author identifies nine steps to ABC implementation and provides explanations and examples for each step. The time and resource commitments are also explored for a typical pilot project (the author recommends implementation as a pilot project no matter how broad the intended scope). A survey reveals contrasts between ABC awareness and implementation in Canada, the UK and the US. [I]

Implementation - Case Studies

Coburn, Steve, Hugh Grove and Cynthia Fukami, Benchmarking with ABCM, Management Accounting, January 1995, pp. 56-60.

The Marketing Resources Group of US WEST analyzed its accounting function with ABC analysis. It then benchmarked its performance against a benchmarking database obtained from an A. T. Kearney study that sampled 25% of the Fortune 100 and other world class companies. Based on the results, MRG decided to redeploy accounting resources from routine processing to management decision support products. In addition, other improvement opportunities within the accounting function were identified. [I]

Gammell, Frances and C. J. McNair, Jumping the Growth Threshold Through Activity-Based Cost Management, Management Accounting, September 1994, pp. 37-46.

ABM is implemented at The Original Bradford Soap Works, a medium-size manufacturer of private label bar soap. The business had slowly outgrown its existing management structure as it began operating "at capacity". Previously sound management decisions failed to work in this new environment. Management had plenty of data but very little was in a usable format. Once information was captured in usable form, it showed that some products were clearly unprofitable. A timeline (showing implementation steps) for the implementation is presented. Much of the implementation difficulty was caused by the redesign of the general ledger and supporting systems so that they integrated with the ABC system. [I]

Hobdy, Terrence, Jeff Thomson and Paul Sharman, Activity-Based Management at AT&T, Management Accounting, April 1994, pp. 35-39.

AT&T's breakup into smaller, more focused business units combined with the advent of price-cap regulation made managing costs (rather than allocating costs) critical. The authors document the process that AT&T used to implement ABC and ABM. A year after implementation, the ABC model is used to manage the center's operations: it measures associates' productivity in completing certain activities and conducts benchmark studies among the functional groups. The authors state that ABC has taught management to mange the business proactively. [I]

Selto, Frank, H., Implementing Activity-Based Management, Journal of Cost Management, Sm95, pp. 36-49.

The author explores four pilot projects undertaken at a large consumer products company. The four projects were in the packaging, manufacturing, warehousing and administrative services areas. The warehousing pilot project is particularly interesting. The company identified activities, ranked these by the amount of value added and identified cost drivers for allocation of each activity's cost to the products. Exhibit 4 reflects this analysis. Exhibit 5 is an example of the activity analysis identifying hours spent on each activity. [I]

Software Packages

Albright, Thomas L., Software for Activity-Based Management, Journal of Cost Management, Sp95, pp. 6-25.

The author divides ABC software into two classes: 1) software developed by the Big Six accounting firms to support their consulting engagements (Activa, Profit Manager Plus 3 and TR/ACM) and 2) software designed to be installed and implemented by the purchaser (CASSO, CMS-PC, Oros/Easy ABC Plus, HyperABC, NetProphet II and DaCapo Process Manager). The author does not attempt to conduct critical reviews of the packages. Rather, he tries to convey the essential characteristics of each package as an introduction to the software available. [I]

Borden, James P., Activity-Based Management Software, Journal of Cost Management, Vol. 7, No. 4, W94, pp. 39-47.

The author reviews software packages designed for PC or networks. Mainframe packages are not considered. The author divides the packages into two classes: 1) software developed by the Big Six accounting firms to support their consulting engagements (Activa, ABCost Manager, Profit Manager Series and TR/ACM) and 2) software sold by independent software vendors (CASSO, CMS-PC, EasyABC, NetProphet, and Quote-a-Profit). The reviews are designed to provide a brief overview of the available ABM software. [I]

Borden, James P., Software for Activity-Based Management, Journal of Cost Management, Vol. 5, No., 3, F91, pp. 7-37.

The author reviews the following software packages: Profit Manager, CMS-PC, Activa, CA-Compete!, EasyABC, TR/ACM, NetProphet, Prism and RK System. The reviews are designed to provide a brief overview of the available ABC software. [I]

Walkin, Lawrence, ABC - Key Players and Their Tools, Management Accounting, February 1991, p. 18.

The author reviews five software packages for ABC: Activa, NetProphet, EasyABC, a package from Integrated Cost Management Systems, Inc. and a package from KPMG Peat Marwick. [B]

Process Based Costing Systems

Lawson, Raef A., Beyond ABC: Process-Based Costing, Journal of Cost Management, F94, pp. 33-43.

ABC systems, as commonly implemented, do not have the capability to improve processes because they do not take into consideration the processes' ability to satisfy customer needs. The author implores the audience not to use ABC models as tools for which they were not designed: benchmarking, TQM and continuous quality improvement. ABC systems should be incorporated into process-based costing systems which do consider customer driven requirements. [A]

Process Cost Management

Greenwood, Thomas G. and James M. Reeve, Process Cost Management, Journal of Cost Management, Vol. 7, No. 4, W94, pp. 4-19.

The authors tout the use of PCM for determining the cost of existing processes (ABC in reverse). A model of spending simulation (working backwards from cost objects to activities to resources) is useful for sensitivity analysis performed for changes in processes. The authors suggest using the spending simulation model for capital budgeting, operational decision making, process and product engineering and kaizen operator process improvement. [A]

Process Value Analysis

Beischel, Mark E., Improving Production with Process Value Analysis, Journal of Accountancy, Vol. 170, September 1990, pp. 53-55.

Process value analysis is the foundation for other cost analysis tools, including ABC. A seven step plan for conducting PVA is presented. [I]

Johnson, H. Thomas, Activity Management: Reviewing the Past and Future of Cost Management, Journal of Cost Management, Vol. 3, No. 4, W90, pp. 4-7.

The development of cost management is reviewed and the future is explored. The author argues that the path to global competitiveness lies in activity management - identifying non-value-added activities and eliminating these. Some of the problems related to elimination of non-value-added activities are examined. Also discussed is how ABC information can help eliminate non-value-added activities. [I]

Ostrenga, Michael R., Activities: The Focal Point of Total Cost Management, Management Accounting, February 1990, pp. 42-49.

Process value analysis is the initial building block of total cost management. TCM is a business philosophy of managing all company resources and the activities that consume these resources. ABC is a way of identifying activities and the value the add or do not add to the business. [I]

Ostrenga, Michael R. and Frank R. Probst, Process Value Analysis: The Missing Link in Cost Management, Journal of Cost Management, Vol. 6, No. 3, F92, pp. 4-13.

Process value analysis is a methodology for reducing costs and improving processes by identifying resource consumption within a process and the underlying cause of the cost. PVA addresses three questions: 1) What do our products actually cost?, 2) Why do they cost that much?, and 3) What can be done to reduce the cost? The authors provide an illustration showing the "linkage" between PVA and ABC. [I]

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Originated on 05/02/96