Every accounting student of the past sixty years has learned about inventory costing- a bookkeeping procedure
that manufacturing accountants follow to separate the production expense of an accounting period from the cost
of manufactured product inventories at the end of the period.
(Johnson and Kaplan, 1991, p. 130)
This technique of valuing inventory should, although often practiced, not be used for managerial
decision making though. It oversimplifies the consumption of overhead costs by
products, services and customers and therefore leads to distorted cost information.
Activity-based costing (ABC), developed by single manufacturing firms in the early 1980s,
seems to provide more reliable information. The second part of this work describes the
concept of ABC by summarizing the arguments of two pioneers in this field. In their book
“Relevance Lost: The Rise and Fall of Management Accounting”, first published in 1987, H.
Thomas Johnson and Robert S. Kaplan (1991) examine the traditions of management accountting
and describe possible improvements. In part three the developments of ABC in the last 20
years are described by reviewing a choice of important literature. Part four then shows the
impact that ABC had on implementing companies. The conclusion, part five, contains an
assessment of the used literature and an evaluation of whether the critic of traditional
management accounting has been overcome by ABC.
Inhaltsverzeichnis (Table of Contents)
- Introduction
- Main arguments of Johnson and Kaplan in "Relevance Lost"
- Subsequent treatment of the topic in academic publications
- The first enhancements
- The upcoming of activity-based management (ABM)
- The development of activity-based budgeting (ABB)
- Recent trend: time-driven ABC
- Criticism
- Impact of activity-based costing on companies
- Conclusion
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This work analyzes the development and implementation of Activity-Based Costing (ABC) and its impact on management accounting practices. It examines the main arguments of Johnson and Kaplan in their influential book "Relevance Lost," which criticized traditional cost accounting methods. The text then explores subsequent developments in the field, including the emergence of activity-based management (ABM), activity-based budgeting (ABB), and time-driven ABC. The key themes include:- The limitations of traditional cost accounting methods.
- The evolution and development of activity-based costing and its related concepts.
- The impact of ABC on companies and their management accounting practices.
- The significance of cost drivers in determining accurate product costs.
- The role of ABC in providing relevant cost information for decision-making.
Zusammenfassung der Kapitel (Chapter Summaries)
The introduction provides an overview of inventory costing and highlights the shortcomings of traditional methods for managerial decision-making. It emphasizes the need for more accurate cost information and introduces the concept of Activity-Based Costing (ABC) as a solution.
Chapter 2 delves into the main arguments presented by Johnson and Kaplan in their seminal work "Relevance Lost." They argue that a good cost system should fulfill four essential functions: providing information for financial statements, enabling managers to control processes, calculating product costs, and supporting special studies. The authors critique the traditional cost accounting system, pointing out its limitations in accurately capturing overhead costs and allocating them to products. They propose a new approach based on identifying and using cost drivers, which represent the activities that actually drive overhead costs.
Chapter 3 explores the development and evolution of ABC in academic publications. It examines various enhancements to the original concept, the emergence of activity-based management (ABM), activity-based budgeting (ABB), and the recent trend of time-driven ABC. The chapter also discusses criticism of ABC and its limitations.
Schlüsselwörter (Keywords)
The primary keywords and focus topics of this work include Activity-Based Costing (ABC), Activity-Based Management (ABM), Activity-Based Budgeting (ABB), cost drivers, overhead costs, product costs, decision-making, traditional cost accounting, management accounting, Relevance Lost, Johnson and Kaplan, and time-driven ABC.Frequently Asked Questions
What is Activity-Based Costing (ABC)?
ABC is a costing method that identifies activities in an organization and assigns the cost of each activity to all products and services according to actual consumption.
What was the main criticism of traditional cost accounting?
Johnson and Kaplan argued in "Relevance Lost" that traditional methods oversimplify overhead allocation, leading to distorted and unreliable cost information for managers.
What is the difference between ABM and ABB?
Activity-Based Management (ABM) focuses on managing activities to improve value, while Activity-Based Budgeting (ABB) uses activity analysis to create more accurate financial plans.
What is "time-driven ABC"?
It is a more recent trend that simplifies the ABC process by using time as the primary cost driver to estimate the demand for resource capacity.
Why are "cost drivers" important in ABC?
Cost drivers are the factors that cause costs to be incurred. Identifying them correctly is essential for calculating accurate product costs.
- Citation du texte
- David Wagener (Auteur), 2008, Activity-Based costing and its later development into activity based budgeting and management, Munich, GRIN Verlag, https://www.grin.com/document/113425
