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.
Table of Contents
1. Introduction
2. Main arguments of Johnson and Kaplan in “Relevance Lost”
3. Subsequent treatment of the topic in academic publications
3.A. The first enhancements
3.B. The upcoming of activity-based management (ABM)
3.C. The development of activity-based budgeting (ABB)
3.D. Recent trend: time-driven ABC
3.E. Criticism
4. Impact of activity-based costing on companies
5. Conclusion
Objectives and Core Topics
This work examines the evolution and implementation of Activity-Based Costing (ABC) from its theoretical foundations established by Johnson and Kaplan to its modern applications, evaluating its efficacy in managerial decision-making and its impact on corporate performance.
- Theoretical development of ABC and its shift from traditional absorption costing.
- Methodological extensions including Activity-Based Management (ABM) and Activity-Based Budgeting (ABB).
- Practical implementations of ABC in industrial and service sectors.
- Critical analysis of the limitations and challenges in adopting ABC systems.
- Evaluation of contemporary trends like Time-Driven Activity-Based Costing.
Excerpt from the Book
2. Main arguments of Johnson and Kaplan in “Relevance Lost”
Johnson and Kaplan argue that a good cost system has to fulfil four functions (1991, p.228, citing Dearden 1967):
i. providing information for the preparation of financial statements
ii. allow managers to control the processes within a company
iii. calculate long- and short-term product costs
iv. produce data that can be used for special studies
Reviewing business practice and the management accounting research of the 19th and 20th century the authors say that the design of cost systems in the late 1980’s first and foremost leads to the accomplishment of the first function. This is all the more astonishing since there have been cost systems at the beginning of the 20th century suiting the demands for information of process control and product cost calculation very well. Reasons for the disappearance of those systems, according to the authors, are an insufficient cost-benefit-relationship at this particular time, the rising of financial reporting and the missing scrutiny of academic researches. (Johnson & Kaplan, 1991, pp. 125-145)
The main problem with the current situation, so the authors say, is that the companies are using a method for decision making that once was put in place by the first auditors to separate occurred cost between sales and inventory. This method uses a two stage process:
First all overhead costs are allocated to a few cost centres (e.g. departments).
Then they are assigned to products using one recovery base: direct labour
Summary of Chapters
1. Introduction: This chapter introduces the limitations of traditional inventory costing and sets the objective to review the development and impact of Activity-Based Costing.
2. Main arguments of Johnson and Kaplan in “Relevance Lost”: This section details the critique of traditional cost systems by Johnson and Kaplan, emphasizing their failure to support effective managerial decision-making.
3. Subsequent treatment of the topic in academic publications: This chapter categorizes the evolution of ABC into enhancements, management-focused applications, budgeting models, and contemporary criticisms.
4. Impact of activity-based costing on companies: This section presents case studies demonstrating both successful implementations and failures of ABC in various corporate environments.
5. Conclusion: The concluding chapter reflects on the disconnect between the extensive academic interest in ABC and its relatively low adoption rate among practicing managers.
Keywords
Activity-Based Costing, ABC, Management Accounting, Relevance Lost, Cost Drivers, Activity-Based Management, ABM, Activity-Based Budgeting, ABB, Time-Driven ABC, Overhead Allocation, Financial Performance, Process Control, Product Costing, Industrial Implementation.
Frequently Asked Questions
What is the primary focus of this work?
The work explores the transition of management accounting from traditional absorption costing to Activity-Based Costing (ABC) and its subsequent extensions.
What are the central themes discussed?
Key themes include the theoretical critique of traditional accounting, the development of ABC-based management and budgeting, and empirical evidence regarding its implementation success.
What is the core research objective?
The goal is to assess whether ABC provides a more profound and reliable system for cost assignment compared to traditional methods and to examine its practical adoption status.
What methodology is employed?
The study utilizes a literature review approach, analyzing seminal works by Johnson, Kaplan, and other contributors to track the evolution and critique of ABC.
What does the main body cover?
The main body covers the initial arguments of Johnson and Kaplan, academic advancements like ABM and ABB, and real-world company experiences with ABC systems.
What key terms characterize the research?
Significant terminology includes Activity-Based Costing, cost drivers, managerial decision-making, and process improvement.
What is "Time-Driven ABC" and why is it significant?
Time-Driven ABC is a modern refinement that simplifies the data-heavy nature of traditional ABC by using time equations, aiming to address the high complexity of earlier models.
Why did some companies fail when implementing ABC?
Failure was often attributed to unsuitable system designs, poor selection of cost drivers, and internal employee resistance to the new management approach.
How do Johnson and Kaplan define the four functions of a cost system?
They argue a system must support financial statements, process control, product cost calculation, and provide data for special strategic studies.
- Arbeit zitieren
- David Wagener (Autor:in), 2008, Activity-Based costing and its later development into activity based budgeting and management, München, GRIN Verlag, https://www.grin.com/document/113425
