Executive Summary of activity-based costing (ABC)

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Subjects: Management accounting, Activity based costing, Process costing

Classification Codes 4120 Accounting policies & procedures, 9190 US

Locations: US, US

Author(s): Robin Cooper , Regine Slagmulder

Publication title: Strategic Finance. Montvale: Jun 1999. Vol. 80, Iss. 12; pg. 18, 3 pgs

Source type: Periodical
ISSN/ISBN: 1524833X
ProQuest document ID: 42663943
Text Word Count 1715
Document URL: http://proquest.umi.com/pqdweb?did=42663943&sid=2&Fmt=4&clientId=2606&RQT=309&VName=PQD

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One of the great myths of modern cost management is that activity-based cost systems are too complex and hence too expensive to support. This article argues for the intelligent approach to cost system design. An intelligent design is one that is as simple as it can be while still providing managers with the information they need to make decisions. As information technology reduced the cost of data collection and manipulation, the ability to design more complex, cost effective cost systems led to the emergence of multiple cost pool designs. It was until the 1980s that systems that used non-unit level cost drivers began to emerge. One problem is the confusion between the appropriate design of systems whose primary objective is to support strategic product costing and those whose objective is to support operational improvement and learning. For product costing purposes, relatively simple activity-based cost systems will suffice.

Full Text (1715 words)
Copyright Institute of Management Accountants Jun 1999
ONE OF THE GREAT MYTHS OF MODERN COST management is that activity-based cost systems are too complex and hence too expensive to support. This myth has two sources. The first is the heritage of minimalist designs that have shaped cost management systems since their inception at the turn of the last century. The other is the recent inappropriate adoption of a maximalist design philosophy that reflects a poor understanding of cost system design theory. In this column we argue for the adoption of an intelligent approach to cost system design. An intelligent design is one that is as simple as it can be while still providing managers with the information they need to make decisions.
Prior to the advent of modern computers, the collection and manipulation of data was extremely expensive. To avoid excessive measurement costs, cost systems were designed using a minimalist approach. This trade-off led to poorly designed cost management systems that relied on data that were already available and therefore did not have to be specially collected and manipulated. With the dominance of the scientific management movement, the time it required the direct labor force to complete tasks was tightly monitored, often in minute detail. As most manufacturing processes were labor intensive at the turn of the century it was only natural to develop labor-based cost systems that assigned all indirect resource costs to products (or, more rarely, services) using direct labor hours or dollars. The only other cost assignment approaches that were readily available were number of units and material dollars. Number of units is appropriate only when the products are essentially identical, so it's rarely used outside process costing. Material dollars is typically a poor predictor of the indirect costs of the products, so it's rarely used other than to assign procurement costs to products in the most sophisticated of systems. Thus, direct labor was the best choice of the limited set of cost drivers available and hence dominated early system design philosophy.
The result of this trade-off was a preponderance of cost systems that relied on direct labor to assign indirect costs to products and services and used a very limited number of cost pools to achieve ...