Provided by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida
How should activity based costing be used? Should it be used as a stand alone system or as a replacement system, i.e., integrated into the general ledger?
The advantages of using activity-based Costing as a stand alone system include the following:
1. Time - Can be implemented faster than a replacement system.
2. Cost - Is much less expensive to develop, implement and operate since the information is needed less often for management strategic decisions, e.g., once per year or when the process is changed.
3. Politics - Does not require corporate approval.
4. Audit - Does not require approval from external auditors.
5. Type of information - Can use subjective information obtained from interviews that might be difficult to verify.
6. GAAP - External reporting does not require the detail and complexity of ABC costing.
7. Expertise - Few have the knowledge and experience to develop a single integrated system.
The disadvantages of using activity-based costing as a separate stand alone system include:
1. Conflicts - Two sets of product costs will cause confusion and arguments.
2. Staff redundancy - Two systems require two groups to maintain.
3. Data redundancy - Two systems creates duplication of data and effort. A single data base system would eliminate the redundancy.
4. Credit - The glory is in the development and implementation, not the maintenance. Developers tend to lose interest after a system is developed.
5. GAAP - Traditional system product cost distortions may produce inaccurate information for external users. (See Problem 7-8).
6. Expertise - The knowledge and experience is available to develop a single data base system to satisfy all the audiences for accounting information.
7. ABC Analysis - Integrating ABC with the general ledger would facilitate ABC analysis at the activity level on a monthly basis. (See Example).
Some Survey Results
The following graphic illustration provides some 2003 survey results (See the Hughes and Gjerde summary). The data in this survey indicates that most of the firms that use ABC use it as a separate stand alone decision support system, not a system integrated with the general ledger.
Cooper, R. 1990. Implementing an activity-based cost system. Journal of Cost Management (Spring): 33-42. (Summary).
Cooper, R. and R. S. Kaplan. 1992. Activity-based systems: Measuring the costs of resource usage. Accounting Horizons (September): 1-13. (Summary).
Jones, T. C. and D. Dugdale. 2002. The ABC bandwagon and the juggernaut of modernity. Accounting, Organizations and Society 27(1-2): 121-163. (Summary).
Kaplan, R. S. 1990. The four stage model of cost systems design. Management Accounting (February): 22-26. (Summary).
Krumwiede, K. R. 1998. ABC: Why it's tried and how it succeeds. Management Accounting (April): 32-34, 36, 38. (Summary).
Mangan, T. N. 1995. Integrating an activity-based cost system. Journal of Cost Management (Winter): 5-13. (Summary).
Mecimore, C. D. and A. T. Bell. 1995. Are we ready for fourth-generation ABC? Management Accounting (January): 22-26. (Summary).