Summary by Jeffrey S. Price
Master of Accountancy Program
University of South Florida, Fall 2001
The purpose of this article is to show that although Activity Based Costing (ABC) was a great help to companies in the 70’s, in today’s global environment, ABC is not capable of guiding companies toward competitiveness and long-term profitability.
Johnson claims that activity-based cost management tools fail to guide companies toward competitiveness and long-term profitability, because they do not generate process maps, have no customer focus, and do not lead to bottom-up ideas for generating continuous process improvement. Johnson states that activity information undoubtedly improved many companies’ efforts to cut costs, but never could it have prompted actions that improve competitiveness by increasing responsiveness to customers and flexibility in processes. It simply links activity with activity drivers and focuses on reducing costs by reducing activities. Johnson says that in order to satisfy customers in this customer driven era, you can’t have an activity analysis that does not focus people’s attention on changing how work is done, nor fail to explicitly and systematically link activity with satisfaction of customer wants.
Johnson argues that instead of activity analysis, companies seeking the pathway to competitiveness need to map and improve customer-focused processes. He states that process information identifies a customer, a supplier, and a mechanism to transform a supplier’s inputs into customer directed output. Cross-functional activity analysis tends to be top down and not customer oriented, and shows where and how much time a company devotes to a broad class of work. Johnson states that while that information can be revealing, it does not show how work is done or how it will contribute to customer satisfaction. It is a tool that greatly improves cost focused management practices of the past, but it is not a tool for managing competitive operations in the global economy.
Johnson feels that too often, activity-based cost recommendations aim at economizing on an activity driver by producing output customers probably don’t want in the first place. Johnson says in order to achieve competitive and profitable operations in a customer-driven global economy, companies must give customers what they want, not persuade them to purchase what the company now produces at lowest cost. Ironically, companies that continually improve customer-focused processes eventually discover that their process improvements eliminate cost of the overhead activity that by causing distortions in product costs, prompted to development of ABC tools in the first place!
Johnson's view is that instead of wasting time designing ABC systems to locate “hidden profits” on products that customers probably don’t want anyway, companies should begin taking steps to eliminate delay, excess, and variation from processes. Johnson believes that only two forces drive product costs – time and material. In this world you don’t need ABC or any other system to cost products – you just need to know the time it takes to do something, the price of that time, and the price of any material consumed to get the job done.
Johnson concludes the article by saying that the answer to competitiveness is not to do the activity analysis that leads up to calculating ABC product costs. Instead of beginning with activity-based information, begin at the beginning - by articulating a customer focused mission statement and then encouraging everyone to help map and systematically improve the processes in which they work. Also, if your goal is competitive operations, don’t waste time gathering data and compiling information in order to cost work you shouldn’t be doing anyway. Focus on reducing variation and lead-time in the work itself, and costs will take care of themselves. Only do ABC if you think you must. But don’t fool yourself into thinking that activity-based concepts will help you become a global competitor. For that, get busy with the improvements process.
For Kaplan's response see Kaplan, R. S. 1992. In defense of activity-based cost management. Management Accounting (November): 58-63. (Summary).
Other related summaries:
Hammer, M. 1990. Reengineering work: Don't automate, obliterate. Harvard Business Review (July-August): 104-112. (Summary).
Johnson, H. T. 1988. Activity based information: A blueprint for world class management accounting. Management Accounting (June): 23-30. (Summary).
Johnson, H. T. 1989. Professors, customers, and value: bringing a global perspective to management accounting education. Proceedings of the Third Annual Management Accounting Symposium. Sarasota: American Accounting Association: 7-20. (Summary).
Johnson, H. T. 1990. Beyond product costing: A challenge to cost management's conventional wisdom. Journal of Cost
Management (Fall): 15-21. (Summary).
Johnson, H. T. 1992. Relevance Regained: From Top-Down Control to Bottom-up Empowerment. The Free Press. (Summary).
Johnson, H. T. 1995. Management accounting in the 21st century. Journal of Cost Management (Fall): 15-20. (Summary).
Johnson, H. T. 2006. Lean accounting: To become
lean, shed accounting. Cost Management (January/February): 6-17. (Summary).
Johnson, H. T. 2006. Sustainability and "Lean Operations". Cost Management (March/April): 40-45. (Summary).
Johnson, H. T. and A. Broms. 2000. Profit Beyond Measure: Extraordinary Results through Attention to Work and People. The Free Press. (Summary).
Johnson, H. T. and R. S. Kaplan. 1987. Relevance Lost: The Rise and Fall of Management Accounting. Boston: Harvard Business School Press. (Summaries and additional information).