Krumwiede, K. R. 1998. ABC: Why it's tried and how it succeeds. Management Accounting (April): 32-34, 36, 38.
Summary by David Lamb
Master of Accountancy Program
University of South Florida, Summer 2003
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The Activity Based Costing (ABC) method has always been debated as to its use and value within a particular organization. After a survey conducted by the Cost Management Group of the Institute of Management Accountants (IMA) in 1996, Krumwiede was able to come to the following conclusions about ABC. Many of the companies that have implemented ABC found it more difficult to adopt than as first suggested. Additionally, more than half of the responding companies that have tried ABC (54%) stated that they were using it for decision making purposes outside their accounting function. Of the companies that actually use ABC, 89% of them said ABC was worth its implementation costs.
a result of the survey, Krumweiede was able to determine four factors that
seemed to separate the users of ABC from the non-users.
Those factors include the potential of cost distortions, decision
usefulness of cost information, lack of system initiatives, and the size of the
An organization may be more motivated to utilize ABC if they have a high potential for cost distortions. A common example of a significant distortion risk is if an organization were to use only one overhead base. By doing this, under or over costing of particular products may occur.
distortions have the ability to affect many important decisions, including those
related to profitability analyses. By
placing ABC into affect, an organization may have the ability to determine (by
some measure) whether all of their clients are profitable or not.
This way, organizations can “fire” (or turn down business from)
unprofitable customers to increase their margins.
there is a lower potential for cost distortions, however, the benefits of ABC
may be limited. Single product
producing companies may not see a substantial improvement in their cost data
through its use. In these cases, an
activity analysis is recommended in place of ABC in order to identify nonvalue-added
activities. Using an activity
analysis would help reduce the potential for cost distortions.
if ABC will reduce product cost distortions substantially, it would probably not
be implemented unless the company could use the better cost information in its
decision-making processes. Companies
that sell products dictated by market rates will most likely find little use for
ABC because they have little control over the prices they can charge.
On the other hand, ABC could be an extremely useful tool for a company
selling multiple products within a highly competitive pricing industry.
These companies could use the information in negotiations with suppliers
for cost reduction efforts.
restructuring or implementing of information systems will often impede the
adoption of ABC within an organization. There
are two reasons for this. First, the
implementation of ABC requires considerable time and effort that it will not
receive if the organization’s attention is focused elsewhere.
Second, ABC needs extremely detailed information that it may not be able to
receive because of the organization’s currently lacking information system.
In order to implement ABC, these organizations must first await an
improvement in their system.
to the survey, ABC adopters, on average, tend to have larger sales figures then
those that do not adopt ABC. Adopting
firms normally had sales figures ranging from $101 - $500 million dollars while
non-adopters ranged between $51 - $100 million in sales.
Krumwiede attributed these size differences to the availability of
resources (people and dollars) and economies of scale in implementing ABC at
multiple sites (p. 34).
to the survey results, ABC’s implementation success factors are not the same
as those affecting its adoption. “Success” with ABC is considered as using
its results when making decisions outside of the accounting function.
In order for ABC to be a “success,” many companies believed that it
was dependent on time, other major initiatives being implemented, existing
information technology (IT) sophistication, top management support, integration
of ABC into the financial system, and the use of ABC as part of the budgeting
usually takes more time to implement than expected.
Once ABC is implemented, it normally takes an even longer period before
its conclusions are actually utilized in the decision-making process of the
organization. Time seemed to be the
most important factor in the study for differentiating usage and non-usage
respondents to the survey stated that they were having trouble implementing ABC
because they had other initiatives of higher priority to the organization at the
present time. Examples include such
priorities as the entering of new products or markets or implementation of new
information systems. Many companies
find themselves in a position where they have too many good ideas and far too
few resources to put them into action.
to the survey, improvements to the information system often precede both ABC
adoption and the reaching of the usage-level of ABC in the decision-making
process. IT appears to be an
important factor in getting to the usage-stage for the majority of companies
implementation of ABC should be simpler if an organization’s IT system has the
following characteristics: good sub-system (e.g. sales system, manufacturing
system, etc.) integration; user-friendly query capability; available sales,
cost, and performance data going back 12 months; and real-time updates of all
these types of data. Although
a strong IT system appears to be useful in implementing ABC, it is not required.
Many organizations utilize ABC successfully with weak IT systems.
from upper-level management is necessary for any ABC system to survive and be
successful. Support includes active
participation, adequacy of resources provided, and ties to the competitive
strategies of the business unit.
ABC cost information in financial reporting generally will lead to its use in
decision making (the ultimate goal for ABC).
Managers often tend to pay attention to the information that is used for
The use of ABC information for budgeting purposes appears to be another good way to increase organizational usage. Twice as many ABC users (that responded to the survey) that included ABC data in their budgeting process found it to be “successful” as compared to those that did not. This result supports one trend that everything “will happen naturally” if ABC is included in the budgeting process. As a general rule, companies should report actual costs using the same method that is used to develop their budget (p. 38).
Was Generally Worth It…But Not Always
Of the respondents who have tried ABC, 54% are using it at least somewhat for decision-making and 89% of those companies using ABC said it was worth the implementation costs. However, not all ABC implementations have proven to be beneficial. Many users commented that ABC is not the single answer to all of their needs, but it is one of many tools to be used in order to meet an organization’s long-term goals (p. 38).
The following charts are based on 178 responses from one of the surveys in this study. Other data in the summary above are from 301 responses to another survey that included more questions.