Summary by Melissa Hagood
Master of Accountancy Program
University of South Florida, Fall 2001
The purpose of this article is to bring to light the fact that management accounting is rapidly changing, and that the deficiencies of traditional cost systems are no longer tolerable. Activity-based management (ABM) is discussed as a solution. The author also proposes three “prescriptions” to bridge the gap between the cost data we gather today and the knowledge about activities we really need.
Pryor states that ABM is a mirror. He uses this metaphor to illustrate that a company that implements an ABM system sees itself in a new way. The activities that consume resources are revealed. These are the things management needs to see in order to eliminate non-value added activities, traditions, and performance measures. Traditional cost systems do not provide such an accurate reflection.
Ten problematic attitudes or traditions that are revealed by ABM systems are enumerated in the article:
1. Managing costs by function when activities should actually be managed.
2. Categorizing workers as direct or indirect cost contributors.
3. Worrying about fixed vs. variable cost instead of used and unused activity and process capacity.
4. Judging department managers by their meeting budget expectations, not realizing that most activities of the department are not under their control.
5. Monthly budget goals that do not really lead the organization to strive to be the best it can be by eliminating non-value added costs.
6. Generating more data and detail than necessary to manage just the most significant activities in the organization.
7. Focusing on quick book closings to sum up costs instead of focusing on preventing the costs before they occur.
8. Managing the organization vertically instead of laterally.
9.)Allocating functional overhead to products instead of designing products that fit into the functional activities and processes of the company.
10. Limiting cost management to costs seen on the profit and loss statement of the organization and not including costs created by supplier and customer activities.
Pryor’s three “prescriptions” for redefining the role of management accounting for the future are to eliminate: functional based profit and loss statements, accounting, and month-end closings.
Profit and loss statements where costs are divided by functions do not reflect the way costs actually occur today. Activities, and the processes they make up, regularly cross functional boundaries. A process-based profit and loss statement is an alternative that provides valuable information excluded from a traditional statement. It promotes continuous improvement, by pointing out the profit potential with waste eliminations. It also promotes better strategic planning and decision making by management because it forces them to focus on what processes they are spending their money on, rather than which functions. It also helps foster the cross-functional cooperation that improves organizations. Process managers become the leaders instead of the functional managers.
Pryor’s second prescription is “eliminate accounting.” While this sounds radical, he makes a good point that accounting for costs after they have already happened adds little value. He believes management accountants should focus their resources instead on helping management measure and control their commitments to expenditures. Most of the cost of a product is committed prior to production. Target costing can be used with activity based costing in designing new processes and products that will benefit the company. Management accountants should work on target cost planning systems and commitment measurement instead of accounting for past transactions.
The final prescription is to eliminate month-end closings. Making sure profits are on target for the month wastes considerable time and effort. These closings contradict the objectives of total quality manufacturing and continuous flow manufacturing as they break up production so that it is not continuous. Closings should be seamless, so that employees, suppliers, and customers are unaffected. Pryor proposes the use of statistical process control in conjunction with ABM information to create activity output control charts. That way, everyone in the organization can see operational issues that arise during the month and correct them then, as opposed to finding out about them too late. Month-end closings reveal these issues too late.
In conclusion, management accountants must change their focus as businesses change theirs. In horizontal organizations with cross-functional business processes, information needs are not met by traditional cost accounting systems. ABM and the three prescriptions listed here are a good starting place for improving cost information.
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