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Thorne, H. and G. Gurd. 1999. Activity-based costing: Improved product costing or activity management? Advances in Management Accounting (8): 173-194.

Summary by Dennis Tichio
Master of Accountancy Program
University of South Florida, Fall 2001

ABC Main Page | ABM Main Page

Activity-based costing (ABC) was first used to assign costs to products. It's main objective was to allocate overhead costs effectively. Along with the results of accurate product costing, it was argued that ABC could also provide important information for managing costs.

ABC is more likely to reach success in a one-dimensional model. The problems and failures associated with ABC arise when an organization wants to both improve product costing, and manage activities and processes simultaneously. When trying to obtain both dimensions of ABC, product costing and managing activities, the goals and procedures often conflict.

Research Issues

ABC used for product costing traces resources to cost objects. In most instances the cost objects are the finished products. This dimension of ABC is helpful in determining prices, product sourcing, and product design.

ABC used for managing activities looks to identify the cost drivers and performance measures for activities. By measuring and identifying these activity attributes, management is able to identify wasted resources as well as maintain continual improvement.

Conceptually both models appear to have significant benefits. However actual results show problems associated with ABC. ABC models have not provided the benefits necessary to outweigh the costs occurred in implementing the system. Occasionally the ABC model is not even completed. ABC failures have been attributed to the design of the system, as well as behavioral and organizational factors.

The main question remains whether it is even possible to achieve both product costing and activity management from an ABC model simultaneously. The two objectives require different types of information. Product costing requires a large aggregation of activities to be cost effective, and a limited number of activity drivers. Activity management requires disaggregated information about activities and a full look at activity and cost drivers. Combining the two approaches creates a large amount of complexity for the product costing dimension. The objectives also pose significant problems, where activity management strives for continual improvement. Therefore information for product costing is constantly changing.

Research Methodology

To research the questions stated in the paragraph above, the authors engaged in five case studies regarding the implementation of an ABC system. The authors included the overview of the five case studies in a helpful table, which is included with this summary. It describes the company, the authors’ involvement and the nature of the data they were able to collect.

Objectives of ABC Implementations

The initial goals of the ABC implementation should be identified immediately. This will aid in the design of the system, the actual engagement of the system, and how the system will ultimately be used. Adjustments of the systems will be made in the final stages to ultimately improve the cost/benefit relationship.

In this study the five cases had differing goals of what they wanted their ABC system to achieve. All of the cases started out with a product costing objective. However, Cases A and C were only one-dimensional. Cases B, D, and E were two-dimensional models.

Analysis: Product Costing

The first step used to identify product costs was to first identify activity costs. Information was obtained through interviews with management and employees, and then general ledger amounts were traced or allocated to resource drivers. Cases A and C needed to allocate overhead costs only, because they were only interested in product costing. The other three cases had to analyze direct labor and overhead costs, because they were interested in managing the overall business costs as well as product costs.

The information obtained varied between the one- and two-dimensional models. The one-dimensional models had fewer activities, which resulted in a higher aggregation of costs. The one-dimensional models also had fewer activity drivers.

The next step in the analysis was assigning the activity costs to products. Case A was successful in assigning the activity drivers to two products, showing significant changes from the original costs assigned to these products. However, major changes in management led to the abandonment of the project.

Case C found it very difficult and time consuming to identify product costs because of the high level of aggregation. However, the costing system was completed for the plant’s 240 products. The costs showed changes from original costing system, but soon after completion, the project was put on hold because of the high demand on the plant’s resources.

The two-dimensional cases found it very hard to allocate the many activity costs. Therefore within an activity center they designated costs as primary or support costs. The support costs were then combined with the primary costs they were associated with to reduce the overall amount of activity costs. The cases still found it very difficult to assign these costs to the products. Instead they tried using an input measure such as labor or machine hours. Ultimately the three cases decided it was not beneficial to determine the costs associated with the products because they would be constantly changing as a result of the activity management perspective, and the amount of work involved to properly assign costs was burdensome.

The amount of data necessary for the dual approach is too detailed to try to allocate costs to products. The dual approach also requires the allocation of both labor and overhead, which provides too much information to handle. The product costing approach in one-dimensional models provides manageable information, resulting in more success.

Analysis: Activity Management

Activity management involves identifying activity attributes, while assessing the costs, as well as the qualitative dimensions of the attribute. The three dual cases identified three attributes; value status, primary/support activities, and business process. The value status of activities was obtained through interviews. In all cases value and non-value-added activities were identified. In all three cases costs were broken down to primary and support activities to help in the assignment of costs. Activity costs were also identified to business processes. The cases hoped to be able to reduce costs associated with the processes. None of the cases were successful in regards to the business process attribute.

All three cases failed to identify a complete set of cost drivers and performance measures, which is necessary to implement and maintain continual improvement. The successful information obtained from activity management relate to the value status and the primary and support activities identified. The business process information is of little use. From these case studies, it is perceived the large amount of detailed information obtained was for analysis of costs and activities, rather than the additional activity attribute information that is required.


Out of the five cases, only one proved to be successful even though it was eventually put on hold. The dual models found it much harder to provide information with regards to product costing. The two objectives conflicted with each other. However some aspects of the activity management objective provided useful information, mainly the knowledge of non-value-added activities. Overall the paper identified that the initial objectives of ABC may be hard to achieve. It may be easier to achieve a successful one-dimensional model, but there are still problems associated with all ABC systems. ABC systems must provide the end results that were set out for, while providing an efficient cost/benefit relationship.

Background of Cases

Case Industry No. of
Employees in
Basis of
Nature of
A Plastics/metal fabrication 200 Academic supervisor Observation
B Defense systems
and software
500 Academic
Interviews and observation
C Automobile 250 Academic
access to all data
D Automobile
200 Consultants Observation, access to
all data and reports
E Heavy engineering/foundry 150 Academic supervisors Observation, access to
all data and reports


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