Management And Accounting Web

Troxel, R. and M. Weber. 1990. The evolution of activity-based costing. Journal of Cost Management (Spring):14-22.

Summary by Henry Stoll
Master of Accountancy Program
University of South Florida, Fall 2000

ABC Main Page | History and Development Main Page

Troxel and Weber discuss the 3 phases of ABC development, a future phase, and provide some company examples for each of the various phases.

Phase 1 - Serendipitous Implementation 1980

ABC characteristics were present in some systems.

The ABC approach was not yet identified.

Systems with ABC characteristics were just considered a sophisticated traditional system.

Systems were used for normal financial purposes, not strategic purposes.

Most common in Europe.

Phase 2 - Ad Hoc Implementation 1980 - 1985

The ABC approach was identified and differences from the traditional cost accounting methods were recognized.

No structure was yet defined for ABC systems.

ABC was considered an alternative to a conventional cost system.

The few systems that were developed were on an ad hoc basis.

Recognition that ABC provides some strategic insights, but still used primarily for financial reporting.

Some concern that full implementation of ABC would conflict with GAAP.

Phase 3 - Structured Implementation 1985 - 1990

Objectives and approaches of development of ABC systems have been specifically identified.

Recognition that ABC provides strategic insights and should be used as a decision making tool.

ABC no longer considered just a replacement for an existing cost accounting system.

Database technology has helped make ABC more practical.

Cooper and Kaplan helped lead the way through their research and publications.

What does the future hold?

Phase 4 - Integration with Performance Management - 2000

Both commonalities and disparities will be recognized between cost drivers and critical performance factors.

Continue to better link product costing, performance measurement, and investment justification.


Phase 1 - Vegetable Canning

Cost system based on joint product costing. - Linear programming and simulation models were used for planning.

Results from the models and the cost system varied greatly and lacked comparability.

A direct cost system was developed using multiple regression. (this was not recognized as an ABC system at the time).

The ABC system provide insight, and several changes to operations and marketing were successfully implemented.

Phase 2 - Pharmaceutical

Used a direct cost system - 15% of products provided over 90% of revenue - Revenues were growing, but profit margin was decreasing.

Used a quality control cost pool with number of products as the cost driver to allocate these costs to finished good.

Small-volume products were being undercosted by the old system.

Management recognized the use of ABC; however, implementation was too expensive. They weeded out their low-volume products.

Phase 3 - Automobile Parts Supplier

A large customer requested a 5 % price reduction on a product with a 7% profit margin.

Turned down the request and needed new customers.

Use of an ABC system returned a 19% profit margin for the product, instead of 5%.

Management directed its efforts to recapturing the lost customer by allowing the price reductions.


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