Management And Accounting Web

Turney, P. B. B. 1990. Ten myths about implementing an activity-based costing system. Journal of Cost Management (Spring): 24-32.

Summary by Robert Heald
Master of Accountancy Program
University of South Florida, Fall 2000

ABC Main Page | ABM Main Page

Purpose: Turney examines ten myths related to ABC product costing identified from the comments of managers and academics, myths meaning a commonly stated view that is accepted without critical analysis.

1. ABC systems are too costly
  • An ABC system identifies activities and cost drivers, traces costs to each activity, and then traces the cost of the activities to products by means of the cost drivers.
  • The data needed for an ABC system already exists in the plant and can be easily captured.
  • An ABC system reduces special studies that companies perform to supplement the information reported by the product costing system.

2. Activity-Based systems are too complex to understand

  • The additional number and type of cost drivers make an ABC system difficult to understand.
  • ABC systems are easy to understand even though there are more cost drivers than unit-based systems because these drivers describe the major factors that create the demand for activity.
  • ABC systems reflect economic reality better therefore are easier to understand than cost accounting systems.
3. All that we need are more cost centers
  • There is a limit to the accuracy that can be achieved by simply increasing the number of cost centers.
4. Machine-hour systems would save the day
  • Advantages of using machine hours instead of direct labor hours:
  • Machine hours may provide more reasonable overhead rates.
  • When machine base diversity exists the number of machines that an operator runs varies according to the product produced.
  • Machine hours will not produce accurate product costs if much of a company‚Äôs costs is incurred by activities that are not at the unit level.
5. A cost system should be kept simple
  • In plants where product homogeneity exists, there is no need for an ABC system.
  • Inaccurate product costs may occur where product diversity exists because more and different types of cost drivers are needed.
  • ABC may need to be implemented for companies who have product diversity or they incur significant costs in activities that are not at the product level.
6. We know what our products cost
  • Managers have a feel for what the costs are to produce their products.
  • Managers do not realize the size of the problem or product cost distortions.
7. The market sets prices so we do not need product costs
  • Pricing to market is common in many industries, which means that the role of product costs in setting prices is, therefore, limited.
  • Improved accuracy is an important benefit of ABC systems.
  • Even firms that do not use product costs to set prices should still devote attention and resources to products based on relative profitability.
8. We cannot do anything about fixed costs
  • While the cost of fixed activities does not vary with the number of product units, it may vary with the number of batches and different products produced.
  • Failure to recognize batch-level and product-level activities diminishes the perceived benefit of ABC systems.
  • Conventional systems recognize only one level of variability, the unit-level.
9. Only manufacturing costs are product costs
  • Excluded activities from this myth include R&D costs, selling and distribution.
  • GAAP influences the exclusion of non-manufacturing activities from product costs because they are classified as period costs rather than product costs.
  • Failing to include non-manufacturing costs distorts product costs if the cost of activity is high and the activities are consumed differently by different products.
10. Product costs are not useful for managing overhead activities
  • Managing cost drivers using ABC may reduce product costs.

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