Traditional versus Activity-Based Responsibility Accounting

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McNair, C. J. 1990. Interdependence and control: Traditional vs. activity-based responsibility accounting. Journal of Cost Management (Summer): 15-23.

Summary by Brenda Okulski
Master of Accountancy Program
University of South Florida, Fall 2000

Purpose of Article

To show how organizational interdependence changes the assumptions underlying traditional responsibility accounting and how an activity based accounting system more closely matches the demands of interdependence.

Activity-based Costing

ABC – a tool for analyzing cost flows and interdependence in complex manufacturing settings.
Costs reported and activities highlighted by an ABC system affect employee & organizational behavior.

Interdependence and the Organization

Interdependence is the integration of activities across functional and departmental lines.

TIME	Throughput Time Continuous Improvement	Measuring move, queue, setup, inspect and process times Trending historical actuals
STRUCTURE	Horizontal / Vertical Controls Cell Configurations	Group incentives Standardizations-product families
PROCESS	Remove buffers Explicitly linking activities	"Stop & fix" replaces "run & sort " Concurrent design, team orientation
CONTROL	Activity rather than individual focus	Activity based responsibility accounting

Interdependence and Responsibility Accounting/ Redefining Control

Traditional responsibility accounting uses budgets and variances to hold individuals responsible for those costs that they control .
Activity-based accounting redefines accountability from costs to activities.

	Activity-based Responsibility Accounting	Traditional Responsibility Accounting
Basic Assumption	Interdependence	Independence
Focus	Organization	Individuals
Objective	Analysis	Cost control
Control Emphasis	Activities	Costs
Control Point	Process	Outcomes
Variance Usage	Improve process	Balance ledger/accountability
Standards	Historical/trended	Engineered/static
Goals Encouraged	Continuous improvement	Meet standards
Control Characteristics	Multi-dimensional Ambiguous Strategic Financial & operational	One-dimensional One-to-one map Budget-based Financial

Adopting a Database Approach

An Activity-based accounting system:

Identifies interrelated activities à then attaches costs à then charges back to process/product.

A database of activity costs is developed and maintained

Looking Forward

ABC could reshape management control processes by creating a new form of responsibility accounting based on activities instead of on individual accountability.
Responsibility accounting needs to be revised to include team-based performance.
Managers who employ the new forms of costing and control offered by ABC, in addition to strategic planning, integrated performance and rapid response to environmental changes, will have a good chance for survival.

ABC Main Page	ABM Main Page
Cost Management Main Page	Responsibility Accounting Main Page

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