Summary by Terry Kuhn
Master of Accountancy Program
University of South Florida, Summer 2003
ABC Main Page | ABM Main Page
The purpose of this article is to introduce a multicontribution income statement based on the ABC cost hierarchy.
The idea is to compute contribution at 4 main levels:
Product Level
Product-line Level
Operations Level
Facility Level
Goal: To help managers assess different levels of profitability and to measure those effects with respect to strategic and operational decisions.
Traditional models of cost analysis:
1. Unit costs
2. Contribution margin
The downsides:
Unit costs analysis is only limited to the product cost and does not give any insight about the contribution of products, brands, product lines, or facilities despite their relevance to management. (p. 45.)
Traditional contribution margin analysis is apparently a short run analysis where fixed cost allocations are ignored.
Product contribution margin = Price – Variable product costs.
The use of a multicontribution activity based income statement starts where the contribution margin ends. The concept is to separate fixed costs into the four levels introduced in the beginning of this paper, resulting in a contribution margin at each of the four levels as indicated in the graphic illustration below.
Product Contribution Level 1
Traditional (or Incremental) Contribution Margin minus unit-based costs (i.e. machine time, direct labor), batch-based costs (i.e. machine setups, processing purchase orders), and product-based costs (i.e. marketing costs of advertising, promoting, & selling particular product that are a direct result of the product sustaining activity)
Product Lines Contribution Level 2
Product contribution minus brand-based costs (i.e. R&D for a brand; advertising & promotion of a brand), and product-line costs (i.e. product line related R& D; technological development)
Excess capacity costs (overcapacity) is a key ingredient in the activity based income statement. While the actual machine utilization is assigned or traced at the product level, any excess capacity costs (the costs of products the company did not produce) are charged according to usage intent and the level of machine specialization. (p. 50)
Operations Contribution Level 3`
Product-line contribution minus customer-sustaining costs (i.e. sales calls) channel-sustaining costs (i.e. catalogues, market research channels)
Simply put, this means that the costs of marketing and sales operations not directly related to individual products are subtracted out.
Facilities Contribution Level 4
Operation contribution minus production facility costs (i.e. plant mgt., personnel, housekeeping), marketing facility costs (i.e. company wide market research, facility level sales & marketing), and administrative facility costs (i.e. general facility mgt., legal, public relations).
According to Ali, an activity-based income statement reveals the profitability of units, products, product lines, customers, channels, operations and facilities, providing information for make-or-buy decisions, to drop or keep products, and various other decisions related to improving efficiency and the adoption of advanced manufacturing technologies.
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Kaplan suggested something like this in Robinson, M. A., ed. 1990. Contribution margin analysis: No longer relevant/strategic cost management: The new paradigm. Journal of Management Accounting Research (2): 1-32. Summary of Kaplan and Shank arguments).
Other related summaries:
Anderson, S. W., J. W. Hesford and S. M. Young. 2002. Factors influencing the performance of activity based costing teams: A field study of ABC model development time in the automobile industry. Accounting, Organizations and Society 27(3): 195-211. (Summary).
Argyris, C. and R. S. Kaplan. 1994. Implementing new knowledge: The case of activity-based costing. Accounting Horizons (September): 83-105. (Summary).
Baxendale, S. J. and P. S. Raju. 2004. Using ABC to enhance throughput accounting: A strategic perspective. Cost Management (January/February): 31-38. (Summary).
Carter, T. L., A. M. Sedaghat and T. D. Williams. 1998. How ABC changed the post office. Management Accounting (February): 28-32, 35-36. (Summary).
Cokins, G. 1999. Using ABC to become ABM. Journal of Cost Management (January/February): 29-35. (Summary).
Cokins, G. 2002. Integrating target costing and ABC. Journal of Cost Management (July/August): 13-22. (Summary).
Cooper, R. 1990. Implementing an activity-based cost system. Journal of Cost Management (Spring): 33-42. (Summary).
Cooper, R. 1996. Activity-based management and the lean enterprise. Journal of Cost Management (Winter): 6-14. (Summary).
Cooper, R. and R. S. Kaplan. 1992. Activity-based systems: Measuring the costs of resource usage. Accounting Horizons (September): 1-13. (Summary).
Cooper, R., and R. S. Kaplan. 1998. The promise - and peril - of integrated cost systems. Harvard Business Review (July-August): 109-119. (Summary 1, Summary 2).
Corbett, T. 2000. Throughput accounting and activity-based costing: The driving factors behind each methodology. Journal of Cost Management (January/February): 37-45. (Summary).
Gosselin, M. 1997. The effect of strategy and organizational structure on the adoption and implementation of activity-based costing. Accounting, Organizations and Society 22(2): 105-122. (Summary).
Hughes, S. B. and K. A. Paulson Gjerde. 2003. Do different cost systems make a difference? Management Accounting Quarterly (Fall): 22-30. (Summary).
Ittner, C. D., D. F. Larcker and T. Randall. 1997. The activity-based cost hierarchy, production policies and firm profitability. Journal of Management Accounting Research (9): 143-162. (Summary).
Jones, T. C. and D. Dugdale. 2002. The ABC bandwagon and the juggernaut of modernity. Accounting, Organizations and Society 27(1-2): 121-163. (Summary).
Kaplan, R. S. 1990. The four stage model of cost systems design. Management Accounting (February): 22-26. (Summary).
Kaplan, R. S. 1998. Innovation action research: Creating new management theory and practice. Journal of Management Accounting Research (10): 89-118. (Summary).
Kaplan, S. E. and J. T. Mackey. 1992. An examination of the association between organizational design factors and the use of accounting information for managerial performance evaluation. Journal of Management Accounting Research (4): 116-130. (Summary).
Kee, R. C. 2001. Implementing cost-volume-profit analysis using an activity-based costing system. Advances in Management Accounting (10): 77-94. (Summary).
Keys, D. E. 1994. Tracing costs in the three stages of activity-based management. Journal of Cost Management (Winter): 30-37. (Summary).
Keys, D. E. and R. J. Lefevre. 1995. Departmental activity-based management. Management Accounting (January): 27-30. (Summary).
Krumwiede, K. R. 1998. ABC: Why it's tried and how it succeeds. Management Accounting (April): 32-34, 36, 38. (Summary).
Landry, S. P., L. M. Wood and T. M. Lindquist. 1997. Can ABC bring mixed results? Management Accounting (March): 28-30, 32-33. (Summary).
Mangan, T. N. 1995. Integrating an activity-based cost system. Journal of Cost Management (Winter): 5-13. (Summary).
Martin, J. R. Not dated. Chapter 7: Activity Based Product Costing. Management Accounting: Concepts, Techniques & Controversial Issues. Management And Accounting Web. Chapter7
Mecimore, C. D. and A. T. Bell. 1995. Are we ready for fourth-generation ABC? Management Accounting (January): 22-26. (Summary).
Palmer, R. J. and M. Vied. 1998. Could ABC threaten the survival of your company? Management Accounting (November): 33-36. (Summary).
Ruhl, J. M. and B. P. Hartman. 1998. Activity-Based Costing in the Service Sector. Advances in Management Accounting (6): 147-161. (Summary).
Rupp, A. W. 1995. ABC: A pilot approach. Management Accounting (January): 50-55. (Summary).
Sandison, D., S. C. Hansen and R. G. Torok. 2003. Activity-based planning and budgeting: A new approach. Journal of Cost Management (March/April): 16-22. (Summary).
Troxel, R. and M. Weber. 1990. The evolution of activity-based costing. Journal of Cost Management (Spring):14-22. (Summary).
Turney, P. B. B. 1990. Ten myths about implementing an activity-based costing system. Journal of Cost Management (Spring): 24-32. (Summary).
West, T. D. and D. A. West. 1997. Applying ABC to healthcare. Management Accounting (February): 22, 24-26, 28-30, 32-33. (Summary).
Zeller, T. L. 2000. Measuring and managing e-retailing with activity-based costing. Journal of Cost Management (January/February): 17-30. (Summary).
