Management And Accounting Web

Cooper, R. 1996. Activity-based management and the lean enterprise. Journal of Cost Management (Winter): 6-14.

Summary by Samantha Carey
Master of Accountancy Program
University of South Florida, Summer 2001

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In this article, Cooper addresses the role of ABC systems in supporting a company’s transition to a lean enterprise. Despite the fact that some people believe that ABC hinders the spread of the lean enterprise, he argues that ABC can be used to encourage the spread of the lean enterprise.

Cooper describes the lean enterprise as a Japanese innovation with the following characteristics:

Adoption of just-in-time (JIT) production.
Total quality management (TQM).
Team-based work arrangements.
Supportive supplier relations.
Improved customer satisfaction.

He says that it is considered to be a better approach to manufacturing than mass production.

Concerns about batch sizes and quality

Cooper mentions two concerns that are often raised relating to ABC and the lean enterprise:

The application of the economic order quantity (EOQ) formulas to activity-based costs would often cause a company to use larger batch sizes, which would contradict the JIT philosophy that is a part of the foundation of lean production.

The transition to ABC may lead to financial signals that suggest lower levels of quality are preferable, which does not support the transition to lean production.

Effect of ABC on batch size and quality levels

In response to the above concerns, Cooper first says that although the new ABC data would result in an increase in batch sizes, this does not necessarily mean that the company is worse off. He says that its profitability could actually increase if the EOQ accurately captures the batch-size tradeoffs that define the cost structure of the company. His argument is that profits would increase because using higher batch-level costs in the EOQ model would lead to higher and thus less costly batch sizes than those suggested by the traditional unit-based cost system information.

Secondly, in relation to quality, he says that an ABC system would have the effect of decreasing defect levels, rather than increasing them, because such a system would identify more of the costs associated with rework and scrap than a traditional system. He claims that a lower defect level might enable the company to obtain some benefits from increased quality, including benefits related to increased customer satisfaction and shorter cycle time because of fewer production-line stoppages and less rework caused by defects.


Cooper also states that people are under the assumption that things should always change in a smooth and gradual manner, but this a myth. He says that implementing an activity-based system in a firm run by managers who believe in gradualism would cause them to reconsider the optimum batch size and quality levels, instead of causing them to convert to lean production.

Changing mindsets

Cooper asserts that changes in the mindset of managers and workers as they pay more attention to production flow can make it possible to eliminate production inefficiencies that were previously hidden. He feels that the gradualistic perspective of assuming that some level of defects is optimum and that only one optimum exists should be replaced by a more modern way of thinking which holds that no defects are acceptable, and that the single optimum defect level is zero.

Do ABC and the lean enterprise conflict?

In addressing this question, Cooper states that "for ABC to hinder the spread of the lean enterprise, the information it generates must be so compelling and contrary to the tenets of the lean enterprise that it forces managers to readopt mass-production practices rather than lean-enterprise practices". He argues that ABC supports the shift to TQM and JIT, and that since both ABC and the lean enterprise result in reduced defect levels, there is apparently no conflict between the two. He points out that ABC systems report higher costs of defects than traditional cost systems do, which helps managers begin the move toward zero defects, and that only if managers continue to make the mistake of believing that the optimum defect level is anything greater than zero would there be a problem. He also says that the reemergence of the gradualistic perspective would not indicate a problem with ABC, but instead a failure of the concepts of the lean enterprise to replace the traditional view.


The relationship between ABC and JIT is described by Cooper as being complex. He does recognize the fact that ABC and the move to the lean enterprise appear to be in conflict, because ABC systems support larger batches, whereas lean manufacturing supports smaller batches, but he claims that this conflict is only on the surface. His belief is that the increase in batch sizes that results from applying the EOQ model to the batch-level costs reported by an ABC system is caused by the way the EOQ model is applied, and not by any inherent limitation of the model. He asserts that EOQ models were designed to minimize costs, instead of to encourage the elimination of costs, and that as result, the application of a cost-minimizing EOQ model leads to manipulations of the size of the batch instead of the elimination of batch-related costs. He also says that if the higher batch-related costs reported by a new ABC system cause management to focus on reducing the costs, the organization would move in the direction of the lean enterprise.

JIT and lean production

Cooper states that the lean enterprise relies heavily on JIT, and in JIT production, the number of batches is very high, therefore, if a lean enterprise is to succeed, it must dramatically reduce the cost of batch-level activities. He says that in addition to batch costs being small, JIT also requires them to have a low variance. However, ABC only measures the average cost of batch-level activities, and not the variance of costs, so these variances would have to be monitored by other performance measurement systems. His claim is that an ABC model can help managers implement JIT because it identifies the costs of all batch-level activities, instead of just setup activities, and this would enable managers to visualize how to achieve the production economies required to make lean production feasible. Cooper also says that an ABC system warns managers about the risks of trying to implement JIT in environments where batch-level activities are too expensive.

ABC and the lean enterprise in practice

In conclusion, Cooper makes mention of the fact that many ABC systems have already been implemented in companies that are lean or are in the process of adopting the lean manufacturing approach. He argues that if ABC does hinder the spread of the lean enterprise, then it would be unlikely that most of the companies that implement ABC are already lean enterprises, or working towards becoming a lean enterprise.


Related summaries:

Berliner, C., and J. A. Brimson, eds. 1988. Cost Management for Today's Advanced Manufacturing: The CAM-I Conceptual Design. Boston: Harvard Business School Press. (Short Summary or Concepts), (Longer Summary).

Beynon, R. 1992. Change management as a platform for activity-based management. Journal of Cost Management (Summer): 24-30. (Summary).

Coburn, S., H. Grove and C. Fukami. 1995. Benchmarking with ABCM. Management Accounting (January): 56-60. (Summary).

Cokins, G. 1999. Using ABC to become ABM. Journal of Cost Management (January/February): 29-35. (Summary).

Keys, D. E. 1994. Tracing costs in the three stages of activity-based management. Journal of Cost Management (Winter): 30-37. (Summary).

Martin, J. R. Not dated. Activity based management models. Management And Accounting Web.

Martin, J. R. Not dated. Lean concepts and terms. Management And Accounting Web.

Martin, J. R. Not dated. Profit Beyond Measure graphics and notes. Management And Accounting Web.

Martin, J. R. Not dated. What is lean accounting? Management And Accounting Web.

Pryor, T. 1997. Making new things familiar and familiar things new. Journal of Cost Management (Winter): 38-42. (Summary).

Reeve, J. M. 1996. Projects, models, and systems -Where is ABM headed? Journal of Cost Management (Summer): 5-16. (Summary).

Spear, S. and H. K. Bowen. 1999. Decoding the DNA of the Toyota production system. Harvard Business Review (September-October): 97-106. (Summary).

Spear, S. J. 2004. Learning to lead at Toyota. Harvard Business Review (May): 78-86. (Summary).

Staats, B. R. and D. M. Upton. 2011. Lean knowledge work: The "Toyota" principles can also be effective in operations involving judgment and expertise. Harvard Business Review (October): 100-110. (Summary).

Swank, C. K. 2003. The lean service machine. Harvard Business Review (October): 123-129. (Summary).

Womack, J. P. and D. T. Jones. 1994. From lean production to the lean enterprise. Harvard Business Review (March-April): 93-103. (Summary).

Womack, J. P. and D. T. Jones. 1996. Beyond Toyota: How to root out waste and pursue perfection. Harvard Business Review (September-October): 140-144, 146, 148-152, 154, 156, 158. (Summary).