Summary by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida
The purpose of this paper is to discuss a new approach to management accounting to show how companies should develop and use activity-based information to become world-class competitors. Johnson says that profitability is no longer determined solely by controlling costs. Quality and flexibility are also important.
The new approach to management accounting is based two types of activity-based information related to the work that consumes resources and creates value. This includes:
1. Non-financial information about the sources of competitive value (e.g., quality and flexibility), and
2. Strategic cost information across the entire value chain (design, engineering, sourcing, production, distribution, marketing and after sale service).
The focus of the activity-based information is on the causes of cost and profit to eliminate the wasted effort, causes of delay, excess and unevenness in all activities across the value chain. Reducing setup and carrying costs is provided as an example to show how the tradeoff decision related to EOQ is avoided by Toyota's management.
According to Johnson there are four steps involved in managing waste in operating activities.
1. Chart the flow of activities throughout the organization across the entire value chain.
2. Identify the sources of customer value in every activity and eliminate any activities that contribute no value.
3. Identify the causes of delay, excess and unevenness in all activities, such as poor training, conflicts in worker's assignments, poorly designed machines, and haphazard placement of tools.
4. Track the indicators of waste such as elapsed time, setup time, cycle time, distances moved, space occupied, and number of parts per product.
These steps call for cooperation from everyone in the organization across the value chain and the entire arsenal of management methods related to just-in-time, total quality management and employee involvement. As the causes of waste are removed, excess resources must be disposed of or used for other purposes before the improvements will show up in the financial accounts.
Companies should abandon traditional measures such as budget variances and labor efficiency measurements. Financial cost data should be generated for planning, coordinating and resource allocation, but not control. Instead, operating managers at the plant and department levels will use non-financial indicators such as those mentioned above, not budget targets, net income and return on investment.
Two additional types of activity-based information include:
1. Chargeouts (i.e., the price an activity center charges internal customers) and
2. Product costs.
Using chargeouts helps determine whether the company should outsource or sell various services. Both internal customers and activity providers should be free to sell or buy inside or outside the company.
Johnson also discusses why traditional cost systems distort product costs and how activity-based costing eliminates these distortions and cross subsidies. These concepts have been discussed in numerous papers since this paper was published in 1988.
The main ideas in this paper are illustrated in the following graphic adapted from Johnson's Figure 1.
Johnson, H. T. 1983. The search for gain in markets and firms: A review of the historical emergence of management accounting systems. Accounting, Organizations and Society 8(2-3): 139-146. (Summary).
Johnson, H. T. 1987. The decline of cost management: A reinterpretation of 20th-century cost accounting. Journal of Cost Management (Spring): 5-12. (Summary).
Johnson, H. T. 1989. Professors, customers, and value: bringing a global perspective to management accounting education. Proceedings of the Third Annual Management Accounting Symposium. Sarasota: American Accounting Association: 7-20. (Summary).
Johnson, H. T. 1990. Beyond product costing: A challenge to cost management's conventional wisdom. Journal of Cost Management (Fall): 15-21. (Summary).
Johnson, H. T. 1992. It's time to stop overselling activity-based concepts. Management Accounting (September): 26-35. (Summary).
Johnson, H. T. 1992. Relevance Regained: From Top-Down Control to Bottom-up Empowerment. The Free Press. (Summary).
Johnson, H. T. 1995. Management accounting in the 21st century. Journal of Cost Management (Fall): 15-20. (Summary).
Johnson, H. T. 2006. Lean accounting: To become lean, shed accounting. Cost Management (January/February): 6-17. (Summary).
Johnson, H. T. 2006. Sustainability and "Lean Operations". Cost Management (March/April): 40-45. (Summary).
Johnson, H. T. and A. Broms. 2000. Profit Beyond Measure: Extraordinary Results through Attention to Work and People. The Free Press. (Summary).
Johnson, H. T. and R. S. Kaplan. 1987. Relevance Lost: The Rise and Fall of Management Accounting. Boston: Harvard Business School Press. (Summaries and additional information).
Martin, J. R. Not dated. Activity based management models. Management And Accounting Web. https://maaw.info/ABMModels.htm
Martin, J. R. Not dated. Chapter 8: Just-In-Time, Theory of Constraints, and Activity Based Management Concepts and Techniques. Management Accounting: Concepts, Techniques & Controversial Issues. Management And Accounting Web. https://maaw.info/Chapter8.htm
Reeve, J. M. 1996. Projects, models, and systems -Where is ABM headed? Journal of Cost Management (Summer): 5-16. (Summary).