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Krumwiede, K. R. 1998. ABC: Why it's tried and how it succeeds. Management Accounting (April): 32-34, 36, 38.

Summary by David Lamb
Master of Accountancy Program
University of South Florida, Summer 2003

ABC Main Page | ABM Main Page | Cost Management Main Page

The Activity Based Costing (ABC) method has always been debated as to its use and value within a particular organization. After a survey conducted by the Cost Management Group of the Institute of Management Accountants (IMA) in 1996, Krumwiede was able to come to the following conclusions about ABC. Many of the companies that have implemented ABC found it more difficult to adopt than as first suggested. Additionally, more than half of the responding companies that have tried ABC (54%) stated that they were using it for decision making purposes outside their accounting function. Of the companies that actually use ABC, 89% of them said ABC was worth its implementation costs.

Who Tries ABC?

As a result of the survey, Krumwiede was able to determine four factors that seemed to separate the users of ABC from the non-users. Those factors include the potential of cost distortions, decision usefulness of cost information, lack of system initiatives, and the size of the organization (p.32).

Potential for cost distortions

An organization may be more motivated to utilize ABC if they have a high potential for cost distortions. A common example of a significant distortion risk is if an organization were to use only one overhead base. By doing this, under or over costing of particular products may occur.

Cost distortions have the ability to affect many important decisions, including those related to profitability analyses. By placing ABC into affect, an organization may have the ability to determine (by some measure) whether all of their clients are profitable or not. This way, organizations can “fire” (or turn down business from) unprofitable customers to increase their margins.

When there is a lower potential for cost distortions, however, the benefits of ABC may be limited. Single product producing companies may not see a substantial improvement in their cost data through its use. In these cases, an activity analysis is recommended in place of ABC in order to identify nonvalue-added activities. Using an activity analysis would help reduce the potential for cost distortions.

Decision usefulness of cost information

Even if ABC will reduce product cost distortions substantially, it would probably not be implemented unless the company could use the better cost information in its decision-making processes. Companies that sell products dictated by market rates will most likely find little use for ABC because they have little control over the prices they can charge. On the other hand, ABC could be an extremely useful tool for a company selling multiple products within a highly competitive pricing industry. These companies could use the information in negotiations with suppliers for cost reduction efforts.

Lack of system initiatives

The restructuring or implementing of information systems will often impede the adoption of ABC within an organization. There are two reasons for this. First, the implementation of ABC requires considerable time and effort that it will not receive if the organization’s attention is focused elsewhere. Second, ABC needs extremely detailed information that it may not be able to receive because of the organization’s currently lacking information system. In order to implement ABC, these organizations must first await an improvement in their system.

Size of the organization

According to the survey, ABC adopters, on average, tend to have larger sales figures then those that do not adopt ABC. Adopting firms normally had sales figures ranging from $101 - $500 million dollars while non-adopters ranged between $51 - $100 million in sales. Krumwiede attributed these size differences to the availability of resources (people and dollars) and economies of scale in implementing ABC at multiple sites (p. 34).

What Factors Affect ABC’s Success?

According to the survey results, ABC’s implementation success factors are not the same as those affecting its adoption. “Success” with ABC is considered as using its results when making decisions outside of the accounting function. In order for ABC to be a “success,” many companies believed that it was dependent on time, other major initiatives being implemented, existing information technology (IT) sophistication, top management support, integration of ABC into the financial system, and the use of ABC as part of the budgeting system (p.34).


ABC usually takes more time to implement than expected. Once ABC is implemented, it normally takes an even longer period before its conclusions are actually utilized in the decision-making process of the organization. Time seemed to be the most important factor in the study for differentiating usage and non-usage companies.

Other major initiatives

Numerous respondents to the survey stated that they were having trouble implementing ABC because they had other initiatives of higher priority to the organization at the present time. Examples include such priorities as the entering of new products or markets or implementation of new information systems. Many companies find themselves in a position where they have too many good ideas and far too few resources to put them into action.

Information technology sophistication

According to the survey, improvements to the information system often precede both ABC adoption and the reaching of the usage-level of ABC in the decision-making process. IT appears to be an important factor in getting to the usage-stage for the majority of companies surveyed.

The implementation of ABC should be simpler if an organization’s IT system has the following characteristics: good sub-system (e.g. sales system, manufacturing system, etc.) integration; user-friendly query capability; available sales, cost, and performance data going back 12 months; and real-time updates of all these types of data. Although a strong IT system appears to be useful in implementing ABC, it is not required. Many organizations utilize ABC successfully with weak IT systems.

Top management support

Commitment from upper-level management is necessary for any ABC system to survive and be successful. Support includes active participation, adequacy of resources provided, and ties to the competitive strategies of the business unit.

Integration into financial system

Using ABC cost information in financial reporting generally will lead to its use in decision making (the ultimate goal for ABC). Managers often tend to pay attention to the information that is used for outside reporting.

Part of the Budgeting process

The use of ABC information for budgeting purposes appears to be another good way to increase organizational usage. Twice as many ABC users (that responded to the survey) that included ABC data in their budgeting process found it to be “successful” as compared to those that did not. This result supports one trend that everything “will happen naturally” if ABC is included in the budgeting process. As a general rule, companies should report actual costs using the same method that is used to develop their budget (p. 38).

ABC Was Generally Worth It…But Not Always

Of the respondents who have tried ABC, 54% are using it at least somewhat for decision-making and 89% of those companies using ABC said it was worth the implementation costs. However, not all ABC implementations have proven to be beneficial. Many users commented that ABC is not the single answer to all of their needs, but it is one of many tools to be used in order to meet an organization’s long-term goals (p. 38).

The following charts are based on 178 responses from one of the surveys in this study. Other data in the summary above are from 301 responses to another survey that included more questions.

Activity-Based Costing Adoption Status

Activity-Based Costing Implementation Status


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