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Miller, J. G. and T. E. Vollmann. 1985. The hidden factory. Harvard Business Review (September-October): 142-150.

Note by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida

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This paper represents a key contribution from the perspective of activity based cost concepts because it introduced, or perhaps reintroduced, the "cost of transactions philosophy".

Miller and Vollman point out that the drivers of support costs were hidden in traditional accounting systems. Support costs are not driven by production volume, but by four types of transactions as follows:

1. Logistical transactions - ordering, executing, receiving, expediting, shipping.

2. Balancing transactions - matching the supply of materials, labor and capacity with demand.

3. Quality transactions - inspection, rework, training, engineering, field support.

4. Change transactions - changes in engineering designs, schedules, standards, routings.

The authors advocate a variety of ways to eliminate transactions such as implementing just in time systems and related concepts.


Note: The term "transactions costing" was used when academics and practitioners discussed ABC concepts in the mid 1980s. Another related term was "attributable costing". I think the term attributable came from Gordon Shillinglaw (See Shillinglaw's 1963 article listed below). Later, the term transactions was replaced by activities.

The term "activity accounting" appears in the CAM-I conceptual design document (Berliner and Brimson, 1988).

The term "activity based costing" is from John Deere Company and appeared in a Harvard Business School Case (187-107) published in 1987. Robin Cooper and Robert Kaplan adopted the ABC terminology and the rest of the world followed their lead. Although the terminology is relatively new, the ideas can be traced back to around 1910 in articles written by Alexander Hamilton Church. See Johnson and Kaplan (1987, Chapter 3) and the paper by Church listed below.

Shillinglaw, G. 1963. The concept of attributable cost. Journal of Accounting Research (Spring): 73-85. (JSTOR link).

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).

Church, A. H. 1995. Overhead: The cost of production preparedness. Journal of Cost Management (Summer): 66-71. (Summary).

Cooper, R. 1990. Implementing an activity-based cost system. Journal of Cost Management (Spring): 33-42. (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).

Gantt, H. L. 1994. The relation between production and costs. Journal of Cost Management (Spring): 4-11. (This is a presentation Gantt made in 1915). (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. and R. S. Kaplan. 1987. Relevance Lost: The Rise and Fall of Management Accounting. Boston: Harvard Business School Press. (Summary).

Kaplan, R. S. 1983. Measuring manufacturing performance: A new challenge for managerial accounting research. The Accounting Review (October): 686-705. (JSTOR link). (Summary).

Kaplan, R. S. 1984. The evolution of management accounting. The Accounting Review (July): 390-418. (JSTOR link). (Summary).

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

Martin, J. R. Not dated. 200 years of accounting history dates and events. Management And Accounting Web.