Summary by Marissa Diaz-Walker
Master of Accountancy Program
University of South Florida, Fall 2000
ABC Main Page | Cost Management Main Page
The purpose of this paper is to describe a two-stage structured approach to implementing activity-based cost systems.
First stage: Decision-making
This stage involves design choices that should be made before starting the implementation. These choices will define the characteristics of the system and will depend on its primary objective.
Should the system be integrated with the existing system or should it be a stand-alone system?
Factors to consider: a) time, b) cost (software development, interfaces, how frequently is info. needed), c) corporate approval, d) approval from external auditors e) expertise.
Should a formal design be approved before implementation?
Factors to consider: a) time involved in design-approval process, b) dealing with design changes during data-gathering and analysis phases of project.
Who should take ownership of the final system?
Factors to consider: a) only finance people involved or a multidisciplinary team.
How precise should the system be?
Factors to consider: a) use of information generated by system.
Should the system report historical or future costs?
Factors to consider: a) use of information generated by system.
Should the initial design be complex or simple?
Factors to consider: a) risks involved in building a) complex system, b) objective of the system
Second stage : Implementation
Objectives of this stage: a) ensure implementation team has adequate knowledge of ABC to allow the team to design an appropriate system, b) ensure management learns the concepts and benefits of ABC so they will accept and use the info. generated by system, c) ensure that the design and data gathering steps of project will be performed efficiently.
The implementation plan involved 7 steps:
1. Seminar on ABC for the management team.
2. Design seminar for the implementation team-computer-based training exercises, which dealt with how to identify
activity centers and methods to assign costs, as well as how to collect data.
3. Design and data gathering-analyze overhead to identify the activities driving it.
a. identify major activities
b. determine the cost of those activities
c. identify what drives those activities
d. determine quantities of each cost driver associated with each product
e. compute activity-based product costs
Overhead was broken into 6 major components: a) salaried wages, b) indirect hourly wages, c) maintenance & repair, d) depreciation and taxes, e) fringe benefits, and f) other resources.
4. Progress meetings-informational meetings with management about the progress made throughout the design and
data-gathering steps. Plant managers played an important role by providing
feedback about the info. obtained, helping to identify possible errors made
by the design team, and providing solutions to problems encountered by the
team.
5. Executive seminar for the management team-more detailed info. about ABC, the final design of the system was
presented, management’s concerns about discrepancy in product costs
between 2 systems was discussed, dissemination of info. generated by new
system was discussed.
6. Results meeting-select group analyzed activity-based info. generated by system to fine-tune system results.
7. Interpretation meetings-how to
interpret the activity-based product costs and the actions that should be
taken based on that info. Engineers gave feedback about how the costs were
assigned to products. Also, discussions about finding ways to improve the
production process to reduce costs took place.
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Related summaries:
Anderson, S. 1995. A framework for assessing cost management system changes: The case of activity based costing implementation at General Motors, 1986-1993. Journal of Management Accounting Research (7): 1-51. (Summary).
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).
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).
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).
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. and M. E. Porter. 2011. How to solve the cost crisis in health care: The biggest problem with health care isn't with insurance or politics. It's that we're measuring the wrong things the wrong way. Harvard Business Review (September): 46-64. (Time-driven ABC applied to health care). (Summary).
Kaplan, R. S. and S. R. Anderson. 2004. Time-driven activity-based costing. Harvard Business Review (November): 131-138. (Summary).
Kaplan, R. S. and S. R. Anderson. 2007. The innovation of time-driven activity-based costing. Cost Management (March/April): 5-15. (Summary).
Kaplan, R. S., M. E. Porter and M. L. Frigo. 2017. Managing healthcare costs and value. Strategic Finance (January): 24-33. (Summary).
Krumwiede, K. R. 1998. ABC: Why it's tried and how it succeeds. Management Accounting (April): 32-34, 36, 38. (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.htm
Mecimore, C. D. and A. T. Bell. 1995. Are we ready for fourth-generation ABC? Management Accounting (January): 22-26. (Summary).