8/2/2019 ABC_120311

1/3

Activity Based Costing

Ir. M. Geense(Delft University of Technology)

Activity Accounting with Kohler and Staubus

In the 1930s, the Comptroller of the Tennessee Valley Authority, Eric Kohler developped the conceptof Activity Accounting. The Tennessee Valley Authority was engaged in flood control, navigation,hydro-electric power generation, etc. Kohler could not use a traditional managerial accounting systemfor these kind of operations. Instead Kohler defined activities and introduced activity accountants. Anactivity is (a portion of) a work carried out by a (part of) a company. For each activity Kohler createdan activity account (Aiyathurai, Cooper and Sinha, 1991, PP 61-64). An activity account is an incomeor expense account containing transactions over which an activity supervisor exercises responsibilityand control (Kohler, 1952, pp, 18-19). Thus instead of determining the costs of a product, Kohlerdetermined the costs of an activity.

In 1971 Staubus described another activity accounting system. Staubus also created an account forevery activity. On the left side of this account Staubus recorded the costs of the inputs of the activity.These inputs are the outputs from previous activities within the company and / or outputs fromanother entity (for instance an outside supplier). On the right hand side of the account Staubusrecorded the value of the output of the activity. The outputs to another activity are measured atstandard costs. If however the output is sold to a customer, the output is measured at the netrealizable value (selling price minus selling costs). Staubus activity accounting culminates in acomparison of outputs, at standard cost or net realizable value, and inputs (Staubus, 1971).

Activity Cost Analysis at General Electric

In 1963 General Electric formed a team which had to study indirect costs. This team focused mainlyon indirect activities in GE such as data processing, inspection, quality control etc. and determined thecosts of these activities. Then they identified the causes of these activities ("key controllingparameters"). For instance a new drawing, made by the engineering department is a key controllingparameter and triggers activities such as data processing, inspection, quality control, etc. The teamalso collected information about the quantity or count of each key controlling parameter, such as thenumber of new drawings per period. Then the team estimated the total costs per unit key performanceparameter, for instance the costs per 1 new drawing made by the engineering department:

8/2/2019 ABC_120311

2/3

With this technique GE wanted to get better control of indirect costs by controlling the activities thatcause the indirect costs (Johnson, 1992, pp 131-141).

Activity Based Costing in the 1980s and 1990s

The activity based costing systems, described by Robin Cooper and Robert Kaplan in the 1980's and

1990's, has attracted much attention. These systems identifies the major activities of a facility's

production process and then classifies these activities into one of the following categories:

unit-level activities; batch-level activities; product-sustaining level activities and; facility-sustaining level activities.

The unit-level activities are performed each time a unit of a product is produced. The number of timesunit-level activities (such as drilling holes and inspecting every part) are performed varies according tothe number of units produced. The batch-level activities are performed each time a batch of goods isproduced. The number of times batch-level activities (such as setting up a machine) are performedvaries according to the number of batches made. The costs of these activities can be assigned toindividual batches but they are fixed regardless of the number of units in the batch. Product-

sustaining activities are performed as needed to support the production of each different type ofproduct. Examples of product-sustaining activities are maintaining product specifications, performingengineering change notices and developing special testing routines. These costs can be assigned toindividual products but are not proportional to the number of units or batches produced. Facility-sustaining activities support a facility's general manufacturing process. Examples of facility-sustainingactivities are lighting and cleaning the facility, facility security and managing the facility.The costs of the unit-level, batch-level and product-sustaining level activities are attributed toproducts based on each product's consumption of those activities. The costs of facility-sustainingactivities are allocated to products arbitrarly or treated as period costs. In the example below,

described by Robin Cooper (1994, pp. B1-20-B1-21);

8/2/2019 ABC_120311

3/3

the number of direct labor hours a product consumes is the cost driver for unit-level activities; the number of setups a product consumes is the cost driver of batch-level activities; and the number of parts a product consumes is the cost driver of product-sustaining level

activities.

According to Robin Cooper activity based costing systems can be used to monitor how anorganization's resources are consumed and helps to manage consumption and spending in a company.With activity based costing systems managers can attempt to perform its activities more efficiently,reprice poducts or alter the company's product mix (Cooper, 1994, pp. B1-9).

BIBLIOGRAPHY

- Aiyathurai, G., W. W. Cooper and K. K. Sinha, 'Note on Activity Accounting', Accounting Horizons,

Dec 1991, pp. 60-68.- Cooper, R., 'Activity-Based Costing for Improved Product Costing', Handbook of Cost Management1994 Edition, Ed. B. J. Blinker, Warren Gorham Lamont, 1994, pp. B1.1 - B1.51.- Johnson, H. T., 'Relevance Regained: From Top-Down Control to Bottom-Up Empowerment', TheFree Press, 1992.- Kohler, E. L., 'A Dictionary for Accountants', Prentice Hall, 1952.- Staubus, G. J., 'Activity Costing and Input-Output Accounting', Richard D. Irwin, Homewood, 1971.