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Statements on Management Accounting

S T R A T E G I C C O S T M A N A G E M E N T

C R E D I T S

T I T L E

IMA would like to acknowledge the work of Gary Cokins([email protected]),performance management solu-tions manager, SAS, on whose work this SMA is basedand Raef Lawson, research director, IMA, who served asreviewer.

Implementing Activity-Based Costing

Published byInstitute of Management Accountants10 Paragon DriveMontvale, NJ 07645www.imanet.org © 2006 Institute of Management Accounting

Statements on Management Accounting

T A B L E O F C O N T E N T S

Implementing Activity-Based Costing


I. Rationale—What Leads to Interest in ABC? . . . . . . . . . . . . . . . . . . . . . . . . 1

II. Scope . . . . . . . . . . . . . . . . . . . . . . . . . 2

III. Defining ABC . . . . . . . . . . . . . . . . . . . . . .3

IV. The Role of the Management Accountant .4

V. Implementing ABC Involves BehavioralChange Management . . . . . . . . . . . . . . .5

VI. Planning for an ABC Implementation . . . . .6

VII. Initial Design of the ABC System . . . . . . .8

VIII. Strategic vs. Operational Cost Management . . . . . . . . . . . . . . . . . . . .15

IX. Customer Profitability Reporting . . . . . . .18

X. ABC Project Planning . . . . . . . . . . . . . .22

XI. Collecting ABC Data . . . . . . . . . . . . . . .22

XII. Implementing the Final ABC System . . .27

XIII. Ensuring Successful Use as a Sustainable System . . . . . . . . . . . . . . .29

XIV. Commercial ABC Software . . . . . . . . . .29

XV. Conclusion . . . . . . . . . . . . . . . . . . . . .30

Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . .31

Bibliography . . . . . . . . . . . . . . . . . . . . . . . .31

ExhibitsExhibit 1: Indirect Costs Are Displacing

Direct Costs . . . . . . . . . . . . . . . .2

Exhibit 2: The Activity-Based Cost ManagementFramework . . . . . . . . . . . . . . . . . .9

Exhibit 3: Each Activity Has Its Own ActivityDriver . . . . . . . . . . . . . . . . . . . .10

Exhibit 4: Multi-Level Cost Assignment Flow .12

Exhibit 5: ABC Cost Assignment Network . . .14

Exhibit 6: Profitability Profile Using ABC—“Profit Cliff” . . . . . . . . . . . . . . . .15

Exhibit 7: Fully Traced Costs to a Cost Object . . . . . . . . . . . . . . . . . . . .17

Exhibit 8: ABC Profit Contribution MarginLayering . . . . . . . . . . . . . . . . . . .19

Exhibit 9: ABC Customer Profit & LossStatement . . . . . . . . . . . . . . . . .20

Exhibit 10: Migrating Customers to HigherProfitability . . . . . . . . . . . . . . . . .21

Exhibit 11: Process View . . . . . . . . . . . . . . .25

Exhibit 12: Final Cost Object View . . . . . . . . .26

Exhibit 13: ABC Rapid Prototyping with Iterative Remodeling . . . . . . . . . .27

I . RAT IONALE—WHAT LEADS TOINTEREST IN ABC?There is a growing desire among organizations tounderstand their costs and the behavior of fac-tors that drive these costs. Yet there is confu-sion over how to go about understanding costsand how to distinguish competing cost measure-ment methodologies (e.g., activity-based cost-ing, standard costing, throughput accounting,project accounting, target costing, etc.). Theresult is that managers and employees are con-fused by mixed messages about which costs arethe correct ones. Upon closer inspection, the var-ious costing methodologies do not necessarilycompete: they can coexist, be reconciled, andblended.

In an increasingly competitive business environ-ment, organizations seeking to maintain orimprove their competitiveness need cost informa-tion that is accurate and relevant. In the past,companies planned and controlled their opera-tions using accounting information that wasassumed to accurately reflect the costs of theirproducts and services (and, ideally, their channelsand customers as well). In fact, this was often notthe case. The costing systems of many compa-nies, with their broad averaging allocation of indi-rect costs, masked by an illusion of precision,were actually providing misleading information todecision makers. This resulted in suboptimal deci-sion making by these companies’ managers.

In order to overcome the over-generalizations oftraditional costing systems, with their excessive-ly simplified cost allocations and resulting lackof visibility for indirect costs, organizations havebeen adopting activity-based costing (ABC) sys-tems. These systems are based on cost model-ing that traces an organization’s expenses—bothdirect and indirect—to the products, services,

channels, and customers that cause thoseexpenses to be incurred.

Exhibit 1 illustrates one factor that has lead tointerest in ABC. Indirect expenses are displacingthe direct expenses that make products or deliv-er services to customers. When asked for thecause of this displacement, most say that it isbecause of technology, equipment, automation,or computers. In other words, organizations areautomating what previously had been manualjobs. But this is only a secondary factor forexplaining the shift in the type of organizationalexpenses. The primary cause for the shift is thegradual proliferation in the types of products andservice lines. Over the last few decades, mostorganizations have been offering an increasinglygreater variety of products and services andusing more types of distribution and sales chan-nels. In addition, organizations have been servic-ing more and different types of customers.Introducing this greater variation and diversity(i.e., heterogeneity) creates complexity, andincreasing complexity results in greater overheadexpenses. The fact that the overhead componentof expense is displacing the recurring laborexpense does not automatically mean that anorganization is becoming inefficient or bureau-cratic. It simply means that a company is offer-ing more variety to different types of customers.The problem with traditional costing is that theincreasingly large amount of indirect expensescontinues to be allocated using allocation fac-tors that are typically unrelated to what causesthe costs to be incurred. The consumption ofresources needs to be traced and assigned ascosts based on cause and effect relationships—and that is what ABC does.

Here is a simple way to understand the basicprinciples of ABC. Imagine that you and threefriends go to a restaurant. You order a small

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salad and they each order the most expensiveitem on the menu—a prime rib steak. When theserver brings the bill, the others say, “Let’s splitthe check evenly.” How would you feel? Youwould feel this is unfair and inequitable. This issimilar to the effect on the calculated cost ofmany products and service lines in a traditionalcost accounting system where the accountantstake a large amount of indirect expenses andallocate them as costs without any logic. Thereis minimal or no relationship to how the productsor service lines uniquely consumed the expens-es. This likely results in distorted product costs.ABC avoids this problem. In the restaurant exam-ple, ABC is equivalent to the server providingfour individual checks—each patron is chargedfor what he or she individually consumes.

Many organizations have evolved beyond usingABC solely for obtaining more accurate and rele-vant costing information. For these companies,the emphasis has shifted from ABC to ABM—

activity-based management. These organizationsuse an understanding of their cost drivers—themeasures of activity that are causal factors inthe incurrence of cost—to improve their opera-tions. They use their improved understanding oftheir cost structure, which is now more highly vis-ible, to proactively manage their resources toenhance the key elements of value from theircustomers’ perspective. (For more information,see IMA’s Statements on ManagementAccounting (SMAs) Implementing Activity-BasedManagement: Avoiding the Pitfalls and Tools andTechniques for Implementing ABC/ABM.)Organizations involved in business processreengineering, quality improvement, and leanmanagement initiatives use both the financialand nonfinancial insights from ABC as a measurement system.

I I . SCOPEThis SMA provides an overview of the approachto designing and implementing an ABC system.

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CostComponents

Stages in the Evolution of Business

Changes in Cost Structure

100%

0%

Overhead(indirect expense)

Direct (recurring) Labor

Old-fashioned Hierarchical Integrated

Trace and assign,

notallocate.

1990s1950s

DirectMaterial

EXHIBIT 1. INDIRECT COSTS ARE DISPLACING DIRECT COSTS

Source: Gary Cokins.

The principles contained in this SMA are applica-ble to any organization, regardless of size orindustry. It provides those considering implement-ing an ABC system with information regarding:l The roles and responsibilities of management

accountants in ABC projects; l The need for behavior change management

when implementing an ABC system;l How to design and implement an ABC system;l How to plan an ABC project implementation;l How to ensure sustainability of an ABC system;

andl How to evaluate ABC software.

The information in this SMA will enable the read-er to design and implement a sustainable ABCsystem that provides a greater understanding ofproduct and customer costs, business process-es, and work activities. This understanding pro-vides an organization with the means for makingbetter business decisions.

I I I . DEF IN ING ABCTraditional costing methodologies and ABC differin the following way:

Traditional cost accounting techniquesallocate indirect expenses to products(and to any cost object) based on charac-teristics of a single allocation factor thatis typically not causally related to the typeand level of work consumed.1 Traditionalcost allocation factors include the num-ber of direct labor hours required to man-ufacture a unit, the cost of that direct

labor, the purchase cost of merchandiseresold, or the number of days occupied.These are broad averages that do notreflect causality for the indirect expenses.The problem is that use of these alloca-tion methods results in allocations thatvary with changes in the allocation basis.ABC systems recognize that individualproducts or customers do not consumeindirect expenses in those proportions.Instead, they focus on the work activitiesof people and equipment required to pro-duce each product or provide each ser-vice, and their consumption of each ofthose activities.

As an example of the cost distortion from apply-ing broadly averaged overhead rates, consider asemiconductor plant that once calculated itsproduct costs by taking direct labor and directmaterial and then added 1600% of these costsas an allocation of overhead costs. Compared tothis standard cost allocation method, however,the company’s various products consumed theoverhead very disproportionately. The result wasproduct cost distortions of over 500% relative tothe organization’s beliefs. The profitability of thecompany’s various products and services wasvery different from what it believed to be thecase.

ABC traces indirect costs (commonly called“overhead”) to products, services, and cus-tomers by identifying resource and their costs,the consumption of these resources by activi-ties, and the performance of activities to pro-duce output. Examples of resource expenses aresalaries, operating supplies, equipment depreci-ation, and electrical power. They represent thecapacity to perform work.

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1 A cost object is a function, organizational subdivision, con-tract, product, or other work unit for which cost data is desiredand for which provision is made to accumulate and measurethe cost of processes, products, jobs, capitalized projects,etc. Intermediate cost objects are internal to a company,while final cost objects are products, standard service lines,or the cost-to-serve customers that generally touch externalentities. Organizational sustaining final cost objects are thosenot caused directly by suppliers, products, channels, or cus-tomers. Senior management and regulatory bodies are exam-ples. Cost objects can be thought of as for what or for whomwork is done.

ABC gives visibility to work activities and theircosts. Activities are a group of tasks in the samefunction that are governed by the same driverand same intensity of resource consumption.The activities performed by an organization areidentified using activity analysis. This involvesdetermining what activities are done within thedepartment, how many people perform the activ-ities, how much time they spend performing theactivities, what resources are required to per-form the activities, what operational data bestreflect the performance of the activities, and thevalue of the activities to the organization.

With ABC, resources are traced to activitiesusing resource drivers; these are used to calcu-late the cost of each activity that consumes theresources. Activity costs are then traced, usingactivity drivers, to each product or service (i.e.,cost object) that consumes a given activity. Thisis done by determining how many units of activi-ty output each cost object consumed during anygiven period of time. (The topic of “drivers” canbe confusing; definitions and examples of “driv-ers” will be discussed in Section VII.)

ABC originated in the manufacturing sector, butsubsequent implementations by organizations invirtually every sector of the economy havedemonstrated its universal applicability. Forexample, many governmental units and compa-nies in the financial services industry now useABC systems to determine customer profitability.

IV. THE ROLE OF THE MANAGEMENT ACCOUNTANTAs with any new management technique, buy-infrom the executive team is crucial to the imple-mentation of an ABC system. Also essential isthe support of an organization’s managementaccounting staff. These professionals need tounderstand that their existing costing system—

which they have a vested interest in maintain-ing—is most likely producing inaccurate and mis-leading costing information. It is essential thatadequate communication take place to demon-strate to the accounting staff that a better alter-native exists—one that provides operational-relevant information and enhances the quality ofthe information they provide to managers.

Management accountants can perform an impor-tant role in the design of an ABC system. Basedon their skills and training, they can help identifywhat is appropriate for analysis (product, cus-tomer, process, etc.) and explain the probablecauses of an existing cost system’s deficiencies. In addition, based on their detailed knowledge ofthe information in their company’s costing infor-mation systems, they are uniquely qualified tojudge the level of aggregation appropriate to theABC costing system. They can use their under-standing of costing methods to recommendappropriate methodologies for the assignment ofcosts to activities and cost objects. Finally, theywill be able to use their understanding of theinformation and cost relationships to supportthe system once it is implemented.

A few notes of caution and a qualifier: ABC cal-culates historical costs to provide insights,understanding, and focus. ABC is basically fullabsorption costing but without violating rules ofcausality as is typically done with traditional costallocations of indirect expenses. But decisionsimpact the future. To validate the expected finan-cial impact of a decision, one should apply man-agerial economics that involve marginal costanalysis that classifies the behavior of expenseswith respect to changes in mix and volumes asbeing variable, semi-variable, step-fixed, or fixed(or include that capability in the ABC model).Such analysis should also distinguish the differ-ence between capacity provided and capacity

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used and consider the presence of unused andavailable capacity. Full absorption costing in anABC context does not mean that 100% of a peri-od’s expenses are traced to customer-relatedproducts, services, and channels. Costs notrelated to customers, including unused capacityexpenses, are ideally traced to a final cost objectcalled “business sustaining costs” (described inSection VII).

When the impact of decisions are less obviousand require validation, marginal cost analysismethods (such as resource consumptionaccounting and activity-based resource planning)or capital investment analysis using discountedcash flow (DCF) should be applied. With ABC,marginal cost analysis and capital justificationtechniques apply various versions of past periodcosts that can be layered according to whichresource expenses are to be included or exclud-ed depending on the type of decision being madeand the planning horizon. Determining whichexpenses to include or not in decision analysiscan be judgmental, such as the cost of unusedcapacity. This SMA addresses how to more accu-rately calculate what something costs today andgives insight as to what expenses may berequired in the future based on various forecasts.It is the role of management accountants todetermine which assumptions to make as theysupport their organization in decision analysis.

Another caution about limitations of ABC datainvolves life-cycle costing. The descriptive view ofABC typically covers a time period such as amonth, quarter, or year. Products and customers,however, pass through life cycles. ABC maymeasure unusually high product costs during aproduct’s early stages, when it requires attentionto stabilize production. The product may appearunprofitable today but be profitable in the futureas those costs subside. The lesson here is that

ABC does not calculate the multi-period costsacross a life cycle, but its cost snapshots duringeach period can be used as inputs for life-cyclecosting.

V. IMPLEMENTING ABCINVOLVES BEHAVIORAL CHANGE MANAGEMENTAs with any new management technique or tool,an effective change management process mustbe in place before implementing an ABC system.An objective of this process should be to ensurethat there is support for the system at all levelsof an organization. This includes having a top-level manager to champion the initiative, as wellas acceptance by lower-level managers. Theacceptance by these later managers often canbe obtained by demonstrating that in most casesthe existing cost accounting system producesdistorted, and thus misleading, information. Thisdistortion often arises because an existing cost-ing system does not reflect the increasing com-plexity of an organization and the products andservices it offers. By implementing a costing sys-tem that reflects that complexity—and providesthe operational information necessary for man-aging a company’s operations—managers cansee the increased relevance of the informationprovided for managerial decision making andenhanced performance management.

The change management process needs tospecifically address the “people” issues that willarise in the implementation of the new costingsystem. This includes addressing commitmentto the existing system that various managersmay have, and their reluctance to change. It isalso important to address the effect of the newsystem on performance measurement and com-pensation systems. New performance metricsmay need to be devised, or existing onesrevised, based on information obtained during

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the ABC system implementation. An example ofan effect of reporting the “new” cost data fromABC is the shift in costs among products. Someproducts that were effectively subsidizing otherswill now be reported with lower costs and higherprofit margins. The opposite effect will occur withother products, which will now show lower profitmargins or even losses.

Effective communication—at all levels of anorganization—of the need for change is essen-tial. An organization needs to communicate thedeficiencies of its existing costing system, theeffect of this distortion on managerial decisionmaking, how ABC costing principles can be usedto provide information that is more relevant formanagerial decision making, and the effect ofthe new system on the evaluation and rewardingof individual employees. Communication is atwo-way process, and employee concerns needto be addressed.

Implementation of an ABC system needs to bejustified on a cost-benefit basis, just as with anyother investment. Yet the value of having betterdecision-making information can be difficult tomeasure—more so than, say, the benefits froman investment that is more tangible, such as thepurchase of a piece of machinery. The key is thatthe benefits from having the improved costinginformation exceed the extra administrativeeffort to produce it. That is, the following equa-tion must be satisfied:

By demonstrating that the equation’s numeratoris much higher than people realize and that thedenominator can be kept low by being practical(e.g., using estimates and only minimal extradata collection), the perceived ratio can be shift-

ed from below 1 to above it (and very likely wellabove it).

One ABC implementation technique introducedin the 1990s that radically accelerated the timeto implement ABC, improved the ABC modeldesign, and minimized the risk that a project mayrun into problems caused by excessive detailand complexity is called ABC rapid prototypingwith iterative remodeling. This techniqueassures that the denominator in the benefits tocost ratio is kept small. It also raises the numer-ator by revealing more unrecognized benefits.This approach is discussed in Section XII. ABCrapid prototyping can lead to a production ABCsystem being created in weeks, not years, andwith minimal support.

V I . PLANNING FOR AN ABCIMPLEMENTAT IONA guiding principle for an ABC initiative is to workbackwards, keeping the end in mind. Have a com-pelling reason to reform the existing cost system.Know a type of decision or analysis the ABC sys-tem will improve. In this way, an ABC implementa-tion is no different than implementation of anyother project: before you start, you need to knowwhat you expect to be the final outcome. By fol-lowing this principle, an organization can helpensure that the ABC system it ends up with hasbeen designed to meet its specific needs, andnot those of some generic organization.

Numerous approaches can be taken whendesigning and implementing an ABC system.There is no generic approach that is universallyappropriate. In order to obtain “proof of con-cept,” many companies, especially larger ones,initially implement ABC using a pilot projectapproach, where a segment of the organizationis selected for implementation of ABC costingconcepts.

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Incremental benefitsIncremental administrative cost >1

The pilot project can be implemented using actu-al revenues and expenses. If the main goal is togain buy-in for ABC, budgeted or planned rev-enues and expenses may be used, but budgetsand forecasts may be substantially different thanactual results. Continuing with the pilot imple-mentation, activities and their interrelationships,cost drivers, and volumes are identified. Costattachment points are identified, and activitycosts are calculated. The consumption of activi-ties by cost objects (such as products or cus-tomers) is identified, and the drivers and vol-umes identified. The successes of the pilot proj-ect can also be used to validate the businesscase for implementing ABC company-wide andprovide “lessons learned” for subsequent rolloutof the methodology.

An organization can also opt to fully implementABC from the start. In this case, the ABC rapidprototyping with iterative remodeling approach isstrongly recommended. The structure of the ABCrapid prototyping approach is similar to thatused in the pilot approach, but it includes moreareas (ideally, the entire enterprise), more data,and more analysis. By exposing managers (forwhich it is important to select advocates andavoid nay-sayers or those who may feel threat-ened) to the quickly produced preview of thereformed costs, buy-in will occur. Use of thisapproach enables an organization to achieve anew awareness of cost system design through-out the organization, giving it the ability to rapid-ly adopt these systems and use the enhancedinformation to improve its performance. Peopledo not know what they do not know. As thesemodels are iteratively scaled, managers will seemore outcomes that will stimulate what theywant to analyze. Seeing results accelerates thislearning process.

If the initial approach is a pilot ABC study of asingle department or process, then the organiza-tion should be cautious in that pilots addressonly a subset of an organization’s activities.Such an approach faces the danger of overlook-ing activities or costs from departments, costcenters, and functions in the organization notbeing studied. Activity analysis across multipledepartments, and, ideally, organization-wide, ispreferred by process consultants. Also, compari-son of the shift in product costs of the existingcosts to ABC costs cannot be done validly byincluding only a few departments or attemptingto focus on only one or a few products.

Various questions need to be addressed in thedesign and implementation of an ABC system.One of these relates to ownership of the ABC sys-tem. While management accountants will calcu-late the ABC information, in many cases it isdesirable for the system to be “owned” by others.

The ownership of an ABC system should be con-sistent with its primary objective. If, for example,improving operations is the primary objective ofthe system, it is best placed under the control ofoperating personnel. Giving this area ownershipof the system instead of the accounting depart-ment will help ensure that the system is usedand maintained properly. In practice, however,this is often a challenge because the accountingdepartment’s role historically has been to col-lect, validate, and report accounting informationand then analyze it. The result is that theaccounting department typically ends up main-taining the ABC model.

Another issue that needs to be addressed is thecomplexity of the system. In designing a costingsystem, there is a trade-off between the cost ofthe system and the detail, accuracy, and flexibil-ity of the system. A guiding principle of ABC is

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that the level of detail and accuracy depends onwhat decisions will be made with the information.The quest for precision is expensive. Ninety-ninepercent accuracy is not required. Those who havecompleted an ABC implementation and look backto compare their previous cost system’s inaccu-rate and flawed costs to their new, more substan-tially correct costs appreciate why the ABC com-munity proclaims, “It is better to be approximate-ly correct than precisely wrong!” Reasonableaccuracy, produced economically, is usually “goodenough,” particularly in light of the inaccuraciesfrom an existing cost system. In general, systemsthat support strategic decision making use moreaggregated data than those used for more opera-tional decision making. The need for additionalaccuracy is a long-term issue to be analyzedbased on evolving business needs, and it may beaddressed as the model evolves. In some cases,data collection can be scaled back as accuracyrequirements and the magnitude of expenses arebetter understood.

The question as to whether to integrate the ABCsystem with the financial accounting system isalso an issue. ABC systems can be integratedinto the financial accounting system or exist asstand-alone systems. In many organizations, awell-designed, periodically updated ABC model(e.g., quarterly, semiannually) is sufficient fordecision-making needs. An offline ABC imple-mentation enables these organizations to obtainimproved costing information without disruptingday-to-day information system activities. Thisapproach to ABC modeling is especially appropri-ate for small and mid-sized organizations. It canalso serve as a first step toward implementingABC in larger organizations.

In situations where ABC is fully integrated into anorganization’s management information sys-tems, it goes beyond the traditional role of cost

accounting and becomes a primary source ofinformation for improving business processesand forward planning. Organizations use theinformation as the basis for activity-based man-agement (ABM); they use the understanding oftheir activities and their cost drivers to improvetheir processes and enhance their customers’satisfaction. In such cases, data collection isadjusted to meet the requirements of the ABCsystem. The general ledger chart of accounts,cost center structure, inventory/cost of salesaccounting procedures, interdepartmentalcharges, accounts payable and payroll cost distri-bution practices, financial and managementreports, or other cost-related facets of theaccounting system remain untouched. ABC sim-ply repurposes the transactional information.Section XIV discusses commercial ABC software.In that section, the removal of interdepartmentalcharges from the general ledger and theirreplacement with proper activity-based costs isdescribed.

V I I . IN IT IAL DESIGN OF THE ABC SYSTEMAn ABC system can be viewed in two differentways: the cost assignment view and the processview. The cost assignment view provides infor-mation about resources, activities, and costobjects. The process view provides operational(often nonfinancial) information about businessprocesses and the activities that belong to them.These two views of ABC can be visualized as pic-tured in Exhibit 2.

The cost assignment view of ABC can be seen inthe vertical portion of Exhibit 2, while theprocess view is represented by the exhibit’s hor-izontal portion. Work activities in the intersectionare essential for both views. For purposes ofmeasuring costs, the difference is:

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l The cost assignment view transforms theexpenses of resources (e.g., salaries, supplies)into the costs of the work activities (for bothpeople and assets) and ultimately into the finalcost objects (e.g., products, customers).

l The process view sequences the work activi-ties in time and accumulates the build-up ofactivity costs from start to end of a businessprocess.

More about the distinction between these twoviews is contained in Section XI, which describesthe process/value stream mapping that ABCinformation can supplement. The emphasis ofABC is typically on the cost assignment view.Although ABC is the acronym for activity-basedcosting, much of the utility from its information

comes from its measurement of the costs of thediverse types of outputs (cost objects) and thedriver-based consumption of activities theycause.

The term “drivers” can be confusing. Resourcedrivers for employees reflect the time they spendperforming work activities. Resource drivers forindirect material purchased items reflect theirusage by an activity, such as energy expense’skilowatts by a machine. Activity drivers are ameasure of the output of an activity. For exam-ple, for the customer-related work activity, “pro-cessing a sales order,” the activity driver wouldbe the number of sales orders processed. A costobject driver is where a final cost object con-sumes a mix of another final cost object, such as

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Cost Assignment View (ABC/M) What Things Cost

BetterDecisionMaking

Why ThingsHave Cost

ProcessView

Resources

Resource DriverAssignment

ActivitiesCostDrivers

Measure andManage

Processes

Activity DriverAssignment

Final CostObjects

(Outputs)

Resource Drivers

ActivityDrivers

Source: Adapted from CAM-I

EXHIBIT 2. THE ACTIVITY-BASED COST MANAGEMENT FRAMEWORK (THE CAM-I CROSS)

Source: Adapted from CAM-I.

when a customer purchases a mix of products.The costing principle for selection of all drivers isthat the level of costs incurred should varydirectly with quantity of the driver.

The term cost driver can be ambiguous. It ismore general than the driver types justdescribed. It can be described in words but notnecessarily with quantitative measures. Forexample, a severe storm is a cost driver that willcause insurance claims to be processed. Onecannot easily measure a storm’s intensity, butyou can measure the number of claimsprocessed that resulted from it. ABC restrictsitself to only measurable resource, activity, andcost object drivers. Cost drivers are typicallyexamined in ABC analysis. They are linked toprocesses or activities to stimulate discussionabout impact or potential impact. Since cost driv-

ers are generally cross-functional, they oftenpoint to areas of improvement. While cost driv-ers often are not quantifiable, they often providethe “why” when looking at ABC results.

The cost assignment view has evolved from thetwo-stage ABC approach of the early 1980s to amultiple-stage approach. We will first discuss thetwo-stage approach to appreciate some funda-mental principles of ABC, and then discuss themultiple-stage approach.

Two-Stage ABC ApproachExhibit 3 illustrates the two-stage ABC approach.Sub-accounts of the general ledger are distrib-uted to the various activities in the appropriateproportions using what were originally called first-stage cost drivers and now are referred to asresource drivers. The costs accumulated in these

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From: General Ledger To: ABC Data Base To: Cost Objects

Chart-of-Accounts View

Claims Processing DepartmentClaims Processing Department

Actual PlanFavorable/

(unfavorable)Salaries $621,400 $600,00 $(21,400)

Equipment 161,200 150,000 (11,200)

Travel expense 58,000 60,000 2,000

Supplies 43,900 40,000 (3,900)

Use andoccupancy 30,000 30,000 ------

Total $914,500 $880,000 $(34,500)

Key/scan claims $ 31,500

Analyze claims 121,000

Suspend claims 32,500

Receive provider inquiries 101,500

Resolve member problems 83,400

Process batches 45,000

Determine eligibility 119,000

Make copies 145,500

Write correspondence 77,100

Attend training 158,000

Total $914,500

Resourcedrivers

#of—#of—#of—#of—#of—#of—#of—#of—

$914,500

Activitydrivers

Pro

duct

s/C

ust

om

ers

#of—#of—

Activity-Based View

EXHIBIT 3. EACH ACTIVITY HAS ITS OWN ACTIVITY DRIVER


activities are then distributed to cost objectsusing what were initially called second-stagecost drivers but are now called activity drivers.For example, costs such as unemployment insur-ance and equipment maintenance might be allo-cated to activities based on labor cost andequipment hours, respectively, based onresource drivers. Costs accumulated in the vari-ous activities are then reassigned to productsusing activity drivers such as the number ofequipment setups, orders, purchase orders,equipment run minutes, direct labor hours, andso forth.

The left-side box in Exhibit 3 is the monthly costcenter spending report. An important reason asto why ABC is being adopted is the realizationthat, in this cost center, the responsibility reportusing chart of account elements, such assalaries and supplies, is structurally deficient inits ability to transform expenses to calculatedcosts. This is a strong statement. But it is notuntil the ledger expenses are restated in differ-ent format—as activity costs—that the activitydrivers can be attached to activity costs in orderto reassign them to the activities’ outputs in pro-portion to their consumption of the resources.This problem is compounded as companies flat-ten and de-layer their organizations. Employeesfrom cost centers flexibly multitask, often work-ing jointly on common activities, making the trac-ing of cost to products (or other cost objects)more difficult, especially when using a traditionalcosting methodology.

In other words, for business process owners—those individuals responsible for the perfor-mance of business processes that cross multi-ple cost centers—to see the costs of theirprocesses, activity costs must first be translatedfrom expenses classified based on the generalledger. They must be reassembled based on the

activities that make up the sequential steps thatcomprise a process. Again, the general ledgercost center report is structurally deficient to dothis. It has been said that when cost center man-agers receive their monthly reports comparingactual to budget (or planned) spending, they areeither happy or sad, but rarely are they anysmarter! ABC information makes them smarter.A more stinging commentary on the generalledger-based report is that it is at best useless(except for collecting transaction data) and atworst leads to dysfunctional and misleadingdecisions. The data needs to be transformedinto meaningful costs that reflect cause andeffect behavior.

Note the total expenses and costs are equal inthe resource, activity, and cost object views; theymust reconcile. The important message here isthat the general ledger’s view of the chart ofaccounts only answers what was spent. By trans-forming expenses into calculated costs in thenext two views in Exhibit 3, there are more valu-able and useful answers regarding why it wasspent, what caused the rate of it to be spent,and for whom or what it was spent.

Multiple-Stage ABC ApproachThe multiple-stage approach represents anadvancement in ABC modeling. Rather than sim-ply tracing the cost of resources to activities andthen to cost objects, the multiple-stage approachmodels cost flows in a manner that more close-ly reflects the actual flow of costs through aorganization. This approach includes an under-standing of the relationships between indirectwork activities and other activities, as well asbetween those activities and cost objects. Costsare traced from activity to activity in a series ofstages, all based on cause-and-effect relation-ships. (To simplify the size of the ABC model,some organizations use the concept of resource

11


pools to accumulate similar expenses into cate-gories before assigning them to activities.)

For a manufacturing company, the activities “per-forming maintenance” and “operating the toolroom” will accumulate the costs directly relatedto those activities. (Note that activities are bestdescribed using an action-verb and noun gram-mar convention.) Under the two-stage approach,an activity (or second-stage) driver would beused to allocate the costs of these activitiesdirectly to cost objects. The multiple-stageapproach differs in that it recognizes that themaintenance activity is not directly consumed bythe final cost objects. The maintenance activitysupports other activities (including some activi-ties of the tool room). In general, an activity maydirectly support both final cost objects and otheractivities; the latter are called intermediate costobjects. The costs accumulated in those activi-ties are distributed to either final cost objects or

other activities based on the demand for thoseactivities, services, or resources.

To some, this multiple-stage method of assigningexpenses may appear to be the traditional step-down cost allocation method of full absorptioncosting. ABC is more granular, however, tracingcosts at the activity level and not at a depart-ment level. The allocation of expenses at adepartment level induced errors because itrestricted the allocation basis of those costs toa single activity driver. As a rule, all assignmentsin ABC are based only on usage and consump-tion. If an activity does not use part of aresource, it is not allocated any of thatresource’s costs.

Activity-to-activity cost assignments and anentire enterprise-wide view of an ABC costassignment network are illustrated in Exhibit 4,where $70 of resource expenses are fully

12


ResourcesResource Expenses

($70)$10 $10 $30 $10 $10

Supportactivities

$30

DirectMaterial $10

Productactivities $15

Customeractivities $20

$15

$10

$5

$10 $15 $20

Products$25

Customers$20

Businesssustaining $25$25

$45 $25$25

External Customers/Orders + Sustaining$70Price

Final costobjects

Activities

Cost-driver Table

Resourcedrivers

*Inter-mediatedrivers

Final activitydrivers

*Intermediate activity drivers reassigneach activity’s cumulative input costsplus its own cost.

EXHIBIT 4. MULTI-LEVEL COST ASSIGNMENT FLOW


absorbed as calculated costs into customer andbusiness sustaining cost objects (the latterbeing traced mainly to senior management).Note how the $30 of support activities is tracedto three other types of activities, which are thentraced to products, customers, or business sus-taining cost objects.

Business sustaining costs ($25 in Exhibit 4) areactivity costs not caused by making products ordelivering services to customers. The consump-tion of these costs cannot be logically traced toproducts, standard service-lines, channels, orcustomers. (They can be arbitrarily allocated, butnot with a causal relationship.) Examples includethe monthly “closing books” activity of theaccounting staff and “file government regulatorypapers” activity of the legal staff. The cost ofthese activities should be traced to senior man-agement and the regulatory agency, respectively,as business-sustaining cost objects. While it istrue that the business must recover these costswith its revenues, the point is that allocatingthem to products or customers is misleadingand would overstate their costs, sending thewrong signals to employees who use productcost information for decision-making purposes.

The cost of customer activities is often calledthe “cost-to-serve.” These activities not onlyinclude examples such as processing salesorders, call center assistance, and handlingreturned items, but also the sales force’s activi-ty “making sales calls.” This last activity mayappear odd since the customer may not initiatea sales call, but the purpose of ABC is to meas-ure how much effort goes into work and wherethat work is consumed. An important or difficult,high-maintenance customer may consume sub-stantial sales-call-related costs. These costsmay be a greater proportion of the customer’srevenues than smaller, less demanding cus-

tomers. ABC measures and detects this type ofnot-so-obvious relationship.

Exhibit 4 also shows that some final cost objects(e.g., the $25 of product costs) can be con-sumed by other final cost objects that use them.For example, customers consume (i.e., pur-chase) uniquely different “baskets” of productsor services. In this example, the products aretraced using “cost object drivers,” such as thenumber of products purchased. Other examplesinclude the type of order (e.g., special vs. stan-dard) or type of sales channel (e.g., truck vs. rail,human bank teller vs. an ATM machine).

Also note that in the exhibit, the price for prod-ucts and service-lines enters as revenues onlyafter all of the costs have been assigned. A pricecannot be distinguished as to whether it is forthe product or cost-to-serve costs (unless it isunbundled separately as a fee). This propertyprovides the insight that layers of profit contribu-tion margins (i.e., the profit and loss statement’sbottom lines, not top lines) can be reported asthe various work activities ultimately are tracedlogically and causally to customers. It must beunderstood that ABC deals with cost. Pricing is amanagement decision that typically is marketbased. What ABC provides is a much more accu-rate “middle” line so that the profit margin,derived from sales less traceable costs, can bemade more visible.

Exhibit 5 disaggregates and expands Exhibit 4 toreveal a generic ABC structure that is a good rep-resentation of any universal costing model forany organization. Note that direct materialexpenses are sometimes traced directly to prod-ucts. A more common modeling practice is tohave direct material expenses “touch” a “pass-through” intermediate cost objects in the Activity

13


view so that the three cost views equate in termsof total costs (e.g., they all equal $70 in Exhibit 4).

To understand Exhibit 5, imagine the cost assign-ment paths (the arrows) as pipes or strawswhere the diameter of each path reflects theamount of cost flowing. The power of an ABCmodel lies in the fact that the cost assignmentpaths and their destinations provide traceabilityto segment costs from beginning to end, fromresource expenditures to each type of (or eachspecific) customer—who ultimately are the originfor all costs and expenses. The cost assignmentnetwork captures and reflects the diversity andvariation in how cost objects uniquely consumeresources and activities. To understand costing,it is useful to mentally reverse all the arrow-

heads in Exhibit 5. This polar switch reveals thatall expenses originate with a demand-pull fromcustomers. The calculated costs simply measurethe effect. Costs are always a measure ofeffect—a basic principle in costing.

With integrated ABC software, the direct costingof indirect costs is no longer an insurmountableproblem, as it was in the past. (Commercial ABCsoftware is discussed in Section XIV.) ABC allowsintermediate direct costing to a local process, aninternal customer, or a required component thatis causing the demand for work. In short, ABCconnects customers to the unique resourcesthey consume—in proportion to their consump-tion. Visibility to costs is provided everywherethroughout the cost assignment network.

14


Resources(general ledger)

WorkActivities

FinalCost

Objects

Salary, FringeBenefits

Direct Material

Phone,Travel

SuppliesDepreciation

Rent,Interest, Tax

Suppliers

ProductsServices

BusinessSustaining

Customers

SupportActivities

PeopleActivities

“cost-to-serve”paths

“Cos

tsM

easu

reth

eEf

fect

s”

(1)D

eman

dson

Wor

k Cost

s(2

)

Dire

ctM

aterial

EXHIBIT 5. ABC COST ASSIGNMENT NETWORK


VI I I . STRATEGIC VS. OPERAT IONAL COST MANAGEMENTThere are two broad purposes for using manage-ment accounting information:l Strategic cost management—to determine the

right things to do, i.e., selecting the correctprocesses, suppliers, products, channels, andcustomers.

l Operational cost management—to perform wellon those things identified as strategic, improveproductivity, and remove waste.

This section discusses both forms of cost management.

Strategic Cost ManagementAfter implementing ABC, organizations typicallyexperience shock. Their erroneous beliefsregarding the true profitability of their products,channels, and customers produced by the flawedand misleading costs of traditional costing havebeen replaced by knowledge of their true costs.

ABC reveals which products are over- or under-costed, exposing the magnitude of sources ofprofits and losses. Exhibit 6 presents a typicalscenario. This diagram is popularly called a“profit cliff.”

15


Cumulative Profit (Millions)

NetRevenues

MinusABC Costs

$8

$6

$4

$2

$0

Misleading profit datafrom traditional cost

allocations.

$ 30.0 sales– 28.2 expenses

= $ 1.8 profits

Specific Products, Services, and/or Customers(ranked most profitable to least profitable)

$1.8 profit

Unrealized profit revealed by ABC

EXHIBIT 6. PROFITABILITY PROFILE USING ABC—“PROFIT CLIFF”


Insights gained from answering questions thatare stimulated from analyzing the “profit cliff”are examples of strategic cost management. Theinsights can address rationalizing which prod-ucts, channels, and customers to develop,acquire, grow, retain, and improve—and whichones not to. But an organization must be carefulnot to improperly conclude what actions to takewhen analyzing ABC data. Ultimately, manage-ment accounting, including ABC, is a methodolo-gy for discovery and focus. Better managementaccounting does not provide all the answers. Itdoes not answer questions directly, but rather itallows more and better questions to be asked.

Here are three problems from reacting to ABCdata prematurely:l It must be recognized that measuring the costs

and profits during a time period such as amonth or quarter does not recognize the costsand profits of individual products, service lines,and customers during their entire life cycle.Hence, servicing an apparently unprofitableproduct or customer today may be done with theintention of developing a very profitable one inthe future. Life-cycle profitability must also beanalyzed (and ABC unit costs are essential forsuch an analysis).

l In some cases, a business will deliberately sellsome products at a loss to promote purchasesof other more profitable ones. Similarly, someunprofitable customers may be retained or pur-sued to retain or attract profitable customerswith which they have referral relationships.Retention of these customers is a managementdecision, but it is important to understand howmuch these customers are “costing” the firm.

l Abandoning unprofitable products and cus-tomers reduces activity costs but not theexpenses of the resources—it merely frees upcapacity in those resources. To realize a profitimpact from dropping products or customers,

the unused capacity created must either befilled with new, profitable orders, shifted to per-form value-added work elsewhere, or altogetherremoved (e.g., closing an operation or terminat-ing employees). The resource cost of freed upunused capacity created by dropping unprof-itable products or customers should not bereassigned in the ABC cost assignment networkto existing products or customers. They did notcause it. It should be traced to a business sus-taining final cost object, “Unused Capacity.”Failure to assign expenses in this way results inover-costing the existing products and cus-tomers, giving the illusion they have becomeless profitable and, therefore, are new candi-dates to drop. This has been referred to as the“overhead death spiral.” Inappropriate deci-sions to drop more products or customers dueto prior period removals, sometimes blamed onthe use of ABC, is a result of flawed cost assign-ment assumptions.

Cost management must always be done in thebroader context of performance management,which adds the dimensions of time, quality, risk,service levels, and other strategic goals to maxi-mize value from existing customers and potentialnew ones.

Operational Cost ManagementExhibit 7 illustrates how the activity costs (witheach activity initially traced from its resourceexpenses) from Exhibit 6 are assigned to eachcost object and then summed or “stacked.” InExhibit 7, a product’s true cost is more than itsprice, creating a loss during that period. This isrepresented by the descending products locatedon the right-hand side of the profit cliff depicted inExhibit 6.

Managers and employee teams are seeking moretransparency and visibility of their costs. Having

16


reliable unit costs of their outputs of work usingABC is useful for benchmarking best practices orto report trends when measuring performanceimprovement. Exhibit 7 visualizes how this needis met. It removes the illusion that overheadcosts are necessary and, therefore, appear to befree when in fact they are not. The exhibit alsoindicates that the costs of a cost object can bereduced (i.e., lowering the “stack”) by:l Reducing the quantity, frequency, and/or inten-

sity of the activity driver (e.g., a fewer numberof inspections reduces the “inspect product”activity cost).

l Lowering the activity driver cost rate from pro-ductivity improvements (e.g., shorten the timefor each “inspect product” event).

l Understanding the sources and causes ofwaste leading to nonvalue-adding activities toreduce or eliminate them (e.g., solve the

problem that requires an “inspection” in the firstplace).

These three items are examples of how ABCdata leads to operational cost management.Note how these actions support the continuousimprovement principles of the Six Sigma qualityand Lean management initiatives that areembraced by the operations and quality commu-nities. There is further discussion ofprocess/value stream mapping to improve oper-ations and quality in Section XI.

ABC AttributesThere is an added bonus to using ABC with com-mercial ABC software. It can report anotherdimension of costs—the “color of money” spent.It applies cost attributes, usually to an activity, bytagging or scoring it with a code. This dimensionof cost does not exist in general ledger account-ing systems because attributes are tagged to

17


ABC provides insight for the product’s or service’s cost drivers anddriver quantities.

$ loss

$

Price/Fee(Revenue)

ActivityCosts

each activity’sdriver quantity

Xunit activitydriver cost(e.g., # of registrations)

$

WorkActivities

EXHIBIT 7. FULLY TRACED COSTS TO A COST OBJECT


activities or to cost objects, not to resourceexpenses.

An example of a tag would be whether an activi-ty adds value (value-adding) or not (nonvalue-adding). Another example is the five “cost ofquality” (COQ) categories of work, whichincrease sequentially in their severity: error free,prevention-related, appraisal-related, internal fail-ure work, and external work. Attributes do notalter the cost of anything calculated by ABC, butthey facilitate grouping activity costs into variouscategories that in turn help focus managementattention (e.g., nonvalue-adding costs) and cansuggest actions. Commercial ABC software cankeep track of a work activity’s attributes andtrace it to cost objects. For example, one maydiscover that the unit cost of delivering two sim-ilar service lines is relatively the same, but oneservice line consumes much more nonvalue-adding activity costs than the other. Presumingoperational improvements can reduce thenonvalue-adding costs, this means that one ser-vice line has a greater likelihood of having alower cost in the future. This could never bedetected using the broad-averaged cost alloca-tions of general ledger cost center reporting.

IX . CUSTOMER PROFITABIL ITYREPORTINGSome customers purchase a mix of mainly low-margin products. After adding the “costs-to-serve” those customers apart from the productsand service lines they purchase, these cus-tomers may be unprofitable to a company and toits extended value chain. Customers who pur-chase a mix of relatively high-margin productsmay demand so much in extra services that theyalso are unprofitable. How does one properlymeasure customer and supplier profitability?After the less-profitable customers and suppliersare identified, they need to be migrated toward

higher profits using “profit margin management”techniques or, if that is not possible, they needto be “fired.”

If two customers purchased the exact same mixof products and services at the exact sameprices during the exact same time period, wouldboth customers be equally profitable? Of coursenot. Some customers place standard orders withno fuss, whereas others demand nonstandardeverything, such as special delivery require-ments. Some customers just buy your standardproduct or service line, and you hardly ever hearfrom them. Others you always hear from—and itis usually to change their delivery requirements,inquire about expediting their order, or return orexchange their goods. Some customers requiremore post-sale services than others do. In somecases, just the geographic location of the cus-tomer makes a difference.

What kinds of customers are loyal and prof-itable? Which customers are only marginally prof-itable or, worse yet, losing you money? StrategicABC is the accepted methodology to economical-ly and accurately trace the consumption of anorganization’s resource expenses to the typesand kinds of channels and customer segmentsthat place varying demands on the company. It istypical to find 10%-20% of your customers areunprofitable; in some cases the percentage ofunprofitable customers is 40% or more, particu-larly with banks, where a minority of highly prof-itable customers carry less-profitable customerswho have the potential to become profitable.

Exhibit 8 decomposes the network of the ABCCost Assignment Network’s final cost object mod-ule depicted in Exhibit 5. It displays two layers ofa “nested” consumption sequence of costs. Ametaphor for this consumption sequence is thepredator food chain. The final cost object, which

18


in this exhibit is the customer, ultimately con-sumes all the other final cost object costs, withthe exception of the business sustaining costs.

Each of the major final cost object categories(e.g., supplier, product/service line, and cus-tomer) has its own “sustaining costs” that areassignable to its end-product or customer. Whentracing these “sustaining costs,” however, onecannot apply a measurable product- or customer-specific quantity. For example, a product brandingprogram from the marketing department may ben-efit only a select group of products, but how muchof the branding cost should be charged to eachspecific product within the brand? Even thoughthere is no cause-and-effect relationship, these“product sustaining costs” can be traced using

some “shared” basis, such as sales unit-volume,or be spread evenly.

As costs flow from one final cost object to anoth-er, each flow will consume the unique mix of theupstream cost object. That is, an individual cus-tomer’s total costs (apart from its direct costs-to-serve) are inclusive of only the product quantitiesand mix that it purchased. In the ABC cost assign-ment network, each product incurs its own activi-ty costs with a cause-and-effect relationship, notwith an arbitrary indirect cost allocation. Thisthen creates layers of costs that produce manyprofit margin layers.

Exhibit 9 is an example of an individual customerprofitability statement. Using ABC, there can now

19


SALARY &FRINGE BENEFITS

DIRECTMATERIAL

CAPITAL(equipment-related)

NON-WAGE RELATED(e.g., operating supplies)

RELATIONSHIPMANAGEMENT

PURCHASES,RECEIPTS

*BRAND/PRODUCT- RELATED WORK,*BRAND/PRODUCT- RELATED ADVERTISING & MERCHANDISING*FACILITIES COST

MACHINESMAKE PRODUCT,MOVE PRODUCT,

SET-UPS

TRADE SHOWS,IMAGE ADVERTISING

SALES CALLS,ORDER HANDLING,

FREIGHT

RESOURCES

WORKACTIVITIES(examples)

FINALCOST OBJECTS

SUPPLIERSUSTAINING

UNIT &BATCHLEVEL

SUPPLIERS

SUPPLIER-RELATED

BRANDSUSTAINING

PRODUCT/SERVICELINE SUSTAINING

UNIT &BATCHLEVEL

CUSTOMERSUSTAINING

UNIT &BATCHLEVEL

SENIORMGT

UNUSEDCAPACITY R&D

# POs# Receipts

BUSINESSSUSTAINING

RELATED

ARBITRARY(for full absorption)

CUSTOMERS CUSTOMER-RELATEDPRODUCT & SERVICE LINE-RELATED

ARBITRARY(for full absorption)

# Sales calls# orders# shipments

OSHA IRSDOT

Etc.

Gvt. Regulators

# Shows# Advertisements

# Machine hours# Material moves# Set-ups

# Punds# Gallons# Meters

Facility costs

# Advertisements

PRODUCTS/SKUs

Prod

uct-s

peci

fic

EXHIBIT 8. ABC PROFIT CONTRIBUTION MARGIN LAYERING


be a valid profit and loss income statement foreach customer and for logical segments or group-ings of customers. A tremendous amount ofdetail lies below and within each of thesereports. For example, individual product and ser-vice lines can be examined in greater detail; theycomprise a mix of high- and low-profit marginitems based on their own unit costs and prices.In other words, in a customer-specific profit andloss summary, the product or service-line profitmargin is reported as a composite average, butdetails about the mix are viewable by “drillingdown” into the product mix information. In addi-tion, the user can “drill down” further within eachproduct or service line to examine the content

and cost of the work activities and materials(“the bill of costs”).

What does all this information reveal? First, itquantifies what everyone may already have sus-pected: All customers are not the same. Somecustomers may be more or less profitable basedstrictly on how demanding their behavior is.Although customer satisfaction is important, alonger-term goal is to increase customer and cor-porate profitably. There must always be a bal-ance between managing the level of customerservice to earn customer satisfaction and theimpact that doing so will have on shareholderwealth. There is a difference between customer-

20


CUSTOMER: XYZ CORPORATION (CUSTOMER #1270)

Sales $$$ Margin $(Sales – oCosts)

Margin % of Sales

Product-RelatedSupplier-Related costs (TCO) $xxx $xxx 98%

Direct Material xxx xxx 50%Brand Sustaining xxx xxx 48%Product Sustaining xxx xxx 46%Unit, Batch* xxx xxx 30%

Distribution-RelatedOutbound Freight Type* xxx xxx 28%Order Type* xxx xxx 26%Channel Type* xxx xxx 24%

Customer-RelatedCustomer-Sustaining xxx xxx 22%Unit Batch* xxx xxx 10%

Product-relatedcosts

Customer-relatedcosts

Business Sustaining xxx xxx 8% 8% Operating Profit

Capital Charge** xxx xxx 2%(inventories, receivables) 6% Economic Profit

(for EVA)

* Activity Cost Driver Assignments use measurable quantity volume of Activity Output (Other Activity Assignments traced based on informed (subjective) %s)

**Capital charges can also be directly charged as imputed interest to products & cust.

EXHIBIT 9. ABC CUSTOMER PROFIT & LOSS STATEMENT


focused and customer-obsessed. The best solu-tion is to increase customer satisfaction prof-itably. Because increasingly more customers willexpect and demand customization rather thanstandard products, services, and orders, under-standing this balance is important. ABC datafacilitates discussions aimed at arriving at thatbalance.

There are two major “layers” of profit margin in thecompany profit and loss statement in Exhibit 9:1. Mix of products and service lines purchased,

and2. “Costs-to-serve” apart from the unique mix

of products and service lines.

Exhibit 10 provides a two-axis view of customerswith regard to these two major layers. Any singlecustomer (or cluster) can be located based onthese two attributes. The vertical axis measures

the “composite margin” of what each purchases(reflecting net prices to the customer), and thehorizontal axis measures a customer’s “costs-to-serve.” Exhibit 10 debunks the myth that thecompany with the highest sales must also gener-ate the highest profits.

Exhibit 10 also reveals that the objective is tomake all customers more profitable, graphicallyrepresented by driving them to the upper-left cor-ner. Although this is a partial list, making cus-tomers more profitable can be accomplished by:l Managing each customer’s “costs-to-serve” to

a lower level; l Establishing a surcharge for or re-pricing

expensive “costs-to-serve” activities; l Reducing services; l Raising prices; l Increasing costs on activities that a customer

shows a preference for;

21


Types of CustomersVeryProfitable

Veryunprofitable

Cost-to-Serve

Product MixMargin

High(Creamy)

Low(Low Fat)

Low

Profita

ble

Unpro

fitab

le

High

EXHIBIT 10. MIGRATING CUSTOMERS TO HIGHER PROFITABLITY


l Shifting the customer’s purchase mix towardricher, higher-margin products and servicelines; or

l Discounting to gain more volume with low“costs-to-serve” customers.

An extreme action is to “fire” the customer—terminate the relationship when one concludes itwill never be a profitable relationship.

Note that migrating customers to the upper-leftcorner is equivalent to moving customers fromright to left in the profit profile in Exhibit 6.Knowing where customers are located on thematrix requires ABC data. Changes can be madeonly by knowing the activity detail behind thenumbers.

X . ABC PROJECT PLANNINGOnce questions involving the initial ABC modeldesign and construction are answered, planningfor the ABC project can move forward. Like anymajor organization-wide systems project, a for-mal project management structure and projectplan is necessary for an effective implementa-tion. The structure should include a steeringcommittee composed of upper managementwhose main role is to ensure that the ABC sys-tem is consistent with the organization’s busi-ness strategy and needs and to ensure thatthere is participation and cooperation from allaffected areas of the organization. The projectmanager reports to the steering committee andis supported by a cross-functional team. The sizeof the team and level of involvement of the vari-ous members would depend on the specifics ofthe project. The important point is that all affect-ed functions of the organization must participatein the development and implementation of theABC system in order to foster buy-in and commit-ment throughout the organization and to improveits design.

An important element of a successful implemen-tation of ABC is training. Although it is not nec-essary for management to become ABC experts,they must understand the need for ABC, its ben-efits, and its key concepts. On the other hand,members of the project team—those actuallydesigning and implementing the system—doneed to develop a thorough understanding ofboth the “hows” and “whys” of ABC. BecauseABC is as much an art as it is a science, it is notenough to master the mechanics. The designersand implementers must comprehend the variousapproaches and the levels of scope, accuracy,and detail that will result in the most cost-effective system for their particular organization.Those who will be providing data input for thesystem, both during its development stages andits ongoing execution as a repeatable reportingsystem, must understand the significance of thedata they provide.

Finally, the system will not be effective unless itsusers understand the new information that ABCprovides. At some organizations, ABC will contra-dict many of the beliefs about the organization’scosts and profit margins. For example, mostmanufacturing firms have believed for decadesthat direct labor efficiency was the key measure-ment of productivity. Under ABC, many of thesefirms found that direct labor may be an immate-rial component of the cost equation relative toindirect expenses, and focusing on direct laborefficiency drew attention away from importantissues. The project team must ensure that every-one involved understands the new system’s out-put and how it can best be put to use in improv-ing the organization’s operations.

X I . COLLECT ING ABC DATATwo types of information are required for an ABCproject: conceptual and transactional.Conceptual information is needed to develop the

22


overall design of the ABC system, and transac-tional information is needed to simulate the costflows through the system model. Transactionalinformation also serves as the raw data fromwhich to develop and validate some of the con-ceptual information.

The goal of the data-gathering activity is to accu-mulate the necessary information to: 1. Identify the work activities performed by peo-

ple and equipment in the organization (forboth the cost assignment and processviews);

2. Identify the organization’s elements of cost(for the cost assignment view) and perfor-mance measures (for the process view);

3. Determine the relationships between thevarious activities and elements of cost (forthe cost assignment view); and

4. Identify and measure the activity drivers thatdetermine the work load (for the processview) and cause accumulated activity coststo flow to other activities or to the organiza-tion’s products and services (for the costassignment view).

1. Identifying Work ActivitiesEven a small organization can identify an almostlimitless number of activities. The work activityidentification exercise, however, should be guid-ed by materiality and the objectives of the ABCsystem. For example, if the objective is strategic(e.g., product line profitability, pricing policies),the primary need is to accurately assign costs tofinal cost objects. In such cases, activities canbe broadly defined. If the intent is to improveoperations (e.g., eliminate nonvalue-addedprocesses), however, the need is for informationabout work activities and intermediate costobjects. For example, in a purchasing depart-ment, what is the difference between the unitcosts of a special order vs. a standard order vs.

a blanket purchase order? What activity costscomprise each, and what activity drivers causeeach? In these cases, activities must be definedmore narrowly.

Materiality will also impact activity aggregationdefinitions. For example, an organization withonly two individuals in the purchasing functionwill not gain as much by dividing the function into20 separate activities as will an organizationwith 50 individuals.

2. Identifying Elements of CostElements of cost are the expenses of the organi-zation’s resources, including labor salaries andexpenses of capital, machinery, buildings, mate-rials, supplies, equipment, and utilities. An orga-nization’s general ledger is typically the source ofinformation about these cost elements, but itdoes not break those cost elements down byactivity performed. That is why ABC reassignsthose resource expenses into activity costsusing resource drivers.

3. Determining the Relationship betweenActivities and Elements of CostThe ABC system designer must assign theexpense data contained in the general ledger toactivities. This assignment is determined by therelationships between the various work activitiesand the elements of cost. Mentioned earlier asan optional design, some ABC models first groupsimilar expenses into categories or jobs, referredto as resource pools. The elements of cost orresource pools can be assigned to activities byassigning them in some directly measurablemanner (e.g., metering electric consumption,charging maintenance via a work order, chargingrequisitioning activities for supplies) or throughestimation (as determined through question-naires and interviews).

23


Arbitrary cost allocations, particularly thoseusing broad averages, should be minimizedwhenever possible. This is because they do notimprove the understanding of the economics ofperforming activities. In addition, over-averagingthe allocations distorts the costs of cost objectsby over-costing some while under-costing others.(Remember that for past period costing, theremust be zero-sum errors.)

4. Identifying and Measuring ActivityDriversActivity drivers are the usage-based variables thatexplain the behavior and magnitude of activitycosts. They reflect the consumption of expensesby activities and the consumption of activities byother activities, products, or services.

The quest for precision tempts ABC systemdesigners to select too many excessivelydetailed activities (effectively, tasks), each ofwhich will require an activity driver. Decisionsmust be made as to the trade-offs between high-er accuracy and administrative effort, as well asthe difficulties of operating a more complex cost-ing system.

Sources of ABC System InformationThere are three primary sources for the informa-tion needed to develop an ABC system: people,the general ledger, and the organization’s infor-mation technology (IT) systems. 1. The people who perform the work can pro-

vide information about the organization’sactivities, the resources consumed, and theperformance measures used.

2. The general ledger provides informationabout an organization’s elements of cost. Insome cases, the ABC system can directlyextract data from the payroll and accountspayable systems that are summarized in thegeneral ledger system.

3. IT systems provide data that measures theoutputs produced. Collectively, the organiza-tion’s IT systems should contain informationabout most of the cost objects and theresource and activity cost drivers. For exam-ple, the number of invoices paid—a potentialactivity driver—should be available from theaccounts payable system.

Including representatives from the IT function onthe cross-functional ABC project team can help inthe determination as to whether the requiredinformation is already available in the transaction-al and other IT systems. This will facilitate captur-ing and processing of information. Some of thedata used in developing the ABC system, howev-er, will come from interviews and questionnairesdirected to the organization’s personnel becausethey are the best source of this information.

It is important that the ABC project team be rea-sonable in its determination regarding the levelof detail needed to design the system properly.Knowledgeable estimates of the relevant itemsare preferable to precise calculations of irrele-vant ones. As a result, team members must notbecome too focused on details and should keepthe concept of materiality and Pareto’s “80-20”rule (80% of an outcome can be explained by20% of all the information potentially available)in mind at all times.

The interview process can be supplemented withtools such as process mapping and valuechain/stream analysis, which help to documentthe results of the data collection process andorganize the information to ensure it is com-plete, understandable, and can be readily ana-lyzed. As mentioned in Section VII, these toolsare embraced by the operations and quality com-munities to remove waste, focus on value-addingwork, and improve productivity.

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Value chain/stream analysis, as it relates toactivity-based costing, requires the subdivision ofan organization’s processes into its distinct strate-gic activities. Basically this is the disaggregationof the end-to-end business processes into thework activities that belong to each of them. Theseactivities provide the building blocks by which theorganization creates value for its customers.

Leveling business processes to a useful level ofdetail can be a challenge, and accountants tendto excessively disaggregate them. Disaggregatingis the result of refining the verb-noun grammar ofan activity. For example, the activity “processinvoices” can be disaggregated into “processdomestic invoices” and “process internationalinvoices.” For ABC’s purpose, the amount of timeand cost for each will sum to the higher aggre-gate, but dividing them provides better structureto trace each activity using its own individualactivity driver. The result will be a more accurate

distinguishing of the unit cost of processing adomestic invoice relative to an internationalinvoice (where the latter is likely be a higher unitcost due to the extra steps involved). Without dis-aggregating the unit cost per processed invoicefor each type, the result will be an average unitcost for the two types. ABC is in effect a de-aver-aging technique. At some level, however, theinsights gained and the increased cost accuracyis not worth the effort. Typically, you do not wantto divide activities into their tasks. Keep in mindthat the level of detail and need for accuracydepends on the decision for which cost data isneeded.

Strategic work activities should be considereddistinct and, therefore, isolated if they representa significant percentage of operating cost, thebehavior of their cost is unique, they are differentfrom the activities performed by competitors, or

25


Re

sou

rces

Work Activities areCENTRAL to processes and

stakeholders.

Dept. 1xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx



Process Measures

$

x = activities= process= cost drivers

Outputs

EXHIBIT 11. PROCESS VIEW


they have potential for differentiating the productor services in the market place.2

Process mapping sequences the activities acrosstime. It does not involve reassigning those activi-ties into their final cost objects—the bottom ofthe three cost views in Exhibit 5. ABC does that.In contrast, during any time period, ABC typicallydoes not consider how activities relate in time—whether an activity occurs before or after anotherone. In a sense, the ABC view for final cost objectsis time-blind but mix-sensitive.

In contrast, the process view of activities is mix-blind but time-sequence sensitive. Exhibits 11and 12 illustrate this difference.

Other useful data can often be found in therecords that support operating employees’ unof-ficial systems—the ones they maintain becausethey do not believe the official accounting sys-tem or because the data they need is not collect-ed in that system. This data can be either finan-cial or nonfinancial. Since these employees needto get their job done in spite of an ineffectivecost system, often they will have accumulated awealth of relevant data that will support a prop-erly designed ABC system.

26


Work Activities areCENTRAL to processes and

stakeholders.




Process Measures

$

x = activities= process= cost drivers

Suppliers

Products

Orders

Sustaining

Customers

Outputs

Re

sou

rces

EXHIBIT 12. FINAL COST OBJECT VIEW


2 For a more complete description of value chain analysis,see John D. Shank and Vijay Govindarajan, “Strategic CostManagement and the Value Chain,” Journal of CostManagement, Winter 1992, pp. 5-21; and Shank andGovindarajan, “Strategic Cost Analysis: The Crown Cork andSeal Case,” Journal of Cost Management, Winter 1989,pp. 5-16.

Finally, informed observation is a valuable information-gathering tool. With a sound under-standing of the basic philosophy of ABC, anobserver can see inconsistencies between thecost system and the real world when watchingthe organization’s product being manufactured orservice being performed.

X I I . IMPLEMENTING THE F INALABC SYSTEMExhibit 5, the multiple-stage cost assignmentsystem, represents the generic structure at ahigh level of what the ABC project team mustdesign, but scaled at a lower level. Think of thisas the scale model that must be inflated and dis-aggregated to become a permanent, repeatableproduction costing system.

Exhibit 13 illustrates the ABC rapid prototypingwith iterative remodeling approach that hasproven to be a successful implementationapproach, avoiding the failures of ABC systemsin the 1990s. The prior approach presumed ABC

was a big system and required devoting monthsto build large components, such as the employ-ee time collection systems, that were ultimatelyall assembled and integrated. This approachsometimes failed because executives began todoubt if the result would be worthwhile, particu-larly with regard to the effort required to sustainthe model because the final result was so com-plex that even the accounts could not under-stand it. The ABC rapid prototyping approach hasthese benefits:l It prevents over-design and excessive detail in

the ABC system. The major determinant foraccurate costs is the design of the costassignment path flow structure. That is, costaccuracy is much less influenced from havingcorrect driver measures. Remember that theperiod’s general ledger expenses to be trans-formed into calculated costs are basically100% correct. Having modest inaccuracies indrivers from using employee estimates ratherthan extracting more precise information fromdata sources of other business systems typi-

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Each iteration enhances the use of the ABC system.

0 1 2 3

ABC ModelsABC System

(repeatable, reliable, relevant)

#0

#1#2

#3

EXHIBIT 13. ABC RAPID PROTOTYPING WITH ITERATIVE REMODELING


cally has minimal impact, and most errorsdampen out (i.e., error offsets) further downthe cost assignment network. The result of notunderstanding this property of costing (whichadmittedly is counterintuitive, but it becomesapparent after the ABC models are construct-ed) is excessive administrative effort to collectthe transactional input data and transform itinto costs.

l The initial models, although not yet attainingthe needed accuracy requirements (whichshould never be 100%) or the necessary levelsof disaggregation of activities, products, orcustomers, accelerate the learning and shiftthe focus from building a more perfect costsystem to determining the best uses of theimproved cost information in decision supportfor profit margin analysis (strategic cost man-agement) and productivity improvement (oper-ational cost management). This shifts atten-tion from squabbling about how the new costsare derived to how the information will lead tohigher-profit-generating decisions.

l Organizational learning by managers aboutABC principles and how to use ABC informa-tion is accelerated simply because it is muchmore engaging to learn about ABC by applyingit to their own organization, where they arefamiliar with its current business problemsand processes, than it is to learn from a casestudy or examples using fictitious companies.The theory becomes reality.

l It is difficult to construct the final ABC systemcorrectly to get the right levels, selection of driv-ers, determination of which drivers can be esti-mated or require data extracts, and so on. TheABC rapid prototyping approach with iterationsallows for mistakes early rather than later,when they can be very expensive to correct.

l Some employees may fear the disclosure ofthe new cost information or feel adverselyaffected by the resulting shift in cost assign-

ments relative to the existing reported costs.For example, a product manager may learn hisor her products are no longer the most prof-itable, but are now actually much lower in prof-it ranking. These employees will be threatenedand exhibit resistance to change.Implementing ABC is much more about behav-ioral change management than it is aboutdoing the ABC math. By briefing select groupsof managers with the early ABC prototypes, theABC project team and those managers candevelop risk-mitigation plans to deal with theexpected resistance.

l Decisions based on the ABC information aremade sooner, increasing the ABC project’sreturn on investment (ROI). Higher-level man-agers who are briefed on early ABC cost itera-tions will find that the information both vali-dates a conclusion they intuitively thought (butwhich was distorted on not disclosed by theirexisting cost system) and reports costs wildlycontrary to their beliefs (formed by flawedcosts from their existing cost system). Withboth outcomes, they will likely makechanges—decisions resulting from the prelim-inary ABC information. A major influencer thatincreases the ROI of any investment or projectis how quickly cash inflows are generated(from revenue enhancements or cost savings).

Common sense assists with the remaining imple-mentation steps to convert the most recent ABCiterative model into a permanent, repeatable pro-duction system. By that point in time, the costassignment structure is designed and all the driv-ers are identified—resource, activity, and costobject drivers. In effect, the IT task of datarequirements definition has been completed.

The remaining tasks are to automate the importof data into the calculation model, routinize theprocedures (e.g., a monthly cycle), and develop

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reports. Fortunately, general ledger, sales order,and operational systems (e.g., enterpriseresource planning or ERP systems) are common,and they serve as the sources of raw transactiondata to program and feed the ABC modeling soft-ware. Driver data that may not be easily availableor is not yet measured can be estimated by func-tional employees who are familiar with theirprocesses. Using reasonable estimates forexpenses or activity costs that are not substan-tially large will not introduce significant costingerrors that could potentially jeopardize gooddecision making.

X I I I . ENSUR ING SUCCESSFULUSE AS A SUSTAINABLE SYSTEM The best ABC system will be useless if no oneunderstands how to use the information. Thereis an anecdote of an untrained end-user who wasgiven the ABC reports and replied, “I feel like adog watching television. I don’t know what I’mlooking at.” As important as it is to design andimplement a theoretically sound and properlymaintained system, it is just as important tomake sure that (1) management has beentrained in the concepts and use of ABC, (2) man-agement receives reports that are not only use-ful but understandable, and (3) the ABC informa-tion is kept current.

An important step in ensuring the sustainabilityof an ABC system is to get the buy-in and “sign-ing on” of managers at the beginning of the proj-ect by convincing them that their old, flawedmethodology is incorrect and denied them theability to see and understand large portions ofthe company’s cost behavior. Again, the ABCrapid prototyping methodology assists withsecuring buy-in. As the new system is developedand becomes usable, these individuals shouldbe shown how the new ABC system overcomesthe deficiencies and related problems of the pre-

vious system and how the new costing systemprovides information that will enable each man-ager to make better decisions. One way toaccomplish this is by developing new reportswith relevant data and eliminating old reportsthat were published but rarely used.

In planning the ABC implementation, it is usefulto identify the key purposes for the ABC informa-tion and work backwards with those ends inmind. That is, have compelling reasons for usingABC data, such as obtaining better price quoteprofit margin estimates. A well-designed ABCsystem can also be the basis for improved budg-eting, planning, and capacity resource planning.Ultimately, management accounting informationis used for many diverse purposes. If a few keypurposes are satisfied, the rest will eventually beaccommodated, too.

The ABC system must be kept current to preventinaccurate costs from gradually creeping in.When recalculating the model at periodic inter-vals (typically monthly), the general ledgerexpenses used for the update are typically accu-rate. Not all the driver data needs to be recollect-ed—only the data that experiences volatility. Therest can be reanalyzed or re-estimated on quar-terly or semiannual cycles. This lowers thedenominator in the benefits to costs ratio, rais-ing ABC’s return on investment. Constant vigi-lance of the structural ABC model maintenanceis necessary in regard to new processes, workactivities, products, channels, and customers.

X IV. COMMERCIAL ABC SOFTWARESome organizations initially construct their ABCmodel using a personal computer and spread-sheet software. They aggregate general ledgerexpense accounts into groups, as yet undefinedactivities into processes, and products and cus-

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tomers into families and segments with similari-ties. The spreadsheet ABC model “hits the wall”when it becomes apparent that: its columns-to-rows math logic is restrictive, multiple-stageassignments are necessary, disaggregation isrequired, and there are too many columns-to-rows calculations. It is also at this stage that itbecomes apparent the ABC spreadsheet willnever graduate from an ABC model to a reliable,repeatable ABC system. Consequently, the selec-tion of a commercial ABC software packagebecomes the only option.

Commercial ABC software is designed to inter-face with general ledger, sales, and operatingsystems, such as ERP. The software itself isdesigned to calculate the multiple-stage costassignment network. After that, raw transaction-al data is loaded, and the laborious calculationof costs is automated.

Some ERP software packages include an ABCmodule, but much of the driver data may comefrom a multitude of disparate data sources out-side of the ERP system. Also the priorities of anERP software vendor are typically transaction-based operations and control. The trend of com-mercial ABC software is toward advanced model-ing capabilities. These packages typically pos-sess functionality to report multidimensionalviews of costs and to display visual cost assign-ment paths that can be quickly and flexiblyremodeled. As ABC software modeling capabili-ties advance to reflect expense and cost behav-ior with regard to volume and mix changes, therewill be further improvements in reliability of fore-casting and predictive analytics to evaluate what-if scenarios.

The premier commercial ABC systems reside ontop of a single, integrated information platformthat has already extracted and cleansed data

from disparate sources (although data sourcescan still be directly accessed). Since manage-ment accounting is only one component in whatare now popularly becoming called businessintelligence systems deployed for enterprise per-formance management, there is synergy to hav-ing all components of a performance manage-ment portfolio linked, including customer rela-tionship management analytics. The ABC systemproduces key performance indicators (KPIs) forthe increasingly popular scorecard and dash-board applications, and the ABC information notonly helps monitor the KPI dials of dashboards,but, more importantly, it also moves them.Systems integration is no longer required, andthese systems also provide powerful, Web-basedquery and reporting capabilities.

XV. CONCLUSIONABC is a powerful management tool that hasevolved in response to the ineffectiveness of tra-ditional cost accounting and cost managementpractices. Advocates of ABC have been won overfollowing their realization that the generalledger’s cost center and chart of accountexpense data is structurally deficient in calculat-ing costs and providing cost visibility and driverunderstanding. They realize that broad-basedcost allocations create grotesquely distorted andmisleading costs compared to tracing costs withABC principles.

The adoption rate of ABC is propelled by increas-ing proliferation of all businesses outputs(including types of suppliers, products, services,channels, and customers) that cause increasedcomplexity and increased indirect expenses tomanage the complexity. Appeals by quality andLean management to their sales colleagues to“standardize” cannot overcome customers’demand for customization. Operations managerstasked with streamlining processes and remov-

30


ing waste recognize that ABC data is useful forcomparable benchmarking and quantifying themagnitude of nonvalue-added costs and of profit-reducing costs of quality.

The need to measure customer profitability andvalue, in which most companies rarely go beyondproduct costing, is escalating. For most compa-nies, products are becoming commodities, andthey must shift to differentiating services for dif-ferent customers in order to gain a competitiveedge and to maximize shareholder wealth. It isno longer about simply growing sales, but ratherit is about profitably growing sales. ABC princi-ples can also be applied to expenses below theproduct gross margin line, and customer-relatedcost-to-serve costs may be arguably more criticalto understand than product costs.

As important as it is, however, ABC is not apanacea. As mentioned earlier, cost managementshould always be done in the broader context ofperformance management that integrates time,quality, service levels, risk, capacity planning, andcosts. Given that, it is critical that an organizationunderstands its cost structure. Having a manage-ment accounting system that supports thatunderstanding, such as ABC, is critical for all ofits stakeholders—its employees, its community,its loyal customers, and its shareholders.

GLOSSARYACTIVITY DRIVER—A factor used to assign cost

from an activity to a cost object. A measureof the frequency and intensity of use of anactivity by a cost object.

CAPACITY—The physical facilities, personnel,and processes available to meet the productor service needs of customers. Capacitygenerally refers to the maximum output orproduction ability of a machine, person,process, factory, product, or service.

COST DRIVER—A measure of activity that is acausal factor in the incurrence of cost to anentity. Examples include direct labor hours,machine hours, beds occupied, computertime used, flight hours, miles driven, andcontracts.

COST OBJECT—A function, organizational subdi-vision, contract, or other work unit for whichcost data is desired and for which provisionis made to accumulate and measure thecost of processes, products, jobs, capital-ized projects, etc.

COST OBJECT DRIVER—The best single quantita-tive measure of the frequency and intensityof demands placed on a cost object by othercost objects.

RESOURCE DRIVER—A measure of the quantityof resources consumed by an activity (e.g.,the floor space occupied by the activity).

B IBL IOGRAPHYBOOKSJames A. Brimson, Activity Accounting: An Activity-

Based Costing Approach, John Wiley & Sons,New York, 1997.

Gary Cokins, Alan Stratton, and Jack Helbling, AnABC Manager’s Primer: Straight Talk onActivity-Based Costing, McGraw-Hill, NewYork, 1993.

Gary Cokins, Activity-Based Cost Management: AnExecutive Guide, John Wiley & Sons, NewYork, 2001.

Gary Cokins, Activity-Based Cost ManagementMaking It Work: A Manager’s Guide toImplementing and Sustaining an EffectiveABC System. McGraw-Hill, New York, 1996.

Ernest Glad and Hugh Becker, Activity-BasedCosting and Management. John Wiley &Sons, New York, 1996.

Douglas T. Hicks, Activity-Based Costing: MakingIt Work for Small and Mid-Sized Companies,John Wiley & Sons, New York, 2002.

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Robert S. Kaplan and Robin Cooper, Cost &Effect: Using Integrated Cost Systems to DriveProfitability and Performance. HarvardBusiness School Press, Boston, Mass.,1998.

Michael C. O’Guin, The Complete Guide toActivity-Based Costing, John Wiley & Sons,New York, 2001.

TEXTBOOKSEdward Blocher, Cost Management: A Strategic

Approach, 5th edition, McGraw-Hill, NewYork, 2006.

Ronald W. Hilton, Cost Management: Strategiesfor Business Decisions, 3rd edition, McGraw-Hill, New York, 2006.

ARTICLESPeter C. Brewer, Paul E Juras, and E. Richard

Brownlee II, “Global Electronics, Inc.: ABCImplementation and the ChangeManagement Process,” Issues in AccountingEducation, February 2003, pp. 49-69.

Stephen Bruesewitz and John Talbott,“Implementing ABC in a ComplexOrganization,” CMA, July/August 1997, pp.16-19.

Gary Cokins, “Identifying and Measuring the Costof Error and Waste,” Journal of CostManagement, March/April 2003, pp. 6-13.

Gary Cokins, “Measuring Profits and Costs acrossthe Supply Chain for Collaboration,” Journal ofCost Management, September/October2003, p. 22-29.

Gary Cokins, “Measuring Customer Value: HowBPM Supports Better Marketing Decisions,”Business Performance Management, February2006, pp. 13-18.

Robin Cooper and Regine Slagmulder,“Designing ABC Systems for StrategicCosting and Operational Improvement,”Strategic Finance, August 1999, pp. 18-20.

Robin Cooper and Regine Slagmulder, “Activity-based Budgeting—Part 1,” StrategicFinance, September 2000, pp. 85-86.

Robin Cooper and Regine Slagmulder, “Activity-based Budgeting—Part 2,” StrategicFinance, October 2000, pp. 26-28.

Robin Cooper and Regine Slagmulder, “Activity-Based Cost Management SystemArchitecture—Part I,” Strategic Finance,October 1999, pp. 12-14.

Robin Cooper and Regine Slagmulder, “Activity-based Cost Management SystemArchitecture—Part II,” Strategic Finance,December 1999, pp. 69-70.

Robin Cooper and Regine Slagmulder, “Activity-Based Cost Management SystemArchitecture—Part III,” Strategic Finance,February 2000, pp. 63-64.

Edward Forrest, “How to Implement a SuccessfulABM Program,” Accounting Today, August 25-September 7, 1997, pp. 16, 34.

Michael Gering, “Activity-Based Costing LessonsLearned Implementing ABC,” ManagementAccounting, May 1999, pp. 26-27.

Ernest Glad, “Implementation Considerations foran ABC System,” Management Accounting(UK), July/August 1993, pp. 29.

David E. Keys and Robert J. LeFevre, “Why Is‘Integrated’ ABC Better?” Journal ofCorporate Accounting & Finance, March/April2002, pp. 45-53.

John Krieger, “Establishing Activity-basedCosting: Lessons & Pitfalls,” NewspaperFinancial Executives Quarterly, Third Quarter1997, pp. 14-17+.

Raef Lawson, “Beyond ABC: Process BasedCosting,” Journal of Cost Management, Fall1994, pp. 33-43.

Raef Lawson, “Process Based Costing atCommunity Health Plan,” Journal of CostManagement, Spring 1996, pp. 31-43.

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Mohan Nair, “The Keys to Implementing Activity-based Management,” Journal of CorporateAccounting & Finance, March/April 2000,pp. 37-42.

Mohan Nair, “Helping Ensure SuccessfulImplementations of Activity-basedManagement,” Journal of CorporateAccounting & Finance, January/February2002, pp. 73-86.

Paul M. Nolan, “Critical Success Factors forImplementing an Enterprise-wide ABCSolution,” Journal of PerformanceManagement, vol. 17, no. 3, 2004,pp. 15-22.

Matti Sievanen and Katja Tornberg, “Process-based Costing: The Best of Activity-basedCosting,” AACE International Transactions,2002, pp. CS151-CS156.

Ken Whittaker, “Five Keys to Deploying Activity-based Costing,” The Armed ForcesComptroller, Winter 2005, pp. 6-8.

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