Activity Based Costing - 2
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ABC: too much activity and not enough costing? by Brian Rutherford
03 Feb 2001
Diploma in Financial Management
Relevant to Paper D2 | |
Activity based costing (ABC) hit the world of financial management with a very large bang in the late 1980s. Within a few years 20% of the UK’s largest companies were using, or at least piloting, ABC systems. By the turn of the millennium, however, the proportion of adopters was no higher, while one third of those adopting the technique earlier had actually abandoned it. Only one third of those companies considering the use of ABC in 1994 had actually adopted the system by 2000.
Why are practising financial managers proving so reluctant to embrace this revolution in one of their key disciplines, when it is so widely praised in the literature and so vigourously marketed by consultants? Are we looking at an example (our critics would say yet another example) of the traditional conservatism of our profession? Certainly that’s the view consultants would urge on our fellow-managers.
A defender of the profession might first point out that ABC is far from guarenteed to work. Indeed, its claim to provide “accurate” costings - truly breathtaking to accountants brought up to believe in different costs for different purposes - are generally exaggerated because in many situations there will be costs (essentially those relating to non-separable resources) that ABC doesn’t handle much better than traditional costing. Appendix A (see over) illustrates the deficiencies of ABC.
Nonetheless, the accusations against traditional (volume-based) costing on the back of which ABC was launched is valid. Where overheads are high and plants produce a range of items with significantly different volumes and complexity, volume-based systems over-cost high volume lines and send the wrong signals about pricing, product choices and resource allocation. But the uselessness of absorption costing for taking decisions in these areas
Share
ABC: too much activity and not enough costing? by Brian Rutherford
03 Feb 2001
Diploma in Financial Management
Relevant to Paper D2 | |
Activity based costing (ABC) hit the world of financial management with a very large bang in the late 1980s. Within a few years 20% of the UK’s largest companies were using, or at least piloting, ABC systems. By the turn of the millennium, however, the proportion of adopters was no higher, while one third of those adopting the technique earlier had actually abandoned it. Only one third of those companies considering the use of ABC in 1994 had actually adopted the system by 2000.
Why are practising financial managers proving so reluctant to embrace this revolution in one of their key disciplines, when it is so widely praised in the literature and so vigourously marketed by consultants? Are we looking at an example (our critics would say yet another example) of the traditional conservatism of our profession? Certainly that’s the view consultants would urge on our fellow-managers.
A defender of the profession might first point out that ABC is far from guarenteed to work. Indeed, its claim to provide “accurate” costings - truly breathtaking to accountants brought up to believe in different costs for different purposes - are generally exaggerated because in many situations there will be costs (essentially those relating to non-separable resources) that ABC doesn’t handle much better than traditional costing. Appendix A (see over) illustrates the deficiencies of ABC.
Nonetheless, the accusations against traditional (volume-based) costing on the back of which ABC was launched is valid. Where overheads are high and plants produce a range of items with significantly different volumes and complexity, volume-based systems over-cost high volume lines and send the wrong signals about pricing, product choices and resource allocation. But the uselessness of absorption costing for taking decisions in these areas
References: 1. Chartered Institute of Management Accountants, Research Update, Spring/Summer 2000 2. For the claim of the proponents of ABC that it yields “accurate” product costs, see Kaplan, R.S. and Cooper, R., Cost and Effect: Using Integrated Cost Systems to Drive Profitibility and Performance, Boston, Mass: Harvard Business School Press, 1998, p19. 3. Johnson, H.T. and Kaplan, R.S., Relevance Lost: The Rise and Fall of Management Accounting, Boston, Mass.: Harvard Business School Press, 1987. 4. Bromwich, M. Accounting for Overheads: Critique and Reforms, Uppsala, Sweden: Uppsala University, 1997. | Brian Rutherford is Professor of Accountancy at Canterbury Business School, University of Kent. He is also an ACCA Council member.