anderson slides

8/3/2019 Anderson Slides

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Activity-Based CostingActivity-Based Costing

Shannon AndersonShannon AndersonJesse H. Jones Graduate School of ManagementJesse H. Jones Graduate School of Management

Rice UniversityRice University


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Activity-Based Costing:Activity-Based Costing:

A response to irrelevance,A response to irrelevance,

a preamble to strategic alignmenta preamble to strategic alignment

Shannon AndersonShannon AndersonJesse H. Jones Graduate School of ManagementJesse H. Jones Graduate School of Management

Rice UniversityRice University


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OverviewOverview

New Beginnings:New Beginnings: Cost management in the new manufacturing settingCost management in the new manufacturing setting Lessons from the fieldLessons from the field

Articulation of the ABC modelArticulation of the ABC model

The Trajectory of ABC ResearchThe Trajectory of ABC Research Investigating the economic model of ABCInvestigating the economic model of ABC

Implementing ABCImplementing ABC Using ABC: Activity-based managementUsing ABC: Activity-based management


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to learn how firms are modifying theirto learn how firms are modifying theiraccounting and control systems to helpaccounting and control systems to help

them manage in the new manufacturingthem manage in the new manufacturing

environment, I visited a select set ofenvironment, I visited a select set of

innovative firms.innovative firms.

Field Work and Cases:Field Work and Cases:Accounting Lag: The Obsolescence of CostAccounting Lag: The Obsolescence of Cost

Accounting SystemsAccounting Systems(Kaplan, 1985)(Kaplan, 1985)


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ConclusionConclusion

I had hoped to be able to document the incidenceI had hoped to be able to document the incidence

and value of innovative accounting and controland value of innovative accounting and control

systems for the new industrial competitionsystems for the new industrial competition

I found that changes in accounting lag far behindI found that changes in accounting lag far behind

changes in the real production phenomena theychanges in the real production phenomena they

are supposed to represent.are supposed to represent.


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Field Work and CasesField Work and Cases

Defining the Contours of Cost System DesignDefining the Contours of Cost System Design Mayers TapMayers Tap (Cooper, 1984)(Cooper, 1984) Seligram, Inc.Seligram, Inc. (Turney and Ittner, 1988)(Turney and Ittner, 1988) Bridgeton IndustriesBridgeton Industries (Bost and Cooper, 1990)(Bost and Cooper, 1990)

Identifying Activity-based Costing in UseIdentifying Activity-based Costing in Use Union PacificUnion Pacific (Kaplan, 1985)(Kaplan, 1985)

Schrader BellowsSchrader Bellows(Cooper & Wiess, 1985)(Cooper & Wiess, 1985) John Deere Component WorksJohn Deere Component Works(March & Kaplan, 1987) [#3 most popular case](March & Kaplan, 1987) [#3 most popular case] American BankAmerican Bank(Kallapur and Kaplan, 1987)(Kallapur and Kaplan, 1987)

Did you know that Bob is

ranked #8 in all time

cumulative case unit sales

with 1.5 M units sold?


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New Beginnings:New Beginnings:

The Design of Cost Management SystemsThe Design of Cost Management Systems(Cooper and Kaplan, 1991)(Cooper and Kaplan, 1991)

The previous academic approachThe previous academic approach

emphasizedemphasized cost analysiscost analysis for isolated, well-for isolated, well-specified decisionsspecified decisions

The new approach of this book emphasizesThe new approach of this book emphasizes

principles ofprinciples ofcost systems designcost systems design..


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Assign costs toAssign costs toACTIVITIESACTIVITIES that are associated withthat are associated with the production of particularthe production of particular productsproducts the delivery of particularthe delivery of particular servicesservices

TheThe COST DRIVERSCOST DRIVERS used to assign costs reflect theused to assign costs reflect theunderlying unit of variability of the cost --- costs oftenunderlying unit of variability of the cost --- costs oftenvary with activity level rather than production volumevary with activity level rather than production volume

Costs often vary in aCosts often vary in a hierarchicalhierarchical fashion as compared tofashion as compared to

unit production volume:unit production volume:e.g., unit, batch, product, facility-sustaininge.g., unit, batch, product, facility-sustaining

Activity-based CostingActivity-based Costing


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TraditionalTraditional vs. ABC Costingvs. ABC Costing

Overhead Costs:e.g., Salaries, Utilities, Tooling

Overhead costs Direct Labor Costs

= 1000%

Product A Cost per unitDirect Material $ 20

Direct Labor $ 50

Overhead $500 ($50 x 1000%)

Total $ 570

Some products use no special toolingand require no advanced engineering

support

What does direct labor have to dowith overhead costs in an

automated setting with diverseprocesses?


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Traditional vs.Traditional vs. ABC CostingABC Costing

Proc A O/H costs

No. of Setups

Overhead Costs: e.g., Salaries, Utilities, Tooling

Process A

Setup activity

Process A

Running Costs

Design Engineering

Support Activities

Proc A O/H costs

No. of Mach. Hrs.

Engg O/H costs

No. Engg changes

Multiple, manageable

activities

Appropriate cost drivers:

- variability: unit, batch, etc.- measurement: frequency,

duration, direct charge


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Assign costs to activities that are associated withAssign costs to activities that are associated with new costnew costobjectsobjects the operation of particularthe operation of particular processesprocesses the support of particularthe support of particular customerscustomers

the use of particularthe use of particular supplierssuppliers

Time-driven ABC:Time-driven ABC: to reduce the cost of system implementation and maintenanceto reduce the cost of system implementation and maintenance to reflect the cost of unused capacityto reflect the cost of unused capacity

Use cost accounting data to affect future costs ratherUse cost accounting data to affect future costs ratherthan simply reflecting past coststhan simply reflecting past costs activity-basedactivity-basedmanagementmanagement

Extensions & RefinementsExtensions & Refinements


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Field Work and CasesField Work and Cases

Beyond Products e.g., costs of customersBeyond Products e.g., costs of customers KanthalKanthal (Kaplan, 1989) [Bobs #1 most popular case](Kaplan, 1989) [Bobs #1 most popular case] Cooperative BankCooperative Bank(Datar & Kaplan, 1995) [#4 most popular](Datar & Kaplan, 1995) [#4 most popular]

Dakota Office ProductsDakota Office Products (Kaplan, 2001)(Kaplan, 2001) Owens and MinorOwens and Minor (Narayanan & Brem, 2002)(Narayanan & Brem, 2002)

Beyond Costing Activity-based ManagementBeyond Costing Activity-based Management

Texas InstrumentsTexas Instruments (Ittner & Kaplan, 1988)(Ittner & Kaplan, 1988) Indianapolis City ServicesIndianapolis City Services(Kaplan, 1996) [#7 most popular](Kaplan, 1996) [#7 most popular]


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ABM: Using ABC for PerformanceABM: Using ABC for Performance

ManagementManagement

Manage costsManage costs Continuous Improvement (Kaizen)Continuous Improvement (Kaizen) Radical Redesign of Products or Processes (TargetRadical Redesign of Products or Processes (Target

costing, Business Process Re-engineering)costing, Business Process Re-engineering)

- Reduce the usage of the cost drivers- Reduce the usage of the cost drivers- Reduce the cost per unit of the driver- Reduce the cost per unit of the driver

Set prices relative to competition and valueSet prices relative to competition and value

Eliminate unprofitable businessEliminate unprofitable business


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Articulation of the ABC modelArticulation of the ABC model

One cost system isnt enough (Kaplan, HBR1988) Measure costs right: Make the right decisions (Cooper and

Kaplan, HBR1988)

Contribution margin analysis: No longer relevant/Strategic cost management: The New Paradigm (Kaplan, JMAR1990)

Profit priorities from activity-based costing (Cooper and Kaplan,HBR1991)

Activity-based systems: Measuring the costs of resourceusage (Cooper and Kaplan,AH1992)


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The Influence of ABC onThe Influence of ABC on

Accounting Research:Accounting Research:

Investigating theInvestigating the

Economic ModelEconomic Model


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Investigating the Economic ModelInvestigating the Economic Model

Cost drivers and the cost hierarchy: Empirical ResearchCost drivers and the cost hierarchy: Empirical Research Manufacturing overhead cost driver analysis(Foster & Gupta, 1990) Costs of product and process complexity(Banker et al. 1990) Simultaneous estimation of cost drivers (Datar et al. 1993)

Are overhead costs strictly proportional to activity? Evidencefrom hospital service departments (Noreen & Soderstrom, 1994) Measuring the impact of product mix heterogeneity on

manufacturing overhead cost (Anderson, 1995) An empirical analysis of manufacturing overhead cost drivers

(Banker, Potter & Schroeder, 1995)

The activity-based cost hierarchy, production policies, and firm

profitability(Ittner, Larcker & Randall, 1997) A field study on the limitations of ABC when resources are

provided on a joint and indivisible basis (Maher & Marais, 1998)


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Cost drivers and the cost hierarchy: Theory ResearchCost drivers and the cost hierarchy: Theory Research Cost driver optimization in ABC(Babad & Balachandran, 1993) A perspective on cost drivers(Dopuch, 1993) Aggregation, specification and measurement errors in product

costing(Datar & Gupta, 1994) Product costing and pricing(Banker & Hughes, 1994) Allocations of sunk capacity costs and joint costs in a linear

principal-agent model(Hemmer, 1996)

On the efficiency of cost-based decision rules for capacityplanning(Balachandran, et al. 1997)

Activity-based costing systems and incremental costs(Bromwich &Hong 1999)


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CostCost managementmanagement with hierarchical cost structure andwith hierarchical cost structure andcommitted resourcescommitted resources resource usage resource usage

Strategic Cost Analysis: The evolution from managerial tostrategic accounting (Shank & Govindarajan, 1989)

Manufacturing configuration, capacity and mix decisionsconsidering operational cost (Karmarkar & Kekre, 1987)

Relevant costs, congestion and stochasticity in productionenvironments (Banker, Datar & Kekre, 1988) Explaining plant-level differences in manufacturing overhead:

structural and executional cost drivers in the world auto industry(Ittner & MacDuffie, 1995)

Direct and indirect effects of product mix characteristics on

capacity management decisions and operating performance(Anderson, 2001) Are selling, general, and administrative costs "sticky"?(Anderson,

Banker & Janakiraman, 2003)

Predicting earnings using a model based on cost variability andcost stickiness (Banker & Chen, 2006)


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Accounting ResearchAccounting Research

Implementing ABCImplementing ABC


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ABC Implementation as Organizational ChangeABC Implementation as Organizational Change

A Behavioral Model for Implementing Cost Management Systems(Shields & Young, 1989)

Implementing an activity-based cost system (Cooper, 1990) Implementing New Knowledge: The Case of Activity-based

Costing(Argyris & Kaplan, 1994)

A Framework for assessing cost management system changes:The case of ABC implementation at General Motors, 1986-1993(Anderson, 1995)

An empirical analysis of firms implementation experiences withactivity-based costing (Shields, 1995)

Towards explaining ABC failure: accounting and control in a

decentralized organization (Malmi, 1997) Cost and Effect: Using integrated cost systems to drive

profitability and performance(Kaplan and Cooper, 1998) Product diversity and costing system design choice: field study

evidence (Abernethy et al. 2001)


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ABC Implementation: an International PhenomenaABC Implementation: an International Phenomena

A Survey of ABC in the U.K.s largest companies (Innes & Mitchell,1995)

Diffusion and accounting: The case of ABC in Norway (Bjornenak,1997)

National culture and ABC systems (Brewer, 1998) ABC costing diffusion across organizations: An exploratory

empirical analysis of Finnish firms (Malmi, 1999) ABC in the U.K.s largest companies: A comparison of the 1994

and 1999 survey results (Innes et al., 2000)

Note on a New Zealand replication of the Innes et al. U.K. ABCsurvey (Cotton et al., 2003)

Managers divided: Implementing ABC in a Portuguesetelecommunications company (Major & Hopper, 2005)


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Evaluating the Impact of ABC ImplementationEvaluating the Impact of ABC Implementation

Case and Field studies The impact of contextual and process factors on the evaluation

of activity based costing systems(Anderson & Young, 1999) Factors influencing the performance of activity based costing

teams(Anderson, Hesford & Young, 2002)Large sample: surveys and archival financial data

Measuring the success of activity-based cost management and

its determinants(Foster & Swenson 1997) The association between activity-based costing and

manufacturing performance(Ittner, Lanen & Larcker, 2002) The impact of ABC techniques on firm performance(Kennedy &

Affleck-Graves, 2001)

The association between ABC and improvement in financialperformance(Cagwin & Bouwman, 2002)


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Accounting ResearchAccounting ResearchUsing ABC in decision-making:Using ABC in decision-making:

Activity Based ManagementActivity Based Management


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Using ABC in decision-making: ABMUsing ABC in decision-making: ABM

Implementing Activity-based Cost Management: Moving from

Analysis to Action(Cooper, Kaplan, Maisel, Morrissey & Oehm, 1992) Flexible budgeting in an ABC Framework(Kaplan, 1994) New Roles for Management Accountants(Kaplan, 1995) Cost and Effect: Using integrated cost systems to drive profitability

and performance(Kaplan & Cooper, 1998) Measuring and managing customer profitability(Kaplan & Narayanan, 2001) The incidence, perceived merit and antecedents of customer

accounting (Guilding & McManus, 2002) The value of ABC in competitive pricing decisions(Cardinaels et al., 2004) Interorganizational cost management and relational context (Cooper &

Slagmulder, 2004)

The adoption of total cost of ownership for sourcing decisions(Wouters et al., 2005)


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Using ABC in decision-making: ABMUsing ABC in decision-making: ABM

Cognitive Effects of ABC on Decision-makingCognitive Effects of ABC on Decision-making

An experimental investigation of the effect of cost information and

feedback on product cost decisions(Gupta & King, 1997) Fairness, Ethics and the effect of management accounting on

transactions costs (Luft, 1997) The effects of alternative types of feedback on product-related

decision performance (Briers et al. 1999) Cost knowledge and cost-based judgment performance(Dearman &

Shields, 2001)

Avoiding accounting fixation: Determinants of cognitive adaptation

to differences in accounting method (Shields, 2005)


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Current Research Issues in ABC andCurrent Research Issues in ABC and

Cost ManagementCost Management

Economics of modern production (and service)Economics of modern production (and service) Increased infrastructure costsIncreased infrastructure costs Cost behavior (e.g., stickiness)Cost behavior (e.g., stickiness)

Interorganizational (boundary of the firm) costInterorganizational (boundary of the firm) costmanagement: transaction costs, trust and intangiblemanagement: transaction costs, trust and intangibleassetsassets

Risk management: managing uncertainty and volatilityRisk management: managing uncertainty and volatilityof costsof costs

Managerial BehaviorManagerial Behavior Cognitive bias and other behavioral influences on costCognitive bias and other behavioral influences on cost

management decisionsmanagement decisions Agency issues in cost managementAgency issues in cost management


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ConclusionConclusion

I had hoped to be able to document the incidence and value ofI had hoped to be able to document the incidence and value ofinnovative accounting and control systems innovative accounting and control systems

I found that changes in accounting lag far behind changes in the realI found that changes in accounting lag far behind changes in the real

production phenomena they are supposed to represent.production phenomena they are supposed to represent.

Effective managerial accounting systems mustEffective managerial accounting systems mustreflect the value-creating activities ofreflect the value-creating activities of

companies: in operations, in marketing andcompanies: in operations, in marketing and

sales, and in product and processsales, and in product and process

developmentdevelopment(Kaplan, 1985)(Kaplan, 1985)

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