Study note on activity-based costing

Study note on activity-based costing (ABC)

References with extracted contents

Thomas H. Stevenson, Frank C. Barnes, Sharon A. Stevenson, (1993) "Activity‐based Costing: An Emerging Tool for Industrial Marketing Decision Makers", Journal of Business & Industrial Marketing Vol. 8 Issue: 2, pp.40-52 [https://doi.org/10.1108/08858629310041375].

"The wide use of direct labor hours as an allocation basis is historical, dating back to the development of these systems in the early part of this century. At that time, labor was a major cost and a target of management attention. Over the last 20 years it has become apparent that this model is oversimplified; many costs are related to other causes than labor";

"In response to worldwide competition, American industry is changing in ways which increase the need for new means of allocating overhead costs. Much of this change has been brought about by changing markets. Since few firms can afford to carry large inventories, just-in time manufacturing and distribution have grown to cut lead times and minimize inventory storage. .... The push to meet market demands for quality, heightened by foreign competition, has resulted in more use of flexible manufacturing, automation, cellular manufacturing and greatly improved machinery";

"Activity-based costing (ABC), pioneered by Harvard's Cooper and Kaplan (1988), allocates staff and overhead costs to products (or lines, or territories) on the basis of how the products actually consume or cause these costs. The process is similar to that used in engineering to develop a bid or estimate the cost of a project. ABC identifies systematic cause and effect linkages between products and costs, before resorting to across-the-board allocations";

Drew Stapleton, Sanghamitra Pati, Erik Beach, Poomipak Julmanichoti, (2004) "Activity‐based costing for logistics and marketing", Business Process Management Journal, Vol. 10 Issue: 5, pp.584-597 [https://doi.org/10.1108/14637150410559243].

"ABC is a costing model that identifies the cost pools, or activity centers, in a firm and assigns costs to products and services (cost drivers) based on the number of events or transactions involved in the process of providing a product or service (McKenzie, 1999). Understanding ABC can lead to greater knowledge of a firm’s business processes and underlying expenses. ABC is a budget and analysis process that evaluates overhead and operating expenses by linking costs to customers, services, products and orders";

"Kaplan and Atkinson (1998) explain that the basic principle behind the ABC system is that resource expenses must be assigned to the activities performed. Expenses identified in the financial system are collected and distributed to these activities. This helps the firm to understand how much they are spending on the activities that support the production of certain products or services";

".....  most departments have some fixed and variable costs. Inside a department, employees may be assigned to perform certain tasks based on the level of demand. This type of task can be traced to what job is being performed, and can therefore, be carried out to the final cost of the end product. Some resources might also be fixed for a department. This might include the space in the facility that the department uses and the machines that the department needs to operate";

Askarany, D., H. Yazdifar and S. Askary. 2010. "Supply chain management, activity-based costing and organisational factors" Int. J. Production Economics 127, Elsevier: 238-248.

"Integrating ABC and SCM [supply chain management], Lin et al. (2001) describe ABC as a complex costing system that assists managers in making important strategic business decisions. They emphasise that every aspect of decision making process in SCM requires cost data. This highlights the significance of the relationship between ABC and SCM";

".... an accumulated body of literature have specified a variety of contributions which ABC is providing to SCM [supply chain managment] in organisations such as: ‘cost reduction’, ‘cost estimation’, ‘performance measurement’, etc. (Baykasoglu and Kaplanoglu, 2008; Charles and Hansen, 2008a, b; Hom- burg, 2005; Qian and Ben-Arieh, 2008; Satoglu et al., 2006; Thyssen et al., 2006). However, despite the vital role of ABC in improving the organisations’ performance and their SCM, the adoption of ABC is not highly prevalent after almost 25 years since its introduction";

"Kee (2008) suggests ABC can be used as a tool for decision making especially for product mix costing and pricing decisions. Further to the above advantages, Qian and Ben-Arieh (2008) consider ABC as a more accurate cost-estimation method. They argue that ABC can help managers to become aware of original parameters that create demands on indirect and support resources and therefore can identify and remove non-value-adding activities";

Adam S. Maiga, Fred A. Jacobs. "Activity-Based Cost Management and Manufacturing, Operational and Financial Performance: A Structural Equation Modeling Approach" In Advances in Management Accounting. Published online: 10 Mar 2015; 217-260.

"... reservations have been expressed regarding the benefits of ABC (Innes et al., 2000; Malmi, 1997; Morrow & Connolly, 1994). In some cases firms have failed to complete their ABC projects and in others they have failed to gain benefits expected from the ABC systems they have installed (Lyne & Friedman, 1996). For example, Ittner, Lanen, and Larcker (2002) find modest evidence that ABC use is positively associated with manufacturing performance. However, on average, they find that extensive ABC use is positively associated with higher quality levels, greater decreases in cycle time, and larger increases in first pass quality";

"Shields (1995) suggests that since ABC is embedded in a behavioral and organizational context that defines the programs and innovations that are implemented and succeed and fail, it is important that an ABC implementation strategy be focused on these behavioral and organizational variables. However, very little empirical information exists about firms’ use of these behavioral and organizational variables and how they impact performance";

Anderson,, S.W., J.W. Hesford and S.M. Young. 2002. "Factors influencing the performance of activity based costing teams: a field study of ABC model development time in the automobile industry" Accounting, Organizations and Society 27, Pergamon: 195-211.

"An aspect of ABC implementation that researchers have neglected is the process of designing the ABC model—i.e. the resources, activities and cost drivers that are the ‘‘economic map’’ of the organization (Kaplan & Cooper, 1998, p. 79). Studies have investigated the structure of ABC models that emerge from the design process (e.g. Noreen & Soderstrom, 1994) but have not explored how group processes that culminate in a particular model design affect the ABC implementation project outcomes";