Activity-Based Costing ( ABC ) method is the most well-known direction accounting invention in the last 20 old ages. It is primary used to heighten the productiveness and efficiency in the concern procedure ; to assist make budgets and set monetary values ; to sort client costs and better client dealingss ; to do determinations on strategic issues ; and to turn to external dialogue issues. ABC has been frequently used together with other direction tools and methods depending on the overall aims of specific enterprises. This paper analyzes ABC undertaking executions in assorted industries, identifies issues related to such executions and offers a model for maximal benefits.
We have investigated recent literature in the countries of concern, direction, accounting, and finance, among others, reviewed over 20 articles related to ABC and identified 5 articles relevant to ABC executions. Based on the reappraisal of published literature from 1998 to 2009, we analyzed the usage of ABC. In a sum of 18 articles looking in accounting, finance, and public presentation direction diaries, we found that ABC was chiefly applied in the undermentioned five countries.
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Many scholars and practitioners admit that ABC has several pitfalls
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Synthesis of ABC Developments
Many bookmans and practicians admit that ABC has several booby traps. We can name the major unfavorable judgments as follows:
• A batch of practicians explain that ABC systems are expensive to implement, clip consuming and difficult to set. For case, Kaplan and Anderson ( 2007, p. 5 ) has described the ABC system of Hendee Enterprises, a Houston-based maker of sunshades. They explain that the ABC package took three yearss to cipher costs for the company 's 150 activities, 10,000 orders and 45,000 line points.
• A batch of failures have been compiled, particularly in the service industries.
• Finally, a batch of people think that the ABC method is excessively complex. As a effect, it sometimes fails to clear up the decision-making procedure and the scheme of the house.
This is why since its early phases, several specific applications based on the ABC method have been suggested. Table 1 shows a synthesis of these applications. Their aims are:
• To diversify the costs objects ( merchandises, services, procedures, clients, markets, etc. )
• To widen the analysis margin ( spacial and temporal broadening ) , and
• To find the relevant degree of inside informations to analyse the costs.
These aim show a common aim, which is, to direct the computation of the costs towards the cardinal value factors of the house.
In Table 1, we distinguish the three groups of techniques.
• The first one gathers those which enable spacial broadening of the costs margin.
Some of them suggest to broaden the cost analysis to the clients ( customer-driven ABC ) , others to the rivals ( benchmarking-driven ABC ) , to the environment ( environmental-driven ABC ) , or to the providers and spouses ( interorganizational cost direction and open-book accounting ) . This list of solutions is non comprehensive.
• The 2nd one brings together those which allow analysis of future costs ( Activity-Based Budgeting ( ABB ) , Antos and Brimson, 1999 ) and a temporal broadening of the costs perimeter. These solutions consist of uniting the ABC method to the life rhythm bing or to the mark costing ( Horvath et al. , 1998 ) . We can besides associate the mark bing to a specific version of ABC called characteristic costing ( Cokins, 2002 ) . The characteristic costing ( Brimson, 1998 ) introduces another degree of analysis in the ABC method which is the merchandises characteristics. Several research workers have identified the links between the ABC and the mark bing methods. Lebas ( 1999, pp. 506-507 ) explains that ABC implies taking into history the value that the clients attribute to the merchandises. This is a rule of the mark bing method and this has a strong impact on the house 's cost rational construction.
• With the 3rd one, we put together techniques which propose to find the relevant degrees to analyse the costs, depending on the characteristics ( strategic and organisational ) of a house. In some instances, the procedures and scheme complexnesss are tremendous. The ABC method is deficient, so we need another attack to apportion the resources. The Resource Consumption Accounting ( RCA ) method ( Keys and van der Merwe, 2002 ) finish the ABC with a deeper analysis of resources. In other state of affairss, the complexness of the procedure is low and the ABC method is excessively elaborate. So, we can convey together several activities to put up a 'meta-activity ' or a procedure with a individual cost driver.
This is the premise of the procedure costing ( Horngren et al. , 2005 ) and the tip accounting methods.
We besides analyze the time-driven ABC ( Kaplan and Anderson, 2007 ) which is an 'equivalence method ' . It is the most recent ABC development. It is clearly a simplification of the ABC. With this technique, the activity film editing can be more simple ( like with procedure costing and thin accounting ) . But it can besides be more refined ( like RCA ) . Then, we conduct a more accurate analysis of several of these applications.
To heighten productiveness and efficiency in the concern procedure
In USA, the authorities bureaus every bit good as the private sectors have embraced ABC to assist place working countries that could be more productive or efficient. For illustration, the United States Coast Guard and the metropolis of Indianapolis analyzed the cost of operations ( Kline and James, Journal of Mangement Issues, 2003 ) . An Air Force Base used ABC informations to cut down costs associated with denudation and painting an aircraft ( American Industrial Hygiene Association, 2003 ) . ABC was used to assist an electricity company to turn to how efficiently operational activities add to the concern procedure and the optimum mix of resources necessary to expeditiously execute these activities ( Management Accounting, 80, 5:30-31, 1998. Lawson, a package confer withing house implemented ABC to place, proctor, and pull off the costs, activities, and processes involved in developing a new income generated service adviser ( Dub, Susan, ABC at Lawson, 1998 ) . In Paper Mills, ABC was applied with benchmarking to acquire the production inputs and resources ( Fogelholm, John. , 2006 ) .
To assist make budgets and set monetary values
Teva Pharmaceutical Industries Ltd. implemented ABC to assist put transportation monetary values among its divisions ( Kaplan, Robert, Norton, Harvard Business School Press: Converting Intangible Assetss into Tangible Income, 2004 ) . It is reported from experimental grounds on the virtues of ABC for monetary value scene in a competitory market that differ in their ability to supply enlightening feedback ( Cardinaels, Eddy, Roodhooft, Filip, Warlop, Luk, Decisions: Journal of Management Accounting Research, 16, 133-148, 2004 ) . ABC can besides be used as a capital budgeting tool. A Fortune 500 company used ABC to turn out the viability of a capital investing of constructing a cybermall ( Coburn, Steve, Grove, Hugh, Cook, Tom, 1997 ) .
To place client costs and better client dealingss
The usage of ABC and Customer Relation Management ( CRM ) aid companies analyze their clients, costs, and profitableness and assist them aline with their strategic ends ( Anderson, Brad, 2004 ) . In a bank, ABC was applied to clear up the relationship between resources and merchandise or client costs ( McDonald, Robert, 2004 ) . An ABC enterprise helped Kimberly Clark alter its internal procedure and besides convert its clients to alter the methods of cargos ( Cokins, Gary, 2004 ) . With ABC informations, Mahany Welding Supply identified concern activities and cost drivers more accurately, assisting to better the bringing service ( Krupnicki, Michael, Tyson, Thomas, 1997 ) . A impermanent employment company used ABC to place the public presentation of client channels ( Searcy, DeWayne, 2004 ) .
To do determinations on strategic issues
At Carrier Corporation, ABC information was used to cipher the fiscal benefits of cut downing rhythm times, natural stuff, work-in-process stock lists, and storage infinite demands every bit good as to do determinations on operation outsourcing ( Kaplan, Robert, 1997 ) . ABC attempts at Reichhold, Inc. improved the company 's capacity direction, rhythm times, value-added pricing determinations, and analysis of a fabrication works ( Palmer, Richard, 1998 ) . For little fabrication companies, ABC showed that most of the costs calculated for big occupations were lower under the volume-base theoretical account than the ABC theoretical account. ABC besides discovered that profitableness began to diminish at certain occupation sizes ( Needy, Kim, Nachtmann, 2003 ) . Website www.Art.com applied ABC to steer resource allotment and determination devising ( Zeller, Thomas, 2001 )
To turn to external dialogue issues
ABC informations helps companies better negotiate contracts with outside sellers. The Hospice of
Cardinal Kentucky negotiated with insurance companies and put payment footings that are more advantageous for the infirmary ( Baxendale, Sidney, 2000 ) . The ABC information besides prompt direction to educate referral beginnings to convey patients to hospital before acute attention becomes necessary. GE Capital Commercial Services implemented ABC to forestall losingss ensuing from underbidding ( Byerly, Davis, 2003 ) .
It seems most of the ABC applications start with placing the cost of production or service bringing and so continue with either bettering efficiency or altering the work flow or activities to do the concern procedure more effectual. In several cases, the ABC enterprises were farther extended to do strategic determinations turn toing the corporate degree issues such as concern alliance or competitory determination devising. It clearly shows that ABC has been applied to a broad scope of industry sectors and functional spheres.
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