Activity based costing in manufacturing: two case studies on implementation. A. Sohla and W. Chung (Integrated Manufacturing Systems !

olume " #o. $ %""&' pp. %$( ) %*( A+C Advantages Innes and Mitchell (1990): Provides more accurate product line costing particularly where non-volume related overheads are significant and a diverse product line is manufactured is fle!i"le enough to analyse cost "y cost o"#ectives other than products such as processes area of managerial responsi"ility and customers provides a relia"le indication of long run varia"le product cost which is particularly relevant to managerial decision-ma$ing at strategic level provides meaningful financial (period cost driver rates) and non financial (period cost driver volumes) measures which are relevant for cost management and performance assessment at an operational level aids identifcation and understanding of cost "ehaviour and thus has the potential to improve cost estimation provides a more logical accepta"le and comprehensive "asis for costing wor$% (p% 1&') In 199( )ustralian *ociety of +P)s initiated a ma#or survey on ),+ amongst ),+ manufacturers% +onducted "y the -niversity of .echnology *ydney involved /1& firms% (+orrigan 19901 2ood 1990) 3 1/4 of firms had adopted it 3 they "elieved they had achieved five goals: more accurate product costing "etter cost management "est cost control "etter allocation of overheads and more accurate cost information% (p% 1&9) Innes and Mitchell (1990) claimed ("ased on a case study of & firms) that an organisation can achieve a range of "enefits reasona"ly 5uic$ly from the design and implementation of ),+% Improved product line cost would "e invalua"le for organisations where price may "e cost sensitive and where product promotion strategies and product range6 mi! decisions need to "e made fre5uently% )n improved visi"ility of overhead cost enhances the process control of costs "y lin$ing costs to the series of activities (cost pools) which cause them% (p%171) 8id a case study of two firms% ),+ delivered many "enefits: more accurate information on costs and pricing and hence competitive positioning of the company in the mar$et place identifcation of appropriate "enchmar$s which can "e used against imported competitive products ena"le companies to outsource many products which were inefficiently managed in house more appropriate capital investment decisions a"le to "e made as a result of "etter weighting "eing determined many pro"lem areas identified where costs were e!cessive performance measurements develeoped which are used to identify improvement initiatives and a validation for annual "udgets for specific e!penses% (p% 17&) Innes and Mitchell (1990): accurate product line costs 3future costs "ased on accurate past costs 3 low potential for misleading information product cost information is geared to 9: strategic analysis cost segmentation relates all costs to determinants 3 volume driven costs and activity (various) driven 3 future costs "ased on pro#ected changes in a whole range of cost determinants non financial cost driver "ased performance in analysis aids process control in *: and 9:% (p% 170) ,isadvantages 7(4 of a"ove survey had never even considered adopting it (eventhough ''4 of those surveyed had heard of it) and 174 had thought a"out it and declined it 3 this was "ecause of uncertainty of "enefits and the hig cost relative to percieved "enefits or they had more important priorities (p%1&9) +o"" et al (199/) followed up on a survey done "y +IM) in 1990 to find out the pro"lems they percieved or e!perienced with ),+% .elephone interviews with &0 of the 0/ firms who were considering ),+ and they also visited 1/ companies who had implemented ),+ and / of which had then re#ected it% .he aim was investigate pro"lems and issues involved in

adopting ),+% /0 of the &0 were still considering implicating it% .he main issues were: amount of wor$ installing an ),+ system particularly for small companies (1( out of /0 companies) competing uses of resources which were given a higer priority than ),+ suita"le accounting staff resources ( a lot is needed) to install ),+ system computer resources and the difficulty of selecting suita"le cost drivers% .he two who had re#ected ),+ siad data collection was difficult and the time involved for the accountants the cost of implementing and running an ),+ system was considered to far e!ceed the "enefits which would "e generated% ;reat retraining needed of "oth accountant and computer staff% (p%170) :e5uires change to organisational structure (p%171) -ncertainty of using ),+ for stoc$ valuation for e!ternal financial reporting (p%171) 8ifficult to lin$ cost drivers to individual product lines (in initial stages of implementation) (p% 171) <igh set up costs associated with the intitial set up (additional staff)(p%171) Many of the pro"lems and difficulties associated with introducing ),+ are related to managerial aspects rather than technical aspects of the ),+% (P% 17()

Absorptional Advantages ,isadvantages Managers and accountants have "ecome dissatisfied with conventional costing systems and have e!pressed concerns a"out their suita"ility in the modern manufacturing environment% (p%1&=) Innes and Mitchell (1990): inaccurate product line costs 3 incorporate product line costs inaccuracies fi!ed6varia"le segmentation "ased only on production volume 3 limited as cost estimation "ased primarily on volume changes high potential for misleading information geared to short-run decision analysis (p% 170) -eneral .oints: ),+ developed in the -*) "y <arvard ,usiness *chool Professors +ooper and >aplan (p% 1&=) In an e!ecutive summary to a report on ),+ pu"lished "y +IM) Innes and Mitchel (1990) differentiated ),+ from traditional costing "y stating that it differs: in its treatement of non-volume related overhead costs% Many significant overheads are related to specific activities which are relatively independent of production volume% It is the volume of such activities (not the volume of production) which consumer resources and therefore determine overhead cost% .hese activities drive the overhead cost and ),+ uses such activities for "oth production costing and process control% (p% 1&=) +orrigan (1990) undertoo$ a similar survey as a"ove in the -*) "y the Institute of Management )ccountant 3 much higer level of implementation amongst )merican firms: 714 already using it and &&4 "elieve they should "e (p% 1&9) Managers need to understand "etter the processes involved in adopting ),+ and recognise the factors that are critical to implementation% (p%171) >ey ingredients for successful implementation of ),+: total commitment from top management clear simple and realistic o"#ectives o"#ectives regularly reviewed and revised as mar$et place and organisation change multi-disciplinary pro#ect team to introduce and implelement ),+ system 3 all with similar values and attitudes education and training of all the people in the organisation to understand the comple!ity of the pro#ect

and its impact on the organisation ade5uate resource allocation to the ),+ pro#ect (time for data gathering and analysis) time allowed to gain confideance with the new system on going feed"ac$ to top management and low level employees on the progress on the ),+ pro#ect (p% 17() Potential reasons for failure of implementation of ),+: employee resistance sceptism 3 in particular where education6training has not "een great or where other ma#or organisational changes are occuring at the same time ),+ pro#ect seen as accounting pro#ect "y other functional managers underestimating the cost of data gathering shortage of appropriate resources in particular people%(p%17()