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Contemporary Cost Accounting & Control. EVALUATION OF ACTIVITY-BASED TECHNIQUES. Important features of Activity-Based Techniques. Redefinition of ‘variable’ Expansion of cost base Activity analysis Costed activities For costing need determination and measurement of cost drivers

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contemporary cost accounting control

Contemporary Cost Accounting & Control



important features of activity based techniques
Important features of Activity-Based Techniques
  • Redefinition of ‘variable’
  • Expansion of cost base
  • Activity analysis
  • Costed activities
  • For costing need determination and measurement of cost drivers
  • For success usually requires active cooperation between functional groups
features of activity based management
Features of Activity-Based Management
  • Uses activity analysis and costed activities
  • Usually requires activities in fine detail
  • Usual objective is cost management or process improvement
  • Has many similarities with Business Process Re-engineering
  • Usually conducted by cross-functional ABM team
  • May be used to find areas for cost savings without damaging the effectiveness of the business
features of activity based management 2
Features of Activity-Based Management - 2
  • May use the VA v NVA classification; possibly with a third category such as ‘sustaining’
  • Frequently seen as a ‘one-off’ event, but may be repeated - not continuous as in ABC
  • May have benefits that are difficult to quantify - such as ‘improved financial awareness’ or ‘better decision making’
rationale for research
Rationale for research
  • Increasing volume of work on implementation of ABT
  • Little as yet on implementation failures (Cobb et al, 1992; Malmi, 1997)
  • Natural consequence of the research methodology
  • Practical value to companies (funding from CIMA)
research design
Research Design
  • Data collection by interview
  • 11 companies interviewed in 1993
  • All had attempted to implement ABT in some form
  • Companies contacted again in early 1995 and through to end 1997
  • Accountants and functional management interviewed - 73 individuals in total
  • Longitudinal study - one of very few
concepts of success and failure
Concepts of success and failure
  • Success criteria - the ways in which success can be evaluated
  • Success perspectives - the different views taken by different organisation members
  • Timescale of success - the way in which the evaluation of success and failure may change through time
  • Features of failure and success
success criteria
Success criteria
  • Decision making
  • Maintenance
  • Improved financial position
  • Meeting objectives
  • Benefits exceed costs
success perspectives
Success perspectives
  • Different organisation functions (marketing, manufacturing, finance etc.)
    • One function does work and another has benefits
    • Different cultures within functions
    • See Malmi(1997) in MAR
  • Different organisation levels
    • Central management keen for control
    • Plant management use ABT for decision making and profit improvement
timescale and features
Timescale and Features
  • Implementation takes time
  • When is evaluation taking place
  • Hence longitudinal nature of study
  • Anderson (1995) has 25 success factors
  • Widely used approach and intuitive appeal
  • Overlooks interaction and organisation
  • Argyris and Kaplan (1994) - ‘resistance’
continuum of success and failure
Continuum of Success and Failure

Total Success with Success or Failure with Complete

success some failure failure? some success failure


definitions failure
Definitions - Failure

Clear failure of an activity-based technique occurs where:

i all or the great majority of initial objectives

have not been met;

ii no significant benefits have arisen; and

iii all further attempts at implementation have


definition of success
Definition of Success

Clear successof an activity-based technique occurs when:

either a substantial proportion of the initial objectives have been met;

OR where significant benefits from their use have been recognised.

failure with some success
Failure with some success!
  • 11 companies interviewed in 1993
  • 1 failure
  • All companies recontacted in 1995
  • 4 more were no longer implementing ABT
  • 6 deemed at least partial success
  • 5 were prima facie failures - firms no longer considered they were ‘doing ABT’
cases of failure companies
Cases of ‘failure’ companies
  • Henley - failure before it began
  • Douglas - case of the absent Finance Director
  • Spicer - success or failure?
henley failed in every way
Henley - failed in every way!
  • Subsidiary of UK engineering company - mainly auto parts
  • 1100 employees initially - much reduced
  • Past history of cost reductions
  • ABC initiated by parent
  • Consultants carried out most work
  • No clear objectives for project
  • Very poor communication
  • Henley 2000?
douglas the absent fd
Douglas - the absent FD
  • Subsidiary of UK engineering company - mainly aerospace
  • 500 employees
  • FD very keen but aimed for a single A-B accounting system - presented major problems
  • Resources tight, worsening trading position, technical problems, takeover, progress slow
  • Data problems with MIS
  • FD left, nothing ‘embedded’, all ABT work ceased
  • Remains - better bids; financial awareness
spicer success or failure
Spicer - success or failure?
  • Irish subsidiary of US multinational
  • 220 employees, threat of closure, no buyer
  • 1992 US financial controller ‘recommended’ ABT and consultants
  • Costing S-R bids, activity mapping leading to process approach
  • 1995:dramatic change in trading, parent investing, all efforts to meet demand
  • ABT ‘met the need of the time’: failure?
success with a degree of failure
Success with a degree of failure
  • 6 companies continuing with ABT
  • All testify to benefits from ABT
  • All have met objectives to some extent


  • None have fully met initial objectives
  • All state that part of the project failed
features supporting success
Features supporting success
  • A compelling business need- next slide
  • Managers need to see benefits
  • Support from senior management
  • Broad-based support throughout firm
  • Embedding of ABT- see case 2
cases and critical success factors
Cases and ‘critical success factors’
  • Standard procedure is to find critical success factors
  • Usually large sample, cross-sectional analysis
  • Evidence of this study suggests such methods miss richness and relevance
  • Examples of 2 cases
feltham the enthusiast
Feltham - the enthusiast
  • Large UK-based aerospace manufacturer
  • Geoff Ridings: initially management acct
  • Introduced ABB, then ABC costing for bids
  • Became general manager site services
  • Introduced ABC for recharging
  • Success but limited?
  • Attitude of managing director!
philpot embedding abt
Philpot - embedding ABT
  • US-based; specialist financial services for vehicle fleet management
  • 1992 ABC for budgeting and pricing
  • Finance oriented, limited scope
  • 1995 US ‘Director of ABM’ - new project
  • Lap-top based ABC model for pricing
  • All new business needed ABC costings
  • Measurement and bonus on ABC profit
concluding comments on success and failure
Concluding comments on success and failure
  • Role of individual - positive and negative
  • Embeddedness
  • Integrated MIS (SAP and Oracle etc.)
  • Use of consultants
  • Relations between accountants and operational managers
concluding comments re activity based techniques
Concluding Comments re Activity-Based Techniques
  • Use of ABC - see below
  • Is it any different? All allocations are fatally flawed
  • Does it miss the point - see Piper & Walley criticism?
  • Does encourage flawed short-run decision making?
  • Is it introspective when companies need to outward-looking
  • Does it pass cost benefit criterion?
use of activity based techniques
Use of Activity-Based Techniques

Innes and Mitchell Surveys in 1994 and 1999

Survey of 1000 largest companies; overall response 45% in 1999 and 51% in 1994

1999 1994

Currently using ABC 17.5% 21.0%

Currently considering 20.3% 29.5%

Rejected ABC 15.3% 13.3%

Not considered ABC 46.9% 36.1%

n = 177 352

other surveys
Other surveys

Drury and Tayles 1999 survey of experienced CIMA members (n = 185)


Full implementation 15%

Partial implementation 5%

Implementation in progress 3%

No implementation 77%

conclusions on abc usage
Conclusions on ABC usage
  • Currently used by significant minority
  • Usage seems to have stabilised around 20-25%
  • Similar story in US
  • Some northern European countries report higher usage
  • Among users are many prominent and leading firms
outstanding issues
Outstanding Issues
  • Usage, see above; not as great as proponents originally expected
  • Cost and benefits
  • Implementation issues
  • Use of consultants
  • ABC for short run decisions - a major debate with strongly contrasting views
  • Effect of ERPS - (SAP, Baan, Oracle)
additional reading on abt
Additional Reading on ABT
  • Malmi, Teemu, 1997, Towards explaining activity-based costing failure: accounting and control in a decentralised organisation, Management Accounting Research, Vol 8, pp. 459-480.
  • Anderson, Shannon W., 1995, A Framework for Assessing Cost Management System Changes: The Case of Activity-Based Costing Implementation at General Motors, 1986-1993, Journal of Management Accounting Research, Vol 7, pp. 1-51.
  • Anderson, Shannon W. and Young, S.M., 1999, The Impact of Contextual and Process Factors on Evaluation of Activity-Based Costing Systems, Accounting, Organisations and Society, vol. 24, pp. 525-559.