One of the most important publications in management accounting is "Relevance Lost- The Rise and Fall of Management Accounting" by Johnson and Kaplan. This book became the stepping stone for the mass improvement in management accounting for the past 20 years. There had been more innovations in these 20 years than in the past five decades (Otley 2008). Johnson and Kaplan criticized the old management accounting systems, MAS. The old systems was said to give misleading information to managers thus leading to poor decision making.
There are four main criticisms of Johnson and Kaplan. Firstly, they criticized that the traditional costing system serves mainly for financial reporting as per SSAP 9 instead of helping the managerial department in decision making. Then, the traditional method concentrates on manufacturing costs. Non-manufacturing costs such as selling and distribution costs are therefore not included in decision making. The problem with this is that if the non-manufacturing costs is high, the profitability of the product may be upset completely turning a profit into a loss. Next, the traditional system usually employs 'blanket' overhead rates. This feature is criticized to be unfair because it may overstate or understate the cost of the products seeing that different production line uses different amount of resources. Besides that, generally, the traditional costing recovery is based on labour costs or labour hours. But in the modern production line, such basis is becoming rather insignificant as there is no real 'direct labour' anymore.
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So to them, it is vital for one to understand the accounting history which is along the same path as Alfred Chandler's work. With that proper and more accurate product costing can be done, by activity based systems. They believe that to "manage by the numbers" is the main and proper role of the MAS (pg. 153, Ezzamel et al. 1990).
2.0 Activity based costing
Activity based costing, ABC is a concept which states that costs were incurred in activities that are required to be done to produce goods or services. With that in mind, it's costing techniques were based on resources consumed (Suthummanon et al. 2011; Balakrishnan et al. 2012; Khataie et al. 2010). It is said to be able to aid organization in maximizing the use of their resources, enabling them to make better decisions and thus helps in the improvement of cost efficiency and competitiveness and performance of a company (Jancala & Silvola 2012; Kirche et al 2005; Suthummanon et al. 2011).
Park & Simpson in 2005 suggested five steps to measure costs using the ABC methodology. First is to identify resource consumption at different activity levels. Second is to calculate the cost needed to run the activity. Third would be to enquire the cost drivers and to measure the cost of consumption rate. Next is to allocate costs to product using the cost driver rates. Last but not least is to examine the profitability of the product at different activity levels.
2.1 Debating about ABC
Many papers had agreed that ABC helps a lot in managerial decision making (Askarany et al. 2010; Mishra & Vaysman 2001; Stratton et al 2009; Jancala & Silvola 2012). By giving the company a clear understanding of the location where most resources are spent, the managers can now effective and efficient in cost planning and control. Besides that, ABC also provides a clear view on value added activities and non-value added activities (Ben-Arieh & Qian 2003). With such knowledge, they are able to eliminate non-value added activities and enhance value added activities.
However, there are academicians who say that ABC is not as good as it seemed. For starters, it is very complex time consuming system which requires the commitment and understanding of the staffs to run it effectively (Suthummanon et al. 2011; Stratton et al 2009 ). Secondly, the cost of implementing the system is quite high depending on the level of information that is wanted from the system. The more accurate the information gain, the more expensive will be its implementation because more skilled employees and software are required to run the system. Moreover, ABC may not be able to capture complex operations (Stratton et al 2009). This may affect its accuracy.
2.2 Development of ABC
It is undeniable that ABC could help a lot in an organization. So it is expected that managers will try their very best to cover the flaws that some of them are mentioned above. For instance, ABC does not provide for resources constraint and there is an issue with lying proportionality assumption whereby it assumes even as volume increase, average costs will stay the same. This is definitely not true with the existence of economies of scale. To complement these flaws, Yahya-Zadeh proposed that ABC should be integrated with Theory of Constraint, TOC using mixed integral programming method during its implementation (Kirche et al 2005).
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ABC not only travelled the financial path, it is also used in other departments like the management, human resource and the IT departments as a tool for the managers to evaluate and improve their performance (Max n.d.). That is how activity based budgeting, ABB and activity based management, ABM came to exist in this world as the ABC becomes more and more suited for budgeting and managerial planning processes (Stratton et al 2009)
One good example to this is the banking industry. The banking industry also began to pay more attention to the ABC system. Realizing that no one ABC system will be suitable for an organization as large as a bank, the focus of this system is shifted from accounting science to costing to management and behavioural science. With that in mind, more training were done to increase employees' competencies and departments connected to ABC are re-tooled for better modelling and analysis skills (Max n.d.).
3.0 Activity based budgeting
Activity based budgeting, ABB is a projection of ABC, whereby the "actual" costs of a product or a service is determined from how time is spent by workers to produce it. Like ABC, ABB uses similar models and from given volume projection, illustrates the projected costs (Moriarty 2001). Thus, it can be said that ABB is the bridge linking budgets and activities for more accurate costing (Serritzlew 2006). Taking all these into consideration, ABB is like another point of view branching out from ABC, concentrating on budgeting costs rather than consumption of costs that result in the use of activity or resources (Stevens 2004).
3.1 Debating about ABB
As mentioned in McClenahen's 1995 article, ABB is useful in the business decision making as it helps to drive the decision making process to operate alongside with budget process. This will enable better decision making on the managerial side. From the same article, ABB is also said to be helpful in environment whereby there is weak cost planning and management which in other words mean the service sector like hospitals and insurance companies. On top of that, ABB enables the management to use resource capacity in its planning and budgeting (Stevens 2004).
Despite saying so, there are others who state that ABB is not really practical. Like ABC, ABB is not an easy system to be implemented due to the difficulties in designing its rules by the managers. For this system to be effective, the measurement of output and identification of possible issues connecting with output heterogeneity need attention from the managers. Furthermore, the organization needs to be highly institutionalized for the designed rules to be effective (Serritzlew 2006).
3.2 Development of ABB
The real problem concerning ABB is the linkage between budget and activity. The stronger the link between budget and activity, the better is the ABB system. With regards to ABB, there is not much innovation done on to the system. Most of them would rather immerse themselves with ABC or just abandon the whole activity based systems. But, there is an interesting thought to the improvement of ABB. In Liu et al. 2006, a study was carried out onto Scottish Courage Brewing. It is said that implementing ABB as a separate system instead of integrating it with the existing product costing system would increase its chances of successful implementation. Managers should just use ABB for managerial planning and leave product costing alone.
4.0 Activity based management
Activity based management, ABM is a system to improve management of process improvement activities using total quality management discipline to reduce costs incurred in a company (Narong 2009; Tardivo & Montezemolo 2009). In other words, it is a new technique that helps in increasing the management's understanding about the business operation costs (Khataie et al. 2011).
There are three aspects to ABM, namely identification of activities in the organization's processes, determination of costs of those activities and allocation of activity costs to cost objects through cost drivers (Tardivo & Montezemolo 2009). ABM works hand in hand with ABC (Cokins & Capusneanu 2011; Tardivo & Montezemolo 2009). Data from the activities are converted by ABC into useful information. From that information, ABM then deployed it for scrutinizing and decision making.
4.1 Debating about ABM
In Khataie et al. 2011, ABM is stated to be able to provide through information regarding costs and activity consumption in specific processes. Thus being said this, more accurate information can be harness, leading to better decision making. Taking that into account, the actual cost of a product or service can be determined and tasks concerning resource planning will be assisted (Narong 2009).
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As good as ABM sounds, there are still researchers finding it more troublesome than the benefits it gives. For instance, the requirement of dedicated resources which needs maintenance and revisions, the risk of misinterpreting the data gathered and resistance of compliance from the managerial perspective (Cokins & Capusneanu 2011). And the rest are basically about the same as ABC because ABM and ABC are very closely tied to one another.
4.2 Development of ABM
Due to the many benefits of using the ABM system, an ABC/M-based Mixed-Integer Programming (MIP) decision support model for product mix problems is developed. Another researcher even took a further step by even integrating certain aspects of TOC into the model mentioned earlier enabling it to determine optimal product mix for the company (Khataie et al. 2011). Others used ABM structure to produce a mathematical Decision Support to increase the model's accuracy (Khataie et al. 2011; Narong 2009).
5.0 Impact on companies and consultants
5.1 Scottish Courage Brewing
The Scottish Courage Brewing was one of the first few companies that try applying ABB into its system. The concept of its ABB was somehow like the reversal of ABC whereby product mix was determined by sales forecasts and capacity constraint is used to generate activity and resource requirement. Budgets were then produced from the influence of costs to resources.
ABB was said to be the ideal system for this firm as it is deemed to be flexible enough enabling sales to different types of organization. ABB was built to help in accurately forecasting levels of activities required to meet target sales. With this, the managers were able to recognise capacity constraint and flagged up activities that do not help to sustain the processes. The budgeting process is then said to be made easier, giving the management more time to work on other matters (Mason 1996).
However, this is just a short term success. Through evaluation, the management team discovered that there are five main implementation problems causing this failure. For starters, the modal specification between ABB and ABC is different making it difficult to use the current ABC system to run the ABB. Furthermore, there is also a problem concerning linear and stepped cost behaviour that ABB has no provision over. Adding on to this problem is the complex systems that are already present within the company and data modelling. There is also a lack of standardization of the rates and drivers used and the effects of structural change worsening this issue (Liu et al. 2002).
Scottish Courage Brewing was unable to continue running ABB but it learnt valuable lessons from its failure.
5.2 Andrews, South Carolina, plant of Insteel Industries
ABC was also implemented in Andrews, South Carolina, plant of Insteel Industries. According to its managers, the newly implemented system changed the operations and portfolios of that branch leading to a new and better decision making. Through ABC, the processes within the plant undergo process improvements with the aid of the system's ability in classifying activities to value added or non-value added ones. With that, Insteel was able to reduce its cost spending significantly (Narayanan & Sarkar 2002).
Companies are paid for wealth creating and certainly not for controlling costs. Bearing this in mind, the traditional management account seemed to be more on cost controlling than on wealth creation. With growing importance of external benchmarking and the search for a better knowledge of cost information, ABC emerged as a "saviour" to these banks (Max n.d.).
The banking industry is a very volatile industry. It is always changing and thus the old management accounting is unable to serve them well. ABC is seem to be a flexible system that is flexible enough to meet these requirements and is also able to evolve as time passes on. With that, bit by bit, ABC influence spread throughout the industry.
ABC is not only used to allocate costs to the service that they provide, it began to seep in to various departments like Operations, Marketing, HR and IT departments. As this happens, ABC changed its focus more to the management and behavioural science aspect. By having ABC in place, the method of deploying information is changed, staff training is constantly done and technologies are leverage to assist in distributed cost modelling and analysis.
Looking at the entire picture, ABC, ABB and ABM are one of the greatest technique ever existed in the management accounting. There are in fact way many more benefits to these three systems than what is already mentioned above. From 1987 up until now, management accounting, specifically the activity based systems have come a long way and along its journey it had been transforming to be a better system to suit the practitioners in the real world rather than just staying as a theory in papers and researches.
With reference to the original scepticisms of Johnson and Kaplan in their "Relevance Lost" book, the developments of the activity based systems are well-geared towards catering the four main flaws of the traditional costing methods. With systems such as ABC, ABB and ABM, costing was done as per activity driver. Thus, all costs, be it manufacturing or non-manufacturing costs, were taken into accounting during costing. There is no one blanket rate used. Costing became more accurate with the usage of various activities and drivers and is most definitely better at serving its need for decision making purpose rather than just to serve the need of financial accounting (SSAP9 in UK).