Many scholars and practitioners admit that ABC has several pitfalls

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Activity-Based Costing (ABC) method is the most well-known management accounting innovation in the last 20 years. It is primary used to enhance the productivity and efficiency in the business process; to help create budgets and set prices; to classify customer costs and improve customer relations; to make decisions on strategic issues; and to address external negotiation issues. ABC has been often used together with other management tools and methods depending on the overall objectives of specific initiatives. This paper analyzes ABC project implementations in various industries, identifies issues related to such implementations and offers a framework for maximum benefits.


We have investigated recent literature in the areas of business, management, accounting, and finance, among others, reviewed over 20 articles related to ABC and identified 5 articles relevant to ABC implementations. Based on the review of published literature from 1998 to 2009, we analyzed the use of ABC. In a total of 18 articles appearing in accounting, finance, and performance management journals, we found that ABC was primarily applied in the following five areas.

Synthesis of ABC Developments

Many scholars and practitioners admit that ABC has several pitfalls. We can list the major criticisms as follows:

• A lot of practitioners explain that ABC systems are expensive to implement, time consuming and hard to adjust. For instance, Kaplan and Anderson (2007, p. 5) has described the ABC system of Hendee Enterprises, a Houston-based manufacturer of awnings. They explain that the ABC software took three days to calculate costs for the company's 150 activities, 10,000 orders and 45,000 line items.

• A lot of failures have been compiled, especially in the service industries.

• Finally, a lot of people think that the ABC method is too complex. As a consequence, it sometimes fails to clarify the decision-making process and the strategy of the firm.

This is why since its early stages, several specific applications based on the ABC method have been suggested. Table 1 shows a synthesis of these applications. Their objectives are:

• To diversify the costs objects (products, services, processes, customers, markets, etc.)

• To widen the analysis perimeter (spatial and temporal widening), and

• To determine the relevant level of details to analyze the costs.

These purpose show a common objective, which is, to direct the calculation of the costs towards the key value factors of the firm.

In Table 1, we distinguish the three groups of techniques.

• The first one gathers those which enable spatial widening of the costs perimeter.

Some of them suggest to broaden the cost analysis to the customers (customer-driven ABC), others to the competitors (benchmarking-driven ABC), to the environment (environmental-driven ABC), or to the suppliers and partners (interorganizational cost management and open-book accounting). This list of solutions is not comprehensive.

• The second one brings together those which allow analysis of future costs (Activity-Based Budgeting (ABB), Antos and Brimson, 1999) and a temporal widening of the costs perimeter. These solutions consist of combining the ABC method to the life cycle costing or to the target costing (Horvath et al., 1998). We can also relate the target costing to a specific version of ABC called feature costing (Cokins, 2002). The feature costing (Brimson, 1998) introduces another level of analysis in the ABC method which is the products features. Several researchers have identified the links between the ABC and the target costing methods. Lebas (1999, pp. 506-507) explains that ABC implies taking into account the value that the customers attribute to the products. This is a principle of the target costing method and this has a strong impact on the firm's cost rational structure.

• With the third one, we put together techniques which propose to determine the relevant levels to analyze the costs, depending on the features (strategic and organizational) of a firm. In some cases, the processes and strategy complexities are enormous. The ABC method is insufficient, so we need another approach to allocate the resources. The Resource Consumption Accounting (RCA) method (Keys and van der Merwe, 2002) complete the ABC with a deeper analysis of resources. In other situations, the complexity of the process is low and the ABC method is too detailed. So, we can bring together several activities to set up a 'meta-activity' or a process with a single cost driver.

This is the assumption of the process costing (Horngren et al., 2005) and the tip accounting methods.

We also 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 cutting can be more simple (like with process costing and lean accounting). But it can also be more refined (like RCA). Then, we conduct a more accurate analysis of several of these applications.

To enhance productivity and efficiency in the business process

In USA, the government agencies as well as the private sectors have embraced ABC to help identify functioning areas that could be more productive or efficient. For example, the United States Coast Guard and the city of Indianapolis analyzed the cost of operations (Kline and James, Journal of Mangement Issues, 2003). An Air Force Base used ABC data to reduce costs associated with stripping and painting an aircraft (American Industrial Hygiene Association, 2003). ABC was used to help an electricity company to address how efficiently operational activities add to the business process and the optimal mix of resources necessary to efficiently perform these activities (Management Accounting, 80, 5:30-31, 1998. Lawson, a software consulting firm implemented ABC to identify, monitor, and manage the costs, activities, and processes involved in developing a new income generated service consultant (Dub, Susan, ABC at Lawson, 1998). In Paper Mills, ABC was applied with benchmarking to get the production inputs and resources (Fogelholm, John., 2006).

To help create budgets and set prices

Teva Pharmaceutical Industries Ltd. implemented ABC to help set transfer prices among its divisions (Kaplan,Robert,Norton, Harvard Business School Press: Converting Intangible Assets into Tangible Income, 2004) . It is reported from experimental evidence on the merits of ABC for price setting in a competitive market that differ in their ability to provide informative feedback (Cardinaels, Eddy, Roodhooft, Filip, Warlop, Luk, Decisions: Journal of Management Accounting Research, 16, 133-148, 2004). ABC can also be used as a capital budgeting tool. A Fortune 500 company used ABC to prove the viability of a capital investment of building a cybermall (Coburn, Steve, Grove, Hugh, Cook, Tom , 1997).

To identify customer costs and improve customer relations

The use of ABC and Customer Relation Management (CRM) help companies analyze their customers, costs, and profitability and help them align with their strategic goals (Anderson, Brad, 2004). In a bank, ABC was applied to clarify the relationship between resources and product or customer costs (McDonald, Robert, 2004). An ABC initiative helped Kimberly Clark change its internal process and also convince its customers to change the methods of shipments (Cokins, Gary, 2004). With ABC data, Mahany Welding Supply identified business activities and cost drivers more accurately, helping to improve the delivery service (Krupnicki, Michael, Tyson, Thomas, 1997). A temporary employment company used ABC to identify the performance of customer channels (Searcy, DeWayne, 2004).

To make decisions on strategic issues

At Carrier Corporation, ABC data was used to calculate the financial benefits of reducing cycle times, raw material, work-in-process inventories, and storage space requirements as well as to make decisions on operation outsourcing (Kaplan, Robert, 1997). ABC efforts at Reichhold, Inc. improved the company's capacity management, cycle times, value-added pricing decisions, and analysis of a manufacturing plant (Palmer, Richard, 1998). For small manufacturing companies, ABC showed that most of the costs calculated for large jobs were lower under the volume-base model than the ABC model. ABC also discovered that profitability began to decrease at certain job sizes (Needy, Kim, Nachtmann, 2003). Website applied ABC to guide resource allocation and decision making (Zeller, Thomas, 2001)

To address external negotiation issues

ABC data helps companies better negotiate contracts with outside vendors. The Hospice of

Central Kentucky negotiated with insurance companies and set payment terms that are more advantageous for the hospital (Baxendale, Sidney, 2000). The ABC data also prompt management to educate referral sources to bring patients to hospital before acute care becomes necessary. GE Capital Commercial Services implemented ABC to prevent losses resulting from underbidding (Byerly, Davis, 2003).

It seems most of the ABC applications start with identifying the cost of production or service delivery and then proceed with either improving efficiency or changing the workflow or activities to make the business process more effective. In several instances, the ABC initiatives were further extended to make strategic decisions addressing the corporate level issues such as business alignment or competitive decision making. It clearly shows that ABC has been applied to a wide range of industry sectors and functional domains.