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Activity-Based Costing: A Tool for Manufacturing

ABC is a strategic weaoon in the Quest for comoetitive oosition.

By Peter B.B. Turney, Ph.D.

This article exammes rne role of at the Portable Instrument Division What is Manufacturing
actiVity-based costing in the of Tektronix reacted to inaccurate Excellence?
achievement of manufacturing ex- cost information by selecting de- Manufacturing excellence is the
cellence. It describes manufacturing signs that increased cost without deliberate and continuous improve-
excellence and the product cost in- adding value to the customer. 2 The ment of all activities within a manu-
formation requirements of managers conventional system at this Division facturing company with the goal of
who seek to achieve it. It shows also encouraged management of the achieving a competitive advantage.
how conventional product costing allocation and absorption of over- This continuous improvement takes
fails to meet these needs, and dem- head rather than the elimination of place within the framework of a
onstrates how activity-based cost- waste.' . competitive strategy that uses mar-
ing corrects these deficiencies. It In contrast, activity-based cost- ket, environment, and technical op-
explains how managers in manufac- ing is a costing technology that pro- portunities to achieve a favorable
turing companies can use activity- vides information for achieving ex- competitive position in an industry.
based costing for strategic, product cellence in manufacturing. (This Manufacturing excellence re-
design, and continuous improve- technology has been named "ABC" quires success in three broad types
ment purposes. Finally, the article despite the use of this term in inven- of activity. First, managers must se-
lays to rest fears that activity-based tory control and Pareto analysis). lect and implement strategies based
costing may be too costly and com- ABC traces costs to products ac- on an understanding of the relative
plex to be compatible with manu- cording to the activities performea profitability of those strategies. Sec-
facturing excellence. on them. The result is accurate cost ond, products must be designed to
chieving and sustaining a com- information for three purposes: fo- profitably meet the needs of custom-
A petitive advantage via manufac-
turing excellence requires attention
cusing manufacturing strategy, de-
signing prodUCts to increase custom-
ers identified by the chosen strate-
gies, and to facilitate excellent man-
to all aspects of manufacturing per- er value, and continuously improving ufacturing. Third, managers must
formance. This attention requires operating activities throughout the strive for continuous improvement in
that managers have information that manufacturing organization. all operating activities. This continu-
helps them choose correct strate- ous improvement has several objec-
gies, improve product design, and A manufacturing company tives:
remove waste from operating activi- that implements a successful Eliminate waste.
ties. program of continuous Reduce leadtimes for:
Conventional product costing improvement sees a -Customers
systems provide little information on simultaneous change in key -Materials
these sources of competitive advan- - Tooling and engineering
tage. Schrader Bellows found that
operating characteristics. changes
the product costs generated by their - New product introduction.
conventional system were so inac- The recent emergence of ABC
Increase quality.
curate they encouraged manage- IS timely because rapid technological
change and global competition have Reduce cost.
ment to adopt strategies which in-
increased the need for accurate cost Develop people: Increase skill,
hibited the improvement of
information. At the same time, de- morale, and productivity.
manufacturing.' Product designers
clines in the cost of processing and Improve continuously.'
capturing data have reduced the l>
cost of building new systems.

Summer 1989 13
A manufacturing company that products cause cost. They therefore labor cost from a product will result
implements a successful program of make the individual product item the in a reported savings of $5 of over-
continuous improvement sees a si- focus of the cost system design. head.' In reality, not only has the
multaneous change in key operating Conventional systems use cost driv- engineering department not gone
characteristics. Cost will come ers' that are attributes of the prod- away, the design change is likely to
down, quality will go up, and the uct item such as direct labor hours, Increase overhead due to the in-
gain in flexibility will enhance cus- machine hours, or material dollars. creased demand for engineering
tomer service. These improvements Conventional product costing change-related activities.
increase the odds that the company systems may report accurate prod- Activity-Based Costing Systems
will implement its strategy success- uct costs where overhead activity is Underlying ABC is the assump-
fully. consumed in relation to production tion that activities consume re-
What do Managers Need from a volume. Benefits for direct employ- sources and products consume ac-
Product Costing System to ees may be related to direct labor, tivities. Activities include establishing
Achieve Manufacturing for example, and power costs may vendor relations, purchasing, receiv-
Excellence? be related to machine hours. ing, disbursing, setting up a ma-
Managers need product cost in- Product costs may be inaccur- chine, running the machine, reorgan-
formation to help them achieve man- ate, however, where overhead activ- IZing the production flow, redesign-
ufacturing excellence. They need ities are not related to volume. Ing the product, and taking a cus-
accurate costs for strategic and Volume-unrelated activities are com- tomer order. The performance of
mon in many manUfacturing set- these activities triggers the con-
product design purposes. They re-
quire information on operating activi- tings, and include setups and engi- sumption of resources that are re-
ties to guide continuous improve- neering changes. There are a corded as costs in the accounts.
ment in these activities. This must number of documented examples of The activities are performed in re-
all be provided by a system whose such settings, such as in the screw sponse to the need to design, pro-
cost does not exceed the benefits machine shop of the John Deere duce, market, and distribute prod-
prOVided. Component Works, where conven-
Product costs are used by man- tional systems report inaccurate
agers to make strategic and design product costs.' In manufacturing settings
In manufacturing settings where
decisions. More accu rate product
volume-unrelated activities are sig-
where volume-unrelated
costs reduce the chances that incor- activities are significant,
rect decisions will be made. The nificant, conventional product costs
do little to enlighten managers' un- conventional product costs do
cost of making incorrect decisions
and the need for accurate product derstanding of the relationship be- little to enlighten managers'
costs are determined by the level of tween the operating activities that understanding of the
competition in the firm's markets. 5 generate the overhead cost and the relationship between the
Managers also need activity- products. In the absence of proper operating activities that
information, managers tend to rely
level information from the product
on across-the-board overhead cuts
generate the overhead cost
costing system to guide continuous and the products.
improvement. Activities are process- to control spending.
es or procedures that cause work. Such well intentioned efforts are
doomed to failure. They do not ad- Each product picks up cost in
Activity level information allows ABC according to the number of
managers to identify and eliminate dress the demand for overhead
resources - the activities that keep driver units consumed. If the number
waste in these processes and pro- of times shipped is a driver, for ex-
cedures. It also confirms progress at people busy. Deterioration in the
quality of service and pressures on ample, a product will pick up the
removing waste from operating ac- cost of shipping activities according
tivities.' an overburdened staff prompt re-
newed spending, and overhead to the number of times the product
Managers who are working hard
creeps up again. is shipped multipiied by the cost per
to simplify manufacturing and elimi- shipment. This cost is divided by the
nate waste do not wish to introduce Conventional systems also con-
vey messages that may encourage number of product items to get the
a product costing system that is ex- cost per product item (Fig. 1). This
cessively costly to design, imple- decisions that conflict with manufac-
turing excellence. A direct labor- view of the economics of manufac-
ment, and run. This cost should not turing is radically different from the
exceed the perceived benefits of the based overhead rate, for example,
may cause design engineers to be- conventional view, and may report
system. Nor must the system be more accurate product costs.
more complex than is necessary to lieve that product design should em-
phasize the elimination of direct Consider the case of a compa-
achieve the required benefits. 7 ny that produces two different prod-
labor cost. The costing system tells
Conventional Product Costing them that direct labor is very expen- ucts requiring different levels of at-
Systems sive. Where the direct labor over- tention from engineering (Fig. 2).
Conventional product costing head rate is 500 percent, a design Product A uses a lot of direct labor
systems assume that individual change that will remove $1 of direct

14 Target
How Activity-Based Costing Works: but has been in production for some
The Shipping Example time and most bugs have been elim-
inated. Product D, however, is a
Plant shipping cost $100,000 new product that is designed to re-
quire less direct labor. It still has
Number of shipments 1000
production and quality problems that
Cost oer shioment = $100 require a number of engineering
Product A Product B ABC traces the costs of engi-
neering change activities via a cost
Volume 1000 1000 driver, such as the number of engi-
Number of shipments 2 20 neering change orders, to the prod-
uct that receives the benefit of this
Product shipping cost $ 200 $2000 activity. Product B required 10 engi-
neering change orders, versus two
Cost per product item $ 0.20 $ 2.00
for Product A, so Product B picks up
an amount of cost that reflects its
Each product consumes cost according to its specific use of the shipping activity use of engineering time.
Product A Is shipped Infrequently In large lots. Relatively little shipping cost is Traditional product costing,
therefore traced to this product. however, traces engineering cost
Product B requires Just-In-Time (JIT) delivery. The higher shipping cost traced to using direct labor. This volume-
this product reflects its frequent shipment. related driver traces an equal
The cost 01 an Individual shipment is determined by the efficiency with which this amount of engineering cost to each
actiVity Is performed. direct labor hour. Product A ac-
Nate: This example assumes that the resources reqUired for each shipment of
Products A and B are the same. counts for three labor hours per unit,
versus two for product B, so product
A picks up engineering cost that ex-
ceeds its actual consumption of this
How ABC Can Correct the Inaccuracies of activity. Product B, with only two di-
Conventional Costing rect labor hours, receives less engi-
Product C Product D Total neering cost than it deserves.
This miscosting-where one
Production Volume 1000 500 product picks up cost that rightly be-
Cost per engineering change $1000 $1000 longs to another - is known as
Number of engineering changes 2 10 cross-subsidy. Cross-subsidy occurs
in conventional systems because
Total cost of engineering changes $2000 $10,000 $12,000 volume-related cost drivers fail to
Direct labor hours per unit 3 2 trace volume-unrelated activities cor-
Total direct labor hours 3000 1000 4000 rectly. In contrast, ABC eliminates
cross-subsidy by using volume-
Engineering change cost per direct
unrelated cost drivers, such as the
labor hr.($12,000/4000) $3.00
number of setups, to trace the cost
ABC overhead cost ~er unit $2.00 $20.00 of volume-unrelated activities to the
(C = $2000/1000 0 = 10,000/500) product.
The process of designing and
Conventional overhead cost per unit $9.00 $6.00 implementing an ABC system yields
(C = $3.00 x 3 direct labor hours
a wealth of information on operating
o = $3.00 x 2 direct labor hours)
activities that can be used by man-
agers to eliminate waste. This infor-
Fig. 2. mation includes an identification of
Product A requires relatively little engineering attention. It picks up a lot 01 activities performed in the organiza-
engineering cost, however, under a conventional system that loads overhead onto tion, a determination of the cost of
direct labor.
Product B, in contrast, reqUires a lot 01 engineering attention. It receives relatively each of these activities, an identifi-
little engineering cost in the conventional system because it uses little direct labor. cation of where in the organization
ABC corrects these errors by tracing engineering costs to the two products based the activities are performed, and the
on a driver-engineering changes-that is chosen to reflect the consumption 01 consumption of these activities by
engineering resources. individuai products.
Note: This example assumes that each engineering change consumes the same For example, in Fig. 3 the ABC
amount of resources. If this assumption is not true, the design of the ABC system system shows that two activities are
can be modified to reflect these differences.
performed in the process engineer-
ing department: performing setups
Summer 1989 15
and making engineering changes to ABC Reveals Information About Operating Activities
products. Each of these two activi-
ties is performed in two different de-
partments (Departments 1 and 2). In
each department the activities are Process
consumed by products according to Engineering
the demand for setups and engi-
neering changes of each product.
Using Activity-Based Costing to
Focus Manufacturing Strategy
ABC can radically change the
way managers determine the mix of
their product line, price the products,
identify the location for sourcing
components, and assess new tech-
nology. It provides a realistic eco-
nomic picture of the impact of these
decisions on activity consumption.
Consider the case of Schrader
Bellows." This manufacturer of
pneumatic valves changed its prod-
uct mix over time by introducing low-
volume specialty products into its #Setups #Eng. Chg.* #Setups #Eng. Chg.*
line. Each of these products con- Dept. 1 Dept. 1 Dept. 2 Dept. 2
sumed engineering, procurement,
quality, setup, and other activities. Products Engineering changes
Introducing one or even a handful of
these products did not require the
hiring of a new engineer, purchaser, "t'
ABC decomposes each functional area into its component actlvlles.
inspector, or setup person. But over Activities are grouped together to reflect similarities of location or type. .
time, as new products were added, The consumption of the activities by the products is measured by cost drivers such
the demand for these activities in- as the number of setups and the number 01 engineering change orders.
creased to the point where new staff
were required. company for the additional activities major impacts on the type of activi-
The introduction of these low- required by the products. ties required and the way they are
voiume specialty products was, in ABC also helps management performed. ABC can model these
part, a response to information re- understand the impact of sourcing changes accurately and provide
ported by Schrader Bellows' con- decisions. Sourcing decisions often management with the data required
ventional direct labor-based product focus on the elimination of direct for an economic analysis,
costing system. This system showed labor that results from using outside
that the low-volume specialty prod- sources but ignore the additional ac-
ucts cost about the same as the The process of designing and
tivities required to coordinate with implementing an ABC system
high-volume standard products. The the vendor. These activities may in-
cost system reported that they were clude qualifying the vendor to make
yields a wealth of information
among the most profitable products the sub-assembly, shipping compo- on operating activities that
sold by the division. nents to the vendor's plant, receiv- can be used by managers to
A new ABC system, however, ing and processing the ~mplet~d eliminate waste.
showed that these low-volume prod- sub-assemblies, monitOring quality
ucts were more costly than had and delivery, and processing pur-
been previously thought. ABC re- Using ActiVity-Based Costing for
chase orders and invoices. ABC Product Design
ported that their costs, in most provides the insights needed to
cases, were 100 to 1000 percent Using ABC to understand the
weigh the impact of these activities impact of alternative product designs
greater than the previously reported on the sourcing decision.
standard costs. Using this informa- is the key to using design as a tool
ABC also allows managers to of manufacturing excellence. Prod-
tion, management was able to con- understand the impact of new proc-
sider a range of alternatives, such uct design determines the activities
ess technologies. Introducing a new that are consumed by the products.
as dropping certain products, in- technology such as surface mount
creasing their price, or changing ABC allows design engineers to
equipment, improving re- understand the impact of different
their design, that would simplify duce inspection, and reorganizing
manufacturing or compensate the designs on product cost and fleXibili-
the plant layout to create a continu- ty. Product cost can be reduced by
ous linear flow of product all have

16 Target
using designs that diminish the de- Product XYZ Summary Bill of Activities
mand for high-cost activities. Prod-
uct cost can be reduced and manu- Activity Cost
facturing flexibility improved by
designing families of products that Receiving $1.87
use many of the same activities. Procurement 2.19
Hewlett-Packard's Roseville
Network Division, for example, de- Raw material inventory 2.99
veloped an ABC system to guide
Finished goods inventory 1.34
product design." An early design of
the system used the number of in- Engineering changes 4.75
sertions as a cost driver, but did not
distinguish between axial and DIP Rework 2.88
(dual in-line processor) insertions.. Quality 1.34
As a result, the design engineers did
not distinguish between these two Setup 5.21
types of components on the basis of Manufacturing-Dept. 4.12
insertion cost. A study based on
ABC technology, however, showed Manufacturing-Dept. 2 2.02
that axial insertions were about one
Total Product Overhead $28.71
third the cost of DIP insertions. The
ABC system was modified to differ- Fig. 4. The summary bill of activities groups e~ch prodUct's activities according
entiate between axial and DIP inser- to meaningful economic or functional categories: ..
tions. The engineers then used this Activities performed in a single functional area-such as receiving-may be
information to guide subsequent grouped together to show the impact of that department on the cost of each
product designs.
Activities may be summarized by economic . types. . that
of activity arei t
unre a ed to
Using Activity-Based Costing for organizational structure. Quality-related actiVities, for exa~ple, may be. performed
Continuous Improvement in various parts of the organization. They, may be summarized In the bill of
ABC provides critical informa- activities, however, to show each product s total cost of quality.
tion to support the process of con-
tinuous improvement in manufactur- Kanban was the trigger for a call to away to a site adjacent to the
ing. ABC maps the company's the vendor to replenish the parts on screwmachine manufacturing area,
activities and describes the cost the Kanban. Manufacturing pro- eliminating the cost of moving the
structure of the products in terms of posed to track the impact of this parts."
activity consumption. change using ABC.
Identifying the activities that are Is Activity-Based Costing
The activity-based product cost Consistent with Manufacturing
performed in each area of the com- structure in ABC also provides im-
pany provides management with in- Excellence?
portant performance information for A company that implements an
sights into eliminating activities or management. This cost structure
improving the efficiency of activity ABC is adding a new system that
- referred to as the bill of activities requires design, training, and main-
performance. Northern Telecom, for -describes each product's pattern
example, used ABC to identify rec- tenance resources. An important
of activity consumption. The bill may test of a new system is whether it
ommended changes in procurement summarize activities consumed by a
activities and to monitor progress contributes to the goals of manufac-
product into economic or functional turing excellence-eliminating
when the changes were implement- groupings such as receiving, pro-
ed. Prior to the changes, the buyer waste, and improving quality and
curement, engineering changes, and flexibility. Otherwise the system
received a weekly printout of the quality (Fig. 4). The bill may also
production plan and material re- adds unnecessary compiexity and
provide detailed information on the becomes a waste itsel!. Robert W.
quirements. The buyer visited the activities themselves (Fig. 5). In both
stockroom to compare the require- Hall made this point well in his dis-
cases the bill of activities is a source cussion of Shigeo Shingo's seven
ments with the quantity on hand. I! of information for setting manufac-
there was a shortfall, the buyer wastes of manufacturing:
turing excellence targets for process
called the vendor and placed an "Were he more familiar with Western
and design improvement.
order. manufacturing, Shingo might have
In the case of the screw ma-
After studying the cost of this added an eighth waste: unneces-
chine shop at John Deere Compo-
procurement activity as reported by sary measuring, recording, and
nent Works, for example, review of
ABC, Northern Telecom replaced managing in an effort to deal with
the bill of activities of screw machine
the above procedure with a trigger unnecessary complexity. "15
parts showed that the movement of
based on Kanban quantities in the parts was a costly activity. This in- It is my belief-based on the
assembly area. A red flag on a sight led management to move a . experience of managers using ABC
heat treatment facility from one mile I>

Summer 1989 17
in a variety of manufacturing Product XYZ Detailed Bill of Activities
situations - that a properly-designed
ABC does not add unnecessary
Activities Cost
complexity. It is a tool for the reduc-
tion of waste and the improvement
Raw Material Inventory:
of manufacturing:
1. ABC helps managers under- # of raw material shipments $1.02
stand and eliminate waste.
ABC provides a road map to # of purchased part shipments 1.33
the complexity of a manufac-
# of setups 0.64
turing organization. It de-
scribes and costs the activi- $2.99
ties being performed. It helps
management understand an Quality:
important source of
complexity-the demands # of setups $0.88
placed on the organzation by # of purchase orders received 0.46
a diverse range of products.
Once managers understand $1.34
what is keeping the organi-
zation busy and where the Fig. 5. The detailed bill of activities lists the activities, and the cost of each
demands for activities come activity, required to design, produoe, and distribute a product.
from, they focus on eliminat- Each activity in the bill is described by its cost driver. The cost driver measures the
ing both the demand for the use of the actiVity by the product.
activity and possibly the ac- The bill of activities shows how each product uses activities. and how much that
tivity itself. use costs, in the manufacturing organization.
This example bill shows three raw material inventory activities and two quality
2. ABC helps prevent product activities. A bill that lists all the activities of a product can be quite extensive if the
design and marketing from product is complex.
placing unreasonable de- Reducing product cost reqUires product or process improvements thai reduce the
mands on production. ABC demands for activities and reduce the resources required by each actiVity.
is a tool for communicating
10 product design and mar- data base like the number of programs have eliminated
keting the impact their deci- production runs. The ABC activities such as incoming
sions have on production. designer can also take ad- inspection and receiving
With the information an ABC vantage of design rules that -requires a simple ABC
provides, the engineers can simplify the system without system. In one organization
avoid designs, such as those sacrificing the accuracy of that was well advanced in its
with a high part count, that product cost. For example, manufacturing improvement
create complexity (as mea- tasks that are performed at program, for example, the
sured by ABC) without add- the same time, such as ABC system used just two
ing features valued by the changing the tools on a ma- product drivers - cycle time
customer. Marketing can pick chine and inspecting the first and part numbers-to mea-
strategies that avoid product part, can be combined as sure the consumption of ac-
proliferation which creates one activity with one cost tivities by the products.
complexity unjustified by driver such as the number of Conclusion
added customer value. setups." ABC is used in a number of
3. ABC system design avoids 4. The complexity of an ABC ways to support manufacturing ex-
unnecessary complexity. system matches the com- cellence. ABC provides information
The cost of designing, imple- plexity of manufacturing. A for strategic decisions, such as
menting, and maintaining an complex manufacturing organ- product mix and sourcing decisions,
ABC can be reduced by sim- ization will require a system that is consistent with the long-run
plifying its design. The ABC that is sufficiently detailed to nature of these decisions. ABC al-
designer can avoid using capture the patterns of activi- lows product designers to under-
data that are not already ty performance and con- stand the impact of different designs
available within the compa- sumption. A simple manufac- on cost and flexibility and modify
ny. In some companies, for turing organization - such as their designs accordingly. ABC sup-
example, he can take advan- one where products of simi- ports the continuous improvement
tage of data that already lar design are built on a sin- process by allowing management to
exist in the manufacturing gle line as a family of prod- gain new insights into activity perfor-
ucts and/or where
manufacturing improvement

18 Target
Using Activity.Based Costing for 'Robin Cooper, "Schrader Bellows," 9-186-
272 (Boston: Harvard Business School),
Behavioral Change 1986.
Some companies use ABC as a behavioral tool to focus attention on one
'Robin Cooper and Peter B.B. Tumey, "Tek-
or two critical aspects of manufacturing excellence. The Portable Instru- tronix: The Portable Instrument Division (A),
ment Division of Tektronix, for example, used ABC to drive down the part (B), and (C)," 9-188-142/3/4 (Boston: Har-
count and the number of vendors. These reductions were considered vard Business School), 1988.
critical to accomplishing cost, quality, and flexibility goals of their manu- 'Peter B.B. Turney and Bruce Anderson, "Ac-
facturing excellence program. counting for Continuous Improvement,"
This division used the number of part numbers as a product driver Sloan Management Review, Winter 1989.
for procurement, storage, receiving, and part data base maintenance 'Robert W. Hall, Attaining Manufacturing Ex-
activities. Because each part number received the same cost regardless cellence, (Homewood, IL: Dow-Jones Irwin,
of volume, the cost per part was much less for high-volume part num- 1987), p.22.
bers than for low-volume part numbers. This situation made it more 'Robin Cooper, "The Rise of Activity-Based
expensive for the product designer to use a low-volume unique compo- Costing-Part Two: When Do I Need an
nent than a high-volume common component. Actlvlly-Based Cost System?" Joumai of
Cost Management, Fall 1988, Vo1.2, No.3,
The result was that the design engineers used substantially fewer pp.41-48.
unique components in their product designs. The part count for the
division fell from about 6000 to 1500 in three years, while the number of 'H. Thomas Johnson, "ActiVity-Based Infor-
mation: Accounting for Competitive Excel~
vendors fell from over 1500 to less than 200 in the same time period. lence," Target, Spring 1989.
Procurement overhead fell, quality improved, and several products that
had previously been produced on separate lines were now produced on 'Robin Cooper, "The Rise of Activity-Based
Costing-Part Two: When Do I Need an
the same line. ActiVity-Based Cost System?"
In another case, Zytec, a manufacturer of power supplies, used
cost drivers to focus attention on the need to reduce the elapsed time 81n this context, a cost driver is a measure of
the consumption of activities by the product.
from the time orders were placed for components to the time the
finished product was shipped to the customer. Order leadtime for com- 9Robert S. Kaplan, "John Deere Component
ponents was used as a cost driver to trace the cost of procurement Works," 9-187-107/8 (Boston: Harvard Busi-
ness School), 1986.
activities to the product. Manufacturing cycle time was used to trace
manufacturing overhead to the product. This focus on elapsed time was 1Dlrect labor overhead rates In excess of
consistent with a manufacturing strategy that emphasized cost, quality, 500 percent are not unusual In IOOay's man-
ufacturing environment where direct labor
and flexibility-all three of which the company believed were a function has declined and overhead has increased
of time. as a percent of manufacturing cost.
11 Much of this section is based on the work of
mance, by focusing attention on the the manufacturing environment. An Robin Cooper. See, for example, "The Rise
sources of demand for activities and ABC for a simple manufacturing set- of Activity-Based Costing-Part One: What
by permitting management to create ting, for example, will be a simple is an Activity-Based Cost System?" Journal
a behavioral incentive to improve system. of Cost Management, Summer 1988, Vo1.2,
No.2, pp.45-54.
one or more aspects of manufactur-
ing. 12Robin Cooper, "Schrader Bellows."
ABC is a tool for managing ABC ... is also a
13Robin Cooper and Peter B.B. Tumey,
complexity in manufacturing. ABC communication tool between "Hewlett Packard: The Roseville Network
provides activity-based information production and marketing and Division" (Boston: Harvard Business
School), 1989.
to help managers understand and product design that helps
eliminate complexity. It is also a minimize product changes 14Robert S. Kaplan, "John Deere Component
communication tool between pro- which create unnecessary Works."
duction and marketing and product complexity. 15Robert W. Hall, Attaining Manufacturing Ex-
design that helps minimize product ceiience, pp. 24-25.
changes which create unnecessary
complexity. The experience of the compa- "Robin Cooper, "The Rise of Activity-Based
The benefits of ABC can be nies described in this article shows Costing Part 3: Determining the Number
achieved without designing a system that ABC is a strategic weapon in and Nature of Cost Drivers," Journal of
Cost Management, Winter 1989, Vo1.2,
that is more complex than neces- the on-going quest for competitive No.4, pp.34-46.
sary. The ABC designer can use the position in manufacturing. For these
rules of ABC design to simplify the companies, ABC is an indispensa- Author:
system without sacrificing the accu- ble, flexible, and cost-effective tool Peter B.B. Turney, Ph.D, is the Tektron-
racy of product cost. A well- for manufacturing excellence that is ix professor of cost management, Port
tailored to the needs of their com- land State University, Portland, OR.
designed ABC system will also have
no more detail than that required by petitive and manufacturing condI-

Summer 1989 19