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Shannon Anderson
Shannon Anderson
Overview
New Beginnings:
Cost management in the new manufacturing setting Lessons from the field Articulation of the ABC model
Investigating the economic model of ABC Implementing ABC Using ABC: Activity-based management
to learn how firms are modifying their accounting and control systems to help them manage in the new manufacturing environment, I visited a select set of innovative firms.
Cases
One Company reorganized manufacturing to create a One cost pool smooth production flow, but
benefits from reorganization were impossible to quantify the accounting system accumulated only total project costs there was no way to compute productivity measures or unit costs for items being produced using the new manufacturing philosophy
But continued to use a standard costing system that allocated all costs based on often obsolete direct labor costs, even though direct labor represented less than 10 percent of total Inappropriate manufacturing cost. cost driver
Conclusion
I had hoped to be able to document the incidence and value of innovative accounting and control systems for the new industrial competition I found that changes in accounting lag far behind changes in the real production phenomena they are supposed to represent.
Defining the Contours of Cost System Design know that Bob is Did you
Mayers Tap (Cooper, 1984) Seligram, Inc. (Turney and Ittner, 1988) Bridgeton Industries (Bost and Cooper, 1990)
ranked #8 in all time cumulative case unit sales with 1.5 M units sold?
John Deere Component Works (March & Kaplan, 1987) [#3 most popular case] American Bank (Kallapur and Kaplan, 1987)
New Beginnings:
The Design of Cost Management Systems
(Cooper and Kaplan, 1991)
The previous academic approach emphasized cost analysis for isolated, wellspecified decisions The new approach of this book emphasizes principles of cost systems design.
Activity-based Costing
Assign costs to ACTIVITIES that are associated with the production of particular products the delivery of particular services The COST DRIVERS used to assign costs reflect the underlying unit of variability of the cost --- costs often vary with activity level rather than production volume Costs often vary in a hierarchical fashion as compared to unit production volume: e.g., unit, batch, product, facility-sustaining
= 1000%
Product A Cost per unit What does direct labor have to do with overhead costs in an Direct Material $ 20 automated setting with diverse Direct Labor $ 50 processes? Overhead Total $500 ($50 x 1000%) $ 570
Appropriate cost drivers: - variability: unit, batch, etc. - measurement: frequency, duration, direct charge
Assign costs to activities that are associated with new cost objects
the operation of particular processes the support of particular customers the use of particular suppliers
Time-driven ABC:
to reduce the cost of system implementation and maintenance to reflect the cost of unused capacity
Use cost accounting data to affect future costs rather than simply reflecting past costs activity-based management
Kanthal (Kaplan, 1989) [Bobs #1 most popular case] Cooperative Bank (Datar & Kaplan, 1995) [#4 most popular] Dakota Office Products (Kaplan, 2001) Owens and Minor (Narayanan & Brem, 2002)
Texas Instruments (Ittner & Kaplan, 1988) Indianapolis City Services (Kaplan, 1996) [#7 most popular]
Continuous Improvement (Kaizen) Radical Redesign of Products or Processes (Target costing, Business Process Re-engineering) - Reduce the usage of the cost drivers - Reduce the cost per unit of the driver
One cost system isnt enough (Kaplan, HBR 1988) Measure costs right: Make the right decisions (Cooper and
Kaplan, HBR 1988)
Contribution margin analysis: No longer relevant/ Strategic cost management: The New Paradigm (Kaplan, JMAR
1990)
Activity-based systems: Measuring the costs of resource usage (Cooper and Kaplan, AH 1992)
Costs of product and process complexity (Banker et al. 1990) Simultaneous estimation of cost drivers (Datar et al. 1993) Are overhead costs strictly proportional to activity? Evidence from hospital service departments (Noreen & Soderstrom, 1994) Measuring the impact of product mix heterogeneity on manufacturing overhead cost (Anderson, 1995) An empirical analysis of manufacturing overhead cost drivers
(Banker, Potter & Schroeder, 1995)
The activity-based cost hierarchy, production policies, and firm profitability (Ittner, Larcker & Randall, 1997) A field study on the limitations of ABC when resources are provided on a joint and indivisible basis (Maher & Marais, 1998)
A perspective on cost drivers (Dopuch, 1993) Aggregation, specification and measurement errors in product costing (Datar & Gupta, 1994) Product costing and pricing (Banker & Hughes, 1994) Allocations of sunk capacity costs and joint costs in a linear principal-agent model (Hemmer, 1996) On the efficiency of cost-based decision rules for capacity planning (Balachandran, et al. 1997) Activity-based costing systems and incremental costs
Hong 1999) (Bromwich &
Strategic Cost Analysis: The evolution from managerial to strategic accounting (Shank & Govindarajan, 1989) Manufacturing configuration, capacity and mix decisions considering operational cost (Karmarkar & Kekre, 1987) Relevant costs, congestion and stochasticity in production environments (Banker, Datar & Kekre, 1988) Explaining plant-level differences in manufacturing overhead: structural and executional cost drivers in the world auto industry
(Ittner & MacDuffie, 1995)
Direct and indirect effects of product mix characteristics on capacity management decisions and operating performance
(Anderson, 2001)
(Anderson,
Predicting earnings using a model based on cost variability and cost stickiness (Banker & Chen, 2006)
Implementing ABC
Implementing ABC
ABC Implementation as Organizational Change
Implementing an activity-based cost system (Cooper, 1990) Implementing New Knowledge: The Case of Activity-based Costing (Argyris & Kaplan, 1994) A Framework for assessing cost management system changes: The case of ABC implementation at General Motors, 1986-1993
(Anderson, 1995)
An empirical analysis of firms implementation experiences with activity-based costing (Shields, 1995) Towards explaining ABC failure: accounting and control in a decentralized organization (Malmi, 1997) Cost and Effect: Using integrated cost systems to drive profitability and performance (Kaplan and Cooper, 1998) Product diversity and costing system design choice: field study evidence (Abernethy et al. 2001)
Implementing ABC
ABC Implementation: an International Phenomena
National culture and ABC systems (Brewer, 1998) ABC costing diffusion across organizations: An exploratory empirical analysis of Finnish firms (Malmi, 1999) ABC in the U.K.s largest companies: A comparison of the 1994 and 1999 survey results (Innes et al., 2000) Note on a New Zealand replication of the Innes et al. U.K. ABC survey (Cotton et al., 2003) Managers divided: Implementing ABC in a Portuguese telecommunications company (Major & Hopper, 2005)
Implementing ABC
Evaluating the Impact of ABC Implementation
Case and Field studies The impact of contextual and process factors on the evaluation of activity based costing systems (Anderson & Young, 1999) Factors influencing the performance of activity based costing teams (Anderson, Hesford & Young, 2002) Large sample: surveys and archival financial data Measuring the success of activity-based cost management and its determinants (Foster & Swenson 1997) The association between activity-based costing and manufacturing performance (Ittner, Lanen & Larcker, 2002) The impact of ABC techniques on firm performance (Kennedy &
Affleck-Graves, 2001)
The association between ABC and improvement in financial performance (Cagwin & Bouwman, 2002)
Implementing Activity-based Cost Management: Moving from Analysis to Action (Cooper, Kaplan, Maisel, Morrissey & Oehm, 1992) Flexible budgeting in an ABC Framework (Kaplan, 1994) New Roles for Management Accountants (Kaplan, 1995) Cost and Effect: Using integrated cost systems to drive profitability and performance (Kaplan & Cooper, 1998) Measuring and managing customer profitability (Kaplan & Narayanan, 2001) The incidence, perceived merit and antecedents of customer accounting (Guilding & McManus, 2002) The value of ABC in competitive pricing decisions (Cardinaels et al., 2004) Interorganizational cost management and relational context (Cooper &
Slagmulder, 2004)
An experimental investigation of the effect of cost information and feedback on product cost decisions (Gupta & King, 1997) Fairness, Ethics and the effect of management accounting on transactions costs (Luft, 1997) The effects of alternative types of feedback on product-related decision performance (Briers et al. 1999) Cost knowledge and cost-based judgment performance (Dearman &
Shields, 2001)
Avoiding accounting fixation: Determinants of cognitive adaptation to differences in accounting method (Shields, 2005)
Increased infrastructure costs Cost behavior (e.g., stickiness) Interorganizational (boundary of the firm) cost management: transaction costs, trust and intangible assets Risk management: managing uncertainty and volatility of costs Cognitive bias and other behavioral influences on cost management decisions Agency issues in cost management
Managerial Behavior
Conclusion
I had hoped to be able to document the incidence and value of innovative accounting and control systems I found that changes in accounting lag far behind changes in the real production phenomena they are supposed to represent.
Effective managerial accounting systems must reflect the value-creating activities of companies: in operations, in marketing and sales, and in product and process development (Kaplan, 1985)