Contemporary Cost Accounting & Control

1. Contemporary Cost Accounting & Control EVALUATION OF ACTIVITY-BASED TECHNIQUES

2. 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

3. 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

4. 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’

5. Success and Failure of Activity-Based Techniques Based on research and literature

6. 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)

7. 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

8. 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

9. Success criteria • Decision making • Maintenance • Improved financial position • Meeting objectives • Benefits exceed costs

10. 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

11. 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’

12. Continuum of Success and Failure Total Success with Success or Failure with Complete success some failure failure? some success failure |_________|_________|_________|_________|

13. 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 ceased

14. 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.

15. 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’

16. Cases of ‘failure’ companies • Henley - failure before it began • Douglas - case of the absent Finance Director • Spicer - success or failure?

17. 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?

18. 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

19. Analysis of ‘failed’ implementation

20. Secondary reasons for failure

21. 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?

22. Success with a degree of failure • 6 companies continuing with ABT • All testify to benefits from ABT • All have met objectives to some extent BUT • None have fully met initial objectives • All state that part of the project failed

23. 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

24. Compelling business need

25. 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

26. 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!

27. 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

28. 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

29. 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?

30. 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

31. Other surveys Drury and Tayles 1999 survey of experienced CIMA members (n = 185) ABC IMPLEMENTATION Full implementation 15% Partial implementation 5% Implementation in progress 3% No implementation 77%

32. 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

33. 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)

34. 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.