Activity Based Costing (ABC) System and Top Management:
Learning Objectives:
- Understand the importance of the
support of top management in the implementation of activity based
costing system.
Experts agree on several essential
characteristics of any successful implementation of
activity based costing. First, the initiative to implement
activity based costing must be strongly supported by
top level managers. Second, the design and implementation of an ABC
system should be the responsibility of cross functional team rather than of the
accounting department. The team should include representatives from each area
that will use the date provided by the ABC system. Ordinarily, this would
include representatives from marketing, production, engineering and top
management as well as technically trained accounting staff. An outside
consultant who specializes in activity based costing may serve as and advisor to
the team.
The reason for insisting on strong top management support and a multifunction
team approach is rooted in the fact that it is difficult to implement changes in
organizations unless those changes have the full support of those who are
affected.
activity based costing changes the "rules of the game" since it
changes some of the key measures that managers use for their decision making and
for evaluating individuals' performance. Unless the managers who are directly
affected by the changes in the rules have a say, resistance will be inevitable.
In addition, designing a good ABC system requires intimate knowledge of many
parts of the organization's overall operations. Top management must support the
initiative for two reasons. First, without leadership from top management, some
managers may not see any reason to change. Second, if top managers do not
support the ABC system and continue to play the game by the old rules, their
subordinates will quickly get the message that ABC is not important and they
they will abandon the ABC initiative. Time after time, when accountants have
attempted to implement an ABC system on their own without top-management support
and active cooperation from other managers, the results have been ignored.
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