Designing and Implementing Activity Based Costing (ABC) System:
Experts agree on several essential
characteristics of any successful implementation of activity based costing
system.
First, the initiative to implement
activity based costing must be strongly supported by top management. Second, the
design and implementation of activity based costing system should be the
responsibility of a cross functional team rather than of the accounting
department. The team should include representatives from each area that will use
the data provided by the activity based costing system. Ordinarily, this would
include representatives from marketing, production, engineering and top
management as well as technically trained accounting staff. An out side
consultant who specializes in activity based costing system serve as an advisor
to the team.
The reason for insisting on strong
top management support and a multifunction team approach is rooted in the fact
that implementing activity based costing system is difficult 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 activity based costing system requires intimate
knowledge of many parts of the organization's overall operations. This knowledge
can only come from the people who are familiar with those operations.
Implementation of activity based
costing system must be initiated by top management due to 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 will abandon the ABC initiative. Time after
time, when accountants have attempted to implement an ABC system on their own
with top-management support and active cooperation from other managers, the
results have been ignored.
For designing and implementing
activity based costing system, management should carefully study the existing
cost accounting system and review the articles in professionals and trade
journals. In most of the organizations, the new activity based costing system
supplement, rather than replace, the existing cost accounting system, which
continues to be used for external financial reports.
The following chart explains the
general structure of activity based (ABC) costing model.
The Activity Based Costing
Model
Cost Objects
(e.g., products and customers) |
| ¯ |
|
Activities |
| ¯ |
|
Consumption of Resources |
| ¯ |
|
Cost |
Usually, company's traditional cost
accounting system adequately measures the direct material and direct
labor costs of products since these costs are directly traced to
products. In most of the organizations activity based costing study is
usually concerned solely with the other costs of the company -
manufacturing overhead and selling, general, and administrative costs.
The activity based costing implementation team
should carefully plan about implementing activity based costing.
Implementation process may be broken down into the following six basic
steps. |
