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Three recent articles in Accounting Horizons have considered the role of flexible budgeting and variance analysis in the context of activity-based costing (ABC). Cooper and Kaplan (1992) considered only activities where resources are fixed (committed) in the shortterm and argued that flexible budgeting and variance analysis will have a limited role for managing the costs of these activities. Two papers in the June 1994 issue of the journal considered activities with both short-term fixed and short-term variable (flexible) components but arrived at what appear to be different approaches to flexible budgeting and variance analysis. Mak and Roush (1994) adapted conventional flexible budgeting and variance analysis to the ABC context and proposed the computation of price and efficiency variances for variable activity costs, and budget and capacity variances for fixed activity costs. Kaplan (1994) showed the computation of a combined spending variance for fixed and variable activity costs, and the breakdown of the unused capacity cost into two components: a budgeted unused capacity cost and a capacity utilization variance. This commentary reconciles the approaches proposed by Mak and Roush (1994) and Kaplan (1994), highlights the similarities and differences, and the different insights which are provided.
COOPER AND KAPLAN (1992)
Cooper and Kaplan (1992) considered activities with resources that are fixed (committed) in the short term. They recognize the importance of distinguishing between the behavior of activity costs for the purposes of calculating long-run product costs and the actual short-run behavior of these costs. According to them, in many cases, activity costs may be fixed in the short term, although they are variable in the long term. For activity costs that are fixed in the short term, they argued that flexible budgeting and variance analysis will have a limited role for managing these costs. They advocated comparing actual spending to budgeted spending and providing information on unused capacity to assist in activity cost management.
According to Cooper and Kaplan (1992), the unused capacity calculation provides a useful signal to managers in their attempts to manage activity costs. This calculation can either be reported in financial or non-financial terms. The non-financial measure involves comparing practical capacity or activity availability with activity usage, while the financial unused capacity calculation is the difference between activity spending (at practical capacity) and...