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"ABC has built our confidence during negotiations. Today we don't crumble when confronted by a customer demanding price improvements...ABC also made us more aggressive in pursuing new business--we're aggressive on bids for products that we believe our competitors are not pricing correctly."
This controller was describing the impact of an ABC project at his division.(1) But what has the situation been in regard to activity-based costing and activity-based management (ABM) at most organizations?
There has been little systematic evidence as to the design of actual ABC systems and the circumstances that would lead companies to initiate an ABC project. Few success stories of bottom-line improvement have surfaced. Is the silence because companies are unwilling to disclose information, or are there real problems with the implementation of ABC and ABM systems?
The IMA Committee on Research, together with Robert S. Kaplan, Robin Cooper, Lawrence Maisel, and the management consulting division of KPMG Peat Marwick, decided to find out what has happened when companies have carried out an ABC project.(2) Their study examined, analyzed, and synthesized the actual experiences of eight companies that implemented activity-based cost systems.
The experiences of the companies showed that activity-based cost models can be developed using a "generally accepted" set of practices with a relatively modest commitment of financial, personnel, and time resources. In developing an ABC model, the project team first identifies the activities performed by the organization's resources and estimates the costs of performing the activities. The activity costs then are linked to the organizational outputs--products, services, customers, projects, and organizational units--that benefit from the activities performed.
CASE SITES AND SCOPE
The case sites included five manufacturing organizations, a financial services company, the finance department of a large energy company, and a distribution company (see sidebar, p. 56). None of the eight sites developed a complete model of all organizational expenses in its initial effort, but, in aggregate, the eight sites included models of manufacturing operating expenses, marketing and selling expenses, distribution expenses, and general corporate overhead expenses.
All five manufacturing organizations analyzed production expenses to obtain the expenses of organizational activities and the costs of individual products. Two of the manufacturing companies also analyzed marketing and selling expenses to obtain measures of customer and market segment profitability. All the...