In the wake of the protracted debate as to which costing method (Marginal or Full costing), activity based costing (ABC) approach to ascertaining the true cost of products appeared as a promising decision support tool in an era where the existing costing methods were being heavily criticised, Geri and Ronen (2005). There was a loud outcry pointing towards inefficiency and wrong performance measurement that many think is directly a product of wrong decision making. This definitely supports the view that inefficiency looked at from any perspective is deeply rooted in un-competitiveness that the traditional cost accounting method incorporated into processes and deemed it as normal. As businesses become modernised, the place of waste and inefficiency in corporate world quickly became history. A company that fails to employ the right kind of performance tools is destined to go bankrupt.
Gunasekaran et al (2005) described a framework for measuring costs and performance in what they called ‘new forms of business organization’. Managing and controlling costs and performance posses a great challenge due to the fact that great breakthrough has been made as a result of the need to reposition for the 21st century competition which is triggered by huge investment made in knowledge capital and information technology.
Malmi (1997) while seeking explanation into what many authors described as the failure of ABC proposed that the claims on ABC failure result, in part fromassessing the use and value of ABC from the decision making perspectives. Malmi (1997) argued that looking at the efficacy of ABC from the pure decision making perspective is an insufficient way of assessing the costing technique as there are loads of other areas where the application of ABC prove to be invaluable. Commenting on the usefulness of the information generated by ABC, Malmi (1997) held that in the context of strategic decision making, the success of ABC cannot depend on whether the cost information generated by the use of ABC triggers action or not but on its ability to diagnose a situation. Although he argued that some of the events that seemed to be termed failure on the part of ABC is not failure as they may merely reflect the limited appreciation of the use of accounting and control systems in practice. This is in line with the argument of Gosselin (1997) who is of the opinion that the implementation problem of ABC is company specific. Looking at these argument from the value relevance point of view of accounting information, one would be left with no choice but to conclude that using ABC is kind of misnomer as it makes no economic sense if the acclaimed perfect and accurate information generated from the laborious process of ABC will not at the end of the day be put into action.
Gupta and Galloway (2003) however strongly believe that ABC will enhance decision making when employed in the context of the framework which they called ‘operations hexagon’. The operation hexagon according to them shows how ABC provides a mechanism for integrating various operations management decisions, but, the issue still remains if the information produced from these rigorous activities is acted upon. Perfect information might be produced from the costing department for the consumption of the marketing manager who might feel inadequate and question the whole process that brought about the information. The marketing manager might feel that his or her experience in the field supersedes that of the cost accountant who sit in the office to determine the cost of product using a system that is so unfamiliar to the sales executive.
CRITICISMS, PROBLEMS AND WEAKNESSES OF ABC
Problems, criticisms and weaknesses are hallmark of every system that is formulated by human beings and ABC is no exception. From the point of view of Malmi (1997), it appeared that one of the major criticism faced by ABC is the one of information utilization. This problem of not utilising the output of the ABC process is the main bone of contention as huge amount of resources is expended in processing those cost information. Accommodating this problem will still amount to accommodating the wastes inherent in the traditional system of costing. Another major problem of ABC is the fact that it requires a complex and resource consuming formalities in gathering and processing information. This is in fact the main reason why companies that embrace ABC with high hopes all of a sudden abandon it for the old traditional cost accounting process. This development gave concern to many including Kaplan and Anderson (2005) who subsequently advocate for what he called ‘time-driven ABC’. Kaplan and Anderson (2005) are of strong opinion demonstrated in their book titled ‘Rethinking Activity-Based Costing’ than abandonment is not the solution to solving the identified problems of ABC.
Aside the physical problems of ABC, managers also face tough and stiff challenge in attempting to change the organizational structure of a company so as to provide an enabling environment where ABC can thrive. The fact that enabling environment where ABC can function without friction needs to be created before importing the system into an already existing system makes it imperative that systematic approach is employed. Any systems integrator will tell you that the problem with integrating two systems is the area of conflict resolution. This is to say that implementation problems and drawbacks of any process are not solely embedded in the process but also in the attitude and behaviours of the custodians of the process. The law of inertia established that human beings are reluctant to adapt to changes even when not adapting could be very disastrous. Those that have allowed the traditional system of allocating overhead costs tend to have some reservation about the information produced by ABC. According to Cohen et al (2005) research indicates that stretch in time schedule of ABC process, exceeding budget and inadequacy of computer software are the main culprit to be blamed for the criticism levelled against ABC system.
Another area where ABC is found wanting is in the area of assigning costs that has no solid driver. A good example is the salary of the chief executive officer (CEO). The salaries of CEOs though part of the monies spent on the work force of a company cannot be directly traced to any segment of a company or product. This is just one of the many cases where it is difficult to trace expense to any activity in an organization. One can still argue in favour of ABC as no other better alternative way of tackling the problem of costs that cannot be traced to any particular product exist. In other words, it is better to a clue to a problem than not to have at all. Just because ABC fail to assign some costs to products or services does not make it a complete failure. This is in line with the objectives of the founding fathers of ABC “…the objective of ABC is to approximately right…” Kaplan and Anderson (2005)
STRENGTHS AND BENEFITS OF ABC
The strongest claim that the proponents of ABC project is that ABC provides better and more accurate cost information that is necessary for modern days businesses to effectively and profitably compete. This claim of ABC costing method providing accurate information have been questioned by some scholars who argued that ABC is a process that sucks resources and would only be justified if the benefits that would be obtained from such investment in processing costing information is justified. Other good sides of ABC includes: (a) provision of insight into the fastest- growing and least element of cost overhead, (b) improving profitability by monitoring total life-cycle cost and performance, (c) encouraging continuous improvement and total quality control as it allows planning and control to be directed to desired direction at process level, and (d) encouraging the elimination of wastes.
Homberg (2001) while developing a mathematical model that establishes an optimal cost driver selection in the ABC process pointed out the dilemma that comes with the implementation of ABC. Aiming for high accuracy in costing will require that more cost drivers be identified which contravenes one of the features of useful information – manageability. According to Homberg (2001), the major issue in implementing ABC costing system in the selection of cost drivers as accuracy is traded off for complexity. The implication of this is that information generated through the use of ABC is not in fact as accurate as many thinks it is- Kaplan and Anderson (2005) also confirmed this.
Another benefit of ABC as indentified by Anderson et al (2002) is the fact that it provides technical knowledge to managers of a company as training is often required as part of the implementation process of ABC. This technical knowledge will be extended to other parts of the company to bear positive fruits on the bottom-line. Although this claim of Anderson et al (2002) might not work in companies engaged in other forms of business outside engineering.
ABC and performance measurement is one area in the reliability of information that ABC as a costing method generate which needs more research.