Transcript 3 MA lecture 2 & 3 - School of Economics, Finance and

Contemporary Cost
Accounting & Control
EVALUATION OF
ACTIVITY-BASED TECHNIQUES
Important features of Activity-Based
Techniques
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Redefinition of ‘variable’
Expansion of cost base
Activity analysis
Costed activities
For costing need determination and
measurement of cost drivers
• For success usually requires active
cooperation between functional groups
Features of Activity-Based
Management
• Uses activity analysis and costed activities
• Usually requires activities in fine detail
• Usual objective is cost management or process
improvement
• Has many similarities with Business Process Reengineering
• Usually conducted by cross-functional ABM team
• May be used to find areas for cost savings
without damaging the effectiveness of the
business
Features of Activity-Based
Management - 2
• May use the VA v NVA classification; possibly
with a third category such as ‘sustaining’
• Frequently seen as a ‘one-off’ event, but may be
repeated - not continuous as in ABC
• May have benefits that are difficult to quantify such as ‘improved financial awareness’ or ‘better
decision making’
Success and Failure of
Activity-Based Techniques
Based on research and literature
Rationale for research
• Increasing volume of work on implementation
of ABT
• Little as yet on implementation failures (Cobb
et al, 1992; Malmi, 1997)
• Natural consequence of the research
methodology
• Practical value to companies (funding from
CIMA)
Research Design
• Data collection by interview
• 11 companies interviewed in 1993
• All had attempted to implement ABT in some
form
• Companies contacted again in early 1995 and
through to end 1997
• Accountants and functional management
interviewed - 73 individuals in total
• Longitudinal study - one of very few
Concepts of success and failure
• Success criteria - the ways in which
success can be evaluated
• Success perspectives - the different views
taken by different organisation
members
• Timescale of success - the way in which
the evaluation of success and failure
may change through time
• Features of failure and success
Success criteria
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Decision making
Maintenance
Improved financial position
Meeting objectives
Benefits exceed costs
Success perspectives
• Different organisation functions (marketing,
manufacturing, finance etc.)
– One function does work and another has benefits
– Different cultures within functions
– See Malmi(1997) in MAR
• Different organisation levels
– Central management keen for control
– Plant management use ABT for decision making and
profit improvement
Timescale and Features
• Implementation takes time
• When is evaluation taking place
• Hence longitudinal nature of study
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Anderson (1995) has 25 success factors
Widely used approach and intuitive appeal
Overlooks interaction and organisation
Argyris and Kaplan (1994) - ‘resistance’
Continuum of Success and Failure
Total
success
Success with
some failure
Success or
failure?
Failure with
some success
Complete
failure
|_________|_________|_________|_________|
Definitions - Failure
Clear failure of an activity-based technique
occurs where:
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all or the great majority of initial objectives
have not been met;
ii no significant benefits have arisen; and
iii all further attempts at implementation have
ceased
Definition of Success
Clear success of an activity-based technique
occurs when:
either a substantial proportion of the initial
objectives have been met;
OR where significant benefits from their use
have been recognised.
Failure with some success!
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11 companies interviewed in 1993
1 failure
All companies recontacted in 1995
4 more were no longer implementing ABT
6 deemed at least partial success
5 were prima facie failures - firms no longer
considered they were ‘doing ABT’
Cases of ‘failure’ companies
• Henley - failure before it began
• Douglas - case of the absent Finance
Director
• Spicer - success or failure?
Henley - failed in every way!
• Subsidiary of UK engineering company - mainly
auto parts
• 1100 employees initially - much reduced
• Past history of cost reductions
• ABC initiated by parent
• Consultants carried out most work
• No clear objectives for project
• Very poor communication
• Henley 2000?
Douglas - the absent FD
• Subsidiary of UK engineering company - mainly
aerospace
• 500 employees
• FD very keen but aimed for a single A-B
accounting system - presented major problems
• Resources tight, worsening trading position,
technical problems, takeover, progress slow
• Data problems with MIS
• FD left, nothing ‘embedded’, all ABT work ceased
• Remains - better bids; financial awareness
Analysis of ‘failed’ implementation
Company
Primary reasons for failure
Douglas
 FD left and successor not enthusiastic for
ABC
Henley
 Imposed from above
 No focus or perceived need for project
 Project carried out by consultants almost
alone and knowledge retained by
consultants
 FD left and not replaced; successor not
enthusiastic
 New process orientation and amount of
change being undertaken
 Opposition from finance function
Richards
Waltham
Secondary reasons for failure
Company
Other reasons for failure
Douglas
 Inherent difficulty of the chosen technique
 Delays by take-over threat and worsening trade
conditions
 Problems with data from other information systems
Henley
 Previous bad experience of another similar project
 Poor communication and training
 Little commitment from directors
Richards
 Activity-based techniques were not crucial for anyone
 Continuous improvement and ABM overtaken by radical
changes
Waltham
 Poor quality data
 Inherent difficulty of task
Spicer - success or failure?
• Irish subsidiary of US multinational
• 220 employees, threat of closure, no buyer
• 1992 US financial controller ‘recommended’
ABT and consultants
• Costing S-R bids, activity mapping leading to
process approach
• 1995:dramatic change in trading, parent
investing, all efforts to meet demand
• ABT ‘met the need of the time’: failure?
Success with a degree of failure
• 6 companies continuing with ABT
• All testify to benefits from ABT
• All have met objectives to some extent
BUT
• None have fully met initial objectives
• All state that part of the project failed
Features supporting success
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A compelling business need- next slide
Managers need to see benefits
Support from senior management
Broad-based support throughout firm
Embedding of ABT- see case 2
Compelling business need
Company
Compelling business need
Brent
Cut overheads to stay competitive
Cambourne
Cut waste to improve profits
Philpot
Pricing tool with high complexity
Feltham
Reliable costs for bids
Wavering
Reliable flexible budget
Zircon
Product costs for site comparison
Cases and ‘critical success factors’
• Standard procedure is to find critical success
factors
• Usually large sample, cross-sectional
analysis
• Evidence of this study suggests such
methods miss richness and relevance
• Examples of 2 cases
Feltham - the enthusiast
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Large UK-based aerospace manufacturer
Geoff Ridings: initially management acct
Introduced ABB, then ABC costing for bids
Became general manager site services
Introduced ABC for recharging
Success but limited?
Attitude of managing director!
Philpot - embedding ABT
• US-based; specialist financial services for
vehicle fleet management
• 1992 ABC for budgeting and pricing
• Finance oriented, limited scope
• 1995 US ‘Director of ABM’ - new project
• Lap-top based ABC model for pricing
• All new business needed ABC costings
• Measurement and bonus on ABC profit
Concluding comments on success and
failure
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Role of individual - positive and negative
Embeddedness
Integrated MIS (SAP and Oracle etc.)
Use of consultants
Relations between accountants and
operational managers
Concluding Comments re
Activity-Based Techniques
• Use of ABC - see below
• Is it any different? All allocations are fatally
flawed
• Does it miss the point - see Piper & Walley
criticism?
• Does encourage flawed short-run decision
making?
• Is it introspective when companies need to
outward-looking
• Does it pass cost benefit criterion?
Use of Activity-Based Techniques
Innes and Mitchell Surveys in 1994 and 1999
Survey of 1000 largest companies; overall response
45% in 1999 and 51% in 1994
Currently using ABC
Currently considering
Rejected ABC
Not considered ABC
n=
1999
17.5%
20.3%
15.3%
46.9%
177
1994
21.0%
29.5%
13.3%
36.1%
352
Other surveys
Drury and Tayles 1999 survey of experienced CIMA
members (n = 185)
ABC IMPLEMENTATION
Full implementation
Partial implementation
Implementation in progress
No implementation
15%
5%
3%
77%
Conclusions on ABC usage
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Currently used by significant minority
Usage seems to have stabilised around 20-25%
Similar story in US
Some northern European countries report higher
usage
• Among users are many prominent and leading
firms
Outstanding Issues
• Usage, see above; not as great as proponents
originally expected
• Cost and benefits
• Implementation issues
• Use of consultants
• ABC for short run decisions - a major debate with
strongly contrasting views
• Effect of ERPS - (SAP, Baan, Oracle)
Additional Reading on ABT
• Malmi, Teemu, 1997, Towards explaining activity-based
costing failure: accounting and control in a decentralised
organisation, Management Accounting Research, Vol 8, pp.
459-480.
• Anderson, Shannon W., 1995, A Framework for Assessing
Cost Management System Changes: The Case of ActivityBased Costing Implementation at General Motors, 19861993, Journal of Management Accounting Research, Vol 7,
pp. 1-51.
• Anderson, Shannon W. and Young, S.M., 1999, The Impact
of Contextual and Process Factors on Evaluation of
Activity-Based Costing Systems, Accounting,
Organisations and Society, vol. 24, pp. 525-559.