Table of Contents
Introduction Textual Abstract Bibliography
Accounting has evolved via the recognition of the impact of accounting information on management operations, security pricing decisions, and social responsibility and welfare. Consequently, the interpretations, measurements, and definitions of costs and benefits given in accounting reports have evolved. When discussing the cost of producing goods and services in accounting, the following distinctions are typically made. Johnson and Kaplan suggest a new method to cost accounting and management in their book Relevance Lost: The Rise and Fall of Management Accounting. This method permits businesses to enhance their accounting and management practices and uncover links between cause and effect in order to assign costs.
According to Johnson and Kaplan, traditional accounting practices result in failures and low productivity. They discovered that management accounting reports are of little assistance to operating managers attempting to reduce expenses and boost productivity (Johnson and Kaplan 1991, p. 1). Cost accounting traditionally focuses on cost buildup, inventory valuation, and product costing. It stresses the expense aspect.
Thus, implicitly, the objective function of the new strategy is considered to be cost minimization. Activity-based costing is a more precise management technique that identifies an item's true cost. The advantage and strength of this strategy is that "complex and extensive organizations evolved to manage each of the activities" as a result of linking several separate processes (Johnson and Kaplan 1991, p. 19). The activity-based costing method emphasizes that expenses are determined for each activity and only for items that pass through it (Cooper & Kaplan 1997).
According to this accounting approach, the organization must take certain actions to implement this accounting system, including defining the process and analyzing its activities, establishing cost pools, matching the pools to the activities, and identifying cost drivers. The necessity for a standard financial measuring stick drove managers of integrated multi-activity organizations to advance management accounting beyond cost management methods (Johnson and Kaplan 1991, p. 87).
This method has the benefit of calculating indirect costs that cannot be attributed to a specific product based on cost drivers. The optimal allocation of resources is the focus of cost-based accounting and budgeting, according to Johnson and Kaplan. Profit maximization may be seen as the objective function. It is also considered that the cost accountant and the management accountant perform distinct functions; the cost accountant is responsible for cost control, while the management accountant is responsible for cost reduction (Cooper & Kaplan 1997).
Activity-based budgeting demonstrates that an emphasis is placed on cost management and planning, which may have perpetuated the notion that these two areas are distinct. Rather than emphasizing these distinctions, it is preferable to view accounting as an attempt to incorporate approaches from different disciplines into cost accounting. In fact, the scope of cost accounting has expanded in many ways in recent years.
The assumption that individuals act rationally and always choose the optimal alternative can only be maintained if a cost measure is included in the comparison of different choices. “The system of internal control is designed to improve the efficiency and effectiveness of routine business operations.” (Johnson and Kaplan 1991, p. 161). As long as costs are a question of human choices, based on subjective measurements and encompassing considerations, it is challenging to substantiate such a claim. In general, the cost principle contrasts various choices within the rational choice framework.
Various opportunity cost measures can be established based on the specific problem statement and underlying assumptions that describe a given issue. "Some costs are fixed over relevant activity ranges, while others vary according to output, scope of operations, quality levels, market coverage area, and number" (Johnson and Kaplan 1991, p. 160). In general, this approach of cost accounting gives cost information for the formulation of the optimal strategy required to acquire a competitive advantage.
Other scholars have created and evaluated the activity-based costing methodologies. Hussein & Tam (2004), Lindahl (1997), Albright & Sparr (1994), Maiga & Jacobs (2003). These academics expand their understanding of activity-based costing by incorporating the strategic components required to acquire a competitive advantage into their analysis. Consequently, accounting information plays a larger role in the strategic process phases:
The formulation of strategies and phases, the communication of strategies, the development of tactics, and the implementation of strategies.
In the paper titled "Management's Role in Enhancing Decision Making with Activity-Based Costing," Barnes (1992) examines the function and significance of activity-based costing in the decision-making process. He makes reference to Johnson and Kaplan:
Activity-based costing is not intended to automatically trigger decisions. It is intended to provide more precise information regarding production and support activities and product costs, allowing management to focus on the goods and processes with the most potential for profit growth. It assists managers in making better decisions regarding product design, price, marketing, and mix, and it promotes continuous operating improvements (Johnson and Kaplan cited Barnes 1992, p. 21).
Barnes demonstrates with these examples how activity-based costing and budgeting can improve decision-making and problem-solving techniques. This approach to practical decision-making offers a strategy for evaluating problem scenarios that arise as a result of suboptimal settings. These problem areas may not be limited to accounting profit metrics and obvious expenses, but may also involve implicit costs and mental values. In this sense, decision-making may involve much broader notions than those established for economically rational conduct based on explicit market values.
Lindahl (1997) expands the scope of problem analysis and posits that it is possible to identify interrelationships and complex adjustment processes that, over time, may eliminate existing problem circumstances. In conventional analytic, static, and simplified models, such dynamic processes are not "obvious." Lindahl (1997) emphasizes that activity-based costing can be effectively used in the marketing and strategic management domains.
The ABC way of thinking casts doubt on performance measurement. If the new “activity” insights require a different emphasis, then performance measurements should drive the manager’s efforts in that direction (Lindahl 1997, p. 62).
In addition, the cost principle gives criteria for selecting relevant information for economic decision-making. Depending on the choice problem at hand, this may also incorporate financial data in addition to estimates of intrinsic and opportunity costs. Given that decisions influence the future, this entails the notion of environmental stability.
Krumwiede and Roth (1997) extend the use of activity-based costing to include information technology. On a micro scale, decision options pertain to particular economic agents, such as companies or individuals. When market prices are fixed, their individual activities will not impact price levels, therefore decision alternatives pertain to diverse uses of resources. Krumwiede and Roth (1997) assert:
The activity-based strategy is expanded to encompass a larger cost management philosophy that focuses on finding and removing nonvalue-added activities related to design, procurement, distribution, selling, and even administrative tasks (98).
An objective of activity-based costing and accounting is to make relevant information on a company's objectives, policies, programs, performance, and contributions to strategic goals optimally accessible to all social constituents. Relevant information is that which supports public accountability and decision-making on social options and allocation of social resources.
Albright & Sparr (1994) and Maiga & Jacobs (2003) find that Johnson & Kaplan's (1991) approach efficiently balances potential information conflicts among a firm's many social constituents. Activity-based costing and budgeting consist of established systems for cost accumulation, product pricing, budgeting, performance evaluation, and resource allocation. Business strategies determine how a company competes in a certain industry and positions itself relative to its rivals.
They emphasize that the adopted strategy style must be backed by adequate and suitable accounting approaches. Therefore, the chosen strategy style is a significant predictor of the accounting principles, procedures, and systems implemented.
The identification of the proper approach is crucial for both internal and external users of management accounting information of a given organization, as it can reveal the "fit" between the strategic style and the management accounting system supporting its adoption, formulation, and implementation. Albright and Sparr (1994) state, "The cost analysis performed by TPG indicates that even in a labor-intensive manufacturing environment, ABC can produce cost estimates that differ from and are superior to those provided by a labor-driven overhead rate" (p. 215).
These tasks entail subjective interpretations and interpersonal interactions. Management control entails both upper and middle management who tackle challenges according to a predetermined pattern and timetable to ensure efficient and effective solutions. Maiga & Jacobs (2003) apply the notion of activity-based costing and assume that the performance of these tasks or transactions is governed by management control and planning-derived norms and procedures. Also, the interaction effect of Balanced Scorecard (BSC) and activity-based costing on manufacturing unit performance is investigated. They discover:
Management accounting systems and BSC systems can have complementary or synergistic effects on performance. The implications of this study are that (1) researchers need to be aware of the significant role BSC and ABC play in determining the efficacy of any "intervention" in contemporary manufacturing environments, and (2) organizations seeking substantial program improvements should modify their manufacturing initiatives to align with the new performance standards (385).
It is feasible to state that the process by which accounting principles have evolved has changed through time, and that management has complete control over the means by which accounting data is collected and the sort of data provided. In order to achieve their strategic objectives, modern firms have implemented activity-based costing and activity-based budgeting strategies.
New concepts and accounting techniques have a significant impact on the strategic management of businesses. The approach provided by Johnson and Kaplan is adaptable and flexible. It refers to the extent to which data can serve as the foundation for multiple sorts of information and reports. It depends on both the database's categorization into distinct categories and the level of aggregation employed for each category. Purchase data, for instance, may be categorised according to the following categories:
by individual product or service, by individual buyer, by individual vendor, etc.
Under the following categories, these data may be aggregated:
per transaction, per day, per month, etc.
The focus is on the management of activities within the framework created by strategic planning (Cooper & Kaplan 1997).
The activity-based strategy enables businesses to adapt to new settings and determine accurate product costs. The information obtained from the database can be adapted to or harmonized with the firm's decision-making processes, which is advantageous for businesses. The adaptability of an accounting system necessitates not only the existence of flexibility, but also an intentional method of harmonizing it with the decision-making procedure.
This is particularly significant within the concept of market equilibrium, in which any individual would be indifferent to the various options given by the market. This suggests that all humans have monetary-based choice structures and prefer more money to less. By applying this argument to the aggregate market environment, we may postulate that all market opportunity costs are equal to zero in equilibrium.
Commonly, while analyzing costs, benefits, profits, and losses, individuals examine cash flows or accounting definitions. Implicit costs and opportunity costs are not recorded since accounting information is primarily concerned with the measurement of revenue based on explicit costs and benefits of objectively determinable activities during a specific reporting period. Thus, accounting revenue does not correspond to economic revenue. This unique quality of accounting data must be taken into consideration in any economic analysis employing accounting data. According to Johnson and Kaplan (1991), "in a multiperson organizational setting, the benefits and costs of implementing a managerial accounting system depend on how people react to and utilize its output" (p. 174).
Failure to identify the conceptual foundations of management accounting as a guide for the creation and evaluation of management accounting procedures is primarily responsible for the absence of an acceptable activity-based costing structure. The primary benefit for businesses is that activity-based costing is based on accounting, issue and decisional, organizational, and behavioral strategies. The introduction of these five pillars into management accounting will offer the necessary framework for the collection of sufficient relevant managerial data for internal problem-solving.
In conclusion, the literature review demonstrates that activity-based costing and activity-based costing budgeting are excellent approaches that enable firms to estimate the true cost of products and enhance operations. The activity-based costing and activity-based costing budgeting include the elements of organizational structure that are most prevalent and essential to the proper functioning of a management accounting system, as well as the theories of organization that are essential for identifying the significant elements that approximate the patterning and order in organizations.
They define the role and scope of management inside an organization, as well as the strategies, tactics, and philosophies it may employ to offer sufficient services. These findings indicate the feasibility of building a model of the nature, elements, and determinants of management accounting's conceptual foundations. Such a model would be the initial stage in the creation of a combinatorial theory.
The new accounting framework determines the scope and methodology of activity-based costing and activity-based costing budgeting. The activity-based costing and activity-based costing budgeting may differ in different fields of business in terms of the level of appreciation and incorporation of these foundations, their determinants, and their components into the system's design. The research investigations and critiques of activity-based costing demonstrate that the original issue is irrelevant. The proof that each of the determinants depends on the collection of variables or elements of the foundations, which will define the resulting management accounting system through their application.
This model gives information that reflects the outcomes of previous decisions and the decision-makers involved. By disregarding opportunity costs and hidden costs, they are prone to make poor decisions and choose suboptimal options. On the other hand, actual judgments may incorporate not only accounting information but also a vast array of future projections, such as risk analysis and cost considerations. In such a context, the function of accountants and the importance of accounting data may be viewed differently. In cost-based budgeting, consistency, uniformity, and the resulting comparability are regarded as desirable characteristics. Long-term and short-term decisions have varying implications for management accounting.
Activity-Based Management for the Labor-Intensive Manufacturer: A Field Study. 1994. Albright, T., and L. Sparr. Journal of Managerial Issues, volume six, number two, pages 213–215
Barnes, F.C. (1992). Management's Role in Enhanced Decision Making Using Activity-Based Costing. SAM Advanced Management Journal, volume 57, number three, pages 20-22.
Cooper, R., and R. Kaplan. "Cost and Effect." McGraw-Hill Ryerson Agency, 1997.
Hussein, M. E. A., and K. Tam. 2004. Activity-Based Costing versus Volume-Based Costing. Pilgrims Manufacturing, Inc. Issues in Accounting Education, volume 19, number 5, pages 539 to 548.
Johnson, T. H., and R. Kaplan, 1991, The Rise and Fall of Management Accounting: The Loss of Relevance Harvard Business Publishing.
1997, Implementing Information Technology Innovations: The Activity-Based Costing Example, SAM Advanced Management Journal, vol. 62, no. 4, pp. 97-98. Krumwiede, K.R., and H.P. Roth.
Lindahl, F. W. 1997, Activity-Based Costing Implementation and Adaptation. Human Resource Planning, volume 20, number 2, pages 62 to 65.
Balanced Scorecard, Activity-Based Costing, and Company Performance: An Empirical Analysis, by A. S. Maiga and F. A. Jacobs, 2003. Journal of Managerial Issues, volume 15, number three, pages 383-385.