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Kaplan and Cooper (in Kaplan, R. S., & Cooper, R. (1998). Cost and effect: Using
integrated cost systems to drive profitability and performance. Boston: Harvard Business
School Press.) Divide ABM into operational and strategic:
Operational ABM is about “doing things right”, using ABC information to improve
efficiency. Those activities which add value to the product can be identified and
improved. Activities that don’t add value are the ones that need to be reduced to cut costs
without reducing product value.
Strategic ABM is about “doing the right things”, using ABC information to decide
which products to develop and which activities to use. This can also be used for customer
profitability analysis, identifying which customers are the most profitable and focusing
on them more.
A risk with ABM is that some activities have an implicit value, not necessarily reflected
in a financial value added to any product. For instance a particularly pleasant workplace
can help attract and retain the best staff, but may not be identified as adding value in
operational ABM. A customer that represents a loss based on committed activities, but
that opens up leads in a new market, may be identified as a low value customer by a
strategic ABM process.
Managers should interpret these values and use ABM as a “common, yet neutral, ground
… this provides the basis for negotiation” (Kennedy, T., & Bull, R. (2000). The great
debate. Management Accounting, 78). ABM can give middle managers an understanding
of costs to other teams to help them make decisions that benefit the whole organisation,
not just their activities' bottom line.
Introduction about review
Johnson & Kaplan (1987)’s publication of the book titled 'Relevance Lost' brought
revolution in the history of the management accounting. The then management
accounting systems failed to provide relevant information for product costing and
performance evaluation in the time of ‘rapid technological change’, ‘fierce competition’,
and ‘information processing revolution’. The pre-war cost accounting systems were
designed to meet the financial reporting and tax planning needs. They failed to provide
information for managerial decision-making and control purposes. Drucker (1992)
argued that accounting systems should provide answers about their businesses, markets,
customers, and environment to ‘information literate’ manager. Thus, the role of a
management accountant expanded in multiple dimensions. They were not just to collect
the cost information as accurately as possible but also analyze the utility of the cost
information for taking vital managerial decisions. This new paradigm of management
accounting called for certain additional skills of the management accountants. Anastas
(1997) discussed the changes required in the skill set of the management accountants in
view of the “Project Millennium: Customers & Future Markets…Looking Ahead to
2007”.
The newfound utility of cost accounting led to a churning of the whole cost accounting
system, its methodology and even it's philosophy in the mid 1980s. The most prominent
that emerged out of the whole brain storming process was activity-based cost
management system.
This system was claimed to have the ability of providing accurate cost information while
removing distortions in product/service pricing and customer profitability analysis in a
complex manufacturing environment. Cooper (1988a, 1988b, 1989a, 1989b & 1995),
Cooper & Kaplan (1988, 1991,1992, 1997 & 1998). For comprehensive review on the
subject, see Borden (1990) and Cooper (1996).
The present study plans to identify activity-based cost management practices in corporate
India. Further, it investigates whether the corporate India uses contemporary cost
management tools in the value chain analytic framework.
REVIEW OF LITERATURE