A Management Accounting Framework: A Taxonomy
3. Reaffirmation of the Two Views of Cost
This section is intended to assist ABC/M design teams to more correctly design their Cost Assignment Networks and process views at the outset—not later when the ABC/M system is large and making changes is difficult. Managers fail to rec- ognize that system design will force certain behavior. To be clear, I am not re- ferring to the project plan to implement ABC/M. I am referring to the design of the ABC/M Cost Assignment Network, its structure, and its cost elements.
Initial ABC/M system designs attempted to calculate both process and product costs (i.e., final cost objects, such as products) using a single system. In practice, two separate views are needed. The problem originated in the cost assignment view when the work activities for various business processes were first clustered as cost pools. Each process’ cost pool was then traced to cost objects using a single activ- ity driver. This compromised the accuracy of the cost objects, because uniqueness exists at the activity level within each process (i.e., multiple activity drivers are re- quired). In addition, improper aggregation of cost pools also resulted in incomplete or inaccurate calculations for the cost of the total business process. This is because business processes are a chain of activities.
The “data mining” analytical tools in the solution space extract data from transaction-intensive systems and deliver them to the reporting and viewing tools.
The Desktop Computer
OLAP/EIS
Performance Measures Value-
Based Management (VBM/SVA)
Process Simulation
Process Modeling
Work Flow Automation
Financial ERP
Systems MRP2 Sales
Systems (1) Transaction-Based
Systems (2) “Analytical Applications”
(3) Reporting
ABC/M
FIGURE 2.13 The Technology Landscape
Ten Advances in ABC/M Model Design and Thinking 63 The expanded ABC/M requires two separate cost assignment structures: (1) a horizontal process cost scheme governed by the time-sequence of activities that belong to the various processes, and (2) a vertical cost reassignment scheme gov- erned by the variation and diversity of the cost objects. In effect, think of this as the ABC/M cost assignment view being time-blind. The ABC/M process costing view, at the activity stage, is output mix-blind. The cost assignment and business process costing are two different views of the same resource and activity costs.
The work activity costs at the intersection of the ABC/M Cross are shared and common to both views. As stated previously, activities belong to processes. These activity costs at the intersection are the starting point of their two alternative route network for flowing costs, one diversity-based and the other time-sequence-based.
The activity costs are theinitialtranslation of the general ledger expenditures that represent their resource consumption. After the work activities are costed from the resources via resource drivers, the activity costs may then either:
• Be added across time for the process view, or
• Be reassigned [R = A = FCO] with their eventual accumulation into the products, service lines, channels, or customers for the view of the mix of final cost objects.
Figures 2.14 and 2.15 illustrate these two views of activity costs. After the resource costs are assigned to and translated into activity costs, one may prefer to
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Process Measures
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FIGURE 2.14 Cost Object View
think of the activity costs at the ABC/M Cross’s intersection as being on a pivot.
In Figure 2.14 each activity cost is pivoted in the direction of diversity and vari- ation; the activity costs are aimed at the cost object that is the originating source of that diversity. One way to think of the ABC/M vertical cost assignment view is that end-customers “place demands on work” in one direction, thus consuming the resources. Then the costs flow as a result (“costs measure the effect”) in the opposite direction. These relationships preserve the basic tenets of a full absorp- tion costing system.
I noted previously that cost amounts flow from resources to activities to cost objects. Thus, activity-based costing’s vertical view is actually a cost reassignment system. The reassignment system is a “closed-cost system.” That is, the initial total resource costs remain as a constant amount of total cost as they eventually transition their way through both the vertical and horizontal views of an ABC/M model and accumulate into cost objects or sequence into process costs. No new re- source costs are created by activity-based costing; no existing resource costs are destroyed by activity-based costing. Cost equivalence is maintained.
In Figure 2.15 the activity costs are pivoted in the direction of time, the ABC/M horizontal process view. Managers and employees generally find the ABC/M process view easier to understand because it aligns with time. Managers are comfortable with a flowchart view of their processes.
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Process Measures
= activities
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FIGURE 2.15 Cost Process View
Ten Advances in ABC/M Model Design and Thinking 65 The expanded ABC/M model’s vertical cost assignment view reveals how the segmenting of activities relates to the variation and diversity in the mix of products and services produced, type of distribution channel, and end-customers (i.e., the final cost objects). It has been said that to use ABC/M’s vertical cost re- assignment view, “One must adjust one’s thinking.” You may now better appre- ciate why.
As a summary, in the ABC/M Cross, the total cost of the same activities going horizontally (i.e., total business process costs) and the total costs being as- signed and causally traced vertically (i.e., total product, customer, receiver, or business infrastructure-sustaining costs; see “Identification and Treatment of Or- ganizational Sustaining Costs” in this chapter ) must equal each other.
∑(Activities) = (R=A=FCO) [horizontal view] [vertical view]
Although the ABC/M Cross is intended to communicate this phenomenon, its simplicity often eludes this subtlety. This is because tracing and measuring costs to their cost objects involves a different combination of activities than chain- linking those same activities and their costs in time along business processes.
4. Development of a Three-Dimensional ABC/M