The Method of Appraising Needs and Possibilities of Activity-Based Costing Implementation

The Method of Appraising Needs and Possibilities of Activity-Based Costing Implementation

Arkadiusz Januszweski (University of Technology and Life Sciences in Bydgoszcz, Poland)
Copyright: © 2008 |Pages: 10
DOI: 10.4018/978-1-59904-843-7.ch070
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Changes that occur in the environment of a given company and a constantly growing competition make the managers enhance the management system. The managers consider which management-support methods and tools could appear effective in fighting competition and ensure the company’s survival or development. Introducing a new management method or tool is in general a complex project, incorporating many aspects and frequently calling for considerable changes in the company’s IT system. Taking up the right decision needs thorough consideration of all the factors supporting or rejecting the project. The decision-making process concerning the implementation of a specific method or tool should address the following questions: • Does, in a given company, there exist objective reasons for which the implementation of a given method would be recommended? • What are the possibilities existing in the company which would make the implementation success realistic? • What tangible benefits will be available due to the new method implementation, in other words, what is the effectiveness of the project? To cut a long story short, one shall determine whether the change is needed, whether it is possible, and whether it will be beneficial to the business. Replying to the third question, different kinds of investment project effectiveness evaluation methods are used, including the internal return rate (IRR) or the net present value (NPV). Their application for the management system improvement project, however, faces many difficulties and can be very time consuming. Yet, one shall remember that before an attempt is made at replying to the third question, positive answers to the first two questions must be given.

Key Terms in this Chapter

Method of Appraising the Possibilities for the ABC Implementation: The method of appraising the needs for the ABC implementation is based on the analysis of subjective opinions of managers on the possibilities of introducing ABC existing in the organization and the factors they defined which might boost, undermine, or make the implementation simply impossible.

Method of Appraising the Justification for the ABC Implementation: The method of appraising the justification for the ABC implementation considers both the needs and the possibilities. A needs to possibilities index is calculated. It facilitates the classification of the company into one of the four groups. In the first group the ABC implementation is recommended and possible, in the second one—recommended but impossible, in the third one—possible but not recommended, and in the fourth group—not recommended and impossible at the same time.

Decision on Introducing ABC: The decision-making process on introducing ABC should address the following stages: assessing of the needs, verifying possibilities existing in the company, and finally, evaluating the effectiveness of the ABC project.

Activity-Based Costing (ABC): ABC defined in the article “Activity-Based Costing System for a Small Manufacturing Company—A Case Study.”

Introducing ABC (ABC implementation, ABC application): Introducing ABC involves the ABC system development that is creating an ABC model for the organization and its implementation in the IT environment. In practice the ABC system is developed either with the use of a spreadsheet, or specialist software for ABC modeling, or by making changes in the bookkeeping system. The ABC implementation also requires the collection system development for the data needed in cost calculation. Similarly, changes in the costs and incomes recording system can be necessary. To make the ABC project successful, the users must be made familiar with the value of the ABC-provided information and encouraged to use it in decision making.

Method of Appraising the Needs for the ABC Implementation: The method of appraising the needs for the ABC implementation is based on the analysis of two sets of objective information: one about the share of indirect costs in the total costs and the other one about the differentiation of the company’s products, customer, and suppliers.

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