The TCA was criticized by Johnson and Kaplan in their book ('Relevance Lost: The Rise and Fall of Management Accounting', 1987). Most organisations are most likely to adopt TCA although it allocated overhead in an arbitrary way as it is mandatory accepted accounting standard for external financial reporting in UK by SSAP9. However, the method lacks the ability to report the performance of activities and production cost across-functioning. It refuses managers the visibility of the true costs across the production therefore the recognition of whether such product or service (outputs) is produced in profitable way is difficult as the TCA allocates range of indirect overheads inappropriately to direct costs based on a fixed percentage and ignore the selling and distribution costs. The TCA isn't "productive for excellent practitioners and managers in the advancing complicated world" (Narong, 2009).
2.0 Development of Activity-Based System
2.10 The rise and development of Activity-Based Costing (ABC)
The techniques of ABC/M were introduced by Kaplan and Cooper and emerged in the United States manufacturing sector during the 1980s in order to competitive pressures that exposed inaccuracies in costing method. Subsequently the techniques were developed by Johnson and Kaplan. ABC was seemed as an improvement on the TCA system and gaining the attention over the places. ABB and ABM are the later expansion of ABC.
The extent of the ABC/ M was initiated in 1987 from costing experimentation. ABC appeared as an implement for profit improvement whereas ABM was tailored for use in the extended various industries and improved resource and capacity planning. "Movement from ABC/M (for product profitability assessment) to ABM (for more general managerial control and decision support) has been supplemented by the broadening of ABC/M application to different types of business, to different functional specializations within business and to the complementarities of ABC/M to other new high-profile management and accounting techniques." (Bjørnenak & Mitchell, 2002) .
Figure 1 and 2 shown below is the four generations of ABC from 1987 to 2010 and the diffusion of ABC/ ABM links to other techniques over the time respectively.
Figure 1 The four generations of activity-based costing
(Adapted from: Turney P. B. B., 2008)
Figure 2: The diffusion of ABC/ ABM and links to other techniques over time.
(Adapted from: Bjørnenak, & Mitchell 2002)
Kaplan and Bruns (1987) declared those manufacturing industries where technology and productivity improvement have reduced the direct costs and increased indirect costs. ABC enables managers to "assign costs to the customers and products that use a department's services more accurately" (Kaplan and Anderson, 2005). There is a misconception that as a result of subsequent changes to ABC techniques, users were being misled, thus leading to shun the method altogether. For instance, the value of ABC in lean accounting will result in differing outcomes if the focus is on ABC as a process-based resource and capacity planning tool rather than on the first generation ABC method. Additionally, Garrison et al. (2008) critics the implementation of ABC in organisations is more costly than a TCA. ABC gather data into the system and allocates resource expenses to activities based on interviews and surveys which is time consuming and "the benefits of increased accuracy may not outweigh these costs" (Alabbadi and Areiqat, 2010).
Time-driven ABC (TDABC)
To overcome the deficiency of ABC, Kaplan and Anderson (2005) come out a new approach which integrated the information from company's Enterprise Resource Planning (ERP) and data warehouse systems with easier form of business process costing to produce detailed comprehensive income reporting. They stated that TDABC would only accomplish its elegant simplicity by requiring only two parameters be estimates for each process which are the cost rate of supplying capacity and the consumption of capacity by each dimensions such as transaction, product or customer.
Furthermore, instead of using transaction drivers by conventional ABC, TDABC estimate the time required to perform each of the department's transaction activities by direct observation or data collection. "TDABC has eliminates the need for the time-consuming, subjective, interview-and-survey process to define resource pools" (Stout and Propri, 2011). Concurrently, TDABC produce more accurate costing information where it represent the under or over capacity in units of time. TDABC is easily to maintain and installed quickly. The TDABC's role in managing resource capacity lead the businesses are more closely align customers and product costs with resource consumption. Thereby, costs are highly transparent and understandable by management while analyzing profitability dynamics, as all dimensions are captured accurately at the same time.
Yet, judge against to the original ABC approach, a Small Medium Enterprise (SME) can succeed by using a TDABC system for allocating costs to support outputs and customers with an effective implementation of ERP system. Moreover, Max (2007) critics that TDABC may not be suitable for every company's activities as there is somewhat differentiated outputs are "homogenous" or cost are somewhat fixed or the amount of time cannot be predicted.
Probability-Driven ABC (PD-ABC)
Stelling et al. (2010) expand further by proposed PD-ABC. The methodology "developed within this framework is probability driven and principally enables differentiate between processes which may use exactly the same resources, but in differing degrees based on probability of certain routes in the process being executed". The business processes don't involve the design and evolution of products or systems. Applications of ABC have expanded into services industries such as insurance, healthcare, banking and others. These industries benefited from data about the cost of services, customers and activities.
Global Decision-Making (GDM) methodology
Although many organizations are well known the faults of TCA and commended by management consultants, but they still retained the conventional approach. Geri and Ronen (2005) criticized that ABC is based on "subjective arbitrary cost allocations". It became a complicated costing system while production volume changes, as ABC couldn't predict the profits and may not ensure its accuracy. ABC ignores "constraints" and does not distinguish a "bottleneck" from limited resources which may bring upon misleading strategic decision. Therefore, they have suggested GDM methodology which "prescribing a light ABC mechanism" (Geri and Ronen, 2005). GDM wasn't modified for resources allocation, but aim at increasing the business' value and to measure more detailed revenue and risk management data. With GDM, managers enable to perceive more accurate and reliable data than those produced by TCA. However, most businesses still retained to TCA since ABC/M require more effort without bringing better results.
Total Quality Management (TQM)
"ABC was inconsistent with the principles of continues improvement and total quality improvement" (Chea, 2011). The concept of Gary Cokins is enunciated as a TQM tool for cost and performance measurement of "activities, resources, and cost object" (Narong, 2009). He expands the concept of ABC includes the investigation of the nature and associated comparison of cost allocation by both TCA and the ABC/M system. He also explains how cost drivers caused operating cost to occur and how ABC/M can be used in such strategic areas such as cost management, profit margin analysis, cost of quality and productivity. He concluded that, ABC system educates and allows managers measure the true costs of processes and outputs in a profitable way (Narong, 2009).
2.20 Activity-Based Budgeting (ABB)
Budgets were established in the 1920s as a control in managing costs and cash flows in large manufacturing firms (Hope and Frazer, 2003). Traditional budgeting approach involves basing next year's budget on the current year's outcome with an incremental for estimated growth or inflation subsequent year. However, it encourages wasteful spending and occasionally there is no review of costs and benefits analysis. ABB model is then more favorable (Hansen and Torok, 2004). ABB is the expansion from ABC which helps businesses to focus on specific activities and help in determines the efficiency of the task.
Horngren (2004) recognised that ABB focus on "cause-effect relationships". The ABB model enables managers to predict financial outcome more accurately in order to improve budgeting, planning, and management control. Additionally, ABB moves reversely from the "cause and effect" (Lin and Yahalom, 2009) of ABC system, which is in agreement with the idea of Horngren (2004). They declared that ABB follow the business's need to budget. By integrating ABB with Balanced Scorecard (BSC) developed by Kaplan and Norton in 1992, it helps company achieve the "performance targets that BSC sets". This was support by Matthew and Miller (1988), set up from the ABC the integration of ABB and BSC provide businesses with tools to make decision more efficiently.
The ABB approach is more sophisticated version of TCA. ABB uses the costs drivers recognised by ABC to derive budgets for support management (Steven, 2007). In contrast, Narong (2009) defined ABB as a "TQM financial-planning tool with the identification of customer requirements in terms of volume of outputs for budgetary purposes. Together with ABC/M, ABB establishes a solid foundation for quality panning and budget reporting".
However, ABB surfaced in 1990 and has been argued as the remedy for "many budget ailment mechanism to convert anticipated levels of activity output into monetary equivalents" (Van Der Merwe, & Keys, 2002). The shortfalls of traditional ABB firstly is it doesn't consider the fixed costs on unit-related activities but only assumes as variable costs. ABC doesn't use quantities in defining relationship in cost model; this ABB from activities to resources is based on a value-based calculation (Van Der Merwe, & Keys, 2002).
Generally, value creation is made outside the production process; the customer relation is one of the vital factors. Wegmann (2009) critic that ABC is insufficient and suggested a new approach namely Resource Consumption Accounting (RCA) method. Accordingly, range from small to giant and complex organisations that have gone beyond budgeting enrich can be found nowadays. It is a new idea to improve management control procedure.
2.30 Activity-Based Management (ABM)
The inclusion of activity and customer costs during first generations increased the investigative power of ABC leading to ABM. ABC supplies the information and ABM uses it for several activities analyses to yield continuous improvement. Activities include cost driver analysis; performance measurement and process improvement opportunities. Managers are responsible to ensure that the customers will make huge contributions to the company's income and profitability. Figure 3 described the correlation of ABC and ABM.
Figure 3
(Adapted from: Tardivo&Di Montezemolo, 2009)
Consequently, Customer Profitability Analysis (CPA) model has been developed and "Customer-Driven ABC" (Wegmann, 2009) is proposed to recognise the ABC architecture. CPA model include the cost to acquire the customer. Customer cost data is necessary for managerial decision-making, by knowing which customer are profitable helps organizations to improve their decision-making and increase their total profitability (Kuchta and Troska, 2007). However, there hasn't been much practical guidance to calculate customer costs and profitability.
Cokins (2002) identified early ABC/ M was focusing "the determination of product costs through better segmentation of resource consumption. Subsequent ABC/M has been concerned to solve broader problem. ABC/M focuses on the work activities associated with operating a business or managing not-for-profit organizations". Although ABC/M eventually becomes part of organisations' information tools, but there is an expensive project that only large organisations with extensive resource might undertake. Recently, ABC/M users try to integrating the output data with ABB systems. He has same point of view with Wegmann, where he acknowledged that the output of ABC/M method is the input to customer relationship management (CRM). "CRM efforts are targeted at attracting new customers and retaining, up-selling, or cross-selling to existing customers" (Ness et al., 2001). Customer lifetime value (CLV) is a performance measurement of customer value in long run. ABM can integrate the results from the CLV into the CRM. Therefore, the cost of all activities required to create are visible and the relationship with customers is maintained. ABM also enable the customers perceive the value they received for the prices they pay.
Goldratt (1990b) and Kaplan and Cooper (1998) have integrated Theory of Constraints (TOC) and ABM into a model called Activity-Based Throughput Management (ABTM). It provides the valuable financial information about process improvement, resources acquisition and consumption for the manufacturing manufacturing's decision makers (Gupta, 2001).
However, due to the recent changes from mass to lean manufacturing, Muskell suggested a value-steam-based methodology. Figure 4 shown below is value steam costing per associate. Costs of outputs will differ according to "labor, materials and assignable overhead costs to only activities in a value steam and an optimized flow of a process" (Narong, 2009). Managers become accountable for the operating expense, efficiency and value created by all value-added activities.
Figure 4 Value Steam Costing per Associates
(Adapted from: Narong, 2009)
The impact of TDABC model on both companies and consultants.
As a results from profitability analysis of different customer group by TDABC in Parsian Hotel in Iran. TDABC provides more proper data on cost and profitability of customers. Managers enable to design an optimized plan to improve productivity and processes. Time equations provide the opportunity for managers to distinguish which activities are not necessary required to or non-value added or very time-consuming in order to minimize needed time for those activities to finally reduced costs of services to the customers (Hajiha and Alishah, 2011).With the implementation of TDABC, managers come across a better situation to maximise company's profit.
Additionally, Sanac Inc, a Belgian wholesale company desired to maximise profit by adopting the ABC, but he suspected the success of ABC in the business. Thus, the consultant has to give advice whether they should continue the traditional ABC system or shift to TDABC. In extremely case, consultants may use academic knowledge in developing new methods or approaches and their work is usually "problem-driven" (Helden et al., 2010). As a result of using both professional and academic journal can enhance the understanding of TDABC by consultant. Evidently, TDABC has increased the Sanac' profitability and shareholder value. He concluded that "TDABC is more appropriate than traditional ABC for an environment where the operations and processes are fast changing" (Everaert et al., 2008).
Conclusion
In this rapidly change business environment, development of costing system are important as the data obtain from cost accounting system are crucial for managerial decision. Every systems developed is designed to enhance decision making. Obviously, TCA no longer meets the needs of today's manufacturing sector. Its' criticisms have bring upon the developments of ABC while ABB and ABM are two further applications for ABC. ABC was widely embraced to provide greater support for more accurate cost information and improves the quality of decision making in manufacturing and services industries. Implementation of ABC leads to a better perceptive of the cost drivers that generate those costs, thus, management focusing on the way resources consumed by activities.
However, not all organisations benefit from the implementation of ABC as it is costly, time consuming, complicated, and might not be accurate thus ineffective to clarify managerial process. When ABC system been criticized, TDABC is then developed to overcome the shortcoming of its predecessor. TDABC can be installed and estimated quickly and forecast demands by looking at the changes in cost and trend of customers. The data can be fed easily from various systems such as CRM and ERP. Other methodologies such as PD-ABC, GDM, and TQM also have been developed and provided the solutions to the original criticism as well. Subsequently, ABC is better integrated into budget and activities where ABB become more favorable compare to traditional budgeting. Although the implementation of ABM is costly in the context of employee's time but it's a critical system to cost and performance evaluation when interrelated with the conventional method. Both ABC and ABM can be an indicator that each one is a tool for the other as ABM lays stress on process and activity analysis in an organisation.
Evidently, the development of ABC has its positive impact on businesses' profitability and consultants too. With the implementation of TDABC, managers enable to maximise company's profit by minimising the time consume for non-value activities and decrease the costs to customers. Overall, the new developed techniques had overcome the scarcity of original ABC developed by Johnson and Kaplan.
