With the book: «Relevance lost: The rise and fall of management accounting», the two American professors Kaplan and Johnson received large attention around the questioning of doing accounting to many businesses the world around.
This book is sold at the airports, and it starts with the following statement: «Today, management accounting is too distorted, too aggregated to be relevant for managers daily decision making». The reason is that we have used old methods through many periods of time in the businesses we are trying to manage and to govern. The solution is ABC, or Activity-based costing. And the father of modern accounting is Italian Luca Pacioli, who in 1494 first described the system of double-entry bookkeeping used by Venetian merchants in his Summa de Arithmetica, Geometria, Proportioni et Proportionalita.
Activity-based costing (ABC) is a method of assigning overhead and indirect costs—such as salaries and utilities—to products and services. The ABC system of cost accounting is based on activities, which are considered any event, unit of work, or task with a specific goal. Hence, we should first define the acitivities in the firm, and the firm must be large in extent for using this system. And we can use it on many firms in business life through the whole globe. And the philosophy is to give prices to the products, and to the cost drivers or the causes of the costs in the firm in question. Therefore, we should measure the management accounting systems in a new way.
Activity-based costing provides a more accurate method of product/service costing, leading to more accurate pricing decisions. It increases understanding of overheads and cost drivers; and makes costly and non-value adding activities more visible, allowing managers to reduce or eliminate them.
How should we use ABC to measure more precisely the costs in the firms in question, and these firms can be of different types and characteristics? Step 1: Identify the products that are the chosen cost objects. Step 2: Identify the direct costs of the products. Step 3: Select the activities and cost-allocation bases to use for allocating indirect costs to the products for allocating indirect costs to the products. Therefore, this methods should define the cost drivers, and allocating the different types of costs to the cost drivers. And this is also the logic in the firms, and it is coming from Harvard.
Activity-based costing is a technique, and it is used as a rhetoric that has its diffusion patterns many places. And the main point is to identify where costs are coming from, and to place the right prices of all wrong prices to the products. Any price on the products can be too high, suitable and too low, and we should have many of the prices in relation to what there is foundation for in the markets. The idea of Activity-based costing (ABC) is a humble attempt to measure the activities that are going on the firms even better, and this logic can be used to many firms around the globe.
So, there is coming several ideas in the academic environments about what to do. A balanced scorecard is a performance metric used to identify, improve, and control a business's various functions and resulting outcome.
Both ABC and balanced scorecard must identify what is happening in the firms, and how we can improve the management of the firms in question. And we find much information in the strategic triangle in the world, and this is about theories, methods and data. And measurement of any firm should be as good as possible, and we should try to govern the businesses to avoid bankruptcy. And we are as we are due to the relations that we have, but it is important for us to give our competence and our time to the right environments that are needing us! And we should be focusing on that in the future. And schools are not there to give bad results and bad performances, but to do things as good as possible, when you have all these teachers with knowledges, opinions and pedagogy about what to do.
The activities in firms are coming from the value chain of professor Michael E. Porter by Harvard Business School. And we can use prices inside the firms and/or in the markets that are outside the firms in question.
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Sverre Larsen
Kristiansand, Norway
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