Activity Based Costing (ABC) System and Top Management

Activity Based Costing (ABC) System and Top Management

Learning Objectives:

  1. Understand the importance of the support of top management in the implementation of activity based costing system.

Experts agree on several essential characteristics of any successful implementation of activity based costing. First, the initiative to implement activity based costing must be strongly supported by top level managers. Second, the design and implementation of an ABC system should be the responsibility of cross functional team rather than of the accounting department. The team should include representatives from each area that will use the date provided by the ABC system. Ordinarily, this would include representatives from marketing, production, engineering and top management as well as technically trained accounting staff. An outside consultant who specializes in activity based costing may serve as and advisor to the team.

The reason for insisting on strong top management support and a multifunction team approach is rooted in the fact that it is difficult to implement changes in organizations unless those changes have the full support of those who are affected. activity based costing changes the “rules of the game” since it changes some of the key measures that managers use for their decision making and for evaluating individuals’ performance. Unless the managers who are directly affected by the changes in the rules have a say, resistance will be inevitable. In addition, designing a good ABC system requires intimate knowledge of many parts of the organization’s overall operations. Top management must support the initiative for two reasons. First, without leadership from top management, some managers may not see any reason to change. Second, if top managers do not support the ABC system and continue to play the game by the old rules, their subordinates will quickly get the message that ABC is not important and they they will abandon the ABC initiative. Time after time, when accountants have attempted to implement an ABC system on their own without top-management support and active cooperation from other managers, the results have been ignored.

You may also be interested in other relevant articles from “activity based costing system” chapter:

  1. Definition and Explanation of Activity Based Costing System
  2. Treatment of Manufacturing, Non-manufacturing and Idle Capacity Costs Under Activity Based Costing System
  3. Activity Based Costing And Top Management
  4. Activity Based Costing System and External Reports
  5. Designing and Implementing Activity Based Costing System
  6. Targeting Process Improvements (Activity Based Costing + Activity Based Management)
  7. Advantages or Benefits | Disadvantages or Limitations of Activity Based Costing System
  8. Activity Based Costing Example

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