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In this inaugural Oct 1998 issue of
On Target :
Book Review: Cost and Effect
COST and EFFECT : Using Integrated Cost Systems to Drive
Profitability and Performance by Robert S. Kaplan and Robin
Cooper Harvard Business School Press, 1998, 357pp ISBN
0-87584-788-9
Reviewed by Janek Ratnatunga
This is a difficult book to review. There are two main reasons
for this. The first difficulty is that the authors, Robert
Kaplan and Robin Cooper, are the two professors widely
acknowledged as being the pioneers who first reported on
companies that had benefited from implementing a cost allocation
system based on the "activities" undertaken by an
organisation, which they described as Activity Based Costing
(ABC). Therefore, the book has to be given its due deferance, as
it comes from the "gurus of ABC".
The activity based approach is not a new concept, it has in
fact been around since the days of Alexander Hamilton Church
over 100 years ago, and implemented extensively since the 1960s
in allocating marketing distribution costs. Cooper and Kaplan,
however, popularised the allocation system by giving it a sexy
label, applying it to manufacturing, and publishing a much cited
article on the subject in the Harvard Business Review in 1988.
The rest is history. Professional accountants who were at that
time searching for a revenue source to counter declining audit
fees, picked up on the ABC technique and marketed it widely. ABC
and its derivatives, Activity Based Management (ABM), Customer
Profitability Analysis (CPA), Kaizen, Target Costing,
Non-Financial Indicators, Balanced Scorecards etc., are all now
standard jargon in most cost management consulting offices and
even in undergraduate textbooks.
This leads to the second difficulty in reviewing this book.
It claims to be "a practical guide for managers on how cost
and performance management systems can increase the
profitability and performance of their organisations by bringing
together, in an integrated comprehensive way, the modern cost
management methods the authors have helped develop during the
past 15 years." It achieves this stated objective
admirably. However, much of the content of the book, due to the
very popularity of the ABC methodology, is not new information
for an informed reader.
Many advanced courses in management accounting have been
presenting this material in an integrated manner for at least
the last five years. Many of the examples quoted, the cases
referred to, and the diagrams illustrated have also been
standard teaching material in many of these courses.
The authors classify the cost systems of organisations into
four evolutionary stages. Stage I organisations are those in
which the cost systems are not even adequate for routine,
periodic financial reporting. Stage II companies are those in
which cost information is used only for the preparation of
periodic financial reports (eg. costing the cost of goods sold).
The authors recommend both such organisations to quickly migrate
to Stage III, where they develop customised, stand-alone
approaches (most often separate from their official financial
system) for measuring organisational costs and providing
relevant, timely performance measurement feedback to their
employees, especially in support of their continuous improvement
activities. It is at this stage that the authors insist on the
ABC approach as the foundation upon which accurate costing and
performance measurement systems can be based. The final
evolution is to Stage IV, where cost and performance measurement
information becomes integrated into the mainstream fabric of
organisational reporting and managerial processes. The authors
claim that it is at this stage that organisations can benefit
from the full power and capabilities of advanced ABC systems.
This integration would enable cost management systems to not
only function in feedback mode, but also in feedforward mode by
motivating improvements in future performance. Continuous
improvement, Kaizen and Target Costing are techniques that play
a role in this shift to a feedforward orientation.
The authors use two important themes throughout the book to
integrate the various tools and techniques: first, that ABC
costs have to be accurately measured, and second that there
should be a continuous (and discontinuous) reduction in such
costs. These two themes provide a common thread as the book sets
out to document how ABC and continuous improvement concepts
impact upon resource capacity decisions, customer account
management, supplier relationship development, product mix and
pricing, operational applications, budgeting and transfer
pricing. In each of the chapters dealing with these integrative
issues, the authors' summary of the literature and relevant
cases is, as expected, excellent, and presented in a very
readable manner. Of some more recent interest is a chapter that
integrates ABC with Enterprise-Wide Systems (EWS) for Stage IV
evolution, although the authors firmly state that much of the
relevant, timely and accurate information needed by managers and
employees can still be achieved by stand-alone PC-based ABC
systems (i.e. Stage III).
In summary, the book provides a good framework for teaching
management accounting systems development. It is essentially,
however, a book that summarises existing knowledge in a very
easy to read manner. While the professionals consulting in the
ABC area and the academic researching it won't learn anything
radically new from reading the book, it remains a "must
have reference" for operations managers, IT professionals
and financial executives looking for a practical guide on how to
develop and enhance the cost and performance management systems
in their organisations.
Book Shelf
The ideas of intellectual capital and knowledge management
seem to be on many people's lips lately. A recent publication by
the OECD (Human Capital Investment: An International Comparison,
OECD, 1998) takes a macro view of the role of knowledge, skills
and competences (often referred to as human capital) in
supporting economic growth and reducing social inequality. As
the world moves into "knowledge-based" economies, the
importance of human capital becomes more significant than ever.
Businesses, governments and individuals are increasingly aware
of the importance of lifelong learning in a society where
economic, social and technological change call for flexibility
and adaptability. The report aims to clarify what is known about
human capital and its measurement, and assess the investment in
human capital and the associated returns.
Knowledge, information and management accounting are closely
connected. The Spring, 1998, number (Vol 40, No 3) of California
Management Review is a special issue on "Knowledge
management and the firm". Of particular interest to
management accountants are:
"Knowledge management in practice" by Rudy Ruggles
(describes what firms are actually doing to manage knowledge),
"Organizing knowledge" by Seely and Duguid (argues
for compatible organizational and technological systems that
enhance the production of knowledge), and
"If only we knew what we know" by O'Dell and
Grayson (explores how firms conduct successful internal
benchmarking).
Don't forget the Institute has been contributing a segment to
CFO Magazine - I am constantly looking for more submissions.
Please feel free to share anything that you have found
interesting. You can send your ideas to: Bill Richardson, Dept
of Accounting & Finance, Monash University, PO Box 197,
Caulfield East VIC 3145.
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