Activity-based costing: A necessity for the future of manufacturing

Abstract

“Continual improvement.” “Enterprise excellence.” Are these merely the manufacturing buzzwords of the 9Os? Perhaps, but more likely, these two phrases represent a trend in manufacturing that is beginning now and may well continue far into the future. The increasing globalization of the marketplace and rapid technological changes in the manufacturing environment have created a fierce arena of competition for U.S. manufacturing businesses. In order to maintain a position as a viable competitor in this arena and, more importantly, to achieve any competitive advantage, companies must adopt strategies that integrate environmental, market, and technical opportunities in the most efficient and effective manner (Turney, 1989). This is where continual improvement and enterprise excellence come into play. Continual improvement focuses on improving all activities related to bringing a product to market, not just the manufacturing process. These activities include “research, design, development, marketing, finance, production, packaging, etc.” (Brimson, 1991, p. 5). Enterprise excellence focuses on improved product design, a better product mix, and removal of waste from operating activities (Brimson). While some may argue that the goals of enterprise excellence have been espoused by manufacturing firms for years, experts in the field such as Robin Cooper and Robert S. Kaplan of the Harvard Business School contend that these goals cannot be achieved without a commitment to continual improvement (“Activity-Based Costing,” 1989). Furthermore, Cooper and Kaplan assert that an integral part of developing and implementing a continual improvement strategy involves revamping manufacturing firms’ productcosting systems. The product-costing system developed by Cooper and Kaplan and already adopted by some manufacturing companies is activity-based costing (ABC). ABC has been described as playing a large part in the “ongoing search for opportunities to improve and attain competitive advantage” (Turney, 1992, p. 21). This report will explain how an activity-based costing system (ABCS)