Measuring Nonvalue-Added Cost and the Cost of Excess Capacity in a Traditional Standard Cost System

Abstract

While activity-based management (ABM) is typically described in the context of activity-based costing (ABC), most firms continue to use traditional standard cost systems for the majority, if not all, of their operations. The objective of this paper is to describe methods to improve cost control efforts during planning within a traditional standard cost system. Using ABM concepts for planning in a traditional standard cost system can provide the value of ABM to managers even without an underlying ABC system. The intent is not to discuss benchmarking efforts but how to use benchmark data once it is available to quantify potential gains from (a) operational improvements or (b) better capacity management. These two approaches require markedly different actions from managers so explicit planning information to differentiate between the gains available from operational improvements or capacity management can be used to better direct managers' efforts.