Using Activity-Based Costing to Improve Performance: A Case Study Report

Abstract

Abstract : The ongoing Department of Defense (DoD) downsizing and reorganization programs have had a significant impact on defense capabilities and resources. Declining defense resources, in particular, are providing significant incentives to improve the management of all costs in the DoD. To improve cost management, the DoD has identified activity-based costing (ABC) and activity-based management (ABM) for defense-wide implementation. ABC is a methodology that measures the cost and performance of activities, resources, and cost objects such as products and services to provide more accurate cost information for managerial decision making. Activity-based management (ABM) complements ABC by using it in the analyses of processes to identify inefficiencies and non-value added activities for process improvement. Although various public and private organizations have implemented ABC, little is known about how military organizations have used ABC information. The purpose of this research is to examine and analyze the experiences of three military organizations to gain insights into how they use ABC information to improve performance. Although the ABC models provided some insights into possible areas for improvement, the results show little evidence that the organizations consistently used the models and acted on the ABC information to improve performance. The failure stems largely from a lack of preparation necessary to effectively use the models to initiate performance improvements. The study offers several recommendations to improve ABC acceptance and use by military organizations.