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Unformatted text preview: The Impact of Activity Based Costing on Managerial Decisions at Insteel Industries- A Field Study * V.G. Narayanan Ratna G. Sarkar Harvard Business School August 16, 1999 Contact Address Harvard Business School Boston, MA 02163 617-495-6359 firstname.lastname@example.org email@example.com * A previous version of this paper was titled, “ABC at Insteel Industries”. We would like to thank the Insteel Industries management for generously providing us with their time and complete access, and Dave Conrad for the data. We also thank Stan Abraham, Sarah Eriksen, and Gregg Friedman of the Harvard Business School for their research assistance, the Seminar Participants at the April 1999 NBER conference on Organizational Change and Performance Improvement, Santa Rosa, California, and Ed Lazear the discussant at the conference, for their comments. 1 1. Introduction In this paper, we seek to provide empirical documentation of the effect of Activity-Based Costing (ABC) information on product and customer-related decisions made by managers in a company. Proponents of ABC argue that when an entity implements ABC, it reaps at least two important benefits. First, its entire operation is scrutinized in great detail and its performance and efficiency analyzed and benchmarked against best practices. Employees are encouraged to be critical of the status quo and to suggest improvements. This can result in process improvements that promote more efficient use of resources and hence reduce costs. Second, ABC generally yields a set of overhead cost numbers that, relative to traditional volume-based methods of costing, better represent the consumption of shared resources by the firm’s products, customers and service offerings. Evaluated in light of these new activity-based costs, particular products and customers may show up as ‘loss-making.' This information may enable a firm to change the mix of products produced and customers served allowing it to focus on making profitable products and serving profitable customers. While there are a number of teaching cases and other such anecdotal evidence about implementation of ABC and decisions impacted by ABC numbers, there has been no systematic, statistical investigation of whether ABC really influences managerial decisions. An ABC analysis may not have any impact on a firm for two reasons. (1) It may not reveal any new information to the managers who intuitively know already what an ABC system formally captures. (2) It is conceivable that outside consultants are hired to do an ABC analysis but decision makers in the firm do not accept the ABC numbers, which often differ significantly from traditional cost numbers. Effective follow-up to the ABC analysis may require managerial decisions and actions significantly different from the status quo, resulting in organizational change and upheaval, to which managers may display resistance....
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