This article chronicles Lord Corporation's implementation of an activity based cost accounting system. Alan W. Rupp, the manager of cost accounting for Lord Corp., gives insight on what they found to be the best approach for ABC implementation.

Lord Corporation is a diverse manufacturer with 250 million in sales at the time of this article. Rupp begins by explaining that the computer generated reports that accounting prepared were regarded as gospel by upper management. The cost accountants that worked for Lord Corp., prior to the implementation of an ABC system, added little value to the company.

Lord Corp. created a Financial Development Program in order to develop highly educated accountants and utilize their talent through out the company. One such project was to develop an ABC system for the Chemical Products Division. Rupp explains how the project was doomed from the beginning. They had used someone who had not worked for the company for a very long to implement ABC. They also selected the Chemical Products Division, which was profitable at the time. The project was viewed as an accounting project and not taken seriously.

The second attempt turned out to be a much better learning experience. The Industrial Products Division became the next "guinea pig" for ABC. However, this time management involved itself in the planning process. A team of managers began the process by interviewing all of the employees to determine what activities they preformed. These activities where analyzed and incorporated into the budding ABC model the team created.

The team was surprised by what they found in the studies. The best cost driver for the division turned out to be inspection. A $.10 part that took on a flat percentage of overhead before, now jumped in cost by 500% to 700%. Even the smallest, most inexpensive part has to be received, inspected, and stocked. This new information sent shockwaves through marketing.

Management deemed the project a success and instructed the team to implement ABC across the division and elsewhere in the company. The models changed continuously as the team learned more about the processes of each division.

After implementing the ABC system, management has begun to change its strategy in lowering costs and increasing profitability. The focus has been on low-volume products; eliminating them from the division, keeping them as part of a larger marketing strategy, outsourcing them to external suppliers, and convincing customers who purchase them to order less frequently in higher volumes. Each low-volume part and product is evaluated with these four solutions in mind. Management seems to understand that activity costing is not the end-all, it is a tool. Other lessons from Lord Corporation's ABC experience are summarized in the table below based on Rupp's Table 1.

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