Summary by Kevin Wrobel
Master of Accountancy Program
University of South Florida, Summer 2002
ABC Main Page | ABM Main Page
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.
Bean Counters Add No Value
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.
First Try a Failure
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.
Try, Try Again
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.
Discovery
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.
Spreading the Gospel
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.
New Focus
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 below based on.
Some Lessons Learned from Various Stages of the ABC Implementation
The Good
They eventually involved several departments in a cross-functional effort.
After learning the hard way they reduced the cost drivers to an absolute minimum.1
Followed Pareto's 80/20 rule achieving 80% effectiveness in ABC with 20% of the effort.
The Bad
Did not get senior management buy-in for the ABC process.
Did not implement an ABC pilot first and used an outsider (new employee) to drive the ABC implementation.
Used ABC as a model rather than an ongoing process.
Did not establish a clear timetable for completion of the project.
The Ugly
Made ABC a self-serving project with no involvement from other departments.
Tried to identify and cost every activity.
Used cost drivers that were not readily available that required new data collection methods. This caused ABC to appear to be too complex.
Viewed ABC as an end-all solution rather than as a valuable tool.
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1 Note: A graphic illustration developed from this paper shows how sixteen activity cost pools are combined into ten homogenous cost pools to reduce the number of cost assignments. (Summary).
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