Turney, P. B. B. 1990. Ten myths about implementing an
activity-based costing system. Journal of Cost Management (Spring):
24-32.
Summarized by Robert Heald
Master of Accountancy Program
University of South Florida, Fall 2000
ABC
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Purpose: Turney examines ten myths related to ABC product costing
identified from the comments of managers and academics, myths meaning a commonly
stated view that is accepted without critical analysis.
1. ABC systems are too costly
ABC system identifies activities and cost drivers, traces
costs to each activity, and then traces the cost of the activities to
products by means of the cost drivers.
The data needed for an ABC system already exists in the
plant and can be easily captured
ABC system reduces special studies that companies perform
to supplement the information reported by the product costing system.
2. Activity-Based systems are too complex to understand
- The additional number and type of cost drivers make an ABC
system difficult to understand
- ABC systems are easy to understand even though there are
more cost drivers than unit-based systems because these drivers describe the
major factors that create the demand for activity
- ABC systems reflect economic reality better therefore are
easier to understand than cost accounting systems.
3. All that we need are more cost centers
There is a limit to the accuracy that can be achieved by
simply increasing the number of cost centers.
4. Machine-hour systems would save the day
Advantages of using machine hours instead of direct labor
hours:
- machine hours may provide more reasonable overhead rates
- When machine base diversity exists the number of machines
that an operator runs varies according to the product produced
- Machine hours will not produce accurate product costs if
much of a company’s costs is incurred by activities that are not at the
unit level
5. A cost system should be kept simple
In plants where product homogeneity exists, there is no
need for an ABC system
Inaccurate product costs may occur where product diversity
exists because more and different types of cost drivers are needed.
ABC may need to be implemented for companies who have
product diversity or they incur significant costs in activities that are not
at the product level.
6. We know what our products cost
Managers have a feel for what the costs are to produce
their products
Managers do not realize the size of the problem or product
cost distortions
7. The market sets prices so we do not need product costs
Pricing to market is common in many industries, which means
that the role of product costs in setting prices is, therefore, limited.
Improved accuracy is an important benefit of ABC systems.
Even firms that do not use product costs to set prices
should still devote attention and resources to products based on relative
profitability
8. We cannot do anything about fixed costs
While the cost of fixed activities does not vary with the
number of product units, it may vary with the number of batches and
different products produced.
Failure to recognize batch-level and product-level
activities diminishes the perceived benefit of ABC systems.
Conventional systems recognize only one level of
variability, the unit-level.
9. Only manufacturing costs are product costs
Excluded activities from this myth include R&D costs,
selling and distribution
GAAP influences the exclusion of non-manufacturing
activities from product costs because they are classified as period costs
rather than product costs.
Failing to include non-manufacturing costs distorts product
costs if the cost of activity is high and the activities are consumed
differently by different products.
10. Product costs are not useful for managing overhead
activities
Managing cost drivers using ABC may reduce product costs.
