Paul Jackson
as well as in identifying the most efficient processes to use and the best channels with which to reach customers.
An activity‐based approach, by contrast, focuses not on the ultimate cost object( such as the product or service), but on the activities that produce the product or service( for example, Arnaboldi and Lapsley 2003, p. 348). As such, it is the activities that are seen to consume resources ‐ such as labour, materials, machinery, space, and other corporate overheads. Having identified activities and allocated resources to them, costs can then be traced to the products and services that consume these activities( Cooper and Kaplan 1998). In ABC this is done via the use of‘ cost drivers’ ‐ the factors that create demand for particular activities( see also Shanahan 2008: 39‐40). As Cooper and Kaplan( 1988) note, traditional cost accounting techniques often use drivers that bear little or no relationship to the activities that create work ‐ for example, allocating the costs of Accounts Receivable based on sales revenue rather than the number of invoices. With cost information so derived, it is argued, managers are better placed to evaluate the options before them, optimise corporate performance and maximise profitability( Stratton et al. 2009; Maelah and Ibrahim 2007). It is for reasons such as these that activity‐based techniques have grown in popularity since the 1990s( Friedman and Lyne 1995).
In research conducted in the UK, Friedman and Lyne( 1995) found a variety of uses being made of activitybased techniques. This included support for costing and pricing( such as in bidding for work, or deciding on product ranges), resource allocation( for example, in departmental re‐charging and justifying capital expenditure) and in cost management( for managing overhead reduction or identifying non‐value‐adding activities).
ABC has now been adopted by a range of organisations in the UK public sector, including universities( Goddard and Ooi 1998; Cropper and Cook 2000; McChlery et al. 2007), local government( Ardaboldi and Lapsley 2003), central government( CIPFA 2001) and health care( Lawson 2005; Arnaboldi and Lapsley 2005). Internationally, too, ABC has been employed by a range of public sector bodies( for example, see Mullins and Zorn 1999; Fortin et al. 2007; Carmo and Padovani 2012).
A range of techniques and frameworks, derived from ABC, emerged during the 1990s, which sought to broaden the appeal of ABC from a cost accounting technique to a tool for performance management and Activity‐Based Management( ABM) more generally( for example, see Brimson and Antos 1994; Forrest 1996; Turney 1996). The use of activity‐based methods as an adjunct to other managerial practices is something for which Cooper and Kaplan originally laid claim. ABC is, they posited,‘ as much a tool of corporate strategy as it is a formal accounting system’( 1988, p. 97). And as Ness and Cucuzza( 1995) argue:
‘... ABC can be much more than a superior accounting technique that shows how much money individual products are really making or losing. When ABC is woven into critical management systems, it can serve as a powerful tool for continuously rethinking and dramatically improving not only products and services but also processes and markets strategies.’( p. 130)
3. ABC and value‐adding analysis
The focus in activity analysis on processes and continuous improvement is emphasised by Johnson( 1991), an early advocate of ABC, and is something observed by Friedman and Lyne( 1995) in their UK research in the mid 1990s. Many of the companies the latter authors studied gained most of their benefits directly from activity analysis itself ‐ often in determining whether or not such activities were value‐added( p. 14).
As CIPFA’ s( 2001) guidance on ABC notes, having identified areas of analytical interest, an ABC exercise can then put those relevant activities into a series of categories( pp 5‐6):
• Customer value‐adding – activity that cannot be removed without reducing the quality of service to the customer
• Business value‐adding – activity that adds value to the business and which, in due course, may add value to the customer
• Non‐value ‐adding – activity that adds no value to either the business or customer, removal of which could improve the service
• Sustaining – activity that adds no value but is required to support operations.
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