Relevance lost: the rise and fall of activity-based costing

Article type: Research Article

Authors: Geri, Nitza^a | Ronen, Boaz^{b; *}

Affiliations: [a] The Open University of Israel, Israel | [b] Faculty of Management, Tel Aviv University, Tel Aviv, Israel

Correspondence: [*] Corresponding author. Tel.: +972 3 6441181. Fax: +972 3 6441267. E-mail: [email protected].

Abstract: In the debate between marginal decision-making and full absorbance that has been going on since the nineteenth century, activity-based costing/management (ABC/M) appeared as a promising decision support tool which answers the criticism leveled against traditional cost accounting. This paper describes the strengths and weaknesses of ABC/M from a global value creation perspective, in an effort to explain why it failed to live up to its promise and why not too many companies retained it beyond a short pilot period. The paper suggests the global decision-making methodology (GDM), as an effective alternative to costing methods, which improves the quality of decisions and enhances organization value. The paper illustrates its implementation by presenting a case study of a large international financial services organization that abandoned the ABC/M system it had been using for seven years in favor of GDM. The ABC/M system was transformed to a throughput focused “light ABC” system that supports GDM. The article describes the circumstances that led the organization to adopt GDM, and provides general guidelines for its implementation.

Keywords: Activity-based costing/management (ABC/M), global decision-making methodology (GDM), light ABC, Theory of Constraints (TOC), the measurements profile

DOI: 10.3233/HSM-2005-24202

Journal: Human Systems Management, vol. 24, no. 2, pp. 133-144, 2005