John Innes* Pierre M6vellec* Comparison ABC: A Franco:British Intra-Group

The Japanese Association of Management Accounting

The JapaneseAssociation bf Management Accounting

The Journal ofManagement Accounting, Japan Vol.3,No. 1 1994

ABC: A Franco:British Intra-Group

Comparison

John Innes*

Pierre M6vellec*

Abstract

'

Thiscase study describesthe implementationof ABC intwo factorieswithinthe one

Britishmultinational group inFrance and Britain, Italso explores thesimilarities and

differeneesbetJweentheassessment, implementationand use of theABC $ystem inthese two factories,The Flirench.managersassessed ABC with themajor objective of product

costing ^whereas inthe BritishfactoryABC was used mainly forcost management.

However,itisimportanttorealise thattheFrenchhomogeneous^cost _pools,basedon a ver- ticalanalysis of thefirm'sorganisational structure, make itrelatively easy forFrenchman- agers tomove fromABC for_product costing toABC forcest management,

1[IhedrivingforcebehindABC differedbetweenthetwofactorieswiththeFrenchFactory

Manager and the BritishFinanceDirectorbeingthetworespective `champions'.

Thishad

implications^forthedevelopmentof tiheABC system withthe Fhrenehfactoryconcentrating on the_production^overheads (andthe^resulting ABC _product costs varying from^+127% to- 13% frDmtheexisting product^{costs); whereas} theBritishABC system ineludedmest over-

heads (such^as production,administratien and marketing) and developedusefu1 brand profitabilityinformation,[[heFrenchmanagers were interesteclinthefactthat theABC

system attributed higheroverhead costs tothesub-contracted products. The Britishman- agers developed^more team working and a revised organisation structure fo11owingthe introductionof theABC system,

^However, similarities also existed between theABC systgms intheFrench and British

factories.^TlieABC _proeess ^{was viewed as} a management ratiher thanjust^{'anaecounting}

tool^{and was considered to} be complementary toJust-in-Time and Total Quality

Management, Costdriversweve incorporatedintotheperformancemeasurement system and thefactthat ABC exarrimes aetivities across departmentalboundariesforcedman- agers tothinkabout business_processesand tochangetheirmental ^`model' oftheorganisa-

tion.Despitesuch similarities thisresearch projecthasshown thateven inthe same group

and with similar factoriesABC informationcan beused indiffbrentways,

Keywords

CaseStudy, Activity-BasedCosting, ProdpctCosting, CostManagament.

SubmittedJanuary1994.

Aecepted February 1994.

* PvofessorefAccountancy, University of Dundee, UK

' Professer_ofManagernent, University of Nantes, France

The Japanese Association of Management Accounting

The JapaneseAssociation of Management Accounting

ABC/ A Franco-Britishlntra-GroupComparison

1. Introduction

Activity-based^costing (ABC)has ^{attracted a} greatdeal^of interestfromboth^manage-

ment accountants and'managers inthe late^'1980s and the 1990s although earlier refer- ences toactivity costing can be found (Solemons(1968),Staubus(1971)and Shillinglaw (1982)).Coeper ^and Kaplan (see,fbr^{example, 1988 and 1991) and} CAM-I (see,^fbT

example, Berliner and Brimson (1989))^{didmuch to}publicise'ABC, A review of the ear-

lierliteratureon ABC can be fbund in Innes and Mitehell(1990),^Boisvert(1991)^and Mevellec(1991),

The ^{early examples of} ABC ^{case studies} concentrated on product ^costing, Instead^of

recovering overheads on the basisof volume based oveThead rates (such^{as labourhours}

or machine hours) on a departmental basis,ABC introduced activity-based eost pools

which crossed departmental boundaries ^{and cost} driversto linkthese cost pools ^and the product lines. However, in recent years the cost management objective of ABe has become at leastas important as the _product costing objective, Brimson (1991),^Turney (1991),Bellis-Jones(1992)^and Brinker(1992)provide details^of activity-based cost man- agement.

Many of the developments inABC have been reported inthe form of case studies-in

particular the Harvard Business School^cases (Cooper^and Kaplan (1991)).British^case

studies on ABC ^{are reported} fbr^example in Innes ^and Mitchell (1990^and 1991),

Gietzmann (1991)qnd^{Bhimani and Pigott}(1992).^{French case studies} on ABC can be

fbund in Evaert _and M6vellec (1991),^Diard (1992),^Adam (1993),^Armitage (1993)^and M6vellec(1993).However, despitethe inteiest^as indicatedby the number of ABC ^con- ferencesand the amount of ABC literature,relatively few organisations in the United Kingdom haveactually implemented an ABC system, IntheInnesand Mitchell(1991a)

survey, 720 questionnaires ^were posted to members of the Chartered Instituteof

Management Accountants ^{'who worked} fororganisations either inthe manufacturing or

the financialservi,ees sectors intheUnited Kingdom. ^There was a 26% ^{usable response}

rate (187questionnaires) ^{and only} 6% (11^firms)were implementing ABC, 33% (62^firms)

were currently assessing it,52% (97firms)had ^not yet^{seriously considered} itand 9% (17

firms) had rejected it. No ^{such similar surVey} has been ^conducted inFrance but it

appears,that relatively few French firmshave implemented ABC.

However, the results of such surveys must beinterpretedwith care. For example, when individuals^reply that their^{companies are} implementing ABC ^{what exaetly} does

thismean? Itmay be that one company within a group isimplementing ABC, Thisis

one ofthe areas which thisarticle explores. Do two companies indifferentcountries but

within the same group implement ^{and use} ABC inthe same way?

Thisisbotha descriptiveand exploratory case study (Scapens,1990). Itdescribesthe

assessment and implementation of ABC in two factorieswithin the same British multi- national group inFrance ^and Great Britain. Thiscase study also explores whether or

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The Japanese Association of Management Accounting

The JapaneseAssociation of Management Accounting

The Journal6fManagement Accounting,1994

not two similar factoriesin different^countries but inthe same group ^assess, implement

and use ABC inthe ^{same way,} Ferreira^and Merchant (1992)_provide ^a _good ^{review of}

existing ease studies inmanagement aceounting.

These two factoriesstudied produce similar productsfora particular^{segment of} the

consumer market. To datethe group has ^{no specific} _{group policy} ^on the implementation

of ABC, Thisarticle explores the reasons why the^French and Britishfaetories^were inter-^'

ested inABC, how thesefactoriesassessed and implemented ABC, how theABC results

have been^used by the managers and the changes caused by theABC _project. The ABC

experiences inthe French and Britishfactorieswill be discussed separately and the similar-

itiesand differencesbetweenthese two ABC systems wi11bediscussedinthe conclusions.

2. ^.French Factor _y

A ^{research assistant} helped^with the development ^{of an} ABC ^{system working} fu11-time during a fburmonth period. This istherefbre an example of^{action research.} In addi-

tion,other researchers made periodic^{visits to the} factoryto discussthe_progress ofthe

ABC ^system. Afterthissystem had been implemented, the research assistant made a

fbrmalpresentationto^an audience which includedthe two researchers and the French FactoryManager. _.This fbrma}presentation^was fbllowedby three hours of.discussion.

Fourmonths latera furtherinterviewwas heldwith thisFactoryManager forfeedback

on the^{use ofABC} information.

3. Background

^{This British} multinational has several French factoriesand thefactoryimplementing

the ABC system exports over 50% of itsoutput. This factory manufactures six difft)rent

types ofproducts fbr^a _particular ^{segment Qfthe consumer market,} This^{segment ofthe}

market isvery competitive with several French and multinational competitors. In

France thisparticularmultinational isnot the market leaderforthe products^made in

the French factory, The introduction^{of new} _products is^an important ^{element of} the

competitive situation with a new product ^{appeqring almost} dailyon the market and an old product beingwithdrawn,

Thisfactoryhas 400 employees ^{with overheads} beingapproximately 25% of totalcosts.

The system of reeovering overheads was tochaTge 30% ^on the direct^{materials and} direct labourcost. For sub-contracted itemsthe overheads mark-up was 10%. Thiswas also

thebasisfbrintra-grouptransfer_pricing. The automated production linesare dedicated

to each of the six types of product but ^each type of product has ^many differentproduct

lines.The Just-in-Timesystem isused inpart ^ofthe factory.^Total _quality ^management

ispractised^and certification under internationalstandard 9002 waS obtained in the spring of.1993. Managers ^considered thatABC ^would link^{well with} both^the Just-in- Time ^and TotalQuality^Management approaches.

The Japanese Association of Management Accounting

The JapaneseAssociation of Management Accounting

ABC; A Franco-Britishlntra-GroupComparison

The factory^{controller uses `un} tableau debord'inthe fbllowing^matrix:

lI

l i'I

l PackaginglDirectMaterialsSub-contracted

/ Items

NumberofReceipts '

9eofcomplaints 9oofqualityproblems

C/eofrejectiens 'i/

O!oofsuppliesunderqualityassurance l '

9oofsupplieseheckedinlaboratory ^[ 9oofsuppliescheckedautomatieally

The detailforthe ^{above `tableau} debord'comes from the shop floorand there isa

detailed^{monthly analysis} for^each performance indicator. Productionis^monitored by

the eMciency of the production linesrelative tothe ^sales schedule ^and thegood preduct despatchedtocustomers. Preductionisalso monitored on the basisefthe actual direct labourtime against the expected labourtime, Budgeting isthe mqin financialmethod

of control. On the costing side fiveindividuals calculate and monitor the production

costs and thg factthat the products ^{are consumer} products isillustratedby seven indi-

viduals ealculating and monitoring the marketing costs. Further details^{of `tableau} de bord'can befound inGreif(1993)^and Lebas (1993).

Itisimportant torealise that the French cest accounting system has been developed dUring^the lastthirty_years on thebasisof an analysis of activities and of the organisa-

tionstructure, The basis^of the French ^{cost accounting system} today still relies on this

ideaof`sections homgenes' or homogeneouscost pools basedon a vertical analysis ofthe firm down the _pyramid of the organisation stucture (see^{M6vellec tindRochery, 1990,}

p.215,and Burlaud ^and Simon, 1993, p,215). Although this theoretical approach of

homegeneous ^cost _pools has been ^simpiified inPractice,^{itoffers the} possibility^{of calcu-}

lating^`true' costs based on thisvertical analysis of the organisation structure. This is thebasic^reason why, inFrance,ABC doesnot have a real advantage interms of finding

eur ^`true' costs unless itincludes^a horizontal^or cross-functional analysis of theorgani-

sation. In other words, in France the introduction^{of an} ABC ^system necessarily

involvesan analysis also of the business_processes across theorganisation. Therefbre,

thisdistinctionbetween activity-based product ^{costing and} activity-based cost manage- ment isblurredinFrench ABC ^systems. You ^{can move} from ABC toABCM ^{without any}

major changes inthe basicunderlying system.

4. ABCAssessment

The ^major reason fbrassessing ABC was that the managers were unhappy with the

existing costing system, For ^{example one manager} believedthat^`the existing product costs donot reflect thereal consumption ofresouTces by ^a _product'. The _primary objec-

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The JapaneseAssociation ofManagement Accounting

The JournalofManagement Aceounting,¹⁹⁹⁴

tive ofthe ABC system was therefbre established as product ^costing, At the begin,nings

ef the process little,ifany, consideration was given tothe cost management aspect^of

A[BC. However, ^{a seeondary objective of} the ABC ^system was to^report detailsof the cost

driverstothe managers. The drivingfbrceor the ^`champion' behindthe introduction of

thisABC system was the FactoryManager.

The overheads ^were dividedintothreecategories:

1.

2.

3.

The ABC system

because ^although

,implementation

overheads.

Individualdisicussions^-were held with approximately 40 managers to determine the activities and the related cost drivers. Itsoon became ^{apparent that an} important^activ- ity^was that of sub-contracting ^with sub-contracted items being^{'40% of total sales.}

PTeviously the cost drivers^of the sub-contracting ^activity had not been seriously consid- ered, The existing system was to add 10% tothe cost of sub-contracted items ^{as an'}

allowance forthecompany's own internal overheads.

The interviewswith ^{managers and} furtherinvestigationsidentified^{the volume of}

part ^numbers sub-contracted as beingthe^most importantcost driverfor^the subcontract-

ingprocess, This analysis revealed that the internal overheads related tosub-contract- ed items varied greatlybetween the items sub-contracted depending on the above cost

driver. OverallthisABC product^{costing analysis revealed that} thetotalinternalover-

heads^{associated with the} sub-contracted itemsexceeded 10% of the cost of sub-contract- ed items. The managers were interested^{and surprised} by ^{some of} the ABC costs for

sub-contracted items.

As is^{usual with most} ABC assessments, the melnagers identified^a large^{number of}

activities and cost drivers. ^{For example, the activities included} planning,sub-contract-

ing,quality^control, maintenance, material ^{receipts and movements,} purchasing, packag- ing,engineering, ^{management of} human resources, accounting ^{and computing.} The'

managers identifiedfrom one to^{nine cost} driversfor^{each activity} during the initial interviews. However,^after furtherinvestigations^{and interviews nine cost} drivers(in

addition tothe one above forsub-contracting) were ^{chosen as} the basisfortheABC _prod- Controllable^overheads forwhich the managers could control

and therefore had responsibility such ^{as salaries and}

depreciation^{of equipment,}

Traceable^{overheads which were services} provided ^{such as} ' quality ^{assurance and central} engineering. Atpresentthese

overheads were reapportioned to production ^{managers on}

bases^{such as number} ofemployees or square metres of space.

Headquarter overheads which were reapportioned on thebasis

ofprime cost. ･ '

excluded category three above namely the headquarter overheads

theheadquarter office was visited, the objective was to explore the

of ABC within this particular faetoryconcentrating on the production

The Japanese Association of Management Accounting

The JapaneseAssociation of Ma'nagement Accounting

ABC/ A Franco-Britishlntra-GroupComparison

uct costs. Ofthese nine cost drivers,fourrelated tothe products:

1. number ofpaTt numbers produced;

2. ^{totalnurpber of part numbers} for^company;

3. ^{number of} formulae;

4. number of differenttypes ofpackaging;

Four cost drivers^re}ated tothe volume of products:

5, Volume ^of _products manufactured;

6, Number ofproduction linesused;

7. Volume of products ^sold;

8. Number ^of _pallets^of finished_product;

One cost driVerrelated to^{the number of} batches:

9. Nurnber ofbatches multiplied by time tochange set-up.

Further ^{analysis revealed} that two of the cost drivers^namely total number of part

numbers for the company and the ^{number of} productionlinesused could account for

approxirnately 50% of the internaloverheads (excluding^{the overhead costs related to}

sub-contracting activities). This informationsurprised the managers and, although the

objective was ABC _product ^costs, thisraised questions from the managers about cost management. For example, doesthe company really need all the part ^{numbers which}

are heldat present? However, the ohjective was ABC _product costing and this was

developed ^using q ^Lotus spreadsheet to compare the existing costs and the new ABC

costs by product^line.

5. Results

The new ABC _product costs changed theexisting costs of product linesfirom+127% to-

13%. The ^{overhead element of} the new ABC _product costs ^changed from+1,400% to^-

50% from thefbrmer basis.The ABC _product ^{costs also revealed one} _{particular product} grpup ^{with several} different_product lines^{which all made a} loss. Following further investigationsthe managers agreed that the overhead element forthisparticularprod-

uct group had been understated inthepast.

An ^{analysis of} the detailedABC product^{costs revealed} fburfurther_general ^results.

First,the manufacture ofsmall volumes of a product^{linewas very costly and much more}

expensive than even the ^managers had assumed. Secondly,and followingon from this

first^result, the high^volume _product lines^{were subsiding} the low ^volume productlineS.

Third,as the managers had expected, theformer ^{system of recovering overheads on} the

basisof 30% of directcost didnot reflect the real consumption of overheads bythediffer-

ent product lines.Fourth,theexisting system of adding 10% of thecost of sub-contract- ed items for^{internal overheadS} understated the overhead costs drivenby the sub-con-

tractmg system.

Four ^{months after the end of this} ABC _project,the manageTs were generallyhappy

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The JapaneseAssociation of Management Accounting

The Journalef Management Accounting,1994

with itsresults. However, todatethisABC _projecthas been viewed as a one-off project

and the ABC product ^cost infbrmation has not been _produced on a monthly basis.

Nevertheless,^one important^change isthat some ef the physical ^cost driverinformation

has been incorporatedintothe performance measurement -system.

^The ABC _project has also ^affected the sub-contracting decisions. Some items are no

longersub-contracted'and some sub-contractors who were previously ^not inthe_quality

assurance scheme have either been dr6pped or includedinthe scheme. The method of

calculating the ^internal overhead element forsub-contracted items has alse been

changed. Similarly,the ABC _projecthas ^changed the managerial response tonew prod-

u'cts. Inthe past ^new products ^{almost a}ways used a new} formula and new packaging.

A _programme was established tostandardise formulae and packaging between difllerent

product groups, The ^managers _generally ^saw _great potential^savings from ^such stan-

dardisationwitheut adversely affeeting the products. ^{Managers now search} for^more

standardisation with existing produets includingmore standardisation on the packaging.

To datethe one permanent ^change tothe monthly overhead aecounting system has been the inclusion^{ofthe volume ofpart numbersi as an overhead} basisofrecovery. The possibility^{isbeing examined of employing a} person ^{fu11-timeto implement and run the} ABC system on a menthly basisbut no decisjonhas_yet been taken on this, .Generally, the managers consider that it^may be bettertoproduce the ABC informationperiodically

on a one-offbasis rather than tun itas a monthly'system. However, discussionsare con-

tinuingwithin thisFrench factory,What therefbreisthe ABC _positiQn within the group'sBritishfactory^which _produces ^{similar consumer} _products to these ofthe French factory.

6. BritishFactory

A major differencefrom the French faetorywas that consultants and an internaltearn

had implemented the ABC ^{system within} the British

factory.

`champion'

behind the introductionof thisABC ^{system was} the Finance Director. A

researcher therefbre visited ^{and spent} a day^with theFinance Direetor.This dayinclud-

ed a slide presentation^{on theABC system and furtherquestions, discussionand exami-}

nation of both documents ^and ABC infbrmation^{on a computer} screen. Following this

visit furtherdiscussionand correspondence took place^{including a write-up of the} ABC

system by the researcher which the Finance Directoramended.

Z ^{Background d}

Thisis^{one of several} Britishfactories^within this_group. This_particular factory^manu- factures^six diffb.renttypes^of products for^{a segment of the} consumer market. Thismar-

ket isvery price competitive with several Britishand multinational competitors. New produet developmentisextremely important. The Britishmarket isdominated by a