Faculty Scholarship 1994 - Present

Management Applications of Activity-Based Cost Accounting

To obtain better information to manage indirect costs, General Electric finance and production managers developed a basic activity-based cost accounting system (ABC) during the 1960s. Harvard Business School Professors Robin Cooper and Robert Kaplan further refined ABC in the late 1980s. They attempted to develop a cost accounting system that would overcome the difficulties inherent in traditional cost accounting systems--particularly the tendency to undercost low- volume products and overcost high-volume products. While ABC has been applied primarily to manufacturing operations, with the increasing importance of cost containment in the service sector, many large service companies are also using ABC. Building on these service sector applications, this paper provides a transition from theory to practice. The paper includes a brief historical framework of ABC, explains how ABC is used in manufacturing settings, and then demonstrate how ABC can be adapted as a management tool in the service sector, using the construction industry as an example.