160 ACCOUNTING FOR MANAGERS
Costs are distributed to products by simplistic and arbitrary measures,
usually direct-labor based, that do not represent the demands made by each
product on the firm’s resources...the methods systematically bias and
distort costs of individual products...[and] usually lead to enormous cross
subsidies across products. (p. 2)Management accounting, according to Johnson and Kaplan (1987), failed to keep
pace with new technology and became subservient to the needs of external
financial reporting, as costs were allocated by accountants between the valuation
of inventory and the cost of goods sold. Johnson and Kaplan claimed that ‘[m]any
accountants and managers have come to believe that inventory cost figures give
an accurate guide to product costs, which they do not’ (p. 145). They argued that:
as product life cycles shorten and as more costs must be incurred before
production begins...directly traceable product costs become a much
lower fraction of total costs, traditional financial measures such as peri-
odic earnings and accounting ROI become less useful measures of corporate
performance. (p. 16)Johnson and Kaplan claimed that the goal of a good product cost system:
should be to make more obvious, more transparent, how costs currently
considered to be fixed or sunk actually do vary with decisions made about
product output, product mix and product diversity. (p. 235)Johnson and Kaplan also argued against the focus on short-term reported prof-
its and instead for short-term non-financial performance measures that were
consistent with the firm’s strategy and technologies (these were described in
Chapter 4).
In their latest book, Kaplan and Cooper (1998) describe how activity-based cost
(ABC) systems:
emerged in the mid-1980s to meet the need for accurate information about
the cost of resource demands by individual products, services, customers
and channels. ABC systems enabled indirect and support expenses to be
driven, first to activities and processes, and then to products, services, and
customers. The systems gave managers a clearer picture of the economics of
their operations. (p. 3)ABC systems were introduced in Chapters 9 and 10 and are further developed in
the next section of this chapter.
Kaplan and Cooper (1998) argued that cost systems perform three primary
functions:
1 Valuation of inventory and measurement of the cost of goods sold for finan-
cial reporting.
2 Estimation of the costs of activities, products, services and customers.
3 Provision of feedback to managers about process efficiency.