Accounting

Institutional Affiliation Goes Here Abstract
 Activity-based costing (ABC) systems report accurate and timely cost information in a business environment, where competition is high and the company has a diverse product mix. In addition, the information ABC supplies can be used for continuous improvement of the business. This paper analyzes the various aspects of ABC and later attempt to gauge how different is the implementation of ABC viz-a-viz the theoretical aspect. The study considers the Finnish Fish Industry and the healthcare Industry and concludes that the implementation of ABC is beneficial for lowering costs and increasing productivity.

An Overview of (ABC)
Activity-based costing (ABC) is a cost accounting method is an advance from the traditional system which ABC identifies the various activities performed in a company and uses multiple cost drivers to assign indirect costs to the products. For example, to allocate the overhead based on each activity-based rather than departments in order to try to increase a better performance measurement.

ABC has been widely adopted in many large organizations such as banks and hospitals, therefore, The researcher would like to take this opportunity to investigate and discuss how important this accounting system could be by providing help on improving the companies financial performance and effectiveness, as Douglas T. Hicks mentioned in 1999 that ABC should also be also implemented in small business as the impacts of using ABC in positive in varied industries.

ABC works by assigning each project activity with a list of cost codes, with a many-to-many relationship between these two lists (i.e., an activity code can have more than one cost code associated with it, and a cost code can have more than one activity code associated with it). Thus, the list of cost codes would not increase as the number of activities increases, since the same cost code can be used with any number of activity codes. Ideally, there should be a standard list of activity codes and a standard list of cost codes used for all projects. Standardization would enable the comparison of actual costs, productivities, etc..., across projects, which would be useful for future estimates. Standardization of activity codes can be done for each class or type of project that a company constructs, such as commercial buildings, industrial facilities, road works, etc. ABC can also be used for service companies, the details of which shall be discussed in the later sections.

For each reporting period, site personnel would report the quantity complete for each activity code, combined with each cost code. The advantage of this approach is that the quantity complete of each activity can be effectively determined and associated with the costs to date for that activity. If the quantity complete was reported only against each activity on the project (rather than breaking the activity down into its cost codes), it would be difficult to assess which portions of the activity have been completed. For example, if the footings are 50 percent complete, this may mean that all of the forming and reinforcing steel have been done, but that none of the concrete has been poured. This method would not give an accurate assessment of the proportion of the activity that is complete, nor would it be possible to assess if the actual costs are within the budgeted costs for each cost code category. Conversely, if quantities and costs were reported against cost codes only, it would be difficult to assess what proportion of each activity is complete and what proportion of the costs are associated with each activity, The proposed approach yields a more accurate assessment of the projects progress than the traditional accounting-based approach to cost control.
In a simple ABC approach, a cost driver rate is derived from budgeted figures on expenses and anticipated activity volumes

                   
Budgeted Inspection Expenses   280,000
Cost per Inspection  ----------------------------  --------
Budgeted Activity Volume          4,000
70inspection

Note When using an ABC system on an ongoing basis, as exposed to a one-time snapshot of prior periods operations, a standard (or budgeted) activity cost driver is calculated from budgeted information.

During the period a 70 charge is assigned to any receipt, batch, or shipment that has an inspection performed that is, the cost assignment uses a standard cost driver rate applied to actual volumes. Alternatively, a cost driver rate could be determined ex post based on actual expenses and actual activity levels (250,0003,500  71.43 per inspection). This ex post calculation has several undesirable aspects, as discussed in standard textbook treatments of service. Assuming that the operating expense for the inspection activity is considered a committed expense, reconciling the inspection expense charged to products with the inspection expense recognized in the periods financial statement can be accomplished in a straightforward calculation

Inspection Expense
Charged to Products          3,500  70       245,000

Volume Variance (Budgeted -
 Actual Activity Level)
 (4,000- 3,500)  500                     70         35,000 U

Spending Variance
 (Actual - Budgeted Expenses)                        (30,000) F

Total Actual Expenses                                250,000

The variances are calculated to reconcile the rate of supplying assets during the period with the price of assets used for the activities actually performed. These variances can serve as a signal or trigger for managerial action. The appropriate interpretation and use of these reconciling variances are managerial judgments.

The Simple ABC approach, however, causes the cost driver rate to fluctuate each period with anticipated activity levels. If anticipated activity levels are falling faster than operating expenses can be reduced, the cost driver rate starts to escalate leading to potential death spirals. (Cooper  Verma, 1991) More fundamentally, no theoretical reason exists for calculating cost driver rates in this manner. The 70 rate is just a rough surrogate, and perhaps a quite inaccurate one, for the costs of assets used in each inspection. The rate comprises the costs of resources actually used for the inspection and also some portion of the unused capacity costs of resources supplied to perform this activity.

Aims of the Research
Compare theory of implementation and operation of ABC and with practice
Objective of the Research
To undertake an analytical literature review in the area of ABC, to discuss pros and cons of using ABC
To carry out one or two interviews with managers in company using ABC
To compare theory and practice
To draw recommendations and conclusions

Organization of the thesisSection breakdown
This paper is divided into six major chapters, namely Abstract, Introduction, Literature Review, Research Methods, ResultsAnalysis and Conclusion. The Literature Review shall analyze the existing research done on ABC by other researchers and critically gauge them with popular ABC theories and practices. The Research Methods section shall present the research methodology adopted for this paper and the steps involved in achieving that outcome. The analysis section shall study the findings of the research and distil key information from it. Lastly, the conclusion shall summarize the entire paper and present a roadmap for future researchers investigating the implementation of ABC.

Literature Review
Theory of ABC
Accounting researchers have criticized traditional cost accounting practices. They charge that the cost accounting system has not changed since the 1920s outmoded cost accounting systems are impediments to realizing benefits from new manufacturing environments because these new environments cannot be accurately assessed and evaluated and financial reporting requirements hinder the development of costing systems (Johnson and Kaplan 1987a, 1987b Kaplan 1983, 1984a, 1984b). These criticisms have prompted a significant amount of research on cost management and alternative costing systems (Young and Selto, 1991).

Recent research has focused on activity-based costing, the process of attributing costs to products according to activities that consume resources and deliver value (Cooper and Kaplan 1988 Foster and Gupta 1990 Johnson 1988 Miller and Vollman 1985). ABC is different from traditional costing systems in two ways (1) the cost drivers identified in an ABC system are not necessarily proportional to the units produced and (2) ABC is a resource usage model, not a cost allocation model (Cooper and Kaplan 1992). Unfortunately, academic accounting research has not reported any evidence (other than anecdotal) that associates the use of activity-based accounting with improved performance (Young and Selto 1991). Young and Selto (1991) also suggest that firm strategy, accounting methods, and technology is interdependent. A possible reason for the lack of reported benefits associated with ABC is that the AIS are not integrated with the manufacturing systems. Kaplan (1993) suggests that a part of the problem is that researchers have not developed research designs and hypotheses designed to test the ABC theory or that the implications from ABC theory are not already in practice and hence the theory cannot be tested by examining extant practice. This latter situation is consistent with the argument we make that the AIS is not integrated with the manufacturing system. The manufacturing (both AMS and traditional) and accounting information systems, as noted above, have many differences. Also, technology, strategy, and accounting methods should be integrated, and that has not been described in the writings. Rather, the ABC systems are patched on top of existing systems and there are no other reported changes in the incentive and evaluation criteria. An indispensable, but not abundant condition is to integrate the AIS and manufacturing systems. To address sufficiency, the firms strategy, behavioural effects and performance measures would need to be included. The differences between traditional and ABC based costing is illustrated by Setala (pg. 63, 1996) in the generalized diagram below

Figure  SEQ Figure  ARABIC 1 Difference between traditional and ABC Product Costing
(Source Setala, pg. 63, 1996)

We believe such a general assumption about the behaviour of activity costs is unnecessarily limiting. If certain expenses within an activity are variable relative to the cost driver of that activity in the short term, the variances calculated under Cooper and Kaplans approach may provide the wrong signals about how costs have been managed. The comparison of budgeted (unflexed) and actual expenses, and the calculation of an unused capacity variance will not show the impact of price changes or efficiencies (or inefficiencies) associated with those activity expenses for which spending should correspond to usage in the short-run. In effect, the budget and capacity variances calculated may be masking a deterioration (or improvement) in the cost of performing each unit of the activity (price variance) or efficiency (or inefficiency) in performing the activity (efficiency variance).

Benefits of using ABC
Activity Based Costing (ABC) is the most popular costing method adopted by big and small companys worldwide (Ferrara, pp. 48-52, 1991). This paper shall consider the various ways in which ABC has been implemented by manufacturing and service enterprises and the difference they experienced between the theoretical and practical aspects of ABC. The activity-based approach to job costing requires that costs be recorded against the lowest level activities in the project work break-down structure (WBS) at the task level. Costs are coded against cost codes (which represent tasks) combined with activity codes, creating a unique code for each task. Traditional accounting cost codes, such as Master format or any other standard set of cost codes, can be used to represent lowest level activities (i.e., tasks) in the WBS providing a link to accounting. These tasks correspond to estimated and scheduled items, providing a link to estimating and scheduling. Scheduling may be done at the less detailed activity level rather than at the task level.

As pointed out by Innes, Mitchell, and Yoshikawa (1994), the development of an activity-based costing (ABC) system involves identifying activities and assessing the basis of relating costs to identified activities, the choice of cost drivers, and the means by which the cost drivers are linked to product lines. This enables managers to obtain product cost information that could be used for developing appropriate Cost of Poor Quality (COPQ) programs to suit the company-specific experience and environment. The activities can be identified as value-- added vs. nonvalue-added activities emphasizing the customer-driven approach. They can be further classified in terms of four levels, namely the unit level, batch level, product sustaining level, and the facility sustaining level activities (Cooper et al. 1992). Or, they can be classified into two categories, namely, micro and macro activities (Turney and Stratton, pp.153-157, 1993).

Implementation of COPQ programs within an ABC perspective can be an effective way to drive for continuous improvement in an organization. Traditional costing systems just show how expensive it is. They do not require careful study of how each task is done. An ABC system, on the other hand, reveals the process used to produce goods and services. It measures the total cost of each significant activity performed and identifies the cost driver of the activity. When this information is available to management, it usually provides new insights about the efficiency of the process and reveals opportunities for improvement. ABC helps management focus on preventive and diversionary activities through quantifying and tracing overhead costs absorbed by them, while a large portion of costs are hidden in the traditional accounting system. Thus, the ABC process provides the foundation for sound business management, and activity-based management is the key for continuous improvement of a companys profitability (Johnson, 1991).

Based on these studies and other company practices in developing and implementing COPQ programs, Leung and Tummala (1999) formulated a 12-step process of implementing an activity-based COPQ program in any organization. The foremost drive of this program is to identify the COPQ by using the activity-based costing model and to enumerate the opportunities and initiate appropriate improvement projects to reduce the costs of poor quality. The program is also useful in evaluating the implemented projects and determining the need for further improvement in reducing the costs of poor quality the 12-step COPQ program is whippyand can be adjusted to suit the company-specific environment and practices (McNair et al., pp. 28-36, 1990).

A Numerical Illustration
Suppose a Company (referred to as  XYZ in this example) produces two products X and Y. Both products go through four processing stages (departments). The company aims at maximizing its throughput under a TOC framework. The maximum capacity of each department and the usage of its resources are calculated for costing purposes. The graphical illustration of the resource constraints and the feasible production region of XYZ and potential product mixes A, B, C, D and E are also made. XYZs optimum product-mix and its maximized throughput can be determined using basic linear programming. The mathematical formulation of this problem. The optimum product-mix of XYZ after these calculations on dummy numbers includes 9,000 units of X and 4,000 units of Y. The maximum throughput, obtained at point D, is 305,000.
Table XYZs products and departments

Observe that under costing above, operating expenses are treated as fixed. This treatment forces throughput to be independent of operating expenses. However, as the ABC literature has correctly emphasized many operating costs, frequently believed to be fixed, vary with respect to certain cost drivers. Ignoring variable operating expenses may have serious consequences for product-mix decisions. To demonstrate this point, assume that the largest share of XYZs operating expenses are due to a single activity (say, the setup activity) with a variable or mixed cost structure. Based on the information above, product-mix D requires 49 setups with a total cost of 107,800 and an average cost of 2,200. Product X, however, consumes five times more setup activities compared to product Y. Consequently, as output-mix varies so does the total number of the setups required.

ABC allows the maintenance of realistic field data collection requirements, and suits the way in which actual costs and quantities are collected in the field.  It provides a method of categorizing costs by activity or by cost category, providing useful information for future estimating purposes. Information on the actual productivity and cost of individual activities can be easily determined using this approach. It provides up-to-date information on activity status, enabling project personnel to quickly identify activities experiencing difficulty at any stage of their completion, so that timely corrective actions can be implemented. It provides a method of documenting changes to the work and distinguishing their quantities and costs from original contract items.

The ability to standardize activity codes and cost codes also provides a number of advantages
 Site personnel need only be familiar with a relatively small set of codes.

The many-to-many relationship between activity codes and cost codes yields a system with extensive flexibility to suit most projects.

Standardization of codes enables comparisons to be made across projects, which are useful for future estimating purposes.

The ability to incorporate any set of standard cost codes, such as Master format, provides a natural link to existing accounting practices.

It is, however, time consuming to manually complete all of the site data acquisition and job costing reports, particularly since they share much of the same data and require extensive calculations.

Given a variable set up cost structure, changing the companys output-mix will change its operating expense and profitability. The TOC approach, however, by treating operating expenses as fixed may fail to identify the finest product-mix and to maximize profits. The resolution to this puzzle is to incorporate activity-based costing into the TOC framework. Setup costs are assumed to be proportional to the number of setups performed. Thus, Problem 1 should be modified to reflect the differential consumption of setup activities by X and Y. The integrated problem maximizes what this study will refer to as modified throughput. Modified throughout equals throughput less setup costs. Observe that two new variables and four new constraints are added to the initial program. The new variables, S1 and S2, represent total number of setups for X and Y, respectively. These are specified as positive integers in the last two constraints. The batch-size constraints ensure consistency between the output level, and the number of setups for each product line. For instance, since the batch size for product X is 200 units and each run requires one setup, the number of setups has to equal the number of batches (i.e., S1 - x200 ). This yields the fifth constraint. The sixth constraint has a similar interpretation.

The activity-based COPQ program consists of three phases
 Phase 1 Determining COPQ
 Phase 2 Initiating improvement projects
 Phase 3 Evaluating the improvement projects
The purpose of phase I am to determine the COPQ in terms of preclusion, assessment, in-house fiasco, and exterior disaster outlays. Based on these COPQ, one can identify the opportunities and develop the corresponding improvement projects, which is the purpose of phase 2. Similarly, the purpose of phase 3 is to evaluate the selected improvement projects and choose further improvement actions in continuously reducing the COPQ and increasing the quality of processes, products, and services. These three phases, in turn, consist of 12 steps. The first eight steps involve identifying the deterrence, assessment, in-house failure, and outside failure costs by using the activity-based COPQ model. (Turney, pp. 20-25 1992)

The ABC based COPQ program, in turn, are determined in terms of four categories in two stages. In the first stage, the use of resources is traced and the costs of quality-related activity cost pools associated with distinct activity cost drivers are assigned. The activity cost driver is the unit of measurement for the level (or quantity) of the activity performed. In the second stage, using the level of activity cost drivers and the activity cost rates, the COPQ of the selected product line are determined in terms of internal, external, appraisal, and prevention costs. (Ferrara, pp. 48-52, 1991)

Disadvantages of using ABC
Companies adopting activity-based costing as a management and decision-making tool should be aware of its potential drawbacks. Activity-based costing relies heavily on the assumption of proportional activity cost structures. Further, it ignores resource and technological constraints. This paper discusses how the theoretical aspects of ABC and the practical implementation differ. Most problems can be addressed through the integration of the activity-based costing with operational decisions based on Goldratts Theory of Constraints, called TOC (Goldratt and Cox, 1986). The proposed approach offers the added benefit of mitigating the short-run bias of the TOC approach in product-mix decisions. (McSweeney, 1996)

Problems in Practice
Activity-Based Costing is widely recognized as a management decision tool in identifying profitable and non-profitable products. It provides a systematic approach to analyzing overhead and fixed operating costs and to identifying non-value added activities, processes and products. Over the course of the last decade many corporations have successfully used ABC systems to overhaul their costing procedures and to streamline their operating processes.

In a recent paper on integrating the two approaches, Robert Kee (pp. 48-61, 1995) writes The strengths of ABC and TOC are complementary in nature. The strengths of each model overcome a major limitation of the other.

Taking advantage of this complementarily and of the mixed-integer programming technique, Kee (pp. 48-61, 1995) integrates the two approaches and explicitly introduces technological, and resource constraints into the ABC framework. However, Kee falls short of utilizing the full potential of the mixed-integer programming technique in overcoming yet another important limitation of ABC approach, namely, its underlying proportionality assumption. The proportionality assumption implies that average costs remain constant as volume increases. However, where economies of scale are present average costs may decrease, and where production is at or close to maximum capacity average costs may be increasing. Thus, the proportionality of costs for each and every single activity in a company is a strong with little empirical support that seriously curtails the application of ABC (Noreen, pp. 159-168, 1991 Noreen and Soderstrom, pp. 255-278, 1994 Datar and Gupta, pp. 567-591, 1994). The present paper extends Kees research by presenting product-mix resolutions and non-linear activity charges into the ABC framework. The proposed approach offers a readily accessible improvement over both ABC and TOC in strategic decision-making and cost management. The proposed approach will be described using the following numerical illustration. (Turney and Anderson, pp.37-47 1989)

Intensified rivalry and new assembly technologies have made precise product cost info fundamental to competitive success. Activity-based costing (ABC) systems report accurate and timely cost information in a business environment, where competition is high and the company has a diverse product mix. In addition, the information ABC supplies can be used for continuous improvement of the business.

Modern ABC models contain a cost view and a process view (see Figure 2 below). The presence of these two dimensions extends ABC beyond product costing with possibilities to achieve continuous improvements. The process view contains comprehensive cost and non-cost (quality, time) information provided about each activity or process used in the improvement process. Cost drivers regulate the amount of work and exertion required to perform an activity. Performance measures designate the work done and the results attained in an activity. The cost view contains aggregated (aggregations of related detail activities) evidence about the cost of resources, activities, products and customers. This information is highly aggregated to guide improvements, but accurate so as to be used in product costing and strategic and tactical analyses such as evaluating customer profitability, prioritizing improvement projects and setting cost targets. Using ABC to advance business is called activity-based management (ABM). ABM uses the info ABC supplies in innumerable analyses premeditated to yield continuous improvement (Compton, pp. 20-27, 1996).

Figure  SEQ Figure  ARABIC 2 Two-Dimensional Activity-based Information and Activity-based Management

(Source Gunasekaran, 1996)
Other advances in management accounting relate to performance measures. Traditional performance measurement systems are characterised by highly aggregated financial measures which rely primarily on information from the financial accounting system. In contemporary management accounting systems like ABC there is a greater recognition of the importance of non-financial measures and of the advantages of integrating internal and external focuses.

Kaplan and Nortons (pp. 79-80, 1992) balanced scorecard developed performance measures to support four perspectives financial, customer, internal business processes, and learning and growth, This framework enables companies to monitor financial results, while also tracking progress in building the organisations capabilities and acquiring the intangible assets needed for future growth. When the balanced scorecard measures are translated down through the various levels of the organisation they can provide the cornerstone for a companys strategic management system (Kaplan and Norton, pp. 79-80, 1992). Contemporary performance measurement systems also incorporate continuous improvement and emphasise the reporting of direct actionable measures at the operational level.

An approach emphasised in the design of many contemporary ABC is to structure components of the system around an organisations value chain. A companys value chain illustrates the stream of interlinked activities entailed in designing, manufacturing, and marketing, delivering and supporting a product or service (Porter, 1985). Essential to the concept of the value chain is the notion of value, which may be used to analyse a firms competitive position. Value is viewed from a customers perspective, being the amount customers are willing to pay for the product or service that the firm provides. (Nanni et al., pp. 33-43 1990)

Thus, individual activities undertaken within a firms value chain can be analysed to determine whether they contribute to the value of a product or service as perceived by the customer (value-adding activities) or whether they do not enhance the value of the product (non-value adding activities). The distinction between these two forms of activities provides the basis for modern cost-management techniques such as activity analysis, activity-based management, business process engineering and value analysis. All of these techniques focus on reducing or eliminating non-value-adding activities to improve competitive advantage.

Research Methods
Introduction
This paper shall include the views and perspectives of two different companiesorganizations regarding their experience of switching over to ABC and the differences between theory and practice of ABC. To widen the learning horizon of this research, one company was chosen from the service sector and another from the manufacturing sector. This methodology would allow the researcher to obtain a birds eye view of the various aspects of ABC which various companies use in order to meet their unique requirements.

Research Question
The main research question for this paper was how ABC is implemented and the challenges and benefits of adopting ABC. The answer for this question shall be sought from real-world case studies and ABC implementation problems and solutions of those companies.

Sample Selection and Data Collection
The samples used in this research are from two different industries. The first is the Finnish Fish Processing Industry and the second is the Healthcare industry. Both cases provide an overall industry-wide view of the implementation of ABC and how successful implementation of ABC can benefit the whole industry to minimize costs and enhance efficiency.

Finnish Fish Processing Industry
The Finnish fish business has traditionally been a very conservative branch. The fish traders rely on their own experience and intuition in costing. At present, fish processing and its trading have undergone many changes. Competition in the fish processing industry has been diversified and intensified. The old experiences and skills are less relevant now than they were in the past. Reliable product cost information has become an important part of a successful business. About 30,000 metric tons of fish were processed in Finland during 1993. Over half of the processed fish was filleted, one fifth was smoked, and one tenth was used in the fish preserving industry. The fish processing industry used mainly domestic Baltic herring (51 of the processed fish), rainbow trout (20) and imported raw material (17). Also, a number of minor fish species like whitefish, salmon, pike, pike-perch, perch, vendace, burbot and sprat were processed. In 1994, there were 196 fish processing andor wholesale firms in Finland. Their total sales were about one billion Finnish marks (FIM) and they employed about 1,100 persons. Over half of the firms are very small (sales under 1 million FIMyear). The sales of 25 firms exceeded 10 million FIMyear and their share of the total sales in the fish business was over 70. The sales of only two cooperating groups of companies exceeded 50 million FIMyear. The smaller processing firms focus their activities mainly on processing, and their distribution channels vary.

The diversity of the processing firms is high. Small firms often operate regionally and they process mainly manually. Many companies fillet Baltic herring by machine. There were about 40 Baltic herring filleting machines in Finland in 1994. The capacity of Baltic herring filleting machines was about 300 metric tons a day, and the effective utilization rate for the machines was about 21. The production processes in the fish preserving industry are highly automated. Nowadays smokehouses mainly use automated equipment, but much of the handling and packing is done manually. The capacity of smokehouses was about 165 metric tons a day, and the effective utilization rate of the smokehouses was about 29. Other fish species are mostly filleted manually as compared to Baltic herring although some companies have specific filleting machines for rainbow trout, cod, whitefish and perch (17 machines altogether).

Implementation of ABC in the Healthcare Industry
The second study is based on several researches on implementation of ABC in the healthcare industry. An example has been made by the researcher in light of the ABC implementation methodology studied and discussed by various researchers.

The healthcare industry can leverage ABC to enhance performance and reduce costs. This case analyzes the healthcare industry in general using the example data (see Exhibits 1-3) to demonstrate how the use of unit-level, batch-level, service-sustaining, and facility-sustaining undertakings can improve costing accuracy. This paper assumes a Radiology Department with two lines of service (1) X-rays and (2) MRI scans. We assume that the total amount invested in equipment in the Radiology Department is equally split between X-rays and MRI. Exhibit 1 supplies information on two types of overhead costs (a) directly assignable overhead costs these are equipment costs which can be traced directly to each line of service based upon machine hours (MIT used, and (b) overhead costs which are allocated to each procedure based upon the hospitals selection of a cost driver or a set of cost drivers setup costs, maintenance costs, supply processing and distribution costs, department clerical support costs, and general administrative overhead costs.

Exhibit 2 lists some basic information for each service, such as volume of service per year in units, number of runs or setups per year, material cost per unit of service, labour cost for setting up the equipment for a run, labour cost for delivering a unit of service, and machine hour usage per unit of service. Finally, Exhibit 3 details the overhead transactions workload relationships, such as that each component is processed once per run, that maintenance is a function of machine hour usage, that clerical support is a function of its labour hours worked, and that general overhead is a function of total units of service.

Exhibit 1Total Overhead to be Assigned to each Radiology ProcedureDirectly Assignable OverheadEquipment Costs(5,147.5 machine hours  100machine hour)541,750 Allocated OverheadSetup28,600 Maintenance20,000Supply Processing  Distribution50,000Department Clerical Support25,000General Administrative Overhead10,000TOTAL OVERHEAD675,350


Exhibit 2Basic Service InformationX-RayMRI ScanVolume in units per year25,0005,000Number of runs or setups per year3605,000Material Cost per unit1 film  1010unit2 Components 2550unitLabour Cost at 20 per hourSetup Labour0.5 labour hoursrun0.25 labour hourrunDirect Labour0.1 Labour Hourunit1.0 Labour HourUnitMachine Usage at   100 per hour0.0167 machine hourunit1.0 machine hourunit

Exhibit 3Overhead Transactions WorkloadX-RayMRI ScanSupply Processing and DistributionProcess each component once per year36010,000Maintenance0.0167 machine1.0 machine100 per machine hourhourunithourunitDepartment Clerical Support2,858.3 labour hours1,141.7 labour hoursGeneral Overhead25,000 units5,000 units

Real Case study
The industry-wide study used in this research is not based on one specific case or company rather it provides an overview of the ABC implementation process in two different industries and how they benefit from it. The information regarding the fish industry in Finland was obtained from the Ministry of Agriculture and Forestry (Finland) and the healthcare costs and costs breakup were dummy figures obtained after studying various healthcare costing methodology (also provided in references at the end) and these figures were thus used to illustrate the ABC implementation process in the healthcare industry. A case study which was also used indirectly for evaluating the costing procedures in the healthcare setting and was Activity based costing in healthcare a UK case study. (Delivering cost efficient healthcare) published in 2005. This case is also provided in the Appendix at the end of this paper.

Analysis and Discussion of Research Findings
Introduction
The research conducted has shown that ABC can be implemented successfully in a variety of industries. An important objective in designing the cost system however is to get the greatest benefit at the lowest overall cost (Cooper, pg.21, 1990). The number of cost drivers depends on the desired accuracy of product costs and the complexity of the product mix. As the number of cost drivers increases, the accuracy of product costs increases. The complexity of the product mix determines whether the costs of two activities can be aggregated and traced by means of a single cost driver.

Sampling
Fish Industry
The business environments for a Finnish fish processing firm are very unstable. Since fish products are perishable, they must be quickly handled and processed. The supply of domestic raw material is uncertain, because of the seasonal and long-term variations in fish catches. The quality of raw material also varies seasonally. The price of raw material and the fisherys products vary mainly depending on the volume of fish landed. The number of suppliers (fishermen) is high and the daily purchases per supplier are often very low (only kilos of fish). The Finnish fish catches are substantially smaller than the catches in most of the other countries in Europe (Karttunen, 1996). The low volumes and high variations in the volume of raw material make it more risky to invest in modern technology and difficult to compete with economies of scale. The variation in cash flows increases the financial risk of the business. The raw material prices are lower or at the same level in Finland than in competing countries, but the prices for the end products are significantly lower.
The most typical accounting system for a fish trader is somewhere inside his or her head, and there may be several reasons for this. Most of the fish traders are oriented to practical work. The traders mostly believe in their own skills and experience and hence do not easily adopt any new methods or tools in evaluating performance. They do not like paperwork, and therefore many traders leave all the firms paperwork to separate consulting accounting firms. The motivations behind entrepreneurship in small firms vary. In many cases the small-scale processors are not interested in maximizing their profits, and accurate cost information does not really matter. For example, a fisherman wants to extend his fishing income by further processing his or her catches (Salmi et al., pg. 96, 1994). Some are only interested in working at the archipelago. The educational level of old fish traders is low and they do not master new technologies and complicated cost systems therefore they have no interest in them. In addition, small firms cannot afford to invest in a cost accounting system or employ a clerk.
The working routines, especially in manually operating firms, are very flexible and diversified due to unpredictable purchase volumes of different fish species. The same staffs works with almost all products and activities from production processes to marketing. The owners and management also participate in the production. They have a better practical knowledge of the operating costs than the management in bigger and more centrally controlled companies. They may be doubtful whether a cost accounting system would be a reasonable investment. They might even think that a cost accounting system gives misleading figures because of their rapidly varying production processes.

However, fish processing has become a more and more professionally managed business due to the changes in the business environment and the new and more educated generation of fish traders. The share of fixed and indirect costs is increasing steadily in fish processing firms, although the share of direct labour costs is still very significant. The costs of new technology, marketing, distribution and general costs are increasing as the share of processing labour costs decreases. Thus, the management of indirect costs and efficiency is becoming increasingly important.
Healthcare Industry

Reliability of the Measures
The ABC implementation in the two industries has considered the use of figures based on average pricing of the product and resources used in that industry. This is a fairly good measure of the study as most costs are industry averages and thus more representative of the underlying industry costs.

Descriptive Statistics
Fish Industry
Twenty-seven percent of the firms that buy their raw material from fishermen used computers for invoicing or accounting purposes in 1994. Another 23 planned to change over to a computerized system (Setala, 1994). The management at two Baltic herring filleting firms and three full-scale processors were interviewed to find out about their cost accounting systems. The filleting firms did not have any cost accounting system in use, because they felt that it would not be very reliable in their business environment. One company was, however, developing a cost accounting system. All three full-scale processors had implemented cost accounting systems. Their system calculates variable costs of processing in detail but either the indirect costs were not allocated to fish products or allocations were based on the products share of the total sales revenue. The accounting systems were individually well tailored to processing operations, but ABC ideas were not adopted.

Healthcare Industry
While our study above has shown that ABC can substantially change a healthcare organizations understanding of its costs, the question still may remain whether there really is a major deficiency in current hospital accounting systems. Cooper (1989) suggested a number of symptoms which are manifestations of an outdated costing system. In our survey, we also asked department managers how frequently in the past three years they or their staff had experienced nine different possible symptoms of outdated costing systems. The results show that across the nine symptoms, about 23 to 90 of the respondents thought this occurred from occasionally to constantly. Further, from about 3 to 55 of the respondents thought that particular symptoms occurred from frequently to constantly.

Case finding
Fish Processing Industry
A cost accounting system in a Finnish fish processing firm is quite a new phenomenon. Thus the appropriate systems are still under development. The existing cost systems use labour hours to trace processing costs and the overheads are allocated in some arbitrary way. The operations in fish processing are very flexible and batch sizes are small. The raw material (whole or gutted fish) is often handled or processed after supply volumes, customer demand and staffs is available. For example, 2,000 kilos of Baltic herring and rainbow trout may be smoked, 1,000 kilos of various fish species filleted and 300 kilos of fillets slightly salted, cold smoked and staked partly by the same personnel in one day. The hygienic regulations impose that raw materials must be stored in a separate cold store from the end products. End products are stored in a cold store or preserved in a freezing plant. Also, different production operations (gutting, filleting, salting, smoking) must be performed in separate rooms. There are many material handling (moving) operations from store to processing, between processing sites and back to store.

The batch sizes vary greatly, depending on the supply of fish. The cultivated rainbow trout is a basic species for processing, because of a more constant supply than that of caught fish. Rainbow trout is often processed in the same plant simultaneously with the minor fish species, but the batch sizes for rainbow trout are larger than those of minor fish species. Rainbow trout is also larger than many other fish species. Thus the volume-related cost drivers may overcast products made of rainbow trout and undercoat the products made of minor and smaller fish species. However, the flesh loss ratios for different fish species and size classes were taken into account in the existing cost system. Also, the physical size bias was avoided.

Purchase and distribution costs may be substantial for a processing firm. Raw materials and purchasing costs are often over 50 of the product costs. Some raw materials (e.g., imported frozen raw materials) are transported to the production plant, while some fish species are gathered from many fishing ports with the firms means of transport. The costs of gathering the same amount of fish from 50 fishermen are different from buying it from a single wholesaler. Also, it means that 50 more receipts must be written. Hence, the costs of exporting, wholesaling, distributing to retailers or institutional kitchens and their own retail sale is different. The allocation method overcasts rainbow trout products, because rainbow trout is an expensive fish, the batch sizes are large, and the purchasing and selling costs are low. Conversely, the costs of minor fish species will be undercoated.

The processors prefer to use labour hours as allocation bases in processing, because it is difficult to find other appropriate cost drivers for the flexible processes. An owner of a large Baltic herring filleting firm described the dynamics of the environment in the following way a cost system appropriate in the morning could be obsolete in the evening. The processors felt that the accurate tracing of indirect costs (general costs, marketing) was not a necessity. This may reflect the influence of generally accepted accounting principles which define product cost to average full manufacturing costs. Also, the accurate allocation would have been very difficult. The difficulty of finding practical solutions for allocations may also be due to the unawareness of alternative ways that, for example, ABC offers to attack the allocation problem. Cost drivers such as the number of batches or transactions may not have been considered at all. The processors were also aware that the share of fixed and indirect costs had increased and accurate product costs were needed in the highly competitive markets.

There are very few studies about the profitability of fish processing in Finland. These studies indicate that major improvements and cost reduction can be achieved in processing activities by measuring the performance and costs in fish processing firms. It has been found that the costs of manually filleting whitefish could be remarkably reduced by changing the work flow from individual work to serial work (Ahlfors, pp. 24-32, 1992). In a case study, the profit of processing whitefish increased 170 when a firm started to use the fish meat from the filleting leftovers. A general observation was that very few processors knew their actual costs. In particular, the new firms were optimistic about the profitability of their business. They did not understand how much the indirect or fixed costs and waste (flesh loss in processing) affected the overall profits and product costs. The characteristic of this branch is that many new companies are grounded and closed down yearly. This may be evidence that many beginners were optimistic about the profitability of fish processing. Another reason may be that many new processors receive financial support to start their firms. Afterwards, they have difficulty holding on to a profitable business after the support money is consumed.

The fish processors are familiar with most of the earlier mentioned methods of improvements (e.g., activity-based cost reduction). The processing plant layout affects the functionality and the effectiveness of the processing activities. The processing sites should be located so that the related operations are close to each other and the operations can be done in a continuous flow. In fish processing where various manual operations are performed simultaneously and the batch sizes are small, the plant layout must be carefully planned to reduce costs. The new hygienic regulations set limitations to functional rationality. Some pre-handling activities (gutting, scaling, roe keeping) that otherwise should be done in separate rooms could be transferred to fish suppliers. It could also improve the quality of fishery products.

The sharing of activities may cut down costs in many operations of fish processing. Many companies have grounded product families. Therefore, identical packages (mainly vacuum packages) and packing methods can be used for several product variations. Products in a similar package associate the taste and quality to a certain company. The better use of fish meat and reducing waste in fish processing are very important. The animal fodder market is vital for firms that fillet Baltic herring. The flesh loss ratio (the share of filleting leftovers) for Baltic herring is about 55. The filleting leftovers are deep-frozen and sold to firms that produce animal fodder. Furthermore, the fish meat from leftovers of other fish species can be removed and further processed to ready meals. A number of operations have been improved in the fish processing industry even without any cost accounting. However, a cost accounting system that supplies information for improving activities encourages continuous improvements and provides incontrovertible facts concerning the present performance and the success of improvement activities.

The details of an activity-based analysis to fish filleting operation are illustrated in Table 1. A filleting operation can be split into ten micro activities four separate cutting operations, washing, quality inspection and two loading and two moving activities. The moving activities are batch-level activities and the other unit-level activities. The cost driver for the moving activity is the distance between filleting site and stores. The actual cost drivers for other micro activities are the number of fish taken to production or the number of fillets produced. These cost drivers can easily be calculated in proportion to kilos of fish taken to production, if the flesh loss ratios are known. All the unit level micro activities can then be aggregated to a macro activity, as well as both batch-level moving operations to another macro activity. The cost of each macro activity can be assigned to products using a single activity driver (e.g., cost per kilo of fish taken to production and cost per moving).
Table  SEQ Table  ARABIC 1 Micro and Macro Activities, Cost Drivers and Performance Measures for a Filleting Operation

Micro ActivitiesLevelCost DriversPerformance MeasureMacro Activities1Moving pallet from the raw material cold store to the filleting siteBatchDistance between the cold storage and the filleting siteTimeMoving2Unloading the boxesUnitNumber of fishesTimeFilleting3Cutting off the filletsUnitNumber of FishesTime, Flesh LossFilleting4Cutting off the ribsUnitNumber of fishes filleted and fins cut offTime, Flesh LossFilleting5Cutting off the filletsUnitNumber of fish filleted and skinnedTime, Flesh LossFilleting6Removing the skin from the filletsUnitNumber of fish filleted and skinnedTime, Flesh LossFilleting7Washing the filletsUnitNumber of filletsTimeFilleting8Quality InspectionUnitNumber of filletsTime, number of defectsFilleting9Loading the fillets in the boxesUnitNumber of filletsTimeFilleting10Moving boxes to the end product cold storageDistance between the filleting site and the end product cold storeTimeMoving

Micro activity-level performance measures call attention to operational improvements. The cost driver for moving activity points out the possibility of reducing moving costs by reorganizing the plant layout. The important performance measure following filleting efficiency is the time consumed by filleting activities. Flesh loss ratio is an especially important measure in a filleting operation and the number of defects may be a good performance measure for quality inspection. The working efficiencies and flesh loss ratios may be different for different persons. The flesh loss varies with fish species, size of fish and season. The data on the optimal output ratios and variations can be fed into the accounting system. The best practices form good targets with which the actual performance can be compared. The above-presented ideas are already partly in use in the existing systems.

Healthcare Industry
Once an activity based cost system is in place, it can provide the basis for benefits beyond just the costing of services and related pricing and product mix decisions. Healthcare organizations also can use the information provided by an activity based costing system to improve organizational profitability. Turney (1992) points out that the real key to success is putting ABC information to work is to identify appropriate strategies, improve product design and remove waste from operating activities (Turney, 1992)

Exhibit 4 shows the details of the costs assigned to the X-Rays and MRI scans using a traditional costing approach, with all of the 675,350 of overhead assigned to the two services based upon direct labour costs. Exhibit 4 illustrates how the traditional costing approach makes the allocation of costs to each X-Ray and MRI scan. The figure shows, in the middle of the diagram, the cost per unit of service (an X-Ray or an MRI scan) as the object to which the hospital assigns the costs. As Exhibit 4 shows, this traditional allocation of overhead assigns all overhead costs to the services based on their use of one volume based measure - direct labour Pounds. The total cost per X-Ray is 21.00 and the total cost per MRI scan is 160.05.


Exhibit 4Allocation Based on a Traditional Costing ApproachX-RayMRI ScanRaw Materials1 film  1010.00 2 Components  2550 Direct Labour(20)(0.1 hourunit)2(20)(1 hourunit)20Overhead (based on Direct labour Cost)990.05Total cost per unit21.00 160.05Overhead RateTotal Overhead costTotal Direct Labour CostTotal Overhead Cost  675,350 (see Exhibit 2)Total Direct Labour Cost  150,000 (from Exhibit 3)for X-Ray (20)(0.1 hrunit)(25,000 units)50,000 for MRI Scan (20)(1 hrunit)(5,000 units)100,000Total150,000 Overhead Rate  675,350150,000  4.5023 per Direct Labour Pound

These findings strongly suggest that there are limitations to the hospital costing systems currently used and that there is a need to seriously consider installing ABC systems in hospitals

Limitation
The approach advocated in Cooper and Kaplan (1992) overcomes the limitations in the Simple ABC Approach by interpreting the budgeted operating expenses of 280,000 as supplying a capability or capacity to perform inspections. With this interpretation, an additional piece of information is required to calculate the cost driver rate for the inspection activity, namely, how much capacity is supplied for this commitment of resources. Assume that contracting to supply 280,000 of resources for inspection provides a practical capacity to perform 5,000 inspections in the period. This assumption leads to a cost driver rate calculation of

Budgeted Inspection Expenses   280,000
Cost per Inspection  ----------------------------  --------
Capacity Activity Volume         5,000
56inspection.

In the Capacity-Based ABC approach (referred to as the Strategic ABC Approach by Yang and Wu (1993)), the cost driver rate is based on the capacity provided by organizational spending, and is not influenced by actual or anticipated levels of actual resource usage. Since, at the anticipated activity level of 4,000 inspections, not all of the capacity provided will be used productively, a cost of unused capacity is anticipated in the budgeting process
Budgeted cost of unused capacity
      (Practical - Budgeted Capacity)  56
      (5,000 - 4,000)  56
      56,000.

Given the actual expenses and use of the inspection activity, reconciling the inspection expense charged to products with the amount recorded in the periods financial statements is now
Inspection Expense Charged to Products
                        3,500  56        196,000

Budgeted Unused Capacity Cost
                        1,000   56          56,000 U

Capacity Utilization Variance
               (4,000- 3,500)   56          28,000 U

Spending Variance (Actual - Budgeted Expenses)

                                            (30,000) F

Total Actual Expenses                      250,000

This capacity-based calculation enables the 84,000 of unused capacity (56,000 expected, 28,000 unexpected) to be highlighted for management attention. It signals the opportunity for actions such as reducing the supply of this resource or soliciting additional business that could be accommodated within existing resource supply.

The capacity-based calculation continues to assume that all of the expenses associated with supplying resources to perform the inspection activity are incurred independently of the actual demand for this activity during the period. This situation arises when the physical resources for the activity have already been acquired (such as the inspection equipment) and the people performing inspections have an implicit or explicit contract with the organization to continue to come to work and be paid whether or not work is available for them to perform. Also, no alternative activity exists that could productively use these resources when they are not actually performing inspections, their intended activity. Thus, any deviation between actual and budgeted spending is attributed to timing differences or unexpected spending rather than to variations in activity levels.

Conclusion and Recommendations
Summary of Study
A number of writers have suggested that activity based costing may be beneficial to hospitals. We have collected survey data on hospitals costs hierarchies, and used these findings to illustrate the extent to which ABC information may be used to more appropriately cost various hospital services as the basis for better product mix, pricing, and cost control, as well as strategic decisions. Our study also has found considerable evidence of the symptoms of outdated costs systems. This suggests that benefits from installing better cost systems are real, and not the artefact of academic imaginings or artificial numerical examples.

Summary of Literature Review
An activity-based approach to job costing and control is described in this paper. Its basis is the reporting of costs against tasks in the project WBS, each of which is represented by a unique code, composed of an activity code paired with a cost code. The activity-based methodology to job costing and control provides a unpretentious yet operative method of linking the estimating, scheduling, and accounting functions with the job costing function. With the data acquisition and job costing reports described in this paper, a closed loop for site data acquisition and cost control is formed. Field data are collected and used to assess project performance, which is compared to planned performance, and provided as feedback to site and management personnel.

Computerized data acquisition and cost control, operating from a central database, are the only solution for efficient project control. The activity-based approach to job costing and the corresponding reports described in this paper can be easily converted into an automated data acquisition and job costing system. Electronic versions of the field data acquisition reports can be developed to provide single-source data entry. Hand-held computers for field data collection may prove to be a viable option. A central database would receive field data on a daily basis, from which up-to-date job costing reports can be automatically generated. Multi-user access and data synchronization are essential to enable field data to be incorporated and used to immediately update job costing reports, and to enable these reports to be viewed instantaneously in the office and on site. The data acquisition and job costing system can be linked to the estimating, scheduling, and accounting systems via the central database and a common inputoutput file format. Common data can then be shared and used for progress tracking, billing, payments, and preparation of future bids.

Summary of Findings
The problems and solutions described in this paper are reflective of the state of the practice for the healthcare and fish industry.. Limitations posed by management resources, short project time frames, and costing difficulties of fish processing and healthcare costs make this ABC implementation a challenge. This paper has attempted to provide some practical solutions to this problem. Activity-based costing (ABC) systems report accurate and timely cost information in a business environment, where competition is high and the company has a diverse product mix. In addition, the information ABC supplies can be used for continuous improvement of the business.

Companies adopting activity-based costing as a management and decision-making tool face certain drawbacks. Activity-based costing relies heavily on the assumption of proportional cost structures and ignores resource constraints. These problems limit the power of ABC as a management decision tool. Both problems can, however, be solved through an integration of the activity-based costing with the Theory of Constraints and the application of the method of mixed-integer programming. Additionally, the technique provides a solution to the short-term focus of the TOC and the adverse consequences of it for strategic decision-making.

Conclusions
In this paper, we discussed and evaluated the alternative views which have been presented in major journal articles and textbooks, concerning how ABC implementation causes a paradigm shift in costing and how ABC is used to enhance productivity, reduce wastages and enhance output. ABC has proven to be a very vital tool for companies functioning in an array of industries and of various sizes. This paper has discussed the implementation of ABC at the Finnish Fish industry and the healthcare industry in general.

Recommendations
The management of the hospital then needs to implement a strategy of continuous improvement in the processes (i.e., an ongoing search for waste in operating activities and the elimination of this waste), at all levels of the cost hierarchy, for delivering these services. Changing a process to reduce costs involves modifying or eliminating it so that fewer resources are consumed. Turney (1991) proposed four ways in which continuous improvement efforts can reduce costs
1. Activity reduction reducing the time or effort required to perform the activity.
2. Activity elimination eliminating the activity entirely.
3. Activity selection selecting the low-cost alternative from a set of alternatives.
4. Activity sharing making changes which permit the sharing of activities with other services to yield economies of scale.

In contrast, conventional approaches to cost cutting, which are based on traditional costing systems, do not identify the costs drivers (i.e., the activities) which cause the costs. Thus, these approaches do not direct the healthcare managers attention to where the activity and cost savings may be found. Instead, they tend to favour comprehensive solutions which may work in the short run but frequently fail in the extended run because assets (often staff) are disregarded without respect to the fundamental work which still needs to be performed.

In order to effectively pursue continuous improvement programs and manage activities and the related resources (and their related costs) consumed by these activities, management must have better cost information than has been provided in the past by conventional cost systems. This points to the use of Activity Based Costing as an important tool in helping to identify which activities (and their related costs) to reduce.

Future research in the area of ABC cost system design can benefit from empirical documentation of diverse activities in different industries. Additionally, field studies providing examples of operational constraints to be incorporated in cost systems can considerably enrich the ABC and TOC literature and enable its implementation according to the requirements of both manufacturing and service industries.