The Costs of Activity-Based Management

by

Peter Armstrong

Deleted: Department of
Management¶
University of Keele¶
¶
Address for correspondence:¶
Department of Management¶
Acknowledgement. The Author would like to acknowledge the valuable comments of Keele University¶
Staffordshire ST5 5BG¶
Tel 01782 583601¶
Dave Dugdale, Colwyn Jones, Rolland Munro and Anthony Hopwood. The errors and Fax 01782 584272¶
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Abstract
Activity-based costing and management are now the stock-in-trade of a lucrative

industry, with at least one Big Six consultancy operation devoted wholly to their

promotion. Both techniques represent a major extension of accountability in the modern

corporation, into a zone previously defined in accounting terms as fixed overhead. The

mechanics depend on treating the staff department as a mass-producer of repeated acts of

routine service (‘activities’) performed ‘for’ particular cost-objects, usually products. By

treating these activities as performance indicators, payroll budgets can be linked to

activity volumes thus creating pressures for the casualisation of staff employment. The

activity frame of reference, particularly when linked with ‘value analysis’, also

encourages the stripping-out of all staff work which cannot be accommodated within its

definition of activities. This threatens a dumbing-down of staff departments in which non-

routine initiatives aimed at competitive advantage in fields such as human resource

management or marketing may be stifled because they cannot be accommodated within

the language of accountability imposed by ABM.

These arguments are concretised through an examination of the ABM treatment of one of

its favoured targets: the purchasing function. The contrast between this and the supply

chain management approach advocated by practitioners and academics who take the

function seriously is a stark illustration of the limitations of ABM as an approach to the

management of staff activity.

Introduction: ABC and the Politics of Fixed Overhead
Fixed Overhead as an Employment Shelter
Writing in the 1970s, against a background of rising unemployment, increased

casualisation and escalating industrial unrest, Freedman (1976) found it useful to

visualise the working population as engaged in a ‘search for shelters’. The shelters she

had in mind were of two kinds: the systems of employment protection created by trade

unions and professional associations and internal labour markets within the capitalist

corporation itself, which existed as a result of the incomplete development of its systems

of accountability and control. Where manufacturing operations were increasingly subject

to the disciplines of budgetary control and standard costing 1, staff departments, such as

marketing, personnel management and accounting itself, remained accountable only

through the discursive medium of the management committee. The result was a marked

contrast between conditions inside and outside the regime of management accountancy.

On the one hand, the wages of the production worker, and to some extent, those of the

supervisor and junior manager were treated as a variable costs of production, to be

adjusted in line with output, so far as was permitted by trade unionism and government

regulation (Armstrong, 1994; Armstrong, Marginson, Edwards & Purcell, 1996, in press).

Employment in the staff department, on the other hand, remained relatively secure,

depending on the abilities of its representatives to convince the rest of the management

team of the importance of the services which it provided. Specimens of the rhetorics of

justification developed by the managerial ‘professions’ are given in Armstrong (1984,

1985), and some from the purchasing function are given later in this paper (page 28).

For those who felt that they were the ones who bore the cost (and absorption costing

systems could have been designed to confirm the suspicions of line managers in this

regard), the comparative lack of accountability within staff departments fuelled the

suspicions unsurpassably expressed in Parkinson’s laws of bureaucratic expansion:

2
‘Work expands to fill the time available for its completion.’ and ‘[Staff numbers increase]

irrespective of variations in the amount of work (if any) to be done.’ (1965, p. 11, 20).

For those who could hack it into a staff position through the thickets of credentialism and

the staff appraisal process the prize was a predictable career progression, topped off with

a pension at the end. The resulting stable core of ‘knowledge workers’ was accepted as

indispensable to corporate prosperity by management consultants and labour process

commentators alike (Atkinson, 1984; Gordon, Edwards and Reich, 1982). In a sense, too,

the indispensability of these core employees was written into the accounting system, in

that their wage and salary costs were treated as fixed overhead, to be absorbed by

products and processes. Like the stomach in Coriolanus, the security of the staff was

supposed to work for the benefit of all. In justice therefore, all should bear the cost. Fixed

overhead both coincided with, and defined, a zone of unaccountability, hedged about by

real complexity and quasi-professional mystique. In Freedman’s (1976) sense, fixed

overhead was a shelter.

There were, however, mutterings. From the economic point of view, the escalation of

fixed overhead had been the subject of concern from the days when the accepted

terminology was that of ‘office costs’ (Curtown, 1960). From the functional point of

view, there were those like the shopfloor worker interviewed by the author in the late

1970s who wondered, ‘what the hell are they doing all day up there in those offices?’ The

gut instinct that the privileges enjoyed by staff departments were an unjustifiable burden

on those who performed the ‘real’ work of manufacturing found expression in

management academia as well as the works canteen (Child et al, 1983). As the recession

of the early 1980s added bite to the question of whether fixed costs really were fixed,

there were reports that senior managements were responding out of the same instincts,

with personnel departments a particular candidate for run-down or contracting out

3
(Torrington and Mackay, 1986). Though fixed overhead remained a shelter there was ill-

will enough on the outside to create a market for some means of undermining it.

ABC, the Productivist Instinct, and the Project of Staff Accountability

On the surface, activity-based costing (ABC) appeared to have nothing to do with all this,

except, perhaps, for the production-centred mindset which propelled its development. As

is well-known, the original concern was with manufacturing competitiveness. Traditional

systems of absorption costing, it was observed, treated indirect costs as a homogenous

lump, to be allocated to product lines on a single volume-related base, often direct labour.

As a consequence, costs which were ‘really’ driven by variety, activity changes or some

other form of complexity, were over-allocated to high-volume, labour intensive products

and under-allocated to short-run capital intensive specialist items 2. The result was said to

be a systematic distortion of manufacturing strategy which favoured the pursuit of

specialist niche markets rather than head-to-head competition in the world’s mass markets

(e.g. Kaplan, 1987, p. 7.16 Johnson and Kaplan, 1987, p. 190).

It was at this point, that the advocacy of ABC connected with long-standing concerns

about the growth of fixed overhead as a proportion of total costs. In discovering the

activities through which overhead could be allocated, ABC could also claim to have

located the levers through which it could be controlled. Johnson and Kaplan’s promise of

a means of tackling the ‘problem [of the] growth in support personnel’ (1987, p. 244)

might be read as an answer to the Earl of Curtown’s plaint about ‘rising office costs’

made at a Summer School of the Institute of Chartered Accountants, England and Wales

(ICAEW) almost thirty years earlier (Curtown, 1960).

The distortions of managerial decision-making through the ‘misallocation’ of indirect

costs may have been endorsed and exacerbated by two strands of 1970s managerial

doctrine. The first was a heavy emphasis on strategic management, with its insistence on

questioning ‘the business we are in’ (e.g. Argenti, 1968). This encouraged a continual,

4
not to say neurotic, scrutiny of the profitability of all product lines (as distorted by

traditional absorption costings), in which their discontinuation was permanently on the

agenda. The second was the then fashionable doctrine of ‘flexible specialisation’,

according to which the corporate winners in the ‘Second Industrial Divide’ would be

those who succeeded in the creation and pursuit of increasingly sophisticated and

dynamic consumer demands (Piore & Sabel, 1984). This school of thought may have

further prejudiced senior managements against continuing to compete in the world’s mass

markets.

ABC was not an isolated development, but one strand of a complex productivist reaction

to the managerial thinking outlined above. As an intellectual movement, this reaction was

prominent in the Harvard Business School of the early 1980s. In reaction to the increasing

penetration of Far Eastern manufactures into US mass markets, there was a new emphasis

on manufacturing competence as a competitive force (e.g. Skinner, 1985, Cooper and

Kaplan, 1991, p. 396) together with a corresponding rejection of the tendency of strategic

management to seek refuge in softer markets (Hayes and Abernathy, 1980 ). These

messages connected with a receptive audience: the Hayes-Abernathy paper was one of

the most-requested reprints ever published by the Harvard Business Review.

Against this background, there was a ready market for a manufacturing-friendly

revolution in cost accounting, and it is significant that an early exposition of Kaplan’s

ideas (1985) was first published in a reader co-edited by Hayes. Outside Harvard

Business School, ABC’s message 3 that America’s mass products were actually more

profitable than had previously been thought chimed well with the new ‘stand and fight

through manufacturing’ mentality. Intellectually fortified by a version of costing history

which glorified the prime cost monitoring systems developed by line managers, whilst

simultaneously excoriating the corruptions introduced by financial accountants in the

name of inventory valuation (Johnson and Kaplan, 1987, Chs. 2, 3 and 6), the message of

5
the new costing fell on receptive ears. In the UK, the roadshow ‘An Evening with Robert

Kaplan’ was a (very expensive) sell-out amongst line managers who did not like

accountants very much. Of these there were quite a few.

In its detailed technology too, ABC was attractive to the line or production manager.

Firstly, it made overhead costs behave as production managers thought they ought to (e.g.

Bhimani and Pigott, 1992; Ruhl and Bailey, 1994; Cooper, 1990a). As has been pointed

out by Armstrong ( 1995) acceptability to managerial common-sense has always been an

important determinant of the direction of cost accounting evolution. More important were

the implicit messages of ABC about the relationships which ought to obtain between staff

and line departments. By distributing the costs of staff departments through the activities

which they performed ‘for’ products and processes, ABC articulated the belief that these

are the only valid staff activities. In its prescription of multi-functional committees as a

means of implementation (e.g. Cooper et al, 1992, Innes and Mitchell, 1990), moreover,

ABC promised the production function a major say in determining the services of which

it bore the cost. As part of the same deal, the scrutiny of staff departments through which

its activities were to be established could be used to reveal any which were ‘non value-

added’ (e.g. Hixon, 1995), thus creating a respectable front for the productivist suspicion

that quite a lot of staff activity is of no value at all. It is no accident that some of the most

successful applications of ABC have been initiated by operational managers (Kaplan,

1987b, p. 297; Lyne and Freidman, 1996) and also no accident that some applications

have resulted in job losses in the staff departments (Pattison and Gavan, 1994; Groot,

1997). In summary, ABC found a receptive audience amongst line or production

managers because it proposed that staff departments should be subjected to regimes of

accountability similar to those already experienced by manufacturing. Better still, this

accountability, if not actually to manufacturing managers, was in terms which they could

accept as valid.

6
Although ABC has subsequently been applied in a variety of settings, such as financial

services (Adams, 1996), education (Acton and Cotton, 1997) and health care (Aird,

1996), and to a variety of cost-objects other than products, such as market segments

(Adams, 1996), the suppliers of goods and services (Lere and Saraph, 1995) and the

‘services’ provided to divisions and business units by a corporate-level finance function

(Cooper et al, 1992), the view which it takes of staff activity has remained true to its

productivist origins. Whatever the setting, the staff department is defined as a ‘service

function’ (e.g. Innes and Mitchell, 1990, p. 5), its workers are ‘support personnel’

(Johnson and Kaplan, 1987, p. 244) and the services performed are taken to be ‘for’ the

cost-object.

If ABC began the process of dismantling the ‘shelter’ of fixed overhead, by specifying

and costing the services for which it was paying, its mutation into activity-based

management (ABM) promises to complete it. The key manoeuvre in this transformation

is expressed in Innes and Mitchell’s (1990) account of the benefits of ABC:

Process control information was enhanced by using a measure of the volume of

each activity (the cost driver) to generate a cost rate which could be used not only

to cost production but also as a performance measure for the activity concerned.

Once the activities through which ABC distributes indirect costs are regarded as non-

financial indicators of performance for the staff department, its destruction as an enclave

of unaccountability becomes straightforward. Budgetary forecasts and reports can be

made in terms of the projected and actual levels of each activity, so that the department is

opened up to a variant of standard costing. The implications for the future of the staff

department as an employment shelter have been forcefully spelt out from the security of a

tenured professorship at Harvard Business School. This is ‘Kaplan’s first law of fixed and

variable costs’:

7
 ‘If there is more than one person in a department, it is a variable cost. If there is

more than one machine in a department, machines are a variable cost. If there is

more than one of any resource, it has got to be a variable cost resource.’

(Kaplan, 1987, p. 7.18)

The Future of the Staff Functions under ABM

The destruction of the staff department as a shelter is not incidental to ABM: it is the

heart of it. In this respect, its promotion by accounting academics and consultants is a

prime example of the politics of the capitalist agency relationship (Armstrong, 1991). On

this view of the modern corporation, managerial hierarchies consist, not only of a

progressive subdivision of tasks and responsibilities, but also of a chain of agency

relationships, in which subordinates are necessarily trusted to act in the interests of their

superiors (i.e., as their agents). Senior managers, however, have a choice as to who they

will trust. Since there are managerial occupations which profess techniques through

which others can be monitored and controlled, senior managers can choose to trust these

as an alternative to trusting the managers of the functions concerned. From this point of

view, ABM, in its most ambitious expositions, constitutes a claim that management

accountancy can now construct regimes of accountability applicable to all staff functions.

Besides the implications for the future security of staff employment in what even the

management consultancy of the 1980s was willing to accept as a ‘stable core’ of

employment, ABM will have consequences for the way in which staff functions are

actually performed.

It has previously been argued (Armstrong and Tomes, 1996; Armstrong, in press) that

regimes of accountability consist of languages which do more or less violence to

activities to which they are applied (the aesthetic design of products was the example

given). This is not just a question of the slippage between performance and performance

indicator (activity and cost-driver in the case of ABC); rather it is a question of the

8
redefinition of performance itself, as it undergoes translation from the culture of the

performer to that of the monitor. Translation is an inherently indeterminate act (Winch,

1970; Hollis, 1970), and this is exacerbated when it is animated by an hermeneutic of

suspicion rather than one of understanding. This, it will be argued, is precisely the spirit

in which ABM approaches the staff department. Instead of seeking to grasp the larger

purpose behind its activities, ABM simply assumes that these activities are (and should

be) separable repeated acts performed ‘for’ products or processes. Anything which does

not fit into this framework is regarded as a prima facia candidate for the chop. Where

ABM is ‘successfully’ implemented, this image of the staff function may become a self-

fulfilling prophecy in that it the department’s activities may actually be reduced to routine

technical or clerical services. The loss, to the extent that spokespersons for the staff

functions are to be believed, will be the prospective value added through developments

within the staff functions themselves, markets, human resources or, in the case discussed

in this paper, the supply chain. The abolition of the staff department as an employment

shelter, therefore, may have a downside, quite apart from its human cost. The case for

ABM, even as a means of boosting profitability, is far from convincing.

Cost Allocation as Convention and as Reality

Although it is not always obvious from practitioner expositions, the ABM project of

opening up staff activity to senior management control depends on a fundamental

reconceptualisation of the nature of indirect costs. The original objective was to correct

the ‘distortions’ of single-based absorption costing, and it was on the promise of a gain in

accuracy that ABC gained its initial purchase on managerial practice. In the process, the

indirectness of indirect costs was newly perceived to be an illusion, caused by the

complexity of the activities which ‘really’ connected them to products and processes. If

this complexity could be adequately modelled in a practical cost control system, it would

9
be possible to monitor and control staff activity exactly as had been achieved for

shopfloor labour two generations earlier.

Both developments - the initial adoption of ABC, and the possibility of its extension into

a means of controlling staff labour - depended on a re-thinking of indirect costs. The

context in which this first occurred, albeit implicitly, was the insistent claim that ABC is

more accurate than absorption costing. Recent examples include Cooper (1990b), Roehm,

Critchfield and Castellano (1992), Cooper et al (1992), Banker and Johnston (1993),

Babad and Balachandran (1993), Borjesson (1994), Datar and Gupta (1994), Danilenko

(1994), Letza and Gadd (1994), Lawson (1994), Marshall (1995), Adams (1996) and

West et al (1996).

The more one reflects upon these claims, the stranger they appear. If the definition of

indirect costs is taken seriously - as those which ‘cannot be traced directly to cost objects’

(Wilson and Chua, p. 82) - in what sense can one method of allocation be more accurate

than another? If correct allocations cannot exist, even in principle, there can be no

standard by which accuracy can be judged. Typically, the response of the activity costers

is that of busy people who have no time for such conceptual niceties: they produce

sample calculations which ‘demonstrate’ the greater accuracy of activity-based costing

simply by showing that single-base absorption costing gives different result (e.g. Kaplan,

1987, p. 7.20; Innes and Mitchell, 1990, p. 14; Adams, 1996). That this simple-minded

tactic appears to convince its protagonists points towards a fundamentalist mindset within

which the relative merits of ABC and absorption costing are not really a matter for

argumentation.

Underlying the controversies over the supposed accuracy of activity-based costing, there

are uncertainties about the ontological status of allocated costs which fail to be articulated

within the language of cost accounting practice. For the sake of exposition, let us take the

10
ontological starting point of cost accounting to be one in which direct costs are real, in the

sense that they are external to cost accounting as a practice 4. That is, their calculation and

their association with particular cost objects does not depend on the particular approach to

costing which is adopted. The question then arises of whether or not allocated indirect

costs are real in the same sense. Discussions of traditional absorption costing are mightily

confused on this point.

If the definition of indirect costs quoted above is taken at all seriously, allocations of them

can never be real. Because they vary according to the allocation base, the resulting

allocated costs are matters for individual judgement constrained by professional

convention. Ontologically, they are intellectual constructs. It follows that claims for them

of greater or lesser accuracy, except in the ‘internal’ sense of computational correctness,

are meaningless 5.

The problem with this position is that costing claims to be a practical art. Whilst it may be

possible to validate cost allocations within a closed universe of accounting convention,

this cannot be the case with management decisions based upon them. Because the

consequences of cost allocation must live in a world of managerial practice, accountants

smuggle in claims of realism by the back door. It is one marked ‘approximation’.

Consider the following statement from Wilson and Chua (1993, p. 82):

‘By definition, indirect costs cannot be traced directly to cost objects which will

mean that the resulting full (or ‘absorbed’) cost is inaccurate to an unknown

extent.’

The contradiction lurking within this statement lies in the fact that inaccuracy, even of

unknown extent, implies that a true allocation of indirect costs is possible in principle.

The same authors’ definition of indirect costs, on the other hand, implies that it is not. It

follows that the extent of the inaccuracy is unknowable (as well as unknown), in which

11
case it is not inaccuracy at all, but a recognition that there is a difference between

convention and knowledge. Wilson and Chua are clearly sensitive to this issue:

‘ . . . the real answer is both unknown and unknowable, given that there is no

definitive basis for apportioning or absorbing indirect costs. However some bases

are better than others.’

(Wilson and Chua, 1993, p. 107. Italics in original)

Thus the admission of inaccuracy obscures the practice of arbitrariness. Meanwhile,

‘inaccuracy’ - paradoxically enough - creates the possibility that allocations of indirect

costs may be near enough to the ‘truth’ for practical people. From this point, it becomes

possible to assert that some bases of cost allocation give better approximations than

others, although the grounds on which such claims are made are necessarily left imprecise

(‘necessarily’, because if clearly articulated they would, again, contradict the definition of

indirect costs 6). Having mooted the notion that there are variations in the appropriateness

of allocation bases, Wilson and Chua arrive, a few pages later, at the familiar starting

point of activity-based costing:

‘And labour-based indirect costs rates continue to predominate in manufacturing

industry, regardless of the evidence which shows that direct labour is an

increasingly insignificant element of total cost, and thus an increasingly

inappropriate base for recovering indirect costs. Any approximation of full cost

that is built up from an indirect cost element based on direct labour is unlikely to

be an acceptable approximation . . . ‘

(Wilson and Chua, 1993, p. 109)

More sophisticated than most, Wilson and Chua’s discussion is entirely typical of the

manner in which the ontological basis of indirect cost allocation hovers between realism

and idealism. It could be that these ambiguities are an evolved response to the social

12
pressures upon cost accounting. As has been shown by Ernest Gellner (1970), the

contradictions lurking within certain everyday concepts may serve important social

functions. So it may be with cost allocation. On the one hand, the concept of

approximation serves to legitimate the arbitrary allocation of costs as the only possibility

in the face of an unknowable truth. On the other hand it asserts the informational value of

these allocations. So it is that a gesture of faith, albeit one which has accumulated the

patina of custom, masquerades as computational convenience.

Activity-based costing, at least in its core expositions, marks a decisive break from these

ambiguities. Although the advocates of ABC continue to use the term ‘indirect costs’,

they do not really believe in them. They sense, though they do not always clearly

articulate, that all costs are, or should be, direct. Indeed ABC’s best-known slogan:

‘Activities cause costs and products consume activities’ is nothing more than a working

definition of the direct (labour) costs of production. As such it is at once an assertion of

fact and a programme of action. If all costs are really direct, the task of (relevant) cost

accounting is to uncover that directness. This is the classic realist enterprise. Underlying

the complexities of empirical situations, it is believed that there are real relationships to

be uncovered between product (or process) and (direct) cost 7. ABC proposes to achieve

this by identifying the real activities which contribute to the product and by computing

the real (direct) cost of each. That this real relationship between product and cost may be

very complex does not alter the fact that it is calculable in principle. And if this is the

case, it becomes meaningful to apply the concept of accuracy to practical attempts to

model it. Approximation here does not stand for arbitrariness: rather it is a matter of

truncating the list of activities in the interests of computational simplicity, and of

choosing cost drivers to proxy for them which are a compromise between representational

accuracy and accessibility to measurement (e.g. Innes and Mitchell, 1990).

13
In this manner, indirect costs are reconceptualised within ABC as the direct costs of real

activities. It is this ontological foundation which underpins both the claims of superior

accuracy made for ABC and the development of ABM as a means of evaluating and

monitoring staff functions.

A first question which needs to be asked of the ABC/ABM programme is how far it

actually succeeds in recasting indirect costs as direct. This is a question of methodology,

as well as ontology.

The Concealment of Indirect Cost Allocations Within Activity

Based Costing
In practice, most applications of ABC make arbitrary allocations of common costs. The

search for the activities which connect costs to products and processes, and for the cost

drivers which proxy for them, needs to compromise between representational accuracy

and manageability. The result is that some indirect costs - hopefully a small proportion of

the total - are virtually bound to be excluded from the cost-pools associated with a

practical set of cost drivers. Whether this is felt to be a consequence of their inherent

indirectness, or merely of the complexity of their real connection to products and

processes (and two views on this are considered on page 21), the consequence is that

these costs are treated as common.

This much is openly acknowledged and there can be no quarrel with reasonable

approximation in the cause of managerial practicality. The problem with the ABC/ABM

project of recasting indirect costs as direct is not so much that it cannot be completed in

practice but that many of the costs which are identified as the direct costs of activities are

still infected with indirectness.

The procedure begins with a census of the activities which staff departments perform,

usually for products and processes, though sometimes for customers or markets (e.g.

Cooper et al, 1992, Ch. 5.) Each activity is then costed according to its occupancy of staff

14
time and other resources. For clarity in the discussion which follows, the cost objects will

be taken to be products and the costs to be traced to them will be assumed to be only

those of staff time. Similar arguments would apply to other cost objects and to the

allocation of the costs of equipment usage.

The costing of activities according to their consumption of staff time means that the staff

department is treated as a mass producer of activities for whom all labour costs are

direct. Computationally speaking, this is similar to the charge-out systems used for cost

recovery by self-employed professionals and, in some companies, as a means of exposing

staff departments to external competition (Johnson, 1988). Charge-outs, however,

explicitly recognise the allocation of indirect costs. The procedure for costing activities in

ABC on the other hand, forces the staff manager to account for all - or most - of the staff

hours as direct labour 8. The result will be that any labour time which is ‘really’ indirect in

relation to the defined activities will be judgementally allocated by the manager to one or

another of these activities, as a means of coping with the imposed form of accountability.

In consequence the apparent direct costs of the activities identified in the process of ABC

implementation will contain concealed allocations of indirect labour costs. The question

of the superior accuracy of ABC as compared to absorption costing then hinges on the

proportion of these concealed indirect costs relative to the whole. The greater the

proportion of true direct costs, i.e. nearer the staff department is to a labour-only-

subcontractor, the more convincing will be the case for the accuracy of ABC. Conversely,

the more the department resembles a solicitor’s office, where the common costs of non-

specific research are charged out on a direct labour basis, the less realism can be claimed

for activity costs. To put the matter another way, the more of the labour within a staff

department which is indirect in terms of its output activities, the greater will be the

proportion of arbitrarily allocation within activity costs.

15
How great is this proportion likely to be in practice? A difficulty here lies in an

imprecision within the notion of direct cost, or, what is equivalent, in the idea that costs

are ‘caused’ by particular events or activities (Piper and Whalley, 1990). Consider a

favourite example of the advocates of ABC, that of placing a purchase order. Only a

small fraction of the staff time attributed to this activity by the departmental manager will

be taken up with actually writing out and dispatching the order. A larger proportion will

be taken up with extracting information from the department’s stock of information so

that the order can be made, whilst the rest will be consumed in updating that stock of

information in the light of the order. Details of the purchase will need to be recorded, for

example, so that the incoming goods and the invoice can be checked against them. If the

procedures for doing so are well-designed, the activity of ‘checking goods inwards’ will

be simple and cheap. If, on the other hand, the records are inaccessible, or otherwise user-

unfriendly, ‘checking goods inwards’ will appear time-consuming and expensive. Most of

the activities of a bureaucratically organised department will be similarly interdependent

in that they both draw upon information deposited in the course of previous activities and

involve the deposition of information needed for future activities. In cost terms, the

activities are connected by a network of cross-subsidies so that the separation of costs

between them becomes arbitrary. To the extent that staff departments approximate to this

model, the costs of record-maintenance will account for most of the total, and should be

treated as common.

Where this is the case, treating the cost of the staff time devoted to an activity as its real

(direct) cost, really amounts to a re-allocation of the common costs of record maintenance

on the assumption that each activity should bear a quantum of this cost exactly equal to

that which it consumes. It is assumed, in effect, that activities which contribute a lot to

record-keeping also depend on a lot of record-keeping, that there are no activities which

depend on a lot of paper work but do not themselves involve very much.

16
Where these allocated common costs are a substantial proportion of the whole, ABC may

fail to model the behaviour of the costs of staff departments when products are dropped or

redesigned so as to reduce their consumption of particular activities. Noreen’s (1991)

analysis demonstrates that the correct modelling of costs in such circumstances requires

that the costs in each cost pool should depend on a single activity, a condition which is

clearly violated where the ‘direct’ cost of each activity includes the cost of maintaining

the stock of information required for other activities.

These considerations reflect badly on Argyris and Kaplan’s (1994) claim that ABC is

now established as an internally consistent technical theory. Whilst there may be staff

departments in which all costs are the direct costs of their activities, this cannot be the

general case. It follows that the project of reworking all or most of the costs of staff

departments as the direct costs of production (or of servicing markets or customers) is

flawed by the presence of concealed allocations of indirect costs within ABC. Also

eroded is the ground on which stands the claim that ABC is more accurate than other

methods of cost allocation. To the extent that the costs of activities are not, after all, direct

costs, there is no reason to suppose that the allocation procedure by which they are

determined is ‘more accurate’ than any other.

The validity of the truth claims made for ABC is one thing; its social consequences are

another. As the sociologist W.I. Thomas pointed out some time ago (1957, p. 42), people

do not act according to the situation but according to their definition of it. So has been

with belief in the reality of activity-based costings. It is this belief which defines the

difference between activity-based and absorption costing, not differences in computation.

Numerically, of course, (putatively real) activity based cost allocations can be reproduced

exactly in the form of (avowedly conventional) multiple-based absorption costings. Only

the rhetorical framing differs - a fact which has led some commentators to the conclusion

that there is no essential difference between ABC and multiple base absorption costing

17
(e.g. Noreen, 1991; Kennedy, 1995). The rhetoric, however, is precisely the point. The

cardinal virtue claimed for activity-based costing is that its allocation of costs is real. This

reality depends not only on the reality claimed for the costs of the activities (discussed

above), but also upon the claim that the activities through which they are distributed are

those actually performed for the production process (or for customers or markets). This

realist ontology was crucial to the development of ABC into activity-based management.

From Cost Allocation to Activity-Based Management

So long as product costing constituted the whole of the ABC agenda, its ontology bore

only on the question of its accuracy. The revelation that all costs were really direct,

however, opened up a whole new project of organisational control for the advocates of

ABC. If the activities identified in the course of implementing the product costing system

were real rather than notional bases of allocation, it became thinkable to control staff

departments in terms of these same activities. If, in the production-centred world-view

which begat ABC, ‘Products consume activities’, it made sense to manage staff

departments, and perhaps the entire organisation, in terms of these activities. Thus:

‘Activity-based management is the management and control of enterprise

performance using activity-based information as the primary means of decision

support.’

(Hixon, 1995)

It was on the basis of its realist ontology, therefore, that ABC evolved ABM. In the

process, the cost-drivers originally devised as a means of allocating indirect costs were

pressed into service as non-financial performance indicators for staff departments

(Morrow and Hazell, 1992; Cooper et al, 1993; Hobdy, Thompson and Sharman, 1994;

Clarke, 1994; Clarke and Bellis-Jones, 1996; Aird, 1996; Lindahl, 1997). Although the

intellectual and political origins of ABC were very different from those of ‘accountable

18
management’ in public sector services (Humphrey, Miller and Scapens, 1993), its basic

technology of control is a series of non-financial indicators of performance similar in

principle to those currently being promoted in the public sector (see, for example,

Cochrane, 1993; Gray and Jenkins, 1993; Ezzamel and Willmott, 1993; Laughlin,

Broadbent and Willig-Atherton, 1994; Lawrence, Manzurul and Lowe, 1994: Chua and

Preston, 1994; Ogden, 1995). Both developments, moreover, were propelled by a kind of

organisational asceticism, pre-occupied with the elimination of activities which failed to

add ‘customer value’, and with minimising the unit costs of those which did.

The difference in the contexts, however, is important: where the public demand for

services such as education and health is highly elastic, that for staff services within a

capitalist enterprise is not. Evidence from companies which have installed ABC systems

indicates that the enthusiasm of manufacturing managers has much to do with the

prospect of reducing the burden of overhead and little to do with enhancing the quality of

service (Pattison and Gavan, 1994). Where the indices of public service performance

allow, in principle at least, for expenditures aimed at increasing the quality of output, the

superficially similar indices applied to service departments within private companies

function more like expenditure caps. This means that ABM is really nothing more than an

updated and partially automated form of cost reduction and control.

The potency of ABM in this respect is considerably amplified when it is mated with

‘value analysis’, a procedure animated by the belief that it is possible to make some

determination of the value added by particular activities (Adams, 1996). The basis on

which this is done is quite obscure 9, and may have much to do with the prejudices of

those making the determination. In one of the case studies by Cooper et al (1992) only

two of the seven activities identified in an ‘Accounts Payable’ section (40% of staff time)

were accepted as representing the actual business of processing accounts (1992, p. 141-2).

The rest, including the 35% of staff time taken up with ‘process management’ were not.

19
A leader of the ABC implementation team spelt out the implications for future staffing

levels: ‘The accounts payable data revealed how expensive we were. I see now how we

can use this information to reduce the cost of processing an invoice.’

In general, ABC produces, as a by-product, a list of staff activities which is handy for the

purpose of value analysis. Since ‘low value-added’ can mean little else but ‘dispensable’,

it is fairly obvious that it is primarily a means targeting staff reductions (See, for example,

Cooper et al, 1992, Ch. 7; Sephton and Ward, 1990; Steimer, 1990). Given this, it is

scarcely surprising that ‘value-added’ tends to become the oval ball in an organisational

scrimmage around the theme of usefulness. In some of the ABC implementations

reported by Cooper et al (1992), attempts to rank activities according to their value added

were described as ‘controversial’ or ‘painful’ because ‘Everyone had a different

definition of what’s valuable to them.’ Cooper et al (1992, p. 72). It was considered

‘surprising’ that the staff managers in one implementation considered only 4% of their

own department’s activities to be of ‘low value’ (Cooper et al, p. 138), an outcome which

indicated to the implementation team that steps should be taken to ensure that in future

value would be judged from the point of view of the corporation as a whole.

( New Para) The identification of indirect costs with activities in ABC also exposes their

potential for variability in ABM. If the consumption of activities varies, either as a result

of market fluctuations or as a consequence of purposive changes in procedure or product

redesign, so, also, should the cost of performing them (Morrow and Connolly, 1991). The

unit costs of activities, or rather, of their surrogate cost-drivers, become, in effect,

standard costs which open up the black box of the staff department, just as Scientific

Management and standard costing once broke open the black box of craft production

(Braverman, 1974, Miller and O’Leary, 1987). This new regime of accountability exposes

the staff department to precisely the same insecurities and pressures for labour

intensification as manufacturing (e.g. Pattison and Gavan, 1994, Hobdy, Thompson and

20
Sharman, 1994) 10. The destruction of the staff department as an employment shelter is not

an unintended consequence of ABM; it is precisely the point, and there are signs that

those on the receiving end are becoming aware of it. Dugdale (1990) has reported that

some ABC implementations have only been allowed to proceed on condition that

employment would be preserved.

Despite their formal similarities as monitoring systems, there are important differences

between the terms on which ABM proposes to open up the labour process as compared

with Scientific Management and standard costing. Where Scientific Management

involved a concrete simplification and standardisation of production processes, ABM

offers no positive guide to the revision of working practices. Its ‘standard costs’ are not

those of activities which have actually been redesigned in standardised form. Rather,

they are the expression of a belief that staff activities already are, or should be, of this

form. Despite attempts to represent ABM as an instrument of quality management

(Steimer, 1990, Armitage and Russell 1993, Letza and Gadd, K 1994, Thomas and

Mackey, 1994; Clarke and Bellis-Jones, 1996), the most it can actually achieve is re-

scaling of existing activities, not a modification of them.

The Scope of ABC/ABM

The potential for ABM to influence the performance of staff functions is proportional to

the claims made for its scope. In general, it is the more creative, least routine staff

activities, those which least fit its framework of accountability, which are under most

threat. It is not inevitable, however, that ABM should be viewed as a comprehensive

approach. In the related debates on the scope of ABC, there is a considerable body of

opinion which accepts that there are activities which cannot, and perhaps should not, be

traced to particular cost objects.

The programme of the ‘comprehensive’ view of ABC was set out by Kaplan in 1987

(Kaplan, 1987, p. 7.27). ‘The scope of the product cost system is the entire value chain.

21
All of the costs of the organisation are included in product costs.’ Similarly Johnson

(1988); ‘In principle, all activities in an organisation supply output to meet customer’s

demands.’ This inclusive view of ABC is operationalised in the interrogation procedure

recommended by Innes and Mitchell (1990, p. 8.): ‘When the work-time of all of the staff

is fully accounted for, it is reasonably certain that the activity listing is comprehensive.’

By 1988, however, Kaplan had reconsidered, suggesting that the costs of unused capacity

should be excluded on the grounds that these are period expenses and that those of

research and development should be treated as an investment in the future of the

enterprise as a whole (Kaplan, 1988: 65). Other arguments against the ‘inclusive’ view

are that there are costs which cannot be identified with particular activities (Staubus,

1990), that it is cannot be meaningful to allocate costs down to product level when they

are not controllable at that level (Sephton and Ward, 1990), and that cost behaviour will

not be correctly modelled by ABC systems when the cost pools include the fixed costs of

maintaining a capability (Noreen, 1991).

In practice, the difference between these positions is not as extreme as the polarisation of

their arguments suggests. Those who believe that ABC ought to form a comprehensive

system of cost allocation are quite prepared to make arbitrary allocations of costs which

prove difficult to trace to particular objects. In Innes and Mitchell’s illustration of the

allocation of purchasing costs, for example, the costs of supervision are distributed

equally to all activities (Innes and Mitchell, 1990, p. 9).

For ABC, the issue of scope may be a minor one in any case, since it concerns only that

proportion of indirect costs which is difficult to identify with accessible drivers. From the

point of view of cost allocation, it makes little difference whether small proportions of

indirect cost are allocated through approximate cost drivers, whether they are recognised

as period costs and allocated arbitrarily or whether they are not allocated at all. When the

22
cost drivers of ABC are regarded as performance indicators, as in ABM, the

consequences may be more serious. To the extent that particular cost drivers fail to

capture the meaning of staff activity, they create pressures to misdirect that activity, and

the costs of doing so may be out of all proportion to expenditure involved.

In contrast to the debates on the scope of ABC, few, if any, discussions of ABM have

confronted the issue of whether or not there are limits to its applicability. On the contrary,

the tendency of management consultants has been to talk up its potential as a

comprehensive approach to the management of staff functions at all levels. Typical is the

following definition from the leaders of Ernst and Young’s specialist ABM

consultancy 11:

‘[ABM is] A way in which an organisation can direct, measure and control its

aim for enhanced performance. This is achieved by the creation and use of an

activity-based performance measurement framework as the primary means of

resource management, continuous improvement and decision-making.’

(Evans and Ashworth, 1995)

If this means what it says, the implication is that divisional and corporate-level staff

functions as well as the support services at level of the operating site are candidates for

the ABM treatment.

The Reduction of Purpose to Activity

The methods by which the activity outputs of staff services are to be established appear,

at first sight, to be both reasonable and participative. The usual procedure begins with an

interview with the manager concerned (Cooper, 1990a; Cooper et al, 1992: 16; Innes and

Mitchell, 1990, p. 8). Multidisciplinary teams which include, but are not necessarily

dominated by, management accountants ask managers to list the activities which they

perform for products and processes, to estimate the proportion of staff time and other

23
resources expended on each activity and to agree a cost-driver which will stand for a unit

performance of it. Interviews of this kind are said to be both quick and cheap, taking

between 30 minutes and two hours per manager (Cooper et al, 1992, p. 16).

In reality, participation on these terms invites staff managers to collude in a very

particular view of their own functions. As a method of cost allocation, ABC can only

work by reducing the work of staff departments to a set of separable activities - separable

because each must have an identifiable cost. When such a view is carried forward into

ABM, the staff department is seen as the producer of repeated acts of service, usually for

production, each of which gives off a countable signal (as, for example, the ordering of

material is signified by a form). Such an atomised view of the staff function is virtually

guaranteed to miss the point. It completely ignores the question of whether there ought to

be some larger purpose behind the activities, and whether it might be more appropriate to

hold the department accountable in terms of this purpose. As has already been recognised

within the literature of ABC, one effect of this substitution of activity for purpose is to

encourage ‘gaming behaviour’ or ‘goal-displacement’ (Merton, 1940). Enmeshed in

performance monitoring systems which prioritise the ratio of activity outputs to cost,

managers find ways of doing their bit which have nothing at all to do with either

efficiency or effectiveness. Innes and Mitchell (1990, p. 26) give the example of splitting

purchases into smaller batches so as to increase the number of purchase orders

‘produced’.

However reasonable it may appear to the productivist mind-set, not all of staff activity

can be reduced to routine services performed for other functions. By threatening to reduce

expenditure to levels which can be justified in such terms ABM threatens to deny space

for developmental activities indigenous to the staff department. To take concrete cases,

the concepts of policy and strategy as applied to human resource management and

purchasing will, according to their advocates, create company capabilities, exactly as

24
R&D creates the potential for new products (e.g. Tyson, 1985; Saunders, 1997). Recall

too that Kaplan (1988, p. 65) advocated the exemption of R&D expenses from allocation

on the grounds that it is an investment in future products, not a cost of present products.

The same argument could equally apply to the recruitment and training of effective

personnel, or to the development of the supply chain. The problem with ABM is that it is

programmed to deny and annihilate anything which is not on its list of routine activities,

whether it is of genuine value or not.

The irony is that the diffusion of ABC/ABM appears to be hampered by exactly the

mentality which it seeks to operationalise in the form of accounting controls. Line and

senior managers tend to regard accounting as a service providing routine (and not very

useful) information to other functions (Lyne and Freidman, 1996). As a consequence

accounting departments were run down during the 1980s, so that a major obstacle to the

development of improved costing systems is now the lack of staff time (Innes, Mitchell

and Cobb, 1992, p. 9). Would there, one wonders, be time in an accounting department

which was itself subjected to ABM?

Despite its potential for de-manning, ABM’s fixation on activities, paradoxically,

threatens to fetishise existing routines. Providing staff managers succeed in establishing

activities as valid during the interview phase, and in shepherding them through the cull of

value analysis, these activities, or rather their cost-drivers, are likely to become fossilised

within the activity monitoring system, especially when this is written into software. It is

all very well for management consultants to argue that ABM should ‘describe, regularly

and in detail, what the organisation does’ (Evans and Ashworth, 1995, italics added), but

one of the problems with ABM is that it is expensive in staff time to install (Innes,

Mitchell, and Cobb, 1992). By the same token, it will be expensive to update. The

consequence may be an anchylosis of the organisation's existing bureaucratic and

technical procedures in which the apparent concreteness of ‘products consume activities’

25
conceals the fact that they do so as a consequence of managerial decisions (e.g.

maintenance routines, purchasing procedures). The incorporation of these decisions into a

system of activity-based management actively discourages reviewing them. Whilst ABM

facilitates the management of activities, in the sense of exerting pressure on the resources

devoted to them, it discourages activity management in the sense of searching for better

ways of accomplishing their purpose. In any case, such a search would (again) create

costs which would be difficult to justify within the ABM framework.

If the foregoing is true, one would expect some show of resistance from staff subjected to

the ABM frame of reference. Reports of the staff view of things, it has to be said, are not

a frequent feature of implementation case studies. Many of these lack ethnographic detail

and they tend, in any case, to be written up by consultants and/or an implementation team,

chosen for their prior commitment to the ABM project (e.g. Bhimani and Pigott, 1992).

Generally the voices of the subjects are suppressed. It is well established, however, that

successful implementation of ABC/ABM depends on the prior commitment of senior

management (Shields, 1995; Adams, 1996), accompanied by a fair amount of pressure.

The recommendation of Lammert and Ehrsam (1987) on this point is an ‘intense program

of education and training.’ accompanied by the linkages of bonuses to the new

performance measurement system (see also Argyris and Kaplan, 1994). This expenditure

of effort on re-education can only mean that passive resistance on the part of some of

those affected is the norm rather than the exception. There are, in addition, some direct

reports of failures of enthusiasm. This is variously attributed to the implications for

staffing levels (Pattison, and Gavan, 1994), adverse effects on incentive payments

(Lammert and Ehrsam 1987) or the embarrassment and threat experienced by managers

whose products or practices are newly revealed as unprofitable (Lammert and Ehrsam

1987; Shields and Young, 1989; Argyris and Kaplan, 1994). Occasionally resistance to

26
ABM is stripped of its rationality altogether and dropped into a conceptual black hole

marked ‘resistance to change’ (e.g. Cooper et al, 1992, p. 324).

Unusually, the staff managers speak in one of the case studies by Cooper et al, (1992, p.

133):

‘Our office environment is difficult to quantify, tasks are less repetitive, and

fewer data are collected, than on the typical shopfloor of a manufacturer.’

It could be that the main evidence of staff resistance to the conceptual framework

imposed upon staff activities is indirect. Horngren (1990), for example, reports the failure

of an ABC implementation in a high-technology company, due to a preponderance of

costs which could not be traced to products. It needs to be remembered that there is an

irreducible social element in the construction of ABM systems and ‘could not’ in this

case is likely to express the outcome of a negotiation between the implementation team

and the staff managers concerned.

According to Innes, Mitchell, and Cobb (1992) it is common to find that the initial list of

activities obtained from staff managers is too extensive to fit into a feasible system, whilst

Pattison and Gavan (1994) report that there have been failures of implementation due to

an over-proliferation of activities and cost drivers. Whilst this over-proliferation could be

exactly what it appears - variety in repetitive acts of service - it could also be

symptomatic of an attempt on the part of staff managers to insist on the organic

complexity of their tasks within a frame of reference which insists that these are made up

of discrete acts of service. Where there is resistance of this kind, the typical

implementation may involve the negotiation of a compromise around the notion of

approximation. To the implementation team, the final list of activities and their cost

drivers is approximate because it is abbreviated. To staff managers it could be

27
approximate in the sense that much of the meaning of their work has escaped the model

altogether.

The Degradation of Staff Functions: Prototypical Purchasing

The previous section has argued that ABM proposes a degradation of other staff

functions. This thesis will now be illustrated on one of the chosen grounds of ABC: that

of the purchasing function. For some reason ABC gurus have it in for the purchasing

department:

‘It should not cost us much more to order a $10,000 dollar part than a $10 dollar

part. Typing the extra zeros on the check is not very expensive. Why [should]

procurement dollars increase with dollars of material purchased.’

(Kaplan, 1987: 7:12)

Recent expositions of the application of ABC/ABM to purchasing include those of Jeans

and Morrow (1989), Innes and Mitchell (1990), Roehm, Critchfield, and Castellano,

(1992) and Pattison and Gavan (1994).

The procedure will be to compare the account of purchasing given in recent textbooks on

the subject with its representation in activity-based management. The potential biases in

both accounts need to be borne in mind. Purchasing enthusiasts are just as likely to

produce expansionary accounts of their field of study as ABC advocates are to reduce it

to terms with which they can cope.

Purchasing: Adding Value Through the Management of the Supply Chain

In recent expositions, purchasing is reinvented as ‘Strategic purchasing and supply chain

management’ (Saunders, 1997). The name says much. ‘Supply chain’ is evidently a

conceptual expansion of the workaday ‘supplier’, ‘management’ stakes out a claims to

executive decision-making and the prefix ‘strategic’, as with management accounting,

28
suggests that the function needs to be represented at board level. In other words, we are

looking at a managerial profession on the make (Armstrong, 1994).

In support of these claims purchasing has developed a ‘rhetoric of urgency’ which

parallels, in many respects, that of management accounting (see page 5). There is the

same invocation of competition from the Far East, coupled with the same threats of loss

of competitiveness if the function is not accorded its due importance :

‘[There is a] huge gap in performance between the best performers in Japan and

the others elsewhere in the world ... Purchasing and supply chain management

practices have played a part in the superiority of these companies and they need to

be emulated by others as they try to catch up.’

(Saunders, 1997, p. 308)

There are even parallels with the case made for ABC in the references to changes in the

cost structure of the modern corporation. Where ABC advocates make much of the

increasing proportion of costs now accounted for by fixed overhead, the case for

increasing the emphasis on supply chain management is argued, in part, from the rising

proportion of total costs accounted for by purchasing decisions (Gadde and Håkansson,

1993, p. 4).

The animating insight behind the supply chain management approach is that the lowest-

price supplier may not be the lowest cost supplier. There is a ‘revenue improvement’ term

‘[Which] means suppliers provide additional services such as product design and

development’ (Saunders, 1997, p. 307) so adding value to the final product and reducing

internal costs such as inspection and handling (see also Gadde and Håkansson, 1993, p.

165, 172ff.). In order to realise these benefits, the role of the purchasing function needs to

be expanded to include the management of these development programmes and the

supplier-customer relationship in general.

29
There is, unfortunately, much to be done. ‘In many companies, purchasing suffers from

low status.’ (Gadde and Håkansson, 1993, p. 31), a problem it appears to have in common

with management accounting (Lyne and Freidman, 1996). Most managing directors, it

seems, ‘remain stunningly oblivious to the benefits which effective practice can bring.’

whilst ‘... senior managers outside the function need to alter their perception of the scope

and potential of purchasing and supply chain management’ ’ (Saunders, 1997, p. 310-

311).

Saunders’ prescription for repositioning the purchasing function begins with its

representation of at board level, so that supply strategies can be integrated into company

strategy as a whole. It also calls for an expansion of the function and the development of

its staff, not only so that the supply chain can be adequately managed, but also so that its

developmental possibilities can be integrated into other management decisions.

The Purchasing Function According to ABC

Like Saunders’ Strategic purchasing and supply chain management (1997), Innes and

Mitchell’s Activity-Based Costing (1990) was published by the relevant Chartered

Institute. To that extent it can be taken to be acceptable as an exposition of ABC to the

Chartered Institute of Management Accountants. Like many textbooks, it uses purchasing

as an illustrative example of how the costs of a ‘support function’ might be allocated

using ABC methods.

The first step is to produce a list of activities performed by the function. Innes and

Mitchell observe that in most existing applications of ABC, management accountants

have drawn up this list in consultation with the department manager. They are careful to

emphasis this participative aspect: ‘It is important that the department manager (given his

(sic) local knowledge) and not the management accountant selects the relevant activities.’

In order to assist the department manager in this task, they suggest that ‘A useful

30
approach at this stage is to question the manager on the purpose for having each member

of staff.’ A little later, they amplify the kind of questions which might be asked:

• Why do you need more than one person on this activity?

• Under what circumstances would more staff be required on this activity?

• Under what circumstances could staffing be reduced on this activity?

• Why is overtime worked on this activity?

• Why does idle time occur on this activity?

If this sounds a little aggressive, consider the following Socratic dialogue on the same

point offered by Kaplan (1987: 7:18):

‘Do not believe someone who says “We have 11 people in this department, but it

is a fixed cost.” Ask why this function cannot be handled with one person. He

says, “We cannot do it with one.” Why not? “Because there is too much work for

one person to do by herself.” Aha, now comes the important question, “What kind

of work?” Find out what creates work for the department that one person cannot

do, that requires 11 people to do.”

One is left to imagine what goes through the minds of staff managers when they are

interrogated in such a manner by an inquisition of accountants and managers from other

functions. If this is participation, it is participation on terms very much defined by the

questioning process. This insists that the agreed activities must account for the whole of

staff time and equipment usage (Innes and Mitchell, 1990, p. 8 ). What counts as an

activity, moreover is defined in a very particular way. Firstly activities must be relatively

homogenous repeated acts. Secondly, and recalling that purchasing has been defined as a

‘support function’, activities must be performed ‘for’ another function, usually

manufacturing 12. A meeting to consider purchasing strategy, for example, would fail to

qualify as an activity on both counts. The list of activities which emerges from the

31
consultation process, therefore, is a picture of the purchasing function which is decisively

shaped by the core assumption behind the questions: that all of the staff time and

equipment usage in a service department ought to be taken up with routine activities

performed for other departments.

Innes and Mitchell’s illustrative table of activities for a purchasing department, and their

associated cost drivers is reproduced in Table 1 (minus the notional figures for the

resources expended on each activity, and their cost).

Table 1
ACTIVITY COST DRIVERS
The receipt of purchase requests No. of requests
Vetting alternative suppliers No. of supplier orders
No. of suppliers
No. of new parts
Ordering items No. of supplier orders
No. of items
No. of suppliers
Expediting delivery No. of deliveries
The approval of payment No. of deliveries
Supervision All of above drivers

Having produced a list of activities and their cost drivers, the next step is to produce a

unit cost for each driver by dividing the total cost of the activities associated with it by the

number of its occurrences. The whole of the costs of the purchasing department can then

be assigned to products (or processes) by multiplying this unit cost by the number of cost-

driver occurrences associated with each product (or process). In this manner, the

procedure expresses, now in calculative form, the assumption with which it began: that all

of the costs within the purchasing department (with the exception of supervision, in Innes

and Mitchell’s example) are, or ought to be, the direct costs of its activities, either of

labour or equipment usage.

32
Innes and Mitchell (1990) present their notional treatment of purchasing purely as an

exercise in cost allocation. Left at that, it would have no immediate consequences for the

way in which the function is actually managed. Later, however, they argue the case for

managing on the basis of activity-based cost information, although the argument is made

in general terms rather with reference to their notional purchasing department. Thus:

‘Management is facilitated through the selection of activity based cost drivers for each

cost pool which (a) provide a set of activity volume based non-financial measures of

performance which can provide useful routine feedback on process efficiency; (b) help in

the identification of activities which are non-volume added and/or waste resources;. . . .’.

(Innes and Mitchell, 1990, p. 21).

Referring to their table of purchasing activities, it is clear that this amounts to managing

the department as if it were nothing more than a mass-producer of requests, vettings,

orderings, expeditings and payment approvals. It is further assumed that the efficiency

with which each activity is carried out can usefully be monitored by comparing its current

unit cost against a set of established standards. It also implies that activities which are not

associated with the defined cost drivers should be considered for elimination as

superfluities.

Clearly these activity-based indices of efficiency are not even capable of indicating the

effectiveness with which the purchasing function carries out its traditional role of

securing supplies at minimum cost. Also completely ignored are the function’s

performance in co-ordinating with other functions, policy development and planning and

forecasting, all of which are extensively discussed in Baily and Farmer (1990). The

contrast between the ABC image of purchasing and the supply chain management

approach is even more stark. Joint developmental work undertaken with the suppliers of

materials or components in order to reduce the internal costs of assembly, inspection or

33
handling, for example, is quite simply beyond its conceptual horizon. More, since none of

these activities are likely to trigger occurrences of the cost drivers identified in an ABC

exercise, any expenditure upon them will tend to be regarded as non-value added. In this

manner, the application of ABM to purchasing would create pressures against any

attempt to add value through the development of the supply chain.

Measuring Purchasing Performance

A striking feature the ABC/ABM treatments of the purchasing function, is that they are

written as if management accountants were the first to consider the question of measuring

its performance. Yet the matter is considered at length even in Baily and Farmer’s

traditional treatment of the subject (1990). The following might be read as a comment on

the kind of activity measures proposed by ABM:

‘In purchasing, the calculation of the number of requisitions dealt with by a buyer

in one day may tell us something about his (sic) efficiency in passing paper. The

number of items received on time and the number of items which fail to meet the

specification will, also, be of benefit in that regard. However, his (sic)

effectiveness may be more concerned with establishing vendors who have the

potential to supply for many years to come - competitively. Also with, e.g.,

reducing the number of these suppliers so that co-makership and just-in-time

approaches may be managed to the best effect.’

(Baily and Farmer, 1990, p. 295)

Since this was written, the techniques of measuring purchasing performance have moved

forward, with developments aimed at modelling some of the benefits of supply chain

management. The key concept is that of the ‘Total costs of ownership’ (TCO). The idea is

to trace all of the costs of processing materials or components (storage, handling,

inspection, returns, re-working etc.) to each supplier so that the benefits of using a higher-

34
quality supplier can be offset against the higher cost (Burt, Norquist and Anklesaria,

1990; Cavatino, 1992; Carr and Ittner, 1992; Ellram and Siferd, 1993; Ellram, 1993;

Ellram and Maltz, 1995; Smytka and Clemens, 1995)

Of course this does not capture the whole of the benefits claimed for the supply chain

approach. Like ABC, TCO is simply a form of cost allocation, and, as such, cannot place

a value on any positive synergies from joint supplier-customer developmental

programmes. Despite this limitation, it remains interesting that the development – which

is essentially one in management accounting - has largely been driven by purchasing

thinkers and practitioners rather than management accountants. Of the 11 case studies of

the approach reported by Ellram (1995) only 3 involved the accounting finance function

at all and only in one case was it the prime mover. In 10 out of 11 of the cases, moreover,

the information used for the TCO implementation was captured outside the firm’s normal

accounting systems.

In view of this, and because the TCO approach is relatively recent, it is perhaps

understandable that the purchasing applications of ABC/ABM so far reported have failed

to engage with it 13. More striking, is their failure even to consider that there might be a

‘purchasing view’ of what its functions ought to be and how the performance of these

might be measured. Since the low-level routine image of purchasing on which

ABC/ABM so much depends might have difficulty in surviving such an encounter, it

could be that the integrity of the ABC/ABM approach depends upon this kind of failure

of awareness.

Conclusion
The relevance ‘regained’ in ABC was really an operationalisation in costing form of a

productivist view of staff activities: that their main justification lies in their contribution

to company outputs. It was this quasi moral view of the functional interdependencies

within the corporation which underlay the distribution of staff costs to products and

35
process according to their consumption of staff activities. In order to build this basis of

cost allocation into a practical system, it had to be assumed that staff activities are

standardised and countable acts, a view which was probably congenial to the productivist

mindset in any case.

Both the technical apparatus and the world-view of ABC carried into ABM. If the value

of staff activity lay in its contribution to products and processes, it followed that staff

departments ought be accountable in terms of that contribution and that staff costs should

be controlled according to it. The activities identified by ABC offered a technology for

achieving both, since they were claimed to be the real functional connection between the

staff department and company outputs, not just conventional bases of cost allocation. In

this respect, the realist ontology of ABC was crucial to the development of ABM. It

meant that the staff activities initially identified for the purpose of cost allocation could

pressed into service as performance indicators. Standard costs for these activities could be

established and used as the basis for budgetary planning and control. In this manner the

technology of ABM could connect with long-standing concerns over the lack of

accountability within staff departments and the continued escalation of staff costs.

For the consultancies now engaged in the promotion of ABM, its consequences for

employment insecurity may not be an issue. Accountability in terms of a newly visible

connection between staff activities and company outputs implies the short-run variability

of payroll costs, is precisely the point, and is nothing more than manufacturing

departments have experienced for several generations. If ABM threatens to ‘go and ruin

more life in the plush offices of support staff’ (to quote a reviewer of an earlier version of

this paper), that is no problem at all. That this may be achieved at the cost of degrading

the performance of staff functions may cause more concern.

36
The problem originates in the concept of activity on which both ABC and ABM are

founded. Neither can function unless an activity is defined as a routine act performed

‘for’ the cost-object. Whilst certain services approximate to this pattern, it is clearly

flawed and myopic as a total view of the work of staff departments. Strategic

developments in the supply chain, in human resources, in marketing capability - and even

in management accounting - may all be important to the long-run profitability of the

capitalist enterprise. None of them, however, would qualify as activities as the term is

defined within ABC and ABM. Although the staff functions of the modern corporation

are as susceptible as any other human activity to pretentious inflation in the cause of

individual and group self interest, it would be hard to find a successful company which

consists solely of a core function backed up by routine services. Yet this is the picture

assumed in ABM.

The threat posed by ABM to the functionality of the staff department is illustrated by the

contrast between the treatment of the purchasing function in modern textbooks and that in

expositions of ABC/ABM. If anything, this is a ground of comparison which should

favour the activity-based approach since the purchasing application has become a

favourite illustration of its potential. The differences are striking. Where purchasing

textbooks emphasise the potential for adding value through the such activities as co-

ordinating supply and production schedules and joint customer- supplier development

programmes, the ABM approach is fixated on the cost-efficient performance of routine

services. Whilst some of the claims made for ‘supply chain management’ may well be

inflated, and whilst there may be a gulf between purchasing prescription and practice, it is

hard, in the light of this comparison, to see the ABM approach as anything other than

tunnel-vision cost-cutting. Because its conception of activities cannot encompass the non-

routine work involved in the management of the supply chain - still less the work

involved in developing the capability for doing so - ABM, where it is implemented, may

37
succeed in imposing budgetary restrictions on the purchasing function which reduce it to

the routine service stereotype assumed at the outset. In this aspect, it could be argued

against ABM that it makes short-termism respectable, a conclusion which is truly ironic

in view of Johnson and Kaplan’s (1987) strictures against the short-termism encouraged

by ‘management by the numbers.’ 14

Endnotes

1
The time-scale of these developments varies enormously from company to company. On the one hand

companies such as Renold Chains were experimenting with standard cost systems before the First World war

(Bougen, 1989). On the other hand, some prominent UK motors companies were still operating in ignorance

of their unit labour costs as late as the 1970s (Armstrong, 1989)

2
When practiced by Japanese managers, apparently, direct labour-based absorption costing posesses the

important virtue of encouraging automation (Hiromoto, 1988; Dugdale, 1990). In the USA, on the other

hand, it merely fosters a form of financial gamesmanship in which reductions in direct labour are made for

the purpose of redirecting overhead elsewhere in the company (Johnson and Kaplan, 1987).

3
In much of this paper, ABC and ABM are written about as if they were active subjects. This is simply a

shorthand for such usages such as ‘the advocates of ABC’ which would become awkward with repetition. It

should not be read as an attempt to reify either technique as a social agent (cf. Mouzelis, 1995, p. 15) -

although a good case could be made for doing so.

4
In its full philosophical sense, of course, realism refers to the belief that there are objects which exist

independently of our perception of them. In this sense, all costs are intellectual constructs sustained by social

convention. The exposition in the main text takes direct costs to be real relative to the practice of cost

accounting, not to the whole of the human perceptual apparatus.

5
These claims are also attacked from the position that there are ‘different costs for different purposes’, but

that is a question of the different cost objects or decisions to which costs can be attached, not whether these

costs are real or conventional.

6
An example is the argument against the allocation of indirect costs on a direct labour cost base quoted from

Wilson and Chua below (see also Johnson and Kaplan, 1987). In logic, the fact that direct labour accounts

for only a small proportion of total costs in many modern production processes is irrelevant to its

38
appropriateness as an allocation base. If the merit of an allocation base were determined by its magnitude as

a proportion total costs, the value of bought-in materials and components would be the automatic choice in

many factories. Really the argument rests on a gut feeling that the destination of large chunks of overhead

cannot possibly depend on the distribution of a small element of total cost. Whilst not quite a claim of know

the truth of overhead allocation, this is still a claim to know the territory in which it lies.

7
The terminology is intended to evoke Bhaskar’s (1986) realist social theory, in which the real is taken to

consist of ‘mechanisms’ which manifest themselves, not directly, but through the empirical. Thus in ABC

the simplicities of a real ‘mechanism’ (Products consume activities and activities cause costs) are assumed to

account for the complexities of empirical cost structures.

8
In practice, the labour of superintendance is often excluded, and distributed arbitrarily amongst other

activities (e.g. Innes and Mitchell, 1990). The point made in the main text is that some of the labour counted

as actually expended upon activities is really indirect.

9
Where, as is to be hoped, there are synergies between activities, the isolation of the value added by any one

of them is actually impossible, for the same reason that it is impossible to assign income to particular assets.

10
It was a difference in the tacit assumptions as to the variability of indirect costs gave rise to a recent

controversy over ABC. To Piper and Whalley (1990, 1991) ABC fails to model cost behaviour because

overhead costs do not necessarily vary with activity volume. Cooper’s reply (1990b) was that ABC is a

resource consumption model, not an expenditure model. He then added the immediate corollary that

‘management must take actions to bring spending in line with resource consumption.’ In other words, ABC

is an expenditure model, and it correctly models the variation of indirect costs with activity volume only

because management ‘must’ be ruthless enough to act on the information.

11
Similar claims have appeared from KPMG Management Consulting (Morrow and Hazell, 1992) and from

a senior consultant with Coopers and Lybrand (Hixon, 1995). A quotation from Hixon is given on page 18.

12
Given the complex interdependencies of modern organizations, the question of whether activities are

performed ‘for’ other functions is one for rhetoric and argument rather than appeal to the ‘facts’. At the

margin, this may mean that what qualifies as an activity may have much to do with the relative negotiating

skills of service department managers and management accountants.

39
13
Ironically, there are signs that TCO may be in the process of reinvention as an extension of ABC, in which

the costs of the activities associated with ownership are traced to individual suppliers (Clarke, 1994).

14
I am indebted to Rolland Munro for this observation.

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