Behavioral Issues in Implementing Activity-Based Costing Systems

Successfully implementing ABC systems requires more than an understanding of the technical details. ABC implementation often represents a significant change in the costing system and, as the chapter discusses, requires a manager to choose the level of detail and how to define activities. What then are some of the behavioral issues to which managers and management accountants must be sensitive when implementing an ABC system?

GAINING SUPPORT OF TOP MANAGEMENT AND CREATING A SENSE OF URGENCY FOR THE ABC EFFORT. This requires managers and management accountants to clearly communicate the strategic and operational benefits of ABC, such as improvements in product and process design. For example, at USAA Federal Savings Bank, managers calculated the cost of individual activities such as opening and closing accounts and demonstrated how the information gained from ABC provided insights into ways of improving the efficiency of bank operations that were previously unavailable.

Concepts in Action

Mayo Clinic Uses Time-Driven Activity-Based Costing to Reduce Costs and Improve Care^*

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Nearly $1 of every $5 spent in the United States is on health care. Several medical centers, such as the Mayo Clinic in Rochester, Minnesota, are using time-driven activity-based costing (TDABC) to help bring accurate cost and value measurement practices into the health care delivery system.

TDABC assigns all of the organization’s resource costs to cost objects using a framework that requires two sets of estimates. TDABC first calculates the cost of supplying resource capacity, such as a doctor’s time. The total cost of resources—including personnel, supervision, insurance, space occupancy, technology, and supplies—is divided by the available capacity—the time available for doctors to do their work—to obtain the capacity cost rate. Next, TDABC uses the capacity cost rate to drive resource costs to cost objects, such as the number of patients seen, by estimating the demand for resource capacity (time) that the cost object requires.

Medical centers implementing TDABC have succeeded in reducing costs. For orthopedic procedures at the Mayo Clinic, the TDABC-modified process resulted in shorter stays for patients, a 24% decrease in patients discharged to expensive skilled nursing facilities, and a 15% decrease in cost. Similarly, the Mayo Clinic redesigned its stroke-recovery practice to reduce costs by 25% with no adverse impact on patient outcomes.

More broadly, health care providers implementing TDABC have found that better outcomes for patients often go hand in hand with lower total costs. For example, spending more on early detection and better diagnosis of disease reduces patient suffering and often leads to less-complex and less-expensive care. With the insights from TDABC, health care providers can utilize medical staff, equipment, facilities, and administrative resources far more efficiently; streamline the path of patients through the system; and select treatment approaches that improve outcomes while eliminating services that do not.

CREATING A GUIDING COALITION OF MANAGERS THROUGHOUT THE VALUE CHAIN FOR THE ABC EFFORT. ABC systems measure how the resources of an organization are used. Managers responsible for these resources have the best knowledge about the underlying activities and their cost drivers. Getting managers to cooperate and take the initiative for implementing ABC is essential for gaining the required expertise, the proper credibility, greater commitment, valuable coordination, and the necessary leadership.
EDUCATING AND TRAINING EMPLOYEES IN ABC AS A BASIS FOR EMPLOYEE EMPOWERMENT. Management accountants must disseminate information about ABC throughout the organization to enable employees in all areas of the business to use their knowledge of ABC to make improvements. For example, WS Industries, an Indian manufacturer of insulators, not only shared ABC information with its workers but also established an incentive plan that gave them a percentage of the cost savings. The results were dramatic because employees were empowered and motivated to implement numerous cost-saving projects.
SEEKING SMALL SHORT-RUN SUCCESSES AS PROOF THAT THE ABC IMPLEMENTATION IS YIELDING RESULTS. Too often, managers and management accountants seek big improvements far too quickly. In many situations, achieving a significant change overnight is difficult. However, showing how ABC information has helped improve a process and save costs, even if only in small ways, motivates the team to stay on course and build momentum. The credibility gained from small victories leads to additional improvements involving larger numbers of people and other parts of the organization. Eventually ABC becomes rooted in the culture of the organization. Sharing short-term successes also helps motivate employees to be innovative. At USAA Federal Savings Bank, managers created a “process improvement” Slack channel to facilitate the sharing of process improvement ideas.
RECOGNIZING THAT ABC INFORMATION IS NOT PERFECT. The management accountant must help managers recognize both the value and the limitations of ABC. Open and honest communication about the tradeoffs inherent in designing an ABC system ensures that managers use the information thoughtfully to make sound decisions and can question its output without sounding adversarial.