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Why the CAM-I Glossary is Important to You
CAM-I Copyrights Statement
Sponsor and other contributors
Glossary of Terms
[A - D]
[F - W]
Appendix A: Choice of Terms
Appendix B: Illustrations
The CAM-I ABC Basic Model
Expanded Process View
CAM-I Expanded ABC Model
ABC Model Example
Activity Based Management Model
We would like to thank Mike Roberts of Mevatec for his contributions to this section.
Why the CAM-I Glossary Is Important To You
The Consortium for Advanced Manufacturing - International, has long been recognized as the
world's leading organization in the research and development of Activity Based Management
Concepts and Techniques. During 1990 - 1991 the Consortium's Cost Management Research
focused on the development a common understanding of Activity Based Management Concepts.
The result of this development effort was this Glossary which has since become the
industry standard in defining the terms and techniques used in ABM. The Glossary includes
common terms used in Activity Based Management as well as appendices which fully
illustrate usage of ABC and ABM concepts. These illustrations which have become popularly
known as the "CAM-I Cross of ABM" and are the foundation of most successful ABM
efforts today. The glossary is an essential tool for providing a framework in which to
understand ABM which no company should be without.
The primary objective of this glossary is to unify, standardize and where
necessary, develop a set of terms pertaining to Activity-Based Management. It is hoped
that this work will facilitate the understanding of Activity-Based Management and
encourage better communication among those involved in the research,
development, and implementation of this discipline.
This is the second glossary CAM-I CMS Program produced. The first glossary was
published in Cost Management for Today's Advanced Manufacturing in 1988. That glossary was
a first attempt at defining the terms of the then emerging discipline known as Cost
Management. The basis of glossary was the design phase of the CMS Program begun in 1986
and was completed in early 1987. This glossary has taken advantage of the experience
gained in the intervening years of the CMS Program. We have had the benefit of significant
additional research as well as several actual implementations of segments of
Activity-Based Management. We should look at this glossary as the next step in the
evolution of the research and development of this discipline. In the Reference section of
this Introduction, we acknowledge several sources, books, and articles of several authors
who helped define and advance theory and practice of ABM.
By the time this glossary was assembled, many competing terms were already in
use. Given that several individuals and organizations were doing work in the area of
Activity-Based Costing, it is not surprising to find identical terms with different
meanings. It was one of the objectives of this project to compile a set of terms and
definitions that would provide a single data base for the CAM-I CMS Program and others
working in this area. We realize that this project in itself may add to the diversity of
terms. However, it is essential that if the CAM-I CMS Program is to continue to develop
and publish work on the theory and practice of Activity-Based Management, we need a single
and accepted set of terms and definitions. This issue became very clear when we looked at
the variations of the term driver in use, as an example. It is the intent of this glossary
to foster an industry standard for the terminology of this discipline. The work by others
in this field should be fully recognized, acknowledged, and appreciated. While it is the
intent of this glossary to fulfill the need of CAM-I sponsor members who require a common
set of definitions that will permit them to communicate effectively with each other, in
the longer view, an industry standard is far more preferable. If interested parties
outside of CAM-I wish to adopt the terms and definitions contained in this work, we would
consider that to be a positive comment on our work. We would also be glad to accept
comment from outside of CAM-I on this work so that it can be continually improved as new
editions are published
Contained in this glossary are several appendices. Due to the early stage of
maturity and evolution of the Activity-Based Management, it was decided that several
topics should be expanded in order to share our views on key issues. We hope that these
additional sections assist in explaining why certain terms were chosen and the context in
which we perceive their use.
The editors would like to extend a special acknowledgment to Michael Roberts,
Program Manager, CAM-I CMS Program. Mike's role in this effort has been one of both as an
individual reviewer and a project facilitator. Mike provided us with valuable insights,
and coordinated our academic review effort. It is doubtful that we could have accomplished
this project in the time allocated without his dedicated effort.
Norm Raffish, Chairman, Ernst & Young; Peter Turney, Portland State University; Mike
Tom Tessier, KPMG Peat Marwick
CAM-I Copyrights Statement
It is CAM-I's stated position with respect to its publications arising out of funded
research, that without written permission of the copyright owner, no part of those
publications may be reproduced or transmitted in any form, except by the Sponsors of the
Program that funded the research. With respect to this document, CAM-I will in the
interest of furthering the advancement of ABM, permit reproduction, or any part thereof,
providing the proper attribution is given. That attribution should be cited as follows:
The CAM-I Glossary of Activity-Based Management, Edited by Norm Raffish and Peter B. B.
Turney, (Arlington: CAM-I, 1991.)
Editors; Norm Raffish, Ernst & Young; Professor Peter B. B. Turney, Portland State
Professor Robert Capettini, San Diego State University; Professor Donald K. Clancy, Texas
Professor Robin Cooper, Harvard; Professor George Foster, Stanford; Professor Don Madden,
University of Kentucky; Professor James Reeve, University of Tennessee; James Brimson,
Coopers & Lybrand,
Barry J. Brinker, Journal of Cost Management; Tom Tessier, KPMG Peat Marwick
Sponsor and other Contributors
As with any mutual effort, there is no single individual responsible for this glossary's
development. There were four CMS sponsor individuals who contributed to the definition of
terms. They were Earl Reno of Douglas Aircraft Co, Paolo Zanenga of CTE Consultenti
Associati, Hidde van der Wal of Philips, and Norm Raffish of Ernst & Young. We also
acknowledge the efforts of Chris Pieper, ABC Technologies, Inc.
We would like to thank the many CMS sponsors and our academic liaisons for reviewing the
list of terms, contributing articles, and submitting various definitions that they found
in use in their respective organizations.
Glossary of Terms
See activity-based costing.
A method of costing that assigns all or a portion of the manufacturing costs to
other cost objects. Costs include both those that vary with the level of activity
and those that do not vary with the level of activity performed.
1. Work performed within an organization.
2. Aggregations of actions performed within an organization that are useful for ABC
The identification and description of activities in an organization. Activity analysis
involves determining what activities are done within the department, how many people
perform the activities, how much time they spend performing the activities, what resources
are required to perform the activities, what operational data best reflect the performance
of the activities, and of what value is the activity to the organization. Activity
analysis is accomplished using interviews, questionnaires, and by observation and review
of physical records of work.
Characteristics of individual activities. Attributes include cost drivers, cycle
time, capacity and performance measures. For example, a measure of the elapsed time
required to complete an activity is an attribute (See cost driver and performance
Demonstrated or expected capacity of an activity under normal operating
conditions, with a specified set of resources, and over a long period (e.g. rate of output
for an activity expressed as 500 cycles per hour.)
Activity cost assignment
Process in which cost of activities are attached to cost objectives using activity drivers
(See cost object, and activity driver).
Activity cost pool
A grouping of all cost elements associated with an activity. See cost element.
Measure of frequency and intensity of demands placed on activities by cost
objects. Used to assign costs to cost objects. It represents a line item on a product or
customer's bill of activities (e.g. number of part numbers, which is used to measure the
consumption of material related activities by each product, material type, or component.
The number of customer orders measures consumption of order-entry activities by each
customer. Sometimes an activity driver is used as an indicator of the output of an
activity, such as the number of purchase orders prepared by the purchasing activity. (See
intensity, cost object, and bill of activities).
Activity driver analysis
The identification and evaluation of the activity drivers used to trace the cost
of activities to cost objects. It may also involve selecting activity drivers with
potential for cost reduction (See Pareto analysis).
Description of how an activity is used by a cost object or other activity. Some
activity levels describe the cost that uses activity and nature of this use. These levels
include activities traceable to the product (unit-level, batch-level and product-level),
to the customer (customer-level), to a market (market-level), to a distribution channel
(channel-level) and to a project such as a research and development project
Methodology that measures cost and performance of activities, resources and cost
objects, assigns resources to activities and activities to cost objects based on their
use, and recognizes causal relationships of cost drivers to activities.
Activity-based costing system
A system that maintains and processes financial and operating data on a firm's
resources, activities, cost objects, cost drivers and activity performance measures. It
also assigns cost to activities and cost objects.
A discipline that focuses on the management of activities as route to improving
value received by customer and profit achieved by providing this value. This discipline
includes cost driver analysis, activity analysis, and performance measurement. ABM draws
on ABC as its major source of information (See customer value).
1. An apportionment or distribution.
2. A process of assigning cost to an activity or cost object when a direct measure does
not exist. For example, assigning the cost of power to a machine activity using machine
hours is an allocation because machine hours is an indirect measure of power consumption.
Allocations can be converted to tracing if additional measurement costs are incurred,
(e.g. placing a power meter on the machine (See tracing).
See cost assignment.
Characteristics of activities, e.g. cost drivers,performance measures. (See cost
driver, performance measure).
A cost associated with an activity that would not be incurred if the activity was
not required. The telephone cost associated with vendor support, for example, could be
avoided if the activity were not performed.
1. A costing method that applies costs based on the output of a process. The
process uses a bill of material or bill of activities explosion to draw quantities from
inventory, through work-in-process to finished goods, and at any intermediate stage, using
the output quantity as the basis. These quantities are generally costed using standard
costs. The process assumes that the bill of material, or bill of activities, and the
standard costs at the time of backflushing represent the actual quantities and resources
used in the manufacture of the
product. This is important since no shop orders are usually maintained to collect costs.
2. Costing method generally associated with repetitive manufacturing (See repetitive
manufacturing, standard costing).
A methodology that identifies an activity as the benchmark by which a similar
activity will be judged. This methodology is used to assist in identifying a process or
technique that can increase the effectiveness or efficiency of an activity. The source may
be internal (another part of the company) or external (such as a competitor). Best
practices is also referred to as competitive benchmarking.
Bill of activities
Listing of activities, and associated costs of resources consumed, required by a
product or other cost object.
1. A projected amount of cost or revenue for an activity or organizational unit
covering a specific period of time. 2. Any plan for the coordination and control of
resources and expenditures.
1. A quantification of the amount of lost revenues sustained or reduction in net
cash flows by an entity due to obsolete technology. 2. A measure of non-competitiveness.
See holding cost.
See best practices.
Continuous improvement program
Program to eliminate waste, reduce response time, simplify product/process
designs, and improve quality.
Cost Accounting Standards
1. Set of rules promulgated by Cost Accounting Standards Board of the US
Government to ensure contractor compliance in the accounting of government contracts. 2.
Set of rules issued by any one of several authorized organizations or agencies such as
AICPA, or Association of Chartered Accountants (ACA), dealing with the determination of
costs to be allocated, inventories, or expensed.
The tracing or allocation of resources to activities or cost objects (See
allocation and tracing).
The basic unit of responsibility in an organization for which costs are
Any factor which causes a change in the cost of an activity. For example, the
quality of parts received by an activity (e.g., the percent that are defective) is a
determining factor in the work required by that activity and therefore affects the
resources required. An activity may have multiple cost drivers associated with it.
Cost driver analysis
The examination, quantification, and explanation of the effects of cost drivers.
The results of such analyses are often used by management in continuous improvement
programs to help reduce throughput times, improve quality and reduce cost (See cost driver
and continuous improvement program).
An amount paid for a resource consumed by an activity and included in an activity
cost pool. For example, power cost, engineering cost and depreciation may be cost elements
in the activity cost pool for a machine activity (See activity cost pool, bill of
activities and resource).
Any customer, product, service, contract, project, or other work unit for which a
separate cost measurement is desired.
Cost of quality
All the resources expended by an organization in connection with the appraisal,
prevention, internal and external failures of activities and cost objects.
See activity cost pool.
The mis-assignment of costs among cost objects. This situation leads to cost
objects being over- or under-costed relative the activity costs assigned. For example,
traditional cost accounting systems tend to over-cost high volume products and under-cost
low volume products.
Difference between customer realization and sacrifice. Realization is what is received by
the customer and includes product features, quality and service, and the cost to use,
maintain, and dispose. Sacrifice is what is given up by the customer and includes the
amount paid for the product plus time spent acquiring the product and learning how to use
it. realization and sacrifice.
See incremental cost.
Cost traced directly to an activity or a cost object. (e.g. material issued to a
particular work order or engineering time devoted to a specific product are direct costs
to the work orders or products (See tracing).
Discounted cash flow
A technique used to evaluate the future cash flows generated by a capital investment.
Discounted cash flow is computed by discounting cash flows to determine their present
Conditions in which cost objects place different demands on activities or activities place
different demands on resources. Arises when there is a difference in mix or volume of
products that causes an uneven assignment of costs. (e.g. diversity are: batch-size,
customer, market, product mix, distribution channel, and volume.
1. Accounting for assets, liabilities, equities, revenues and expenses as a basis for
reports to external parties.
2. Methodology that focuses on reporting financial information primarily for use by
owners, external organizations, financial institutions, and constrained by rule making
bodies (e.g. FASB, SEC and AICPA).
See resource cost assignment.
A cost element of an activity that does not vary with changes in the volume of cost
drivers or activity drivers. The depreciation of a machine, while direct to the activity,
is fixed with respect to changes in the number of units of the activity driver. The
designation of a cost element as fixed or variable may vary depending on the decision time
frame and the extent to which the volume of production, activity drivers or cost drivers
The objective of a flexible factory is to provide a wide range of services across many
product lines in a timely manner. An example of this is a fabrication plant with several
integrated manufacturing cells capable of performing many functions for non-related
product lines with relatively short lead times.
The objectives of a focused factory is to organize around a specific set of resources to
provide low cost and high throughput over a narrow range of products.
Allocating costs of a sustaining activity to a cost object even though cost object may not
clearly consume or causally related to that activity. Allocating a plant-level activity,
e.g. heating, to product units using an activity driver such as direct or labor hours,
forces the cost of this activity to the product (See sustaining activity).
Full absorption costing
See absorption costing.
Identifies activities performed in organization. It yields a hierarchical representation
of organization showing the relationship between the different levels of the organization
and its activities. For example, a hierarchy may start with the division, and move down
through the plant, function, process, activity, and task levels.
Financial technique calculates cost of retaining an asset, e.g. finished goods inventory
or a building. Generally the calculation includes a cost of capital in addition to other
costs such as insurance, taxes and space.
A situation in which all the cost elements in an activity's cost pool are consumed in
proportion to an activity driver by all cost objects (See cost element, activity cost
pool, and activity driver).
1. Cost associated with increasing output of activity or project above some base level. 2.
Additional cost associated with selecting one economic or business alternative over
another e.g.difference between working overtime or subcontracting work. 3. Cost associated
with increasing quantity of a cost driver. Also know as differential cost.
The amount of cost that is allocated, not traced, to an activity or a cost object. For
example, the costs of supervision or heat may be allocated to an activity on the basis of
direct labor hours (See allocation).
The amount of cost consumed by each unit of the activity driver. It is assumed that the
intensity of each unit of the activity driver for a single activity is equal. Unequal
intensity requires that the activity be broken into smaller activities or that a different
activity driver to chosen (See diversity).
Net present value
A method that evaluates the difference between the present value of all cash inflows and
outflows of an investment needed to obtain a desired return at a given rate of discount.
If the discounted cash inflow is greater than the outflow, the investment is considered
An activity that is judged to be or contain non essential actions that do not contribute
to customer value or the organization's needs. The attribute "non-value- added"
reflects a belief that the activity can be redesigned, reduced, or eliminated, without
reducing the quantity, responsiveness, or quality of the output required by the customer
or the organization (See customer value, and value analysis).
A product or service which has lost its value to the customer due to change in need or
The economic value of a benefit that is sacrificed when an alternative course of action is
Identification and interpretation of significant factors using Pareto's rule 20 % of a set
of independent variables is responsible for 80 % of result. Pareto analysis can be used to
identify cost drivers or activity drivers responsible for majority of cost incurred by
ranking them in order of value (See cost driver analysis, and activity driver analysis).
Indicators of work performed and results achieved in an activity, process, or
organizational unit. Performance measures may be financial or non-financial. E.g.
performance measure of an activity is the number of defective parts per million. An
example of a performance measure of an organizational unit is return on sales.
The discounted value of a future sum or stream of cash flows.
A series of activities that are linked to perform a specific objective. For example, the
assembly of a television set or the paying of a bill or claim, would contain several
A group of products or services that have a defined relationship through physical and
production similarities. The term product line is used interchangeable.
Product life cycle
Period starting with initial product specification, and ending with withdrawal and support
from marketplace, characterized by defined stages i.e. research, development,
introduction, maturity, decline, abandonment.
See product family.
Segment of business, e.g. project, program, or business unit accountable for both revenues
Planned undertaking, usually related to specific activity e.g. R&D of new product, or
redesign of plant layout.
Cost system collects information on activities and costs associated with specific
activity, project or program.
The manufacture of identical products or a family of products in a continuous flow.
An economic element that is applied or used in the performance of activities. Salaries and
materials, for example, are resources used in the performance of activities (See cost
Resource cost assignment
Process in which cost is attached to activities. Requires assignment of cost from general
ledger accounts to activities using resource drivers. E.g. chart of accounts may list
information services at a plant level. It then becomes necessary to trace, where
practical, and allocate where it is not, cost of service to benefiting activities using
appropriate resource drivers. It may be necessary to set-up intermediate activity cost
pools to accumulate related costs from various resources before assignment can be made
(See activity cost pool and resource driver).
A measure of the quantity of resources consumed by an activity. An example of a resource
driver might be the percentage of total square feet of space occupied by an activity. This
factor is used to allocate a portion of the cost of operating the facilities to the
An accounting method that focuses on identifying persons or organizations that are
accountable for the performance of their revenue and/or expense plans.
The subjective assessment of the possible positive or negative consequences of a current
or future action. In a business sense, risk is the premium asked or paid for engaging in
an investment or venture. Often, risk is incorporated into our business decisions via
factors e.g. internal rate of return, or number of interest points paid over a prevailing
base interest rate.
See activity cost assignment.
A costing method that attaches costs to cost objects based on reasonable estimates or
studies, and budgeted rates rather than on actual costs incurred.
Costs that have been invested in assets for which there is little alternative or continued
value except salvage, if any. Using sunk costs as a basis for evaluating alternatives may
lead to incorrect decisions. Examples are the invested cost in a scrapped part, or the
cost of an obsolete machine.
Costs of activities not directly associated with production. Examples are the costs of
process engineering and purchasing.
Surrogate activity driver
Activity driver not descriptive of an activity, but closely correlated to the performance
of the activity. In addition, the surrogate activity driver should reduce cost of
measurement without significantly increasing the costing bias. The number of production
runs, for example, is not descriptive of the material disbursing activity, but may be used
as an activity drivers if the material disbursement occurs coincident to a production run.
An activity that benefits the organization but not any specific cost object. These
activities may take place at various organization levels such as the company, division,
plant or department. Examples of such activities are preparation of financial statements,
plant management, and the support of community programs.
Cost calculated as result of subtracting the desired profit margin from an estimated or a
competitive-based price to arrive at a desired production, engineering, or marketing cost.
This may not be the initial production cost, but one that is expected to be achieved
during the mature production stage (See target costing).
A method used in the analysis of product and process design that involves estimating a
target cost and designing the product to meet that cost (See target cost).
Category of cost associated with development acquisition, implementation, and maintenance
of technology assets; can include depreciation of research equipment, tooling
amortization, maintenance, and software development.
A non-traditional approach to valuing technology acquisitions which may incorporate such
elements as purchase price, start-up costs, current market value adjustment, and the risk
premium of an acquisition.
The rate of production of a defined process over a stated period of time. Rates may be
expressed in terms of units of products, batches produced, dollar turnover, or other
The ability to assign a cost, using a causal relationship, directly to an activity or a
cost object, in an economically feasible way (See tracing).
The assignment of cost to an activity or a cost object using an observable measure of the
consumption of resources by an activity. Tracing is generally preferred to allocation if
the data exists or can be obtained at a reasonable cost. For example, if the cost of
supplies is captured in the accounting system according to which activity uses the
supplies, it may be traced to each activity. Tracing is also called direct tracing.
The cost associated with a single unit of the product, including direct and indirect,
traced and allocated costs, such as a car, or the output of an activity, such as a
An activity that is judged to contribute to customer value or satisfy an organizational
need. The attribute "value-added" reflects a belief that the activity cannot be
eliminated without reducing the quantity, responsiveness, or quality of output required by
a customer or organization (See customer value).
A cost reduction and process improvement tool that utilizes information collected about
business processes. The tool examines various attributes of the processes such as
diversity, capacity, and complexity to identify candidates for improvement efforts (See
activity attribute, and cost driver.
The set of activities required to design, procure, produce, market, distribute, and
service a product or service.
An activity-based cost model that contains all the activities in the value chain.
The difference between an expected and actual result.
A cost element of an activity that varies with changes in volume of cost drivers and
activity drivers. The cost of material handling to an activity, varies with the number of
material deliveries and pickups to and from that activity (See cost element, fixed cost,
and activity driver).
Resources consumed by non-essential or inefficient activities.
Willie Sutton rule
Focus on the high cost activities. The rule is named after bank robber Willie Sutton. He
was once asked "why do you rob banks?" He is reputed to have replied
"because that's where the money is."
A physical or logical grouping of resources that performs a defined job or task. The cell
may contain more than one activity. For example, all the tasks associated with the final
assembly of a product may be grouped in a work cell.
A physical area of the plant or factory. It consists of one or more resources where a
particular product or process is accomplished.
Appendix A: Choice of Terms
There is probably no term, other than activity, that has become more
identified with ABC as the term driver and its several variations. The problem is it has
been applied with varying meanings. It is often difficult to understand whether the use of
the term driver is related to a causal effect (cost or input driver) or to the output of
an activity (cost or output driver). In addition, terms such as first and second stage
driver have come into use which also describe entities similar to resource and activity
In this glossary we chose to use term cost driver as causal event that influences quantity
of work, and therefore costs, in an activity. We believe by restricting the definition of
cost driver to one meaning, it will facilitate its understanding.
We appended the term driver to two other entities. The first deals with the mechanism of
assigning resources to activities. That we call a resource driver. The second deals with
the mechanism of assigning activity costs to cost objects. That we call an activity
We hope that by limiting the use of the word driver to three clearly defined entities, we
can prevent misinterpretation or misuse of the term.
Non-Value Added and Sustaining Activities
There are many activities in an organization that do not contribute to
customer value, responsiveness, and quality. That does not mean that those activities can
be eliminated or even reduced without doing harm to the business entity. Preparing
required regulatory reports certainly does not add to the value of any cost object or to
the satisfaction of the customer. However, that activity does have value to the
organization since it permits it to function in a legal manner. Business community needs
to distinguish between activities that are:
not required at all and can be eliminated, (e.g., a duplication of effort), ineffectively
accomplished and can be reduced or redesigned (e.g., due to outdated policies or
procedures), or required to sustain the organization and therefore may not be able to
reduce or eliminate (e.g., provide plant security).
In the definition of this term we listed several examples of types of diversity that could
influence cost assignment. We did not attempt to define all the possible types of
diversity, or to give examples of each. However, we feel that a good understanding of the
issues surrounding diversity is important to insure that the process of cost assignment is
equitable and accurate among cost objects. We would refer the reader to an article
published in the Harvard Business Review (Sept-Oct 1988), by Robert Kaplan and Robin
Cooper entitled, "Measuring Costs Right: Make the Right Decisions" which covers
many of the aspects of this topic.
Appendix B: Illustrations
The CAM-I ABC Basic Model
The first illustration of the basic model is an attempt to establish a
generic illustration that can be used to assist in explaining the concepts of
Activity-Based Costing. The model should be thought of as a template that can be adapted
for various purposes.
The model should not be thought of as a flow chart of activity-based costing. It is meant
to be a conceptual diagram that allows the reader to gain a high level understanding of
the ABC processes.
There are two axes to the model. The vertical one deals with the classic two-stage cost
assignment view. In the expanded model, there are three entities and two processes. The
resource entity contains all available means upon which the selected activity can draw.
The resource cost assignment process contains the structure and tools to trace and
allocate costs to the activity. It is during this process that the applicable resource
drivers are developed as the mechanism to convey resource costs to the activity. The
activity entity is where work is performed. In this view, the activity is part of the cost
structure. It is where resources are converted to some type of output. The activity cost
assignment process contains the structure and tools
to assign costs to cost objects, utilizing activity drivers as the mechanism to accomplish
This cost assignment view is basically a "snap-shot" view in the sense that the
Balance Sheet on a financial statement is only a view of the business at the moment the
accounts were tallied. In this sense, the cost assignment view can be seen as the
structure and rules by which cost assignment takes place at some specific time. This time
period may be at the end of a month, quarter, or any other time period which
may or may not coincide with an accounting reporting period.
The horizontal axis contains the process view. This is a dynamic view, similar to the
Income and Expense statement that reports on what has/is happening. This part of the
process is initiated by a causal occurrence we call a cost driver. The cost driver is the
agent that causes the activity to utilize resources to accomplish some designated work. In
this view the activity is some type of active work center. During and after the activity
work effort, performance data are collected. The performance measure of activities entity
houses the evaluative criteria by which the organization can determine the efficiency and
effectiveness of the activities work effort. It should be noted that there are many other
performance measures, such as market share and return on equity, that are not included in
the performance measures included in the ABC model.
The process view will constantly be changing. Each time a cost driver initiates work in an
activity, new results will be obtained. It is therefore critical that applicable and
realistic performance measures be established so that tracking of activity results can be
monitored and improved on a continuing basis. ABC, through its reporting and analysis, can
become an enabler of other process changes such as synchronous manufacturing, Design for
Manufacturing, and Design for Assembly.
Cost Assignment View
Process View Resources
Cost Drivers Activities Performance Measures
Appendix B: Illustrations
Expanded Process View
The second illustration is a more realistic view of what really takes place in an
organization. There are many processes in progress, and each is usually made up of several
linked activities. The illustration points out that the output (cost object) of any
activity, may be the input (cost driver) of the next activity. This relationship, of
several activities forming a process or sub-process, offers the opportunity to link
congruent performance measurements which would offer a more appropriate view of the
effectiveness and efficiency of that process.
An activity may generate a Cost Driver or a Cost Object and performance data. For example,
a process change is the Cost Object of the engineering department, but a cost driver to
the production department.
CAM-I expanded view
Cost Drivers Activities #1
Performance Cost Drivers Activity #2
Performance Cost Object
Appendix B: Illustrations
CAM-I Expanded ABC Model
The third illustration displays an expanded view of the ABC model. Depicted in this
illustration are the resource cost assignment and activity cost assignment processes, and
their respective data bases of drivers. Another addition is an entity called the activity
trigger. This term is not defined in the glossary as it pertains to an activity-based
costing system rather than to the ABC methodology. The activity trigger is often, but not
always, the link between the occurrence of a cost driver and the initiation of action in
an activity. As an example, the mere occurrence of scrap does not in itself initiate an
activity. There will need to be some management authorization to proceed before a
replacement part is produced. In an information system about ABC, the activity trigger
will often be the collection point for the information about the cost driver. The other
entities depicted are cost drivers, activities, cost objects and activity related
Cost Assignment View
Resource Cost Resource Drivers
Process View Assignment
Cost Drivers Activity Activities Performance
Activity Cost Activity Drivers
Appendix B: Illustrations
ABC Model Example
Included as well in this section is the fourth illustration that displays how the model
might be applied to a functional activity. The activity illustrated here is the purchasing
activity at a department level.The particular task involved in generating purchase orders.
One can see by the metrics selected for performance measures, that a trend analysis could
certainly identify candidate tasks for a continuous improvement program.
Cost Assignment View
Total Procurement Cost Pool: $6,000,000
Process View Resource Cost Resource Drivers
Assignment Tracing & Allocation: $450,000
Material Requirement Requisitions
Cost Drivers Activity Activities Performance Purchasing
Trigger Purchasing Measures
Customer Orders:8,000; Scrap Tickets: 40
Activity Cost Activity Drivers
6,000 P.O.'s/year Assignment $75/P.O.
1,500 P.O. Errors
3,500 Expedited orders
Cost Object 6,000 P.O.s/year
$75/P.O. Part 12 day cycle
Appendix B: Illustrations
Activity-Based Management Model
The last illustration is a view of Activity-Based Management. It depicts the key
relationship between ABC, and the management analysis tools that are needed to bring full
realization of the benefits of ABC to the organization. ABC is a methodology that can
yield significant information about cost drivers, activities,
resources and performance measures. However, ABC is a discipline that offers the
organization the opportunity to improve the value of its products and services.
Cost Assignment View Continuous Improvement Process
Process View Activity
Cost Drivers Activity Performance Cost Driver
Cost Object Analysis
Appendix C: References
Dictionary for Accountants by Eric L. Kohler, Fifth Edition (Englewood Cliffs:
"Management Accounting Terminology, SMA# 2A" (NAA, May 1990)
Webster's Ninth New Collegiate Dictionary, (Merriam-Webster, Inc., 1984)
Cost Management for Today's Advanced Manufacturing, C. Berliner & J. A. Brimson (HBS
H. Thomas Johnson/Robert Kaplan, Relevance Lost: Rise/Fall of Management Accounting, (HBR,
Thomas Johnson, a series of articles:
Activity Management Reviewing Past and Future of Cost Management, (Journal of Cost
Management, Winter 1990)
Pitfalls in Using ABC Cost-Driver Information to Manage Operating Cost, (Corporate
Controller, Jan/Feb 1991, co-authors T. P. Vance and R. S. Player)
Activity Management: Past, Present, and Future, (The Engineering Economist, Spring 1991)
Robin Cooper, a series of articles:
Schrader Bellow, (Harvard Business School Case, 1986)
Rise of ABC (Journal of Cost Management, Summer and Fall 1988, Winter 1989 and Spring
Two Stage Procedure in Cost Accounting, (Journal of Cost Management, Spring/Summer 1987)
Cost Classifications in Unit-Based & ABM Cost Systems, (Journal of Cost Management,
Robert S. Kaplan, Union Pacific, (Harvard Business School Case, 1987)
Robert S. Kaplan, One Cost System Isn't Enough. (Harvard Business Review, J-F 1988)
Robin Cooper/Robert S. Kaplan, Measure Costs Right: Make the Right Decisions. (HBR, S-O
Peter B. B. Turney, a series of articles:
What is the Scope of Activity-Based Costing (Journal of Cost Management, Fall 1988)
Ten Myths About Implementing ABC Systems (Journal of Cost Management, Spring 1990)
Impact of Continuous Improvement on Design of ABC Systems, James Reeve (Journal of Cost
Management, Summer 1990)
How Activity-Based Costing Helps Reduce Cost (Journal of Cost Management, Winter 1991)
James Brimson, Activity Accounting: An Activity-Based Cost Approach (Coopers and Lybrand,
John Wiley & Sons. 1991)
M. Stahl and G. Bound, Competing Globally Through Customer Value: Management of
Suprasystems. (Greenwood Press, 1991)
Charles T. Horngren and George Foster,Cost Accounting A Managerial Emphasis
(Prentice-Hall, Inc. 1991)
Peter B. B. Turney, Common Cents: ABC Performance Breakthrough (Cost Technology, 1991)
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