After implementing ABC the company performed significantly better than most of it's competitors

This is one of the conclusions in a recent article in "Management Control & Accounting" (MCA) by drs. M. Schoute, University Professor at VU University Amsterdam (September 2008). Drs. M. Schoute reviewed 6 recent articles on the effectiveness of ABC implementations on company performance. One of the models to examine the effectiveness of ABC is developed by Foster and Swenson:

The effectiveness model is based on a causal logic, where ABC information needs to be used for decision making, which leads to actions, which in turn lead to financial performance. The conclusion of the reviewed articles is that a positive effect on company performance is found caused by the implementation of ABC. The effect is either direct or through operational improvements correlated with ABC.

Another interesting model of ABC-decision making is the split in Strategic and Operational ABC.

Strategic ABC:

Aim is to increase profitability by making changes to the demands for products by clients

Efficiency of activities is taken as a fact

Operational ABC:

Aim is to increase efficiency of activities

Demand for products/activities is taken as a fact

The conclusion is that Operational ABC leads to significant cost reductions. Both managers of the company and researchers conclude that the use of ABC can be held responsible for the cost reductions.
Strategic ABC leads to a tendency to increase prices or phase-out products that are relatively loss-making. The same holds for relatively loss making clients.

The above profit improvements caused by Strategic and Operational ABC can be shown in the Chart below:



The above is based on the following articles:

Banker, R.D., I.R. Bardhan and T.-Y. Chen (2008), "The role of manufacturing practices in mediating the impact of Activity-Based Costing on plant performance", Accounting, Organizations and Society.

Cinquini, L. and F. Mitchell (2005), "Success in Management Accounting: Lessons learned from the Activity-Based Costing/Management experience", Journal of Accounting & Organisational Change.

Foster, G. and D.W. Swenson (1997), "Measuring the success of Activity-Based Cost Management and its determinants", Journal of Management Accounting Research.

Ittner, C.D., W.N. Lanen and D.F. Larcker (2002), "The association between Activity-Based costing and manufacturing performance", Journal of Accounting Research.

Maiga, A.S. and F.A. Jacobs (2008), "Extent of ABC use and its consequences", Contemporary Accounting Research.

Narayanan, V.G. and R.G. Sarkar (2002), "The impact of Activity-Based Costing on managerial decisions at Insteel Industries - a field study", Journal of Economics & Management Startegy.

Schoute, M. (2004), "De effectiviteit van Activity-Based Costing: recente ontwikkelingen in onderzoek", Management Control & Accounting

Schoute, M. (2008), "De effectiviteit van Activity-Based Costing nader beschouwd: recente ontwikkelingen in onderzoek", Management Control & Accounting.