The design and implementation of activity‐based costing

Abstract

Purpose This paper describes the design and implementation of an activity‐based costing (ABC) system for a textile company in Taiwan. Design/methodology/approach An in‐depth field investigation by collecting and analyzing 39 months of field data, gathering information from files and archives, direct observation, interviews, and statistical analyses was conducted. Findings First, the company's existing cost system adopted a volume‐based cost driver to allocate overhead costs to products. While the company devised an “equivalent factor” to take production‐complexity into account, the weakness of the metric led to product cost distortions. Second, the existing volume‐based cost system ignores the impact of rework processes on product costs. Third, adding complexity‐related cost drivers to the volume‐based cost driver increases the ability to explain variations in overhead costs. Fourth, the newly designed ABC system incorporates both volume‐based and non‐volume based drivers, which considers the effect of rework on product costs. Fifth, the existing volume‐based cost system overestimates the costs of high‐volume products and underestimates the costs of products with high production‐complexity. Finally, the company still stays at the analysis phase of the ABC system implementation, possibly due to revision of strategy, no linkage to incentives, lack of MIS support, and inadequate inventory control. Practical implications The above findings have implications for companies attempting to implement ABC. Originality/value This paper extends prior research in the following. First, it reports on the entire process of ABC implementation for a given company, as well as facilitators/impediments in the process. Second, while most prior research tends to focus on success cases, our study presents a failure case, which has implications for practitioners trying to avoid the same mistakes.