Promise--and Peril--of Integrated Cost Systems

While it is true that there is great promise in integrated cost systems, there is also great peril, according to Harvard Business School Professor Robert Kaplan and Claremont Graduate School Professor Robin Cooper. The authors explain that unless managers approach integration very thoughtfully--with extremely careful customization--they could end up with a system that performs neither function well and that drives decision making in the wrong direction altogether. Operational-control and ABC systems have fundamentally different purposes. Their requirements for accuracy, timeliness, and aggregation are so different that no single, fully integrated approach can be adequate for both purposes. If an integrated system used real-time cost data instead of standard rates in its ABC subsystem, for example, the result would be dangerously distorted messages about individual product profitability--and that's precisely the problem ABC systems were originally designed to address. Proper linkage and feedback between the two systems is possible, however. Through activity-based budgeting, the ABC system is linked directly to operations control: managers can determine the supply and practical capacity of resources in forthcoming periods. Linking operational control to ABC is also possible. The activity-based portion of an operational control system collects information that, while it mustn't be fed directly into the activity-based strategic cost system, can be extremely useful once it's been properly analyzed. Finally, ABC and operational control can be linked to financial reporting to generate cost of goods sold and inventory valuations--but again, with precautions.

• Cost analysis
• Cost allocation
• Accounting procedures and policies
• Activity-based costing
• Cost systems
• Cost accounting