ACTIVITY-BASED COSTING AND SMALL BUSINESSES

It used to be that large corporations were the only
businesses involved in activity-based costing. Not so
today. Service industries such as banks, hospitals, insurance
companies, and real estate agencies have all
had success with ABC. But since its inception, activity-
based costing has seemed to have been more successful
when implemented by larger companies rather
than by smaller ones.
As Henrick noted, ‘‘Companies
with only a few products and markets aren’t likely to
get as much benefit from basing costs on activities as
companies operating with diverse products, service
lines, channels and customers.’’ But since setting up
activity-based costing for a business usually takes less
time for a smaller project, a small business that is
unsure about the effectiveness of ABC can consider a
simple test program to determine whether it is right
for them.
Douglas T. Hicks is one expert who feels that the
time is right for small businesses to implement activity-
based costing. In a 1999 Journal of Accountancy
article entitled ‘‘Yes, ABC is for Small Business,
Too,’’ Hicks presented a case study for one of his
clients, a small manufacturer that builds components
for the automobile industry. Hicks detailed how they
were able to triple sales and increase profits fivefold in
a four-year span after adopting ABC. ‘‘Much of this
improvement came from a profitable mix of contracts
generated by a costing/quoting process that more
closely reflects the actual cost structure of the company,’’
Hicks stated. ‘‘This has enabled the company
to improve the management of its contracts.’’ Isolating
and measuring the cost of material movement and
using the data to justify many operational changes
were other factors Hicks cited for the success his
client had with ABC.
Hicks also noted a change in management’s attitude
after the success of ABC: ‘‘On an important but
less tangible level, management’s knowledge of and
attitude toward cost information have undergone a
substantial change. Where once managers had their
own way of measuring the cost impact of management
actions, they now measure those costs in a formal,
uniform way. When managers contemplate changes,
they have a mental model that directs them toward
changes that truly benefit the organization.’’
Hicks went on to say that ‘‘any small or midsize
organization can develop an ABC system. It doesn’t
require a great commitment of time or financial resources.
Nor does it require the implementation of
special software integrated into the general ledger—
although for larger organizations that may be a benefit.
It requires only that management view its operations
through ‘the lens of ABC’and create a model
that will enable it to measure costs in accordance with
that view.’’
Gary Cokins, director of industry for a noted
ABC software and services firm, tends to agree with
Hicks. In his book Activity-Based Cost Management:
Making It Work, he proclaimed that ‘‘Within 10 to 20
years, everyone will have some sort of ABC. It’s a
matter of when, not if.’’

FURTHER READING:
Cokins, Gary. Activity-Based Costing: Making It Work. 1998.
Cokins, Gary. ‘‘Learning to Love ABC.’’ Journal of Accountancy.
August 1999.
Cokins, Gary. ‘‘Overcoming the Obstacles to Implementing
Activity-Based Costing.’’ Bank Accounting and Finance. Fall
2000.
Chutchain-Ferranti, Joyce. ‘‘Activity-Based Costing.’’ Computerworld.
August 1999.
Henricks, Mark. ‘‘Beneath the Surface.’’ Entrepreneur. October
1999.
Hicks, Douglas T. Activity-Based Costing: Making it Work for
Small and Mid-Sized Companies. 1998.