Advanced Management Accounting
UMAC3J-20-3
Assignment 2012/2013
Monday 10th December 2012

09016707

The Development of the Techniques of Activity Based Costing, Budgeting and Management from the 1990s to the Present Day.

Executive Summary:
This report aims to explore the developments of activity based costing, budgeting and management from the 1990’s to the present day. This report aims to evaluate the criticisms made during this period by Kaplan and Cooper, and to use a range of theories and developments to assess whether these criticisms have been overcome. The use of case studies to evaluate these changes in practice will give supporting evidence to the changes that have been made.

Introduction to Kaplan and Cooper’s Criticisms:
Since 1987 when H. Thomas Johnson and Robert S. Kaplan wrote ‘Relevance Lost: the rise and fall of Management Accounting’, there have been significant developments in the traditional cost accounting methods used at the time; these mainly being absorption and marginal costing. Although these methods are “geared toward compliance with financial reporting requirements”1, they often resulted in misleading and inaccurate cost information used by managers. Traditional costing methods use a ‘blanket’ overhead recovery rate which meant when the number of overhead costs increased with more complex production schemes, cost allocations were inaccurate. This method was now “invalid relative to how the products and services consumed costs”2. With reference to the commonly used theory by Miller and Vollmann (1985), to demonstrate the increase in the number of overheads being incurred the graph below shows how overhead costs add value to a product.

Figure 1. ‘The Hidden Factory’, (1985), Miller, J.G. and Vollmann, T. E.

A blanket overhead recovery rate may seem cost-effective and provides information to managers in a fairly short