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Strategic Business Management by Gary Cokins

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5

MANAGERIAL ACCOUNTING DESIGN COMPLYING WITH THE CAUSALITY PRINCIPLE

Up to this point in the book, concepts and principles have been covered, including references to activity-based cost management (ABC/M) principles. In this chapter, the design of a managerial accounting system is discussed. Because ABC/M principles are essential, this chapter begins with it as a topic.

REMOVING THE BLINDFOLD WITH ABC/M

Imagine that you and three friends go to a restaurant. You order a small salad, and they each order an expensive prime rib and a glass of wine. When the waiter brings the bill, your three friends say, ‘Let’s split the bill evenly.’ How would you feel?

This is how many products and service lines also feel when the accountants take a large amount of indirect and support overhead expenses and allocate them as costs without any logic. There is minimal or no causal link that reflects a true relative consumption of the expenses by the individual products, service lines or end-users. This is unfair. ABC/M more fairly ‘splits the bill’ based on what was individually ordered. Many ABC/M practitioners wish the word allocation never existed. It implies inequity to managers and employees based on past abuses in their organisation’s accounting practices. The word allocation effectively means ‘misallocation’ because that is usually the result. ABC/M practitioners will often say that they do not allocate expenses. Instead they trace and assign them to costs based on cause and effect relationships. ...

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