THE ABC BANDWAGON AND THE JUGGERNAUT OF MODERNITY

T Colwyn Jones David DugdaleFaculty of Economics & Social Science Bristol Business School

University of the West of England

Abstract:

ABC is a quintessential phenomenon of modernity. It begins with persons changing theirpractices in specific local contexts which are penetrated by global change. It is provoked by areflexivity in which a disruption of practical consciousness leads to a new discursiveconsciousness. These practices and discourses are then disembedded in the creation of anabstract system of symbols and expertise. This changes the nature of the disembeddedpractices/discourses by translating them into a standardized (global) form. It is this global formwhich is then reembedded in new localities but this process is reflexively mediated in localcontexts so that, again, its form changes. Whilst this is happening epistemological reflexivityworks away at the globalized level so that the original expertise is undermined and anotherglobalized discourse emerges. What makes all of this so distinctively modern is the pace atwhich this happens and the territory it covers. As the binding together of time and space atglobal and local levels becomes more powerful, so it becomes more fragile. This is the historyof ABC we explore in this paper.

Accounting Stream, Critical Management Studies Conference,Manchester, 14-16 July 1999.

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This is a working paper. Please do not quote.

Address for correspondence:

David Dugdale, Bristol Business School, University of the West of England, Frenchay Campus,Bristol, BS16 1QY.

Telephone: +44 (0)117 9656261 x3418.

E-mail: David.Dugdale@uwe.ac.uk.

1The ABC Bandwagon and the Juggernaut of Modernity

INTRODUCTION

This paper is concerned with the development of management accounting theories andpractices and their inter-relationships. Specifically it deals with the rise of activity-basedaccounting and management. We trace this development from US manufacturing in the early1980s, through its first theoretical formulation, successive extensions and amendments to thistheory, to its application in UK business in the 1990s.

In the course of this journey various activity-based costing practices were identified andbranded as ABC. As its originators reflected on this new accounting, and as more and morepeople became interested in it, ABC spawned a number of other theories and practices - suchas ABB, ABC/M, ABM, Activity Accounting, Total Cost Accounting. This is the ABCbandwagon.

The bandwagon was constructed in a world which Giddens (1990) likens to a runaway engineof enormous power that we try to drive but fear may rush out of control at any moment. This isthe juggernaut of modernity. Faced with the complexity and risks of the modern worldpeople must trust in abstract systems of knowledge, whilst at the same time recognizing thatknowledge can never be guaranteed, and thus is not ultimately trustworthy. The technologies ofaccounting perpetually undermine themselves and require constant support and reaffirmation. ABCwas a response to global challenges to US manufacturing, and to a crisis of confidence intraditional accounting as means of informing managers actions. It was advanced as a moretrustworthy form of knowledge relevant to modern conditions. However, even as this newform of accounting was being implemented in practice, the basic principles of ABC underwenttransformation which undermined its early claims. Yet, at the same time, these claims werebeing used to promote its implementation in new sites.

Our discussion is structured as follows. We begin by laying out an analytical framework forexamining the ABC phenomenon drawing on the work of Anthony Giddens. We then explorethe origins of ABC in case studies of mid-1980s US manufacturing practices, their expositionas ABC by Cooper, Kaplan and Johnson in 1987-89, and the subsequent popularization anddissemination of ABC. Finally we trace the development of second-wave ABC ideas in 1989-92, demonstrating their rapid and fundamental transformation. We conclude that thedevelopment of ABC is classic example of the power and simultaneous fragility of expertsystems in modernity.

ANALYTICAL FRAMEWORK

Our exploration of the development of ABC draws on Giddens (1990) analysis of modernity. Inaccounting research interest in Giddens work has generally been in his development ofstructuration theory which attempts to replace the dualisms of agency and structure with theduality of structure (Macintosh & Scapens, 1990; Boland, 1993; Dirsmith et al. 1997). Macintoshoffers a succinct summary of the main points:

structuration theory is concerned with the interplay of agents actions and social structures

2in the production, reproduction, and regulation of any social order. Structures, existing invirtual time and space, and drawn upon by agents as they act and interact in specific time-space settings are themselves the outcome of those actions and interactions (1994:172).

Giddens does not accord priority to either structures or action. Instead he suggests we should studysocial practices that both socialize (constitute) individuals as actors, and realize (embody)structures. The production and reproduction of society are seen as a skilled performance of itsmembers who draw upon both practical and discursive consciousness. The former refers to ourknowledgability about the world in a taken-for-granted way: the latter to our reflexive monitoringof action. Systems are patterns of relationships that are structured and restructured in socialpractices: therefore systems have structures, but are not structures themselves. The three centralstructures in systems are signification, legitimation, and domination.

Signification creates meaning in social interaction, domination produces power, andlegitimation provides for a systems morality. These three layers, while separable in theabstract for analytical purposes, are intimately entwined in reality (Macintosh, 1994:172).

This general theoretical framework is the foundation for Giddens substantive sociology ofmodernity. It is this latter sociology on which we draw for this paper.

The Nature of ModernityGiddens argues that the:

dynamism of modernity derives from the separation of time and space and their recombination... the disembedding of social systems ... and the reflexive ordering and reordering of socialrelations (1990:16-7, emphasis in original).

Let us consider each of these in turn before constructing a framework for research.

Time and Space. For the majority of people in the pre-modern world time and place were firmlylinked: we might characterize this as a concrete when-where. In modernity, time and space becomeseparated and abstract. Time becomes standardized through the mechanical clock and universalcalendar: space by uniform measurements and official maps. The separation of time and spaceinvolves standardization which empties them of the necessity for a particular local physical settingfor time-space that now becomes global. This distantiated time and space can now be recombinedthrough time-space ordering devices (such as railway timetables). Giddens refers to this process asdisembedding which means the "lifting out" of social relations from local contexts and theirrestructuring across almost indefinite spans of time-space (1990:21). This is particularly evident inthe way modern rationalised organisations connect the local and the global.

Disembedding Institutions. Giddens argues that the scope of time-space distantiation is greatlyextended by the development of disembedding institutions. He identifies two key mechanisms inthis process.

First there is the development of symbolic tokens, in particular - money. Modern money exists bothas cash and coins in everyday transactions and as disembedded symbolic token. It is a mode ofdeferral in time and implies a space between individuals and their possessions. Thus it is a means ofbracketing time-space by coupling instaneity and deferral, presence and absence (1990:25). Thesecond important disembedding mechanism is the development of expert systems, described assystems of technical accomplishment or professional expertise that organise large areas of thematerial and social environments in which we live today ... An expert system disembeds by ...providing "guarantees" of expectations across distantiated time-space (1990:27). The laypersonhas little direct access to the knowledge that is inherent in such abstract systems and so the

3plausibility of these guarantees rests upon faith in the authenticity of the expert knowledge whichthey apply (1990:28).

Giddens argues that:In conditions of modernity, larger and larger numbers of people live in circumstances in whichdisembedded institutions, linking local practices with globalised social relationships, organisemajor aspects of day-to-day life (1990:79).

This everyday organization involves reembedding which is the reappropriation of disembeddedsocial relations so as to pin them down (however partially or transitorily) to local conditions of timeand space (1990:79).

Reflexivity. Giddens argues that modernity generates new forms of reflexivity. In early modernitysocial change appeared as a move from tradition to reason. So, for example, Weber (1922)identified rationality as the defining feature of modern society. At first this seemed to promise thereplacement of the certainties of traditional knowledge with new certainties of science. However, asmodernity developed, it became clear that modern reflexivity subverts reason: the rationalquestioning of all things leads to questioning the assumptions on which the questions rest. In theconstant monitoring of behaviour and contexts, of thought and action, all knowledge becomesunstable. Whereas some have identified this as the post-modern move, for Giddens it is the workingthrough of the modern (radicalised modernity) as it comes to understand itself. In modernityknowledge is always provisional, contestable, and open to differing understandings. Since reflexivitybecomes the basis for system reproduction, the instability of knowledge produces an unstableworld.

Given that the knowledge of expert systems cannot be guaranteed, why then do people continue totrust in them? Giddens argues that we make a bargain with modernity (1990:90). We aresocialized to trust so that as we learn science we also learn a respect for science as reliableknowledge. This spills over into respect for other forms of technical knowledge. This respect existsin conjunction with scepticism so that attitudes are ambivalent - a balance of respect and scepticism.In the modern world there is no escape from expert systems and attitudes of trust towards abstractsystems are usually incorporated into the continuity of day-to-day activities and are to a large extentenforced by the intrinsic circumstances of daily life (1990:90). Thus we have a predisposition totrust, which is constantly being undermined, but lack of alternatives means we make pragmaticcompromises that are woven into our routines.

ounting and Modernity: an Analytical FrameworkDrawing together these aspects of modernity we now construct an analytical framework for studyof the development of accounting theory and practice. Accounting can be seen as a social practicethat constructs information: concrete things and events are recreated as abstract values andexchanges. In the modern corporation such accounting information conditions the possibilities ofacting at a distance through its centres of calculation (Latour, 1987). Accounting provides themechanisms by which information on the local (e.g. operating units) is communicated to the global(eg. head office) where it constitutes a means to act back into the local (Johnson & Kaplan, 1987).In this process, accounting information is emptied of local (tacit) knowledge and changes itsmeaning (Armstrong, 1987a). The resulting management by the numbers involves particularrecombinations of time and space.

The power of accounting as a disembedding mechanism rests to a considerable extent on its abilityto re-present other forms of data and calculation in terms of money as pure information - thus

4linking itself to modernitys most potent symbolic token. Miller argues: Whilst accounting shareswith other means of quantification such as statistics the ability to translate qualities into quantities, itdoes so largely by translating these qualitative differences into financial values which need nofurther referent (1994:2). Accounting, then, claims to provide the ultimate translation - the bottomline.

Accounting is not only a mechanism of disembedding: it is an institution which is itself disembeddedand reembedded recursively. In the process of disembedding the nature of accounting changes. Theact of disembedding involves a reflexivity which mediates between concrete practices andabstracted theory. Accounting also changes as it is reembedded in local contexts where there it maymeet with consent, mediation and/or resistance as it encounters reflexive monitoring in localcontexts. In part, this is signalled by the long-running discussion of the gap between theory andpractice (Edwards & Emmanuel, 1990). The usual assumption is that the gap is created bytheory taking a lead which practice is slow to follow. In our analysis, what is taken to beleading and following (or what is prior and subsequent) is a function of the point at which we cutinto the cycle. If the dissemination of new accounting techniques is studied then it appears thattheory leads practice: if learning from field research or personal experience is investigated then itseems that practice informs theory. In our approach theories and practices are seen as sociallyconstructed in recursive cycles of disembedding and reembedding in which each influences the other(see Figure 1).

FIGURE 1 ABOUT HERE

In our discussion of ABC which follows there is a major disembedding-reembedding cycle whichtakes activity-based theories and practices from the local contexts of particular US manufacturingplants, through their globalized abstraction as ABC, and inserts them in new and diverse localcontexts. Within this are minor cycles in which reflexive monitoring of contexts and actionscontinually reforms these theories and practices at both global and local level.

THE ORIGINS OF ABC

There are two main strands in the development of accounting theories and practices. The first,which is more familiar to academics, flows through the work of Bob Kaplan, Tom Johnson, RobinCooper, and their associates who brought ABC to global attention. For convenience (with someapology to Johnson) we label this the Harvard approach. The second, less well known, is theCAM-I approach, mostly represented through the work of Jim Brimson, which producedActivity Accounting. In this paper we follow the first of these strands1.

Theoretical RootsThe origins of what was to become ABC appear highly specific. It began in the practices ofa small number of US manufacturing companies in 1985 as interpreted in Harvard BusinessSchool cases written by Robin Cooper in 19862. By 1988 these practices had been branded as

1 The analysis of the second strand is not yet complete. Already we regard it as an important area forunderstanding the rise of activity-based accounting and management, and it will be included in later drafts ofthe paper.

2 There are occasional references to earlier literature on activity-based accounting approaches (Staubus, 1971;cited in Johnson, 1988) and vague references to practices in General Electric in the early 1960s (Johnson,

5a new approach that produced activity-based information and heralded as a blueprint forworld-class management accounting (Johnson, 1988) and a year later they were brand-namedas ABC (Cooper, 1989). From this account the origins of ABC seem clear enough - it wasdiscovered in emergent accounting practices in US manufacturing in the mid-1980s. Whatwere the circumstances of this discovery?

Perspective on Manufacturing. US manufacturing in the early 1980s was seen asexperiencing a wave of new opportunities and threats. There was the development of forms ofadvanced manufacturing technology (AMT) - for example, through successive generations ofnumerically-controlled machine tools (NC, CNC, DNC); flexible manufacturing systems(FMS); computer-aided design (CAD) which could be linked to the computer-aidedmanufacturing systems (CAD-CAM); all of which offered the prospect of computer-integratedmanufacturing (CIM), There was increasing international competition which threatened torelative security of American home markets. In particular, there was the challenge fromJapanese manufacturing, which was believed not only to be making superior use of AMT, butalso to have devised more effective management techniques - with just-in-time (JIT) and totalquality management (TQM) beginning to recognized as central to Japanese success.. Therewas also a concern that consumer markets might be changing so that the American dominancein mass consumption/mass production business could now be destabilized. The long-run, large-batch, long-term production in which the US had previously excelled was might now beobsolete in face of demand for short-run, small-batch, short-lined products. In short, the USbusinesses were seen as facing major issues in a new manufacturing environment.

This, at any rate, was the diagnosis advanced by many Harvard University academics, withmuch of their work published in the Harvard Business Review. The titles of these works areevocative - The focused factory (Skinner, 1974); Managing our way to economic decline(Hayes & Abernathy, 1980); The hidden factory (Miller & Vollman, 1985), Postindustrialmanufacturing (Jaikumar, 1986). These, with other texts such as Japanese managementtechniques (Schonberger, 1982) and The Japanese corporation (Abegglen & Stalk, 1985),informed the Harvard approach to manufacturing and all are cited in later ABC articles.

Critique of Traditional Accounting. Alongside this general perceptive on manufacturing, theHarvard approach was influenced by Kaplans pre-ABC critique of existing accountingsystems. In `Yesterdays accounting undermines production (1984) he lays out the themeswhich will drive his work over the next 15 years. He identifies three problem areas:inadequacies of traditional costing systems; the use of the ROI measure; and the dominance ofthe financial accounting mentality in enterprises. At this stage there is no sign of any activity-based approach but there is an interest in the use of nonfinancial indicators (which wouldeventually emerge in the balanced scorecard literature of the early 1990s). The paper alsoreflects Kaplans commitment to field research (Kaplan, 1986, 1988b) as a means ofdeveloping accounting theory - a method which continues to be important over the comingyears (Kaplan, 1998).

The Initial Case Studies.

1992b). However, these are recollected retrospectively after the brand-named product ABC had beenproduced.

6Field Research Failure. Kaplan (1985) reports the findings of the first of his excursionsinto the realm of management accounting practice. He identified a select set of innovativecompanies (including Hewlett-Packard, Intel, IBM, Westinghouse, and Omark Industries) onthe assumption that since they were leaders in developing JIT, TQM and CIM, they were likelyto be implementing innovative accounting systems. He was disappointed with his findings:

I had hoped to be able to document the incidence and value of innovative accounting andcontrol systems for the new industrial competition; to learn how firms making majorchanges in their manufacturing operations were developing and using measures of quality,inventory reductions, manufacturing flexibility, employee morale and abilities,productivity, and new product effectiveness. Instead I found that changes in accountingprocedures lag far behind changes in the real phenomena they are supposed to represent(p.75).

Kaplan speculates on the reasons for this lack of innovation in accounting and suggests four:lack of role models (in contrast to the Japanese techniques informing manufacturing change;the prevalence of computer-based systems with extensive traditional accounting programs; theemphasis on financial accounting even among managerial accountants; and the:

most important explanation for accounting lag ... that senior company management havenot emphasized the need to improve the relevance and responsiveness of theirmanagement accounting systems (p.78).

Thus there is no sign of innovative management accounting - let alone activity-based costing -in Kaplans survey of innovative US manufacturing companies in 1985.

Coopers Discovery. A discovery was, however, made in the same year by one of Kaplanscolleagues - Robin Cooper. There is no indication that Cooper had self-consciously soughtinnovative companies in the same manner as Kaplan. Perhaps he found interesting sites notbecause they were innovative (and successful) but because they had urgent problems that hadto be addressed. Two cases were of key importance: the Schrader Bellows and John Deerecompanies.

In a series of Harvard Case Studies Cooper, with various research assistants (Cooper etal.,1985), tells the story Schrader Bellows Group - a division of Scovill Inc. The case openswith the views of William F. Boone, Vice President of Planning and Development at Scovill,who notes that, in a diversified company, it is not uncommon for a few products to subsidisethe others and that:

traditional cost accounting systems systematically mask the damage caused by losingdivisions, product lines and products (p.321).

In 1983, Boone analysed the product profitability of the Schrader Bellows Group. One plantproduced over 2,700 different final products and stocked up to 20,000 parts: Over the years,the firms strategy of providing a full product line had resulted in a considerable proliferationof variations for each product. The firm had a traditional standard costing system but withseveral overhead pools rather than a single plant-wide pool.

Product costs were calculated by the firms computerized standard cost system as the sumof material, direct labor, and overhead costs. [To calculate overhead costs the] total costsof the setup and quality control departments were allocated to the manufacturingdepartments... The allocated costs from each of the support departments were then addedto the overhead costs of the manufacturing departments, creating a separate overheadpool for each manufacturing department. Departmental burden rates were determined bydividing each overhead pool by the direct labor hours worked in the department (p.324-5)..

7Boone then appointed two people - the Head of Strategic Planning (PhD aeronautical engineerwith an MBA in finance) and the Manager of Strategic Planning (degrees in economics andlaw and an MBA) to determine the profitability of products manufactured at the plant. Whenthey visited the plant they noted that:

the procedures used to allocate support department costs to the products were simplisticand, in our opinion, bore little relationship to the underlying economic reality (p.329)..

They decided to interview the support department heads in order to find better bases forallocating support overhead.

In a later case study Cooper reports a developing costing procedure at Schrader Bellows:Our first step was to explode the sales data. We took the quantity sold of each endproduct, determined the individual components contained in the end products, and thenestimated the quantity of each component required in 1982.

The second step, costing the components according to the selected allocation bases, wasthe most challenging. A great deal of judgement was required to allocate the supportdepartment costs down to individual components. We also spent a considerable amount oftime insuring that the factory and sales, general and administration costs wereappropriately allocated. In our opinion, very few of these costs were truly fixed.

After we completed the allocation of costs to the components, we imploded these costsback to the product level by summing the costs of all components in a given product(p.336).

A computer program was written to calculate product cost data for some 2,000 products andit took several months to debug the program and overcome the many problems that had to besolved.

Although we are provided with little detail it seems that this exercise was a fore-runner ofwhat was later to become known as activity-based costing. The aim of the Schrader Bellowsexercise is clear. It was to allocate overhead costs more accurately to products - allocating notonly manufacturing overhead but also sales, general and administration costs.

Kaplans Discovery. Kaplan was soon to find his own example of activity-based costing. Thisis the case of John Deere Component Works (JDCW) again published as Harvard CaseStudies (March & Kaplan, 1987) prepared by research associate Artemis March underKaplans supervision. JDCW was part of a vertically integrated company, a captive producerfor Deeres equipment divisions with virtually all sales internal.

In practice, equipment divisions did not always follow the corporate guidelines forinternal sourcing, and JDCW lost a portion of the equipment factories business to outsidevendors (p.293).

By early 1984 the Gear and Special Products Division of JDCW had much excess capacity andits managers set out to penetrate other markets (such as automobile OEMs). Also, in October1984, when Deere invited bids for the manufacture of 635 parts Gear and Special Products bidfor 275 of them, but was awarded only 58.

The bidding experience generated a good deal of ferment at Gear and Special Productsand confirmed the feeling of many that we didnt even know our costs. Some of uswere quite alarmed. We had been saying , Lets go outside, [to gain orders] but wecouldnt even succeed inside...And when we looked at the results, we knew we were not

8costing things right. It was backwards to think we could do better in low-volume thanhigh-volume parts, but thats what the cost system said (p.295).

JDCW employed a standard cost accounting system which, for many years, had used directlabour run time as the base for overhead absorption; in 1984, machine hours was introduced aswell. Keith Williams and Nick Vintila (a manufacturing supervisor) were chosen to undertake aspecial study in Gear and Special Products and, as a first step, they studied a sample of 44 ofthe 275 bid parts.

Vintila spent the first half of 1985 working full-time on what became known as the ABC(Activity-Based Costing) study... he and Williams learned that use of overhead resourcescould be explained by seven different types of support activities: direct labor support,machine operation, setup hours, production order activity, materials handling, partsadministration and general overhead. Vintila then analysed all the cost categories in thegeneral ledger, estimating what percentage of each cost was caused by each of the sevenoverhead driving activities (p.297).

When the activity-based method was used to allocate overhead, 41% of the overhead shiftedfrom the original two pools (labour; machine support) to five new pools (machine setup;production orders; materials handling; part administration; and general & administration). ALotus 1-2-3 spreadsheet was used to calculate activity-based costs for individual parts andWilliams and Vintila were able to demonstrate the change in estimated costs for the sample of44 parts. Further studies were undertaken and ABC was widely embraced for decision makingin the machined parts business. ABC was used to prepare bids for both Deere and outsidecustomers; to re-evaluate the economics of long production runs; to inform decisions aboutwhich parts should not be produced on automatic machines; and to help division managers indeciding how to re-arrange the machining departments.

When a new division manager was appointed to Gear and Special Products in September 1986he described his divisions response to activity-based costing:

Few things have generated more excitement. Even though its still an allocation, its suchan improvement. Parts we suspected we were undercosting have turned out to be evenmore expensive than we had thought. Its proven what we suspected about the costs ofmaterial handling and transport distances, and triggered our making layout changes. Whenit showed us the costs added by secondary operations, we brought them back onto themain floor (p.304).

The John Deere case shows clearly how activity-based costing was seen as an improvement onthe traditional standard cost system. Instead of two overhead cost pools there were seven andthe estimated costs were much more reliable. The system was very obviously seen as a meansof better allocating overhead to product (even though its still an allocation its such animprovement). The consequences of ABC analysis can, again, be seen clearly, pricing,outsourcing and method changes were areas that immediately received attention in the light ofthe ABC analysis.

The genesis of ABC seems to lie in the Schrader Bellows (1985) and John Deere (1987) cases.Both concentrated on recosting manufactured products so as to better inform management asto the economic consequences of particular activities. In both cases product costs werecalculated that included revised allocations of manufacturing overhead. In the SchraderBellows case the allocation of non-manufacturing overhead to product also featured. Thedifference between the old standard costs and the new activity-based costs was a key

9feature in both cases and typical managerial actions included dropping products, repricing andchanging processes and layouts. The term activity-based costing appears for the first time inthe Deere case, as is recognized later by Kaplan (1990). However, this does not immediatelygrab the interest of the researchers: instead the subject matter of the two studies is described asdesigning and implementing a transaction-based product cost system (Kaplan, 1988b, p.7.2,emphasis added).

Supporting Cases. Having now discovered companies with innovative costing practices,Cooper and Kaplan were soon to find more cases. The most important of these was presentedby Tom Johnson at a colloquium in June 1986 at the Harvard Business School. Cooper &Kaplan presented the Schrader Bellows case and, as Kaplan was to later to report, Johnsondescribed a similar system developed at the Weyerhaeuser Company to measure and controlcorporate overhead costs (Kaplan, 1994, p.248). Soon other companies were added to thelist:

After these initial observations on the new transaction-costing approach, Robin Cooperand I saw essentially identical systems that had been developed and implemented atseveral other manufacturing companies: John Deere, Hewlett-Packard and Tektronix inthe U.S., Siemens in Germany; and Ericsson and Kanthal in Sweden (Kaplan, 1994,p.248, emphasis added).

Kaplan was later to describe learning from these innovating companies:Coopers and my initial rate of knowledge creation were highest in the period 1986-1989when we worked directly with our initial population of companies (1998, p.109).

It may be seen as something of a puzzle why a number of manufacturing companies, indifferent countries, suddenly appeared to be spontaneously generating not only innovativeforms of management accounting, but essentially identical forms. Perhaps even moresurprising, companies in other industrial sectors were also found to display the samephenomenon:

service organizations, such as banks, transportation companies and health careinstitutions, were also beginning to use costing systems with the same underlyingstructure as those we had observed in innovating manufacturing companies (Kaplan,1994, p.248, emphasis added).

Only a year or so after Kaplan had reported the failure of his first field trip to uncover any newpractices, activity-based costing appeared to be erupting all over the place (including Hewlett-Packard - previously a non-innovative company).

The Rise of Activity-based Accounting.We find two possibilities for explaining this phenomenon.

First, following the analytical framework we outlined above, the form of reflexivity whichinfluenced the researchers approach to their case studies may have played a significant role inshaping their interpretations. They already had a general perspective on the state of USmanufacturing constructed from themes of the implementation of new technology, increasinginternational competition, and change in consumer markets impacting on production. Theyalso had a general critique of existing accounting practices - which was soon to advanced inRelevance Lost (Johnson & Kaplan, 1987). This may have inclined them to emphasize whatwas general in the cases and to pay less attention to the detailed differences. The view thatactivity-based costing began in a handful of sites, before it was generalized and popularized byacademics (see below) appears to gain support from Coopers (later) comment that:

10

Activity-based costing - ABC - is a relatively new concept, the oldest known system onlyhaving existed for a few years. But activity-based costing systems are gaining lots ofattention (1989).

There were differences, even in the two initial cases. The term activity-based costing mayhave been coined at John Deere, but it is the Schrader Bellows case to which Cooper andKaplan repeatedly return over the next few years (while John Deere is only accordedoccasional references). Despite Kaplans insistence that cost systems are context-specific,that there are no generic cost systems that work well in all environments, and that systemsmust be tailor-made (1988b, pp. 7.3-7.4), what was to emerge was a blue-print for world-class management accounting (Johnson, 1988). This would suggest that, in disembeddingspecific local practices so that they could become global, abstract principles, the researchersacted upon their materials to shape them into a coherent movement.

The second possibility is that there were widespread changes in US manufacturing (andperhaps elsewhere) which were driving company management accounting systems along new,diverse, but eventually convergent paths. This is suggested by Johnsons (1992b) history ofactivity-based initiatives beginning in the US company General Electric in the 1960s,developing through the cost-driver approaches of consultancy firms such as Bain & Co., andBoston Consultancy Group in the 1970s and early 1980s, and being implemented in some UScompanies (Johnson adds Union Pacific and, possibly, Caterpillar and Hewlett-Packard to thetwo initial Cooper & Kaplan cases). The contribution of academics Gordon Shillinglaw (atColumbia University) and George Staubus (at Berkeley) are noted but not accorded muchinfluence:

the activity concepts they enunciated seem not to have influenced other academic thinking(until very recently), nor do they appear to have influenced ... activity-baseddevelopments in business (Johnson, 1992b, p.27).

All of this constituted the business development of:cost-driver activity-based costing (ABC), [which] was eventually codified by HarvardBusiness School professor Robin Cooper (p.29, emphasis added).

This interpretation places little weight on the role of academics in constructing activity-basedcosting - they merely tidy-up and package pre-existing developments in industry3.

THE EXPOSITION OF ABC

In the mid-1980s the materials gathered by Cooper, Kaplan and Johnson began to crystallize asactivity-based costing. Although the term is not actually used in Relevance Lost (Johnson &Kaplan, 1987), the book draws together the themes of the new manufacturing environmentand the inadequacies of traditional management accounting that we noted earlier, and begins toset out prescriptions for the future.

Relevance LostThe discussion of process control emphasizes the need for clearly defined cost centres and theidentification of appropriate measures, which need not be direct labour hours:

For instance, machine hours may be relevant for highly automated departments, numberof orders received or processed for the receiving department, number or some physical

3 The social construction of accounting pictured in this view is perhaps more clearly evident in the secondstrand of activity-based accounting and management - the CAM-I approach.

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measure (pounds, gallons, square meters) of orders shipped for the shipping department,number of set-ups and pounds of material moved for an indirect labor department. Ourgoal should be to do the best we can in explaining the short-term variation in costs withineach cost center.

It is argued that there is a danger in using short-term variable costs for pricing, productintroduction/deletion and make versus buy decisions:

These decisions turn out to involve the commitment of the firms capacity resources andshould be made in the light of long-term, not the short-term, variability of costs ... A goodproduct cost system measures the long-run costs of each product. (pp.233-4).

They argue that we can treat: virtually all costs as variable. (p.234) and: Assuming that thecurrent size and costs of the overhead departments is defensible ...our task is to identify thecost drivers for these departments. (p235). Typical cost drivers are identified and referencemade to Miller and Vollmanns (1985) taxonomy of transaction types. Finally a (rather vague)explanation is given of the way revised product costs can be derived form the cost per driverdata generated. This is seen as producing surprising information that can be generated by suchan exercise and the actions that might be taken. A further section deals with the need to extendthe analysis to costs outside the factory (p.244) and attributes the neglect of non-manufacturing costs as likely [to] be attributed to a financial reporting story somewhere in thedistant past. Implicit in all of this are the ideas of activity-based costing.

Early ABC PapersOnce the idea of activity-based costing had crystallised it did not take long to disseminate andpopularize it. Practitioner-oriented journals - Harvard Business Review and ManagementAccounting (US) - were important publication vehicles and several articles were published in1988 and 1989. These instructed accountants and managers that One cost system isntenough (Kaplan, February 1988a), that [traditional] cost accounting distorts product costs(Cooper & Kaplan, June 1988), that a solution is at hand. Known as activity-based costingsystems (Johnson, June 1988), and that this will enable managers to Measure costs right:make the right decisions (Cooper & Kaplan, October 1988), so that ABC is the key to futurecosts (Cooper, 1989). In the course of these few months the term transaction costing wasreplaced with activity-based costing as the preferred label, and then graced with the acronymABC - putting it in line with other management techniques of the period. What was the natureof this early ABC?

Cooper and Kaplans ABC Kaplan (1988a) identified three purposes for cost systems:inventory valuation, operational control, and individual product cost measurement, and arguedthat the cost system for external reporting did not give managers relevant information forperformance measurement and product cost purposes. In particular standard cost systems arecriticized for failing to measure product costs accurately, and compared with a moreaccurate system (not named, but presumably the Schrader Bellows case). Thus companiesneed an alternative to their standard costing system to discover how their product costs arebeing distorted. To construct this information:

Analysts, attempting to understand the demands a product makes on the companysresources, can start by interviewing the supervisors of production, support, logistics, andmarketing departments... Product cost estimates will not have the five- and six-digitprecision reported by a standard cost system. They will also more subjective and lessprecise than the measurements in an operational control system ... But the estimates willrealistically approximate the long-run demands each product makes on the organizationsresources (p.64, emphasis in original).

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What is on offer then is not a cost system which is more accurate because it is more precise,nor because is it less subjective: rather it claims to be more accurate by being more realistic

The theme is pursued in Cooper & Kaplan 1988a. Again the importance of product costs andmanagers rejection of short-term perspectives is emphasized. Managers are reported to beunconvinced that their full-cost systems are adequate for product related decisions. Cases arecited (Mayers Tap, Rockford and Schrader Bellows) as evidence that product costs can besystematically distorted, and that this impacts on important pricing and product decisions.Sections of the paper deal with the failure of the two-stage allocation system, the failure ofmarginal costing, and the failure of fixed-cost allocations based on labour cost or hours.Having set the scene with a fictional case (the ubiquitous pen example) the article thendiscusses the importance of transaction costing utilizing the Schrader Bellows case. Thecompany is reported as having recently:

performed a strategic cost analysis that significantly increased the number of bases usedto allocate costs to products ... The effect of changing these second-stage allocations wasdramatic ... the change in reported product costs ranged from minus10% to plus 1,000%(p.24).

The changes are reported in table which shows seven products unit cost and unit grossmargin under the existing cost system and the transaction-based system. The differencesbetween the two sets of figures are then used to demonstrate the distortion that traditionalsystems generate: this distortion is serious, systematic, and cannot (in general) be overcomewithout a different type of allocation base ... for overhead costs that vary with the number oftransactions performed, as opposed to the volume of product produced (p.25).

In Cooper & Kaplan 1988b we find a confident exposition of the alternative to traditional costsystems - this now being referred to as activity-based costing. After a cursory dismissal ofthe old simplistic approaches they introduce their own:

The theory behind our methods is simple. Virtually all of a companys activities exist tosupport the production and delivery of goods and services - and they should therefore beconsidered to be product costs (p.96).

Thus they begin by re-asserting the point that activity-based costing about all costs (not justfactory costs) and suggesting that (virtually) all costs can be related to product.

We believe that only two types of costs should be excluded from a system of activity-based costing. First, the costs of excess capacity should not be charged to individualproducts....The cost of excess or idle capacity should be treated as a separate line item -the cost of the period, not of individual products ... The second exclusion from anactivity-based cost system is research and development for entirely new product lines(pp.101,102).

Finally, Cooper & Kaplan consider the strategic implications for executives now that they arearmed with more reliable cost information that an ABC analysis might generate. They arecareful to note that dropping unprofitable products is not the only option, prices can be raisedand/or processes redesigned. They conclude:

Activity-based costing is not designed to trigger automatic decisions. It is designed toprovide more accurate information about production and support activities and productcosts so that management can focus its attention on the products and processes with themost leverage for increasing profits. It helps managers make better decisions aboutproduct, design, pricing, marketing, and mix, and encourages continual operatingimprovements (p.103).

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These three papers lay out the main features of the Cooper & Kaplan version of activity-basedcosting, which Cooper (1989) summarized and illustrated with case studies.

Activity based cost systems are more accurate than traditional volume-based systems ...they all appear to rely upon a two-stage allocation procedure to indirectly trace the costsof resources consumed in the production process to the end products (emphasis added)

The new approach had been discovered in US manufacturing plants (most notably SchraderBellows). It involved analysts gaining interview data on activities in overhead and servicedepartments, identifying cost-drivers - from two in a very simple case to nine in a relativelycomplex case (Cooper, 1989) - and then tracing virtually all costs (except excess capacity andR&D) to products via a two-stage allocation procedure. Essentially then, ABC was seen as asuperior version of full absorption costing. The enthusiasm demonstrated for it by Cooper &Kaplan was only tempered by their warning that the superior information it generated shouldnot be used to make automatic decision. The vision for ABC was still relatively narrow: itshould be used to supplement, rather than supplant, other cost systems. The central role ofABC was to supply managers with information - crucially strategic cost managementinformation.

Johnsons ABC. Some further dimensions to ABC were added by Johnson (1988). The sceneis set by a first page headline: To be world-class competitors companies should manageactivities - not costs (p. 23).

Whilst recognizing that: strategic cost information, enables managers to assess the long-termprofitability of a companys current mix of products (p.24), Johnson concentrates on the waysin which activities might be managed as sources of competitive value. If Cooper & Kaplanscentral concern was the more accurate measurement of costs, Johnson was more concernedwith attending to the activities which caused them, and advocated:

four steps to managing waste in operating activities: chart the flow of activitiesthroughout the organization; identify sources of customer value in every activity; andeliminate any activities that contribute no identifiable value to customers; identify causesof delay, excess and unevenness in all activities; and track indicators of waste ...businesses need information that it will make it possible for managers to identify and toeliminate generators of nonvalue activity (pp.28,29).

He identifies a number of nonfinancial measures - elapsed time, distance moved, spaceoccupied, number of part numbers - that might be important in managing activities, and arguesthat JIT and TQM companies need to reduce their emphasis on financial measures.

With this approach Johnson sets a much wider agenda for ABC - now seen as the e technicalcore of a general management approach - and, in this, anticipates the development of activity-based management (ABM).

POPULARIZATION OF ABC

ABC had now been, in Giddens terms, disembedded from the specific local contexts ofaccounting practise and constructed as a discourse at the global-abstract level. This discoursewas then to be disseminated and reembedded in a wide range of new local contexts. Interest inABC ideas was both widespread and rapid. In part this interest was new - inspired by thearticles themselves - and in part it confirmed other similar developments in activity-basedapproaches.

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CAM-IOf the similar developments the most important seems to be the work of CAM-I. Thisorganization - originally Computer-Aided Manufacturing, International, later renamedConsortium for Advanced Manufacturing, International - is a research and developmentgroup sponsored by a coalition of some of the largest industrial organizations, the bigprofessional accountancy firms, and government agencies in the US (see Figure 2). In 1986 itset up a group composed of representatives of these organization (plus university academics)to create the CAM-I Cost Management System.

FIGURE 2 ABOUT HERE

The brief for this group was to condense the cumulative experience of the sponsors who aresome of the largest and most successful companies in the United States and Europe (Berliner& Brimson, 1988, p.xi) and construct from this a unified cost management system (CMS)available to CAM-I members. The project was planned in three phases: conceptual design(1986); systems design (1987); and implementation (1988), with Jim Brimson as CMS ProjectDirector. The time period of the project closely overlaps with the development of ABC, andboth Kapan and Cooper are listed university members and identified for special thanks for thesignificant amount of time they have devoted to working with the CAM-I staff and the sponsororganizations (Berliner & Brimson, 1988, p.xv). Brimson (1988) presented a paper on theCAM-I cost project at the same conference Kaplan delivered Regaining relevance. Therewere clearly quite close connections between the Harvard group and CAM-I, and the outcomeof their work was similar. In the case of CAM-I it was the construction of ActivityAccounting which aims: to measure the cost of resources consumed in performing significantactivities of the business (Berliner & Brimson, 1988, p.85) and from this to provideinformation on product cost, pricing, life-cycle costs, and the non-value-added cost element.

Management Consultancy and Practitioner PublicationsOthers were also interested in the ABC approach. The Peat Marwick McLintock CostManagement Group approach to product costing in AMT environments was influenced byABC (Jeans & Morrow, 1989). The attempt by Ernst and Youngs Cost Management andManufacturing Industry consulting services to differentiate their own product as total costmanagement (TCM) did not disguise its close relationship to ABC (Ostrenga, 1990). Cooper& Kaplan were themselves involved with consultancy when, in the late 1980s:

we made a strategic alliance with a large consulting organization (KPMG Peat Marwick),trained their U.S. and overseas consultants, and served as consultants and observers totheir clientsactivity-based costing projects (Kaplan, 1998, p.102).

The outcomes of these, and other developments were publicized in the ManagementAccounting - the professional magazine of the Institute of Management Accountants in theUK. Interest grew rapidly reaching a high point in the mid-1990s (see Figure 3). Even thoughthere was a decline in the number of articles after that ABC retained its claim on readersattention, and for the 1997-98 issue the gold and two joint silver Lybrand awards for bestarticles went to, respectively, case studies on: JIT, target costing, and ABC: ABC solely; andABC and TOC (theory of constraints).

FIGURE 3 ABOUT HERE

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ABC in the UKABC ideas quickly crossed the Atlantic into the UK. The spread of these ideas is demonstratedin the pages of Management Accounting (UK), the magazine of the Chartered Institute ofManagement Accountants (CIMA). Readers were introduced to the new thinking inSeptember 1988 through an interview with Kaplan (Maskell,1988). In the next ten years therewere over 100 articles which dealt with ABC (or ABC-related issues such as ABB and ABM)peaking in 1995 (see Figure 4). These consisted of expositions of ABC, general reviews ofdevelopments in ABC theory and practice, reports of CIMA meetings and research projects onthe subject, surveys of ABC implementation, case studies - and the occasional critique.

FIGURE 4 ABOUT HERE

The case studies report implementation in manufacturing (Dugdale & Shrimpton, 1990; Laing,1994; Brent, 1995; Lyne & Friedman, 1996) communications (Gwynne & Ashworth, 1993;Bussey, 1993), publishing (Mitchell & Wycherley, 1994), and brewing (Mason, 1996). Innes &Mitchell (1991) reported that almost half the CIMA members they surveyed in 1990 - a merefive years after its discovery, and only a couple after its formal exposition - were employed byorganizations which had considered implementing ABC4. Brent (1992) found an astonishing90% of sampled firms considering ABC with 10% implementing it: and by 1994 16% ofsampled CIMA members were using ABC (Innes & Mitchell, 1995). Whilst we havereservations about the validity the data gained from mail questionnaire surveys of this type (seeDugdale & Jones, 1998) the pages of Management Accounting point to widespreadawareness, and some implementation, of ABC ideas across a range of UK businesses.

Most of the general expositions and reviews of ABC are faithful to its 1988-89 form, orincorporate new features into the absorption costing framework of that period. As late as 1997Lucas commented that:

textbook writers ... continue to present ABC as a product costing system - a moresophisticated absorption costing system, using a number of absorption bases.

Thus it appears that the ABC, as disembedded from local manufacturing contexts in 1983-86,and recreated at the global-abstract level in 1988-89, was becoming reembedded inpractitioner thinking, and sometimes action, in the UK of the mid-1990s.

THE TRANSFORMATION OF ABC THEORY

Whilst this reembedding was proceeding, the theoretical development of ABC at the global-abstract level moved apace. Two key moves by Cooper & Kaplan were the making of adistinction between resources supplied and resources used and the construction of the ABCcost hierarchy (Johnson moved in an entirely different direction).

Second-wave ABCResources Supplied and Used. The first development extends, rather than overturns, earlierABC thinking. In Cooper & Kaplan (1991, 1992) the 1988 notion of excess capacity isredefined as unused capacity, and is given far more weight in understanding cost structures.The distinction between resources used and resources supplied is now seen as crucial.

4 This survey appeared to be confirmed by work published elsewhere that, in 1990, 60% of large UK firmswere claiming to be using or planning to use ABC (Bright et al., 1992).

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Activity-based cost models estimate the cost of resources used in organizational processesto produce outputs .. the costs of resources supplied or available [is] reported by theorganizations periodic financial statements (1992, p.1, emphasis in original).

Later Kaplan explained the difficulties that arose when this distinction had not been fullyappreciated:

ABC costs were, in general, greatly in excess of the amount which spending wouldchange, leading these people [i.e. sceptical academic colleagues5] to question the value, infact the validity, of the ABC cost concept (1994, p.253).

The Cost Hierarchy. The second development was of much more fundamental significance -the construction of ABC cost hierarchy. Cooper & Kaplan (1991) point out that activityanalysis allows costs to be analysed into those that relate to unit level activities, batch levelactivities, product sustaining activities and facility sustaining activities. (Other authors havementioned customer sustaining and distribution channel sustaining activities.) This may seemto be merely a useful analytical insight but, in Cooper & Kaplans hands, it has profoundrepercussions. Armed with the hierarchical analysis they claim (in a boxed headline):

ABC is a powerful tool - but only if managers resist the instinct to view expenses at theunit level (p.130)

and elaborate in the text, that:Managers must refrain from allocating all expenses to individual units and instead separatethe expenses and match them to the level of activity that consumes resources (p.130).

This is a theoretical re-statement of shattering proportions. Cooper & Kaplan admit that:Initially, managers viewed the ABC approach as a more accurate way of calculatingproduct costs (p.130).

As we have shown earlier, managers were not alone in this: Cooper & Kaplans simpletheory of 1988 states that virtually all costs should be treated as product costs - excludingonly excess capacity and R&D. By 1991 the list of excluded costs has grown dramatically.Unit-level activities include consume only direct labour, materials, machine costs and energy.Above this level there are batch-level activities (consuming setups, material movements,purchase orders, and inspection) and product-sustaining activities (consuming processengineering, product specifications, engineering change notices, and product enhancement).These costs are not to be applied at unit-level:

Allocating expenses to individual units sends signals that managers can easily misinterpret.When batch- and product- level costs are divided by the number of units produced, themistaken impression is that the costs vary with the number of units (p.132).

This does not mean that costs cannot be traced to products, but the way in which this is doneis now very different. Product cost over a time period can be derived by summing unit, batchand product-sustaining support resources consumed: Production of shaft A103 consumed$2,453 worth of resources last year (p.132). However stating the unit cost of production(This product costs $30-plus a unit, p.132) is found to be less useful.

The 1991 version moves further by arguing that some costs should not be allocated toproducts at all. We are now told that there are: largely fixed costs of owning and runningthe plant (p.133). They are fixed because product-related activities do not impact facility-level costs - plant management, building and grounds, heating and lighting. This means that:

5 Eli Goldratt is the only one named specifically.

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Only unit, batch, and product-sustaining expenses should be assigned to products.Therefore, in ABC, facility-level expenses are kept at the plant method and not allocatedto products (p.133)

This is an extraordinary change. ABC was originally advanced as a superior costing system.This was based on the premise that traditional methods of allocating (in the UK absorbing)support costs to products was flawed and misleading. One of the key features of ABC was itsability much more accurately to perform this allocation and hence better inform managers inmaking key decisions - such as product start-up/deletion, pricing, outsourcing. The superiorityof ABC was specifically demonstrated through the unit costs it generated. This was the pointhammered home in repeated uses of the Schrader Bellows valve costing example. Not onlywas more accurate unit costs the promise that ABC held out: it was also the proof of itssuperiority over traditional systems.

The Nature of Second-wave ABC In the 1991-92 version of ABC is not to be used to derivebetter unit-level product costs. Instead, activity analysis should be employed in order tobetter understand the hierarchy of costs in the organisation and then managers will have betterinformation for decision making. They will be able to identify relevant revenues and costs thatshould be considered for particular decisions. This is, of course, standard textbook advice andthis view of activity-based analysis is much closer to a marginal or contribution style approachthan it is to better allocation of overhead support costs to products. This point wasrecognized by Kaplan in 1992:

When Robin Cooper and I first encountered ABC systems in the mid-1980s, in sites suchas Schrader-Bellows, John Deere, and Union Pacific, we described as an allocation theprocedure by which operating expenses were supplied, via activities, to products andservices (p.59, emphasis added).

By 1992 two things have happened to the presentation of ABC. Firstly, and perhaps of acosmetic nature, references to allocation have been dropped.

[Originally] Our use of the term allocation alarmed people who have been taught or arecurrently teaching that allocations are arbitrary and therefore provide no informationrelevant for management decisions ... [Now we realize] The process we had describedinitially as an allocation is an estimation. That is an attempt to estimate the cost ofperforming a setup or of processing a customer order ... we have found that estimates,based on interviews, employee judgements, and available operating data, are usuallysufficiently accurate for the managerial use of the information from an ABC model (p.59,emphasis added).

Second, there has been the identification of more non-product-related costs. This significantlychanged ABC so that:

Once Robin developed and articulated the hierarchical structure of activity-based costing,we understood that ABC was really a contribution margin approach, not an attempt to getmore accurate fully-allocated unit costs (p.59)

In the 1991-92 version of ABC it was no longer the more accurate allocation procedure it hadbeen claimed to be (Cooper, 1989). Instead it was concerned with estimates of the costs ofactivities which are sufficiently accurate (according to Cooper & Kaplans experience andjudgement) for managerial purposes. It turns out that ABC was really a contribution marginapproach.

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Neither according to Johnson, the third important figure in the disembedding of ABC, did ithold the promise he had earlier claimed for when he concluded:

Activity-based management accounting information is the key to continuous improvementof profitability, a journey without end (1988, p.30, emphasis added).

By the early 1990s he had changed his views considerably:As someone who helped put the activity-based concept in motion, I feel compelled to warnpeople that I believe it has gone too far. It should be redirected and slowed down, if notstopped altogether (1992, p.26).

Indeed he went further to argue that what had emerged was:a new competitive environment - call it the global economy - in which accountinginformation is not capable of guiding companies toward competitiveness and long termprofitability (p.31).

The man who had been the most enthusiastic cheerleader on the ABC bandwagon had jumpedoff, and the two who remained aboard were trying to steer it in new directions. How had thesechanges come about?

Kaplans RetrospectivesKaplan (1990, 1994, 1998) gives us various explanations of the processes producing second-wave ABC in his reflections on his, and ABCs, journey from the mid-1980s to the mid-1990s.

The 1990 Retrospective The first reflection on the development of ABC comes from Kaplanscontributions as a panel member at the 1989 Annual Meeting of the American AccountingAssociation (Kaplan, 1992).

Kaplan begins by noting that the view of contribution analysis that has been pervasive for fiftyor sixty years (p.2) splits operating expenses into two cost pools - fixed and variable. Thelatest incarnation of this received wisdom is Eli Goldratts theory of constraints. However:

many companies have resisted for the most part the attempts by academic accountants toconvince them to ignore their fixed costs. Most companies persist in performing full costallocations.

One could be forgiven for thinking that ABC is therefore going to have something to say aboutcost allocations. However, by 1989, Kaplan was already changing the nature of ABC:

The new approach to contribution margin analysis derives from activity-based costing(ABC). We did not invent this name: it was used by the John Deere company (p.5,emphasis added).

Kaplan acknowledges that his readers might have misinterpreted ABC in their his andCoopers earlier writings:

Our statement that the costs of all of a companys activities ... should be consideredproduct costs6 has led many people to believe we were saying that all expenses, evenexpenses caused by activities above the product level, should be allocated down to a unit-product cost calculation...[However] Intuitively, we knew that obtaining such a unit-costnumber was impossible (p.6,7, emphasis added).

Given the confidence with which the original statement was written, it is perhaps not surprisingthat some readers might have thought it meant what it said.

6 The full original statement is presented earlier in our paper.

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Kaplan then goes on to note that batch or product sustaining expenses can be divided byproduction volumes but this:

is clearly an allocation process, with all the disadvantages that have been discussed for thepast sixty years ... [It would be better to take] the opportunity of not allocating expensesdown from north to south, but of aggregating them up from south to north ... Noallocations are required to obtain this product-level margin (p7).

Kaplans summary leaves us in no doubt that, in 1989, he sees the correct use of ABC aspart of a marginal costing analysis:

The ABC analysis strives to assign operating expenses to factors that cause them.Contribution margins can be calculated at the unit level; or after covering batch-relatedexpenses, and even after covering product line, customer, and distribution channelexpenses.

Here the momentum for change to ABC is presented as initiated by their own intuition.Cooper & Kaplan had reported that, in their cases, managers were dissatisfied with unit costsderived from traditional costing systems, and had invented a new costing approach which they(the managers) believed provided more accurate unit costs. In retrospect Kaplan now claimedthat he and Cooper intuitively knew that accurate product costs it wasnt really realistic. Herethey distance themselves from the case studies. They were merely reporters of, and notadvocates for, the use of ABC.

Our interpretation differs. We believe that Cooper & Kaplan did advocate ABC as a superiorallocation system for unit costs: that they were learning from the cases, not merelyreporting them. Their articles in practitioner-oriented journals were not neutral academicreports: they were committed exhortations to change. To put this another way, the 1989revisionism was not driven by intuition but by hindsight.

The 1994 retrospective. The next review is a more comprehensive history of events. Kaplandescribes the origins of ABC, mentioning the following cases: Schrader Bellows, SchraderBellows and Winchell Lighting, John Deere Component Works, Hewlett-Packard: RosevilleNetworks Division, Siemens Electric Motor Works and Kanthal. Kaplan acknowledges theearly version of ABC:

For the first few years of articulation and implementation of ABC systems, they weredescribed as being more accurate than traditional cost allocation systems and ofsupplying long-run variable costs ... The breakthrough for ABC systems came from twotheoretical developments that elevated the approach from deductive assertions toscientifically testable hypotheses: (1) discovery of the cost hierarchy of indirect andsupport expenses; and (2) the distinction between costs of resources supplied and thecosts of resources used - the role for unused capacity costs (p.249).

What are the origins of this change in the 1994 history?The conceptual advances occurred well after the initial discovery of ABC systems inpractice. These advances also came after the first wave of writings that described ABCsystems and how they differed from the traditional cost systems they were replacing.These advances came from studying and teaching cases describing early ABCimplementations and by working closely with companies that were implementing ABCsystems (p. 254, emphasis added).

These companies come into two categories: those who had developed ABC systems on theirown - many contacted through CAM-I; and those who approached Cooper & Kaplan for

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assistance in building ABC systems, and with which they often worked over a period of severalyears.

Here we are offered three drivers of change: reflecting on the original studies through studyingand teaching; discovering new (independent) developments; and assisting in theimplementation of (some form of) ABC in novice (dependent) companies. The creation of thecost hierarchy is explained in terms of an initial discovery of a limited aspect of it (themarketing, distribution and channel-sustaining hierarchy at Winchell Lighting) and as atheoretical development reported by Cooper in 19907. At the same time, academics aredistanced from practice through their reflexive reconsideration of past events, and movedcloser to it through a second wave of disembedding in the present (e.g. the CAM-Icompanies), and reembedding, where academics actively engage in the construction of futureABC systems.

The 1998 retrospective. This weaving together of the past, present and future is elegantlypresented in the third retrospective (Kaplan, 1998) - just as though it had, self-consciously,been there all along. It is now identified as innovation action research. This mode of researchengages both academics and practitioners in attempting to implement theoretical ideas andthen modifying and extending the theory in the light of the knowledge gained. The researchmoves through four stages - which are recursive8.

The first stage is to observe and document innovative practice and Kaplans story begins (inthe early 1980s) when:

I became persuaded that a major gap existed between the needs of managers in leading-edge companies and the practices then being taught and studied by academics (pp.92-3).

Recalling his first excursion into the field (see above) he decided that conventionaldescriptive field research was unhelpful:

what if some scholars believe that the current practices occurring in companies are notdesirable or optimal? ... Extensive studies of existing practice would merely documentobsolete and ineffective practice (pp. 89, 94).

The solution was to articulate the problem to those who might know of possible solutions. Inthe ABC case this was done through the Harvard MBA programme in 1984. Kaplan states thatexecutives at Scovill (the Schrader Bellows) and John Deere cases alerted him to theinnovative approaches he was seeking. Meanwhile Cooper, through CAM-I, gained contactwith Siemens and Hewlett-Packard. The second stage is to teach and speak about theinnovation:

The preparation and delivery of these talks ... forced us to go meta - to generalize thephenomena occurring in these diverse organizations, not just describe the details of eachcompanies experience (p.101).

The third stage is to write books and articles:At this point, each concept had evolved far enough that it could be named [as ABC] andillustrated with experiences from the initial innovating companies(p101).

7 The source of this theoretical development in unclear here. The previous version - Robin developed andarticulated the hierarchical structure (Kaplan, 1992) - suggests there was a more active academic role thanreporting.

8 Kaplans third retrospective was published some time after we had become interested in Giddensdisembedding-reembedding framework. The correspondence between the two we find eerie.

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And the fourth stage is to implement the concept in new organisations.

The first loop around this circuit takes us from 1984 to 1989 - the first-wave of ABC. Thesecond loop produces second-wave ABC. Using this framework, Kaplan retells the story ofthe development of the resource use/supply distinction and the cost hierarchy.

In the case of resource use/supply it is the teach-speak and write parts of the cycle whichappear the more important. ABC was confronted by a hostile alternative - TOC (Theory ofConstraints) - produced by Eli Goldratt9. This adopted an extreme version of marginal costingwhere all costs except materials are considered fixed (with specific exceptions, such asroyalties, for particular cases) and where the concept of excess capacity is replaced with thatof protective capacity - unused resources which buffer bottleneck machines or locations.

Cooper and I participated in a series of three conferences, spanning 1988 to 1991,sponsored by the Institute of Management Accountants. These three conferencesprimarily featured two emerging management innovations; activity-based costing and EliGoldratts Theory of Constraints (Goldratt & Cox, 1986). Recall the familiar expressionthat nothing focuses the mind so much as an imminent hanging. Well, running a closesecond place is engaging in public debate with Goldratt who is an articulate andpersuasive advocate of his deductive theory of constraints. As we struggled withreconciling our emerging theory of activity-based costing with Goldratts well articulatedtheory of constraints, we came to understand the central role for measuring activity costdrivers based on resource capacity. This led us to articulate the difference betweenGoldratts cost definition, which related to the costs of resources supplied, vs. theactivity-based costing definition, which related to measuring the costs of resources used(p.107).

The amendment to ABC did nothing to shake Goldratts conviction that cost accounting isenemy number 1 of production (the charge is repeated more strongly in the second edition ofGoldratt & Cox, 1994), and the two camps have never been reconciled. However, thedeductive reasoning of Goldratt certainly seems to have influenced the inductive (as it wasoriginally presented) approach of ABC.

The construction of the cost hierarchy, on the other hand, is attributed more to theimplementation stage of loop one and the observational stage of loop two. Hewlett-Packard,Chrysler, General Electric, Kanthal, Maplehurst Bakeries, and British ColumbiaTelecommunications are cited as implementations: Hewlett-Packard, Maxwell Appliances, andPillsbury as new observations. It was these new cases that replaced Schrader Bellows and JohnDeere as the sources of ABC information.

As we worked with other manufacturing and service organizations, we learned that manyindirect expenses helped to sustain individual products and customers; they were notsupplied to support transactions. Cooper, after systematically studying the variety of costdrivers in our population of organizations ... developed a powerful taxonomy (p.105).

The third retrospective, it appears, restores the practice-theory relationship of 1988. Businesshas supplied examples of existing innovative practices, the academics have generalized it, and

9 For a discussion of the history of the Theory of Constraints see Jones & Dugdale, 1998, and for itsapplication as Throughput Accounting, Dugdale & Jones, 1998.

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they will go on to promote it. The distancing of researchers as mere reporters (Kaplan, 1990)has gone - and Cooper & Kaplan are striding out on their third loop (Kaplan, 1998).

The reconciliation between theory and practice might be seen (as implied in Kaplan, 1998) asABC practice being reflexively reconsidered following the same path as that taken by Cooper& Kaplan - and so the two converge after the 1989 parting of the ways. In essence there is abasic and an advanced ABC and researchers and companies move towards it - sometimesindependently; sometimes together. This would fit with an evolutionary view of the progressentailed in accounting history.

We offer another possible10 interpretation. That in the early 1980s the researchers discoverednew forms of full-absorption costing for producing unit costs, and in the late 1980s/early1990s they discovered new forms of marginal costing for understanding cost behaviour. Ofcourse, both were concerned with activities in some way, but in other respects they werevery different. What they had in common was that they were both packaged and promoted asnew accounting solutions under the label of ABC. Perhaps it was simply the power of ABCas a brand name, plus the personal and corporate investment (and reputation) involved in itsconstruction, that led researchers to regard their observations as two forms of the samephenomenon, rather than as two different phenomena.

DISCUSSION

In the development of first- and second-wave ABC we see a complex inter-relationshipbetween theory and practice: between academia and business. In the early in 1980s we have agroup of academics with theoretical perspectives on the general nature of the newmanufacturing environment and the failure of traditional accounting. At first they can find noinnovatory management accounting practices to study. Then, around 1985, there are threeindependent discoveries made by Cooper, Kaplan, and Johnson in US manufacturingcompanies. Soon there are more essentially identical cases - including three in Europe -although the first case (Schrader Bellows) continues to be the most important. Thesedisembedded practices are then packaged and disseminated as the ABC theory - a world-classmanagement accounting which provided more accurate product costs through a two-stageallocation procedure. Then this first-wave ABC is confronted by academic critique, by issuesarising in implementation (under advice from the academics), and new independentdevelopments in practice. Thus second-wave ABC appears which is a contribution marginapproach which helps managers understand their costs better. While second-wave ABC isemerging, first-wave ABC continues to be reembedded in local contexts - reinforced bydiscussion of ABC in textbooks. What then is ABC by the mid-1990s? Is it an absorptioncosting system for product costs, or a marginal costing system to inform managers on coststructures?

It seems to us that ABC is in a state of confusion in the period. There are both first- andsecond-wave practices, and the theory shows elements of both. For example, where do Cooper& Kaplan stand on the question of fixed versus variable costs? By the mid-1990s the confidentassertion that virtually all costs are variable (Johnson & Kaplan, 1987) has gone. Instead wehave the more careful statement:

10 We raise this as a possibility in order to problematize the official history set out by Kaplan.

23

Costs are not intrinsically fixed or variable. ABC analysis permits managers to understandthe sources of cost variability (Cooper & Kaplan, 1991, p.135).

This, however, is not an acceptance that there need be fixed costs. Second-wave ABC analysispromises to enable managers to reduce demands made on the organizations resources.However:

If managers fail to follow up any reductions in the demands on organizational resources,improvements will create excess capacity, not increased profits. Managers might thenconclude erroneously that operating expenses were indeed fixed and not variable ...Having reduced the demands, managers can then increase throughput or to reducespending to convert the savings into increased profits (p.135).

In short, costs are variable if and when people manage to vary them - which seems somethingof a truism.

Even the question of whether or not second-wave ABC allocates costs to products at unit-level is not clear-cut. Cooper & Kaplan (1991) find that unit costs are not useful. However, inKaplan and Atkinsons (1998) textbook, students are told:

When pricing policies are derived from a traditional (unit-level) standard costing system... managers can make poor pricing decisions ... [However] Companies, after an initialABC analysis, have frequently been able to sustain price increases of 50% or more fortheir speciality, customized, and - as they now see - much more costly products (p.151).

This seems to imply that meaningful unit-level ABC costs can still be derived to inform pricingdecisions - and we are returned to the 1988 claim that ABC produces more accurate productcosts.

In Giddens (1990) discussion of disembedding and reembedding in modernity, new forms ofknowledge are constantly emerging and being bound into expert systems. This knowledge iscreated through the reflexive monitoring of actions and contexts. Knowledge is unstablebecause the self-doubting nature of modern rationality which means that it is constantly beingundermined, and expert systems must be reformulated and re-legitimated if they are to betrusted to inform decisions in the modern world. We suggest that the development of ABC isclassic example of the speed and complexity of these processes.

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