Group 11 : Management Accounting Seminar

1510534002 Ramadhani Sardiman International Accounting

1510534013 Retno Ladyta Andalas University

Reaction Paper of Chapter I - Activity-Based Management

Case :

US Airways implemented an activity-based cost management (ABCM) system to

manage its in-house engine maintenance business unit. First, ABCM helped determine the
cost of engine maintenance with increased accuracy. Second, ABCM provided operational
and financial information that allowed work teams to identify opportunities for improvement.
Thus, ABCM provided accurate cost information and simultaneously revealed opportunities
for improvement. ABCM identified 410 activities—activities such as tear-down, welding,
waiting for tooling, and rework. Of the 410 activities, 47 were identified as non-value-added.

The non-value-added activities were rank-ordered on the basis of activity cost,

providing information about where the most significant process improvement opportunities
were located. Root cause analysis was undertaken by the various work teams to determine the
causes for the efforts being expended on the non-value-added activities. Once the root causes
were identified, the teams took action to reduce or eliminate the non-value-added activities.
The net effect was to produce $4.3 million in process savings per year.

Pro :

We agree to make ABCM system is sustain in the US Airways. Cause according the
case, ABCM give positive value for US Airways, some non-value-added activities that
unrecognized before, can be found. ABCM, a powerful tool in Management Accounting,
provides accurate information on the costs of activities and processes, which helps the
managers to take decisions that have positive impact on the organization's production.
Earlier, management accountants depended on traditional cost accounting methods to obtain
information on product and service costs for these decisions. ABC, now argued to be
remarkably better than traditional volume based costing system, has elicited the attention of
both researchers and practitioners for its involvement in decision making. Several empirical
studies have been conducted to examine the importance, adoption and successful
implementation of ABC, reasons for implementing, issues related to its adoption, critical
success factors of ABC.

1
 A significant number of companies are modifying their cost management systems to
reflect changes in the business environment. Activity-based cost management systems are
positioned to be a solution to the problems caused by the mismatch between traditional cost
management systems and the modern business environment. The ultimate goal of an
organizational unit in implementing ABCM is to improve employees’ performance on the job
and ultimately the performance of the entity. Improved performance is tough to achieve if the
user reacts negatively to the implementation of the system. A significant challenge to the
successful implementation of an information system is motivating the users of that
information to change their behavior to help the firm respond to the changes brought by the
use of ABCM.

ABCM makes possible equitable and scientific pricing by reducing prices of products
that use less activity resources and increase prices of products that consume more of the
firm’s activity resources. It eliminates unprofitable items from the product line, thereby
increasing profitability without increasing prices, a valuable option in recessionary times.

Reference :

Hansen, Don R., Mowen, Maryanne M. & Guan, Liming (HM). 2009. Cost Management,
Accounting and Control, 6th edition. South-Western Engage Learning. HM-12.