In January 2003, CFO.com featured an article entitled, “Where Are They Now? From corporate raiders to earnings management to activity-based costing, we take a look at some of finance’s greatest hits.” The author, David Katz, examined eight ideas that were big news in corporate finance and accounting practitioner journals over the previous two decades.

He rated these ideas using gold stars (“the idea is still peaking”), silver stars (“percolating along just fine”), and bronze stars (the idea is gone). Most of the ideas, including activity-based costing, were awarded silver stars. Activity-based costing was awarded a silver star because, although it had lost ground, Katz believed that interest may resurge, particularly during times of recession. ABC provides information about customer profitability and could help companies develop ways to raise profits without raising prices.

When Robert Kaplan and other academics published their first papers explaining ABC in the late 1980s, business managers were highly interested. ABC involves identifying activities and cost drivers that should reflect a cause-and-effect relationship with cost for many of the resources used to produce goods. Kaplan and other consultants extolled the advantages of ABC for understanding product profitability. They suggested that managers did not really understand how products used resources in the manufacturing process.

By the mid-1990s, some business experts argued that ABC was being replaced with tools such as economic value-added (see Chapter 15) and the balanced scorecard (see Chapter 16). However, a large number of organizations continued to use ABC.

REQUIRED

A. Why might accountants believe that ABC information would be useful?

B. What uncertainties do managers face when they adopt ideas that are new and for which there is little data about effectiveness?

C. Given uncertainties about whether a new method will be effective, why might managers consider adopting it?

D. Discuss possible reasons for a method losing favor over time.

E. How might a recession affect the popularity of ABC?