Name: Anas Mahdi Barakat

I.D.20610025

Reasons behind the Failure of ABC and ABM

with the development of business and business strtaegies fields such as

Management Accountig had a major changes and developed what is called
Strategic Management Accounting (SMA) which intreduced to the organizations
new techniques as a substitued for the old Traditional method, those techniques
are represented in the ABC and ABM sytemes.

ABC costing system or Activity Based Costing system helps the organizations
in estimating the cost of it’s individual products and services for the purpose of
identifying and eliminating products which are unprofitable and lower the prices
of the ones which are overpriced. but this system suffered from a series of failure
which have affected it and let the organization refuse to use it.

The first reason that affected the ABC system was the ABC practical
deficiencies, theoretically it should be possible to trace all overheads in the
organization but in practice it’s likely that we can’t assign them to products and
customers, for example, the cost of the head office administrativestaff. Such
costs aren’t assigned to products because it have no mean for the product.

Another reason for the failure of ABC system is cost. ABC is considered a
relatively costly accounting methodology to be applied in all types of
organizations, and ther final reason for the failure which is considered the most
significant one is the lack of knowledgeand experience in using the system. The
lack of knowledge in the ABC led to an ineffectiveness i implementing it, which by
it’s turn led to the waste of financial and human resources in the organization.

After the failing of ABC system the management accountants decided to come
up with a new technique that focuses more on the masnagement side of the ABC
system rather than the technical apects and that will be a part of the SMA, this
new methodology is what we call the ABM system or Activity Based
Management.

ABM system basically relies on ABC data but also focuses on the management
attention on activities in order to improve customer value and the firm’s profit, it
consist of two parts: (Operational ABM) which relies on using ABC information to
improve efficiency, and (Strategic ABM) that depend on using ABC data to
decide which products to develop and which activities to use. Although the new
method was better enhanced in reality it implementation also failed for a variety
of reasons.

A major reason behind the failure of ABM is the lack of support of higher level
management, not only the support must be obtained before the implementation
but it should continue after it, this loss of support usually occurs when the
expected results don’t materialize.

The second reason of ABM failure is the same reason for ABC system failure
which is the lack of information and knowledge in how to use the new system,
that reason led to the failure because results weren’t as expected since results in
the ABM needs to be spelled carefully and managers should be taught how this
data must be used in order to increase efficiency and productivity of the
organization or the system will be inefficient and the system will fail just like what
we are noticing now.

The third main reason behinbd the failure is the risk that in ABM some activities
have an implicit value which is not necessarily reflected in a financial value
added to any product. An example for that is bonuses and offers like health
insurance which are offered by big organizations help in attracting the best staff
but it is not identified as adding value in operational ABM, anothe example is a
customer that represents a loss based on committed activities, but that opens up
leads in a new market, may be identified as a low value customer by a strategic
ABM process.

The last reason for the system breakdown is the failure to integrate the new
system; because the system was released in a competition with other
improvement programs and maybe if that wasn’t going on the system would have
been more effective and efficient.

In conclusion we can easily tell that the failure of ABC and ABM system
pushed the organizations to be more carefull in using them or to choosenot to
implement those two strategies, and also let the top managers become more
tempted to continue using the traditional accounting method but in accordance
with the new data.