It is also believed that the cost accountant and the management accountant are performing different activities cost control is in the domain of the cost accountant, while cost reduction is in the domain of the management accountant (Cooper & Kaplan 1997). The objective function may be perceived to be profit maximization. Johnson and Kaplan underline that cost-based accounting and budgeting deals with the efficient allocation of resources. The advantage of this method is that indirect costs which cannot be traced to each product are calculated on the basis of cost drivers. “The need for a uniform financial measuring rod compelled managers of integrated multi-activity firms to push management accounting beyond the cost management systems” (Johnson and Kaplan 1991, p. The method of activity-based costing underlines that costs are calculated for each activity, and only for those products that pass through this activity (Cooper & Kaplan 1997).Īccording to this accounting method, the company should follow some steps to introduce this accounting system” to define the process, analyze the activities in the process establish cost pools: match the cost pools with the activities identify the cost drivers. The advantage and strength of this method is that “By linking many separable processes, complex and extensive organizations evolved to handle each of the activities” (Johnson and Kaplan 1991, p. Activity-based costing is a more accurate management method that helps to identify a true cost of an item. Thus, the objective function of the new approach is implicitly perceived to be cost minimization. Traditional cost accounting deals mainly with cost accumulation, inventory valuation, and product costing. They found that “Management accounting reports are of little help to operating managers as they attempt to reduce costs and improve productivity” (Johnson and Kaplan 1991, p. Johnson and Kaplan state that traditional accounting procedures lead to failures and low productivity levels.

Activity based costing