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Isabelle Lacombe & Pierre-Laurent Bescos

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Activity Based Costing leads to a better identification of activities that drive cost. By using more cost pools it is possible to gain a better understanding of ‘how costs are consumed by individual customers, the activities related to customers, the direct and indirect costs in the various activity centers and how indirect costs are generated by cost drivers’ (van der Meulen & Koomen, 2010).

ABC can be a solution in different cases:- Increase in product diversity- Increase in Indirect Cost- Advances in information technology- Competition in foreign marketsIn the case of Hewlett-Packard we see that first the three business units, imaging and printing systems, computing systems and IT services, used the same cost accounting system. The Worldwide Customer Support Organisation however delivered mostly services (computer maintenance). The accounting system that was in use could not sort out the, mostly indirect, costs of delivering a service to customers. Another point of concern was the competition in the market that drove profit margins down. The main objectives for the ABC project at WCSO were ‘to measure the efficiency of the activities, to find the link between departments and activities and to measure profit per repair (at client, contract or product level)’ (Lacombe & Bescos, 1998).

These reasons are in line with the general reasons to use ABC as stated by van der Meulen & Koomen (2010) and Horngren, Datar, Forster, Rajan & Ittner (2009). ABC is used as a solution for the increase in product diversity, to allocate the indirect cost and to find ways to anticipate on the market.

QUESTION 3Explain the interests and disadvantages of the non-integration of ABC in the Cost Accounting Information System.

HP in 1994 decided not to integrate the ABC in the Cost Accounting Information System (abbreviated CAIS) for a number of reasons. The first reason is that at that time the CAIS was implemented in all HP business units worldwide. This system was considered very complex and difficult to change. Because ABC was only used in one business unit it was thought to be insensible to change the whole system. The second reason is connected to the codification of the operations in the CAIS. If the ABC would be integrated this system would have to be reorganized and all the employees would have to learn to operate the new system. The disadvantages of integrating the ABC in the CAIS were that it would be difficult and time consuming to anticipate on both objections, therefore it was decided to not integrate the ABC system into the CAIS.

However, it is also possible to point out benefits of integrating the ABC. If implemented, the ABC system could make decision making easier. It would provide a benchmark so that the different countries could compare results. Based on the best practices that would manifest comparing the results and approaches, the different processes could be reengineered to optimize the business processes. Also the pricing of products and services could be based more accurately on the cost resulting in the possibility to adjust the competition strategy. Finally the ABC gives objectives to the country managers to improve performance and reduce costs based on the real costs instead of estimations.

QUESTION 4What kind of difficulties could HP have in implementing ABC in an international environment with a lot of subsidiaries?As stated in the answer of question 3, HP has multiple business units in different countries. All these business units currently use the same complex accounting system that is difficult to change. In the current system all countries follow the same rules. However, based on size, organization, market and customers the countries have each decided upon their own list of cost centers. These differences between countries would also have to be implemented in the ABC system if it would be integrated in the current accounting system. The second difficulty is that if the system would be changed the codifications of all the different operations would also have to change. Because of the size of the organization and the number of employees (112,000) it is difficult to implement. Not only does the system need to be adjusted or even partly redesigned, also the employees would have to be taught to use the new system.


Meulen van der, H. & Koomen, C. (2010) Lecture 2, chapter 4&5 Held at Nyenrode Business Universiteit, 20 January 2010.

Lacombe, I. & Bescos, P.L. (1998) ABC-ABM at Hewlett-Packard Europe for customer support.

Horngren, C.T. Datar, S.M. Forster, G. Rajan, M. & Ittner, C. (2009) Cost Accounting, a managerial emphasis, thirtheenth edition. USA, Pearson International Edition.

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