Cost and Effect: Using Integrated Cost Systems to Drive Profitability and Performance.

• Author: Morrill, Christopher
• Position: Review

Kaplan, Robert S. and Cooper, Robin Boston, Massachusetts: Harvard Business School Press, 1998. (357 pp)

Reviewed by Christopher Morrill, Research and Budget Director, city of Savannah, Georgia.

If organizations are to survive in today's environment of rapid technological advances, customer focus, and global competition, they will need to change the way they measure and manage resources. Cost and Effect: Using Integrated Cost Systems to Drive Profitability and Performance, by Robert S. Kaplan and Robin Cooper, shows how these changes can be accomplished through an integrated set of operating, financial, and management systems. These systems provide managers and front-line employees with the information they need to measure true costs of activities and the results of innovation and continuous improvement.

The authors' vision is for "an integration of cost and performance measurement systems, and the expansion of capabilities that can be accomplished with integrated systems," the fourth and final stage of management information system development. The book first brings the reader through the initial three stages of information systems. A Stage I system does not meet even the minimum needs of external financial reports. Stage II systems are tailored to financial reporting requirements, tracing costs to cost centers and not to activities or processes. These systems provide feedback to managers that is "too late, too aggregate, and too financial." The authors contend that Stage II systems are completely inadequate for estimating the cost of activities and processes and for providing useful feedback to improve business processes. Feedback, especially for non-performing activities, is critical for organizations to remain competitive.

In Stage II systems, according to Kaplan and Cooper, "auditing and financial accountants often prefer consistency to accuracy." They point out that most management accountants often act like scorekeepers, sitting on the sidelines as observers, producing periodic reports - often weeks after the activities has taken place.

Organizations move to a Stage III system when the financial staff, while continuing to meet external financial reporting requirements, become partners with line departments to develop stand alone activity based cost (ABC) and performance measurement systems. A major message of the book is that terrific gains can be made by well-planned implementation of activity-based costing, operational and...