THE PROMISE AND PERIL OF INTEGRATED COST SYSTEMS

Recent advances in managerial accounting have helped executives get th e information they need to make good strategic decisions. But today's enterprise resource planning systems promise even greater benefits - t he chance to integrate activity-based costing, operational-control, an d financial reporting systems. But managers need to approach integrati on very thoughtfully, or they could end up With a system that drives d ecision making in the wrong direction. Operational-control and ABC sys tems have fundamentally different purposes. Their requirements for acc uracy, timeliness, and aggregation are so different that no single, fu lly integrated approach can be adequate for both purposes. if an integ rated system used realtime cost data instead of standard rates in its ABC subsystem, for example, the result would be dangerously distorted messages about individual product profitability - and that's precisely the problem ABC systems were originally designed to address. Proper l inkage and feedback between the two systems is possible, however. Thro ugh activity-based budgeting, the ABC system is linked directly to ope rations control: managers can determine the supply and practical capac ity of resources in forthcoming periods. Linking operational control t o ABC is also possible. The activity-based portion of an operational c ontrol system collects information that, while it mustn't be fed direc tly into the activity-based strategic cost system, can be extremely us eful once it's been properly analyzed. Finally, ABC and operational co ntrol can be linked to financial reporting to generate cost of goods s old and inventory valuations - but again, with precautions.