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This paper describes the concept of activity-based costing (ABC) and examines its relevance to the life insurance industry. The paper contends that the high overheads and diversified product lines of many life insurance companies makes them appropriate environments within which to apply ABC. It is considered that ABC can provide at least three important benefits to a life insurance company, namely: more accurate cost information, closer insights into the costs of production and better information concerning the strategic consequences of business decisions. These attributes can help a life insurance company to achieve important business objectives, such as the management of expenses and the continuous improvement in the quality of its products and services. However, the transition to ABC is not easy and it cannot be seen as a panacea for all corporate woes. Nevertheless, the paper concludes that with sound project management, an ABC system can provide life insurance companies with much better information for activity management and the achievement of longer term strategic goals.
INTRODUCTION
There is a growing body of literature which argues that, compared with traditional costing systems such as absorption costing, Activity-Based Costing (ABC) offers important advantages to organisations. Amongst other things, ABC is purported to provide managers with more accurate product costing, clearer insights into operational performance and more relevant information for strategic decision-making. Additionally, when applied in conjunction with other initiatives, such as total quality management (TQM) and business process re-engineering (BPR), ABC has reportedly helped many organisations to better manage their business activities - a process which has been labelled activity-based management (ABM).
Most published studies investigating the development of ABC systems such as, Cooper and Kaplan [1987] and Cooper [1990], focus on the United States (US) manufacturing sector. Indeed, it was the manufacturing sector where there are tangible outputs and fairly standard production processes to which costs can be attributed - that first spawned interest in ABC. Nevertheless, despite its antecedents in manufacturing, there does not appear to be any reason why ABC cannot also be applied to complex service sector environments such as life insurance. Consequently, this paper describes the concept of ABC and examines its relevance to the life insurance industry.
The remainder of the paper examines:
* the background of the ABC...