Activity-Based Costing (ABC)
Background
Our Clients Often Lack an Understanding of Profit Factor
Trade Offs Needed for Decision Making
As – Is Decision Making…
To – Be Decision Making…
Covering contribution
margin is most
Competitor
pricing
important
Can't lose
Need to gain
Customer X
market share
Activity based
product costing
Billing
factors
?
…often relies on mental rules of thumb
Alternative
transaction
profitability
Expert
System
poundage
Accept/reject decision by Marketing Management
Customer
profitability
?
Accept/reject decision
…can incorporate price/terms modeling
to optimize profitability and business
decision making
A centralized, information based transaction analysis model and management
process can improve decision making and profitability.
Background
Activity-Based Costing (ABC) Enables Managers to Accurately
Determine Product and Customer Costs
Activity-Based
Costing Framework
RESOURCES
Attribution
ACTIVITIES
}
Identify all activities performed
and their resource consumption
}
Attribute dollars to products and
customers based on activities
performed
}
Act on findings (e.g., reallocate
resources, modify pricing,
refocus efforts)
Cost Drivers
Customer
Product
Customer Segment
Product Line
Actions
Objective
The Objective of ABC Is to Allow Management
To Make More Informed Decisions
Objectives
Enhance understanding of
Business Division costs
Deliverables
•Costing of activities
•Key cost drivers of activities
Identify unit contribution
Contribution of products, product lines,
customers, and customer segments
Develop decision rules for resource
allocation
Cost performance metrics for
activities
In the A&D phase, depending on the client situation, your primary objective
is to create senior management understanding and
appreciation for the benefits and impact of ABC for their business
Approach
Development of a High Level ABC Model
Can Be an Effective Selling Tool
A&D Worksteps
• Hypotheses on the value and opportunity to apply ABC modeling to
client situation.
• Understand business cost structure and determine major activities
performed.
• Identify selected high impact cost drivers for those activities.
• Interview key clients to build model and identify cost drivers.
– Marketing Managers
– Sales Reps
– Plant Managers
– CFO and staff
– Cost Accountants (HQ and Plants)
– IS function
• Build dynamic PC-based model for selected sample of transactions,
products and customers.
• Analyze outputs, and demonstrate value of ABC methodology.
• Identify the quantitative and qualitative benefits of ABC stream for
results delivery project.
Outcome
Results Delivery Implementation of ABC
Consists of Several Stages
Proposed Workplan Draft
Months
1
2
3
4
5
6
7
8
9
10
11
Step 1:
Launching
the Effort
• Appoint
Steering
Committee
•
• Appoint
Natural
•
Work Team
•
• Agree on
Workplan
•
• Initiate
ongoing
•
communication
Step 2:
Developing ABC Product Costs
Gain consensus and buy-in
Step 3:
Identify key cost drivers
Determining Profitability
Highlight performance improvement
opportunities
Determine methodology for new
product resource requirements
Develop actionable product costs
• Product profitability
Step 4:
• Product mix and pricing
strategy
Designing a Business Decision Model
• Customer profitability
• Coordinate information gathering and
updating
Step 5:
• Customer mix strategy
• Streamline interfaces
Implementing
Systems
• Align decision model with existing
processes
• Implement ABC system
• Train staff
• Link ABC with other
financial/planning tools
• Roll-out of the model to
the entire operation