Activity Based Cost Management

Symptoms For ABCM Analysis

  • Declining profitability for no obvious reason.
  • Winning sales in products that the company is least well configured for, and vice versa.
  • Growth in support costs relative to direct costs.
  • Managers have little faith in the existing product costing system.
  • Obsolete allocation mechanisms (e.g., exclusive use of direct labor).
  • Constant need for special studies.
  • Identify the true total product cost because of unnecessary allocation and complexity
  • Identify and report cost of quality.
  • Provide cost and performance information to support strategic goals.
  • Measure or reward desired performance.
  • Focus on Cost prevention of potential non-value-added costs.
  • Identify and isolate non-value-added activities.


  • Costs cannot be ascertained to the products
  • No Consensus on and ownership of the costs
  • No Analysis of Activities- its costs and deliverables
  • No Alignment of Strategic issues to the Deliverables of the business processes - Management
  • No Realistic Profitability of Product, Customer Channel and Geographic Segments - Sales
  • No Alignment of Strategic measures to the measures of operational activities- All Operations

Value Addition with an ABCM Assignment

• A significant/improved focus on customer-centric activities and value-added focus for all activities and depts.
• Involvement of all HODs in working capital management and cost ownership with enhanced action plans and motivation.
• Elimination / Reduction of non-value-added activities and quantified agenda for all personnel and departments.
Serious multiple caps for people, fully owned up additional KRAs, and eliminating the demotivating cross-subsidies that exist.
• More motivating performance management reviews for people and product groups, geographies, branches, Sectors, and applications.
• Numerical Evolution of personnel at all levels to discuss and talk in quantified terms rather than being vague.
Significant Cross-functional, well-knit working teams and wiping out the Silo approach of stubborn archaic working methods.
• Quantified approach to daily life and ensuring people are specific and to the point in all discussions and behaviour.
• Understanding the unabsorbed costs of the organization which are not Product/Service costs and are actually the quantified slack.
• Interplant comparisons for performance reviews and Benchmarking.
• Improved Throughput, Profitability, and Employee Motivation.
• Idle capacity is isolated and not charged to a product or service. Under traditional approaches, some idle capacity may be incorporated into the overhead allocation rates, thereby potentially distorting the cost of specific output. This may limit the ability of managers to truly understand and identify the best business decisions about product pricing and targeted production levels.
• Improves Management’s focus on the firm’s critical success factors thereby enhancing the firm’s competitive advantage. Managers

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Methodology

(1) Preparation of departmental financial Trial Balances.
(2) Identification & Definition of Activities, Cost Drivers and Business processes.
(3) One-to-one meetings with departmental heads.
(4) Allocation of people time and expenses to activities and allocation of Activity costs to Cost objects.
(5) Deriving the profitability of various Products/ Customers/ Market segments.
(6) Generation of Action plans and cost reduction.

For mid-sized companies with 10 departments, our typical assignments span 4- 5 working weeks. It includes Our dedicated team of 2-3 consultants along with all HODs who need to spare one to two hours per day for 3 days per department. One internal resource as a facilitator and coordinator for Data, meetings as well as other activities. This resource sustains continuity with all HODs.

For Strategic Decision-making

Why are Activities so Important for Analysis

  • They are actionable; They are what the Company does.
  • They consume resources that are consumed by products and processes.
  • They can be easily understood by diverse groups of people and their cost can be tracked and measured by the beneficiary.
  • They link planning, control, and integrate financial and non-financial performance measures.
  • They highlight cross-departmental interdependencies.
  • They facilitate understanding of cost drivers.


Why ABCM is so popular for improved performance & planning

  • Load and onus of cost accountant taken off - No Blame

  • Builds consensus on cost allocations - Apolitical

  • Can be replicated in two days per quarter - Speed

  • Action plans suggested - MD’s Agenda

  • Throws up before and after pictures for strategies - Timing

  • Facilitates Balanced Scorecard - Pre-requisite

  • Decision-making data processing – No Software costs

  • Buy-in company-wide support - System Success

  • Archived data of resource utilization helps all and new HODs immensely

  • You need to walk well before you run. Driven by all HODs and not By Finance Dept alone

Some Example