Activity Based Costing and Sales Management

Activity Based Costing (ABC) is a process by which you attempt to identify the discrete costs associated with a product, service or process.  Activity Based Management (ABM) is the process of using ABC derived information.  The primary uses for ABC include new product/process development and process improvement.

  •  New Product Development – Prior to implementing any new product or process you want to understand the costs of development and the expected returns.  Anyone that has experienced a major system conversion, understands that the true cost of the conversion is more than just the monthly licensing fee.  Some of the hidden costs include contract negotiations, compliance reviews, project staffing, testing…
  •  Process Improvement –In the ongoing quest to offer quality services at the lowest cost and remove non-value added expenses, ABC is a valuable tool.  Activities include – process mapping and validation, apportioning costs by activity, identifying areas of improvement to maximize revenues and minimize expenses.  This process is extensive and complicated.

The ABC process makes tremendous sense for these aforementioned uses.  However, the greatest drawback of ABC is that it cannot easily be utilized month-to-month, due to the extensive analysis required to allocate expenses.

In every p&l some items are obviously associated to a product or service sold, but others are not.  Items that are not as clear include HR, IT, Legal, Payroll.  For smaller companies these administrative services show up on the p&l and are tracked by themselves, as they are considered the cost of doing business.  But for larger companies, with multiple channels, these costs are a source of frustration, as they show up as a management fee or corporate allocation.  Lumping together and allocating is much easier to administer than an accurate monthly allocation of expenses.

So what can you do monthly?  ABC should be used monthly when reviewing Sales activities.  For each Sales person, the company should track the individual expenses associated with obtaining the sales generated, i.e. revenues less discounts, marketing dollars utilized, commissions paid.  Through this process you will better understand which sales managers are bringing you the most value vs. the sales managers that are not as profitable.  Once identified, these less profitable sales managers can be coached with the intention of bringing their profitability to parity with the rest of the sales force.

What has been your experience?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.
© Copyright 2012 Regis Quirin, All rights Reserved. Written For: CFO Tips - What you need to know, to be a CFO TODAY!

Regis Quirin

Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

35 thoughts on “Activity Based Costing and Sales Management

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  14. I represent Shriram Value Services Pvt Ltd (SVS) an IT and BPO arm of USD 8 Billion Shriram Group, HQ in India. SVS is an ISO 9001:2008 certified leading IT, BPO, Infrastructure, Staffing and Learning Solutions Company with an ISO 27001 data center with strong technology and domain expertise.

    We have developed Activity-Based Cost Management – “Analytic application that models business processes to determine cost, profitability and drivers. With this solution, organizations can make informed decisions that streamline processes, deliver revenue growth and reduce costs across the organization.

    Our client includes UCAL Fuel – Chennai, SRF – Delhi & Trichy, Sundaram Industries (TVS Madurai), India Japan Lighting TVS Group, Reem Batteries – Muscat, Kirloskar – Hospet

    I am interested to have a call with the CFO who are interested to discuss more.

    Anand

    1. Please send your marketing materials to me (regis.quirin@cfotips.com). If you have a different way of performing this analysis I would like to read about it.

      Regis

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  16. Hi Regis,

    I think ABC has its place in many businesses and industries. I work in an asset intensive industry where we have long term contracts for most of our assets so we dont want to measure our sales people as illustrated above, but rather measure our individual assets based on ABC, but really it goes down to EBIT.

    Our reporting system is setup to allow for reporting only on asset basis and although we do have an activity called other it holds no P&L items. For all direct costs it is of course a simple exercise, but for the semi-fixed and fixed costs we have done a timestudy simply asking the various HQ departments what they spend their time on and linked that in a matrix with the size of each asset in terms of revenue, OPEX and FTEs.

    I think that provides for fairly transparent ABC model and it has improved our management reporting significantly as we can now produce reliable return measures per asset such as ROI and EVA.

    Brgds,
    Anders

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