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?© Copyright 2012 Regis Quirin, All rights Reserved. Written For: CFO Tips - What you need to know, to be a CFO TODAY!