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More Complex, More Robust: Activity-based costing systems are harnessing the internet and adding new functionality, giving companies more horsepower than ever. (Activity-based Costing).



ABC ABC
 in full American Broadcasting Co.

Major U.S. television network. It began when the expanding national radio network NBC split into the separate Red and Blue networks in 1928.
 isn't what it used to be. Activity-based costing In a business organization, Activity-based costing (ABC) is a method of allocating costs to products and services. It is generally used as a tool for planning and control. This is a necessary tool for doing value chain analysis.  and its offshoots -- activity-based management Activity-based management (ABM) is a method of identifying and evaluating activities that a business performs using activity-based costing to carry out a value chain analysis or a re-engineering initiative to improve strategic and operational decisions in an organization.  and activity-based budgeting -- are more sophisticated than ever, in part because of Internet-based tools that allow managers to share information across the entire corporation.

Managers can now get a good snapshot of the enterprise's customer profitability Customer profitability (CP) is the difference between the revenues earned from and the costs associated with the customer relationship in a specified period.

According to Philip Kotler,"a profitable customer is a person,household or a company that overtime,yields a revenue
, new product or service opportunities and suggestions for relationship-building. "What-if" scenarios allow testing of strategic and operational options before choosing a process or implementing costly changes. With some software, executives can even retrieve reports, scorecards and profitability data from the Internet and save them for off-line review.

In theory, ABC allows organizations to consolidate accounting, activity and output data into a single management tool. "Using this information, managers are able to make strategic activity-based management (ABM ABM: see guided missile.

ABM - Asynchronous Balanced Mode
) decisions based on a complete picture of how their organization consumes resources and the results produced from the consumption of those resources," observes accounting firm Grant Thornton LLP This article or section is written like an .
Please help [ rewrite this article] from a neutral point of view.
Mark blatant advertising for , using .
.

With that, the firm says, companies "are able to better understand the linkages between demand for goods and services In economics, economic output is divided into physical goods and intangible services. Consumption of goods and services is assumed to produce utility (unless the "good" is a "bad"). It is often used when referring to a Goods and Services Tax. , and the factors that impact their capacity to satisfy that demand. This knowledge provides organizations with a significant competitive advantage."

A critical advance is faster decision-making. "These emerging applications improve corporate reaction times as business conditions change, and facilitate the sharing of market data and business intelligence at several levels within the organization and across the value chain," wrote AMR (1) (Adaptive Multi-Rate) A variable rate speech codec selected by the 3GPP for the 3G evolution of the GSM cellphone system (WCDMA). Using the Algebraic CELP (ACELP) compression technology, AMR provides toll quality sound at transmission rates from 4.75 to 12.  Research in a report last year on enterprise management.

Grant Thornton views the ABC process ABC process can refer to:
  • Activity-based costing, method of allocating costs to products and services.
  • ABC process (purification), a method of purifying water using alum, blood, and charcoal http://www.biology-online.org/dictionary/Abc_process.
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 as comprising three key costing elements. The first, job-order costing, relates costs to specific jobs. Process costing assigns costs to an organization's processing divisions, in which each division is responsible for a specific output, whether it is an interim or end product. And standard costing compares predicted against actual costs to identify areas that vary significantly from the forecasted costs of performing a task. Once identified, those areas can be scrutinized and the work redesigned to bring its cost levels in line with predictions.

One potential trap with an effort like ABC is over-measurement, or getting bogged down in trying to quantify everything. Three or four performance measurements are enough, argues Bala Balachandran, a management professor at the Kellogg School of Management
  • Two of the Kellogg School's other executive MBA programs are also highly ranked by the Financial Times. The School's Kellogg-HKUST program at the Hong Kong UST Business School is ranked No.
 at Northwestern University and an expert on business processes. Likewise, he suggests that companies don't need more than five drivers on the cost side or the revenue side. Balachandran, who addressed the audience at the Bettermanagement.com LIVE conference in Orlando this past fall, also argued that executives need to learn a mantra of four "Ms" -- measure, monitor, manage and maximize.

It's abundantly clear, however, that ever more sophisticated software has given companies the ability to measure a lot more, and much faster than before. ABC Technologies, for instance, in November released Oros [R] Analytics 5.3, which integrates ABC/M ABC/M Activity Based Costing/Management  and value chain analysis, sequenced drivers for ABC/M analysis, a scorecard strategy map designer and scorecard meter enhancements.

The company says the new release integrates easily with its value chain analyzer to incorporate ABC/M costs into the activity rates used by the value chain analyzer. Moreover, results from this analyzer can be sent to the ABC/M model, "thereby completing a roundtrip of activity information and value chain results for more accurate costing of products."

Benchmark Against Objectives

The scorecard feature allows companies to measure, analyze and communicate their performance against defined strategic objectives, helping identify performance problems before they hurt the organization. A strategy map in the software "presents a graphic representation of the cause-and-effect relationship between strategic objectives, as well as how those objectives are grouped into specific perspectives."

ABC/M should be an enterprise-wide solution, argues Chris Pieper, chairman and CEO (1) (Chief Executive Officer) The highest individual in command of an organization. Typically the president of the company, the CEO reports to the Chairman of the Board.  of ABC Technologies, and needs to have a strong buy-in from the information technology (IT) people. "IT cares about thin and thick clients [those using a Web browser The program that serves as your front end to the Web on the Internet. In order to view a site, you type its address (URL) into the browser's Location field; for example, www.computerlanguage.com, and the home page of that site is downloaded to you.  and those who aren't], scalability and standard components," he says -- issues he thinks ABC/M software must address.

Pieper says ABC Technologies has had a close relationship with Microsoft, and its Oros Active Enterprise Management product runs on Microsoft SQL Server A relational DBMS from Microsoft that is a major component of the Windows Server System. It is Microsoft's high-end client/server database and is closely integrated with Microsoft Visual Studio and the Microsoft Office System. , as well as XP Office, Analysis Services' OLAP (OnLine Analytical Processing) Decision support software that allows the user to quickly analyze information that has been summarized into multidimensional views and hierarchies. OLAP tools are used to perform trend analysis on sales and financial information.  Engine and .NET, "We've been leveraging Microsoft all along," Pieper says. The company says it has 2,700 customers with 4,300 installations in 70 countries. (A new book, Activity-Based Cost Management: An Executive's Guide, by Gary Cokins, director of industry relations at ABC Technologies, was reviewed in the December issue of Financial Executive.)

A few creative minds are attempting to take ABC to another level of output -- something they call "predictive accounting," which they say projects future financial performance through an understanding of an organization's processes. By using "process maps" to understand a sequence of key activities, critical events are translated into predictive financial statements, using ABC resource consumption activity standards.

According to Jim According to Jim is an American situation comedy television series originally broadcast by ABC. The show premiered with little publicity in October 2001, following the surprise hit comedy My Wife and Kids.  Brimson, a principal with Value Creation Group in Dallas, predictive accounting allows companies to: influence the future; tie resource consumption to value creation; tie process variation to financial statements; and see where and how to control variation in order to boost profitability. Brimson says the process seeks to expand the three required financial statements (income statement, balance sheet and cash flow statement) to include a Process Performance Statement, which measures the value creation potential and "storehouse of value" generated by an organization's products and processes.

Brimson (jim.brimson@valuecreationgroup.com), the author of four books on activity-based costing and management, has been taking his message around the country in a series of seminars, both public and on-site at companies that request them.

Predictive accounting may not be exactly around the corner, but there is plenty of high-octane software for activity-based costing and the benefits it brings, especially for manufacturers and others with a set of standardized products and processes. Linking this software to the Internet has given ABC activities a new level of immediacy and functionality, and those are likely only to increase.
COPYRIGHT 2002 Financial Executives International
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2002, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Author:Marshall, Jeffrey
Publication:Financial Executive
Geographic Code:1USA
Date:Jan 1, 2002
Words:992
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