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).
Managers can now get a good snapshot of the enterprise's customer profitability, 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) 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.
With that, the firm says, companies "are able to better understand the linkages between demand for goods and services, 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 Research in a report last year on enterprise management.
Grant Thornton views the ABC process 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 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 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 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 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, as well as XP Office, Analysis Services' OLAP 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 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 (email@example.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.