Activity Based Costing (ABC) was developed to ascertain the accurate process cost data on activities and products and can be used for Product and Customer Profitability, Operational improvement and Resource Planning. Activity Based Costing has not became popular in India to whatever extent it deserves. There are so many Myths as far as this concept is concerned. Here are some of the myths about ABC and the facts around the myths.
Myth - ABC systems are too difficult to implements and use
Fact - This has to be discussed with respect to the time when ABC was introduced and today. Yes, it was too difficult to implement and use, when it was introduced and implemented in the initial years of it. This was due to the fact the consultants were enthusiastic and they created models that were in too detail and hence they looked too difficult to implement and use.
The same thing is a myth in today’s context. Now we can create models depending upon the objectives of the organizations. We can also use the ‘Rapid Prototype’ methodology in which we can build a small model in just two days, which can be expanded in multiple rounds as per the requirement.
With respect to the use of it, there are various ways in which the results can be surfaced. The various commercial software solutions can create reports that can be distributed, OLAP views as well the results can be integrated with the overall BI delivery in the organization.
Fact - This has to be discussed with respect to the time when ABC was introduced and today. Yes, it was too difficult to implement and use, when it was introduced and implemented in the initial years of it. This was due to the fact the consultants were enthusiastic and they created models that were in too detail and hence they looked too difficult to implement and use.
The same thing is a myth in today’s context. Now we can create models depending upon the objectives of the organizations. We can also use the ‘Rapid Prototype’ methodology in which we can build a small model in just two days, which can be expanded in multiple rounds as per the requirement.
With respect to the use of it, there are various ways in which the results can be surfaced. The various commercial software solutions can create reports that can be distributed, OLAP views as well the results can be integrated with the overall BI delivery in the organization.
Myth - ABC systems are too costly
Fact - This is a relative term. Even if take it absolutely, then we have to see the cost-benefit from the application. The general outcome that has been seen across the globe is, the organization can save its overheads to the tune of 5-15 %. If you consider this, then typically you would recover the investments not in months but weeks.
The organizations have money to invest in such solutions. It has been observed that the CxOs can see this as a Strategic Initiative and not mere a Costing system. When this happens, then the view of the management is different. Incidentally ABM supports any other initiative that is going on in the organization like BSC, Lean, Six Sigma, CRM, SCM, TQM, JIT, Kaizen etc.
Myth - ABC systems are too complex to understand
Fact - There is always a ‘First Time’. The complexity depends on the design of the ABC model. There are various methodologies to develop the ABC model like Paper Model, Story Board, Rapid Prototype etc. Once we create the model outside the software solution, then we understand the design very well.
The commercial software solutions that are available today are quite user friendly. Once you start using it and providing results to the management, it can be integrated with the dashboards also.
Myth - Improving our existing system will do the job
Fact - Yes, this is true, but one has to understand, what kind of improvement is needed. ABM is a strategic tool and it has to given the corresponding infrastructure.
Traditional costing systems trace all the costs directly to the products only. Have we thought about the ‘Customer Costs’? Most probably the answer would be ‘No’. Do we know who our best customers are? More importantly who are the worst? Generally those customers with high revenue are treated as God. Have we seen how much resource that they are eating out? Once we put the 2x2 diagram of Customer revenue v/s Customer profit, we understand the difference.
We have to understand the characteristics of the customers in each quadrant. We have to try to bring them in the ‘Top-Right’ quadrant.
Myth - All that we need are more cost centers
Fact - More cost centers would help you to get more accurate ‘Cost center accounting’. ABC is based on the ‘Cause-and-effect’ relationship. This causal relationship is lost when we try to relate the costs at various cost centers directly to the products.
When we use the ‘Cause-and-effect’ relationship, we understand that, the products are not the only entities that are causing the costs. With this reasoning we can segregate the costs as Product Costs (caused by products), Customer Costs (caused by customers), Business sustaining Costs (compliance related costs) and Available to use Costs (caused by the capacity that is built but not utilized). Use this information to improve the performance of the organization.
Myth - Machine-hour systems save the time
Fact - Machine hour system is related to the calculation of cost of production only. The experience has shown that we can take the cost of production from the conventional costing system. The accuracy is enough for the ABC models used for strategic decisions purpose. The accuracy of the production cost can also be improved, if needed using ABC. ABC is actually for assigning the ‘overheads’ with a causal relationship.
No comments:
Post a Comment