Yes, I have not written for a while,
but one question was disturbing me for quite a long time now. Especially after looking
at few software solutions for Activity Based Costing. Some of them are now
called Profitability and Cost Management solution. The question is, do we need
to have structural compartments (aka Modules) like ‘resource’, ‘activity’ and ‘cost
objects’ in those solutions? I understand that all those solutions have been
designed quite a few years back and they are mostly based on the CAM-I cross.
The CAM-I cross told us that the
vertical flow is the cost flow and it flows from resources to activities to
cost objects. Cost objects are the final destination points for which we
calculate costs for. As such the Activity Based Costing requires three phases
as resources, activities and cost objects. All the software solutions based on
this concept created in there solutions three modules as the same. Also the diagram
also shows that the cost flows from resource to activity and activity to cost
objects. Again the solutions had assignments that can have cost flow like
resource-activity, activity-cost object or resource-cost object. Some of the
solutions have resource-resource, activity-activity or cost object-cost object assignment
(intra-module) facility. Almost none (actually I wanted to write ‘none’ here,
but I cannot claim that I have seen all the solutions) of the solutions have
cost assignment possible (directly) from activity-resource or cost object-activity
or cost object-resource. Where ever it is possible, one has to create some work
around to handle this.
I certainly do not want to say
all this is bad. But it was based on the concepts and methodologies adopted at
that time. It is more than 20 years that the concept has been around. We have seen
many changes in the Body of knowledge, implementation methods, uses and
software solutions in those years. Few things still remain as they were earlier
like
1) The
solutions are having resource, activity and cost object as structural
divisions.
2) The
follow up of this is, assignment are not possible in the reverse order (as direct
functionality)
Scenario
Let us take one example of
distributing the cost of ‘shared service functions’. These functions like HR,
Admin or IT provide services all other functions in the organization. To
distribute their cost based on the ‘cause-and-effect’ relationship, we create
following steps
a) Define
the services provided by those function. For example recruit people, manage
hotel booking, manage software solutions.
b) Calculate
the cost of each of these services
c) Assign
cost of those services based on the volume of the services consumed by each of
the other functions
d) This
cost is as good as the other expenses (like employee cost, travel cost etc.) of
the functions
This scenario cannot be created as
it is defined here as a direct functionality.
Some of the
software solutions where one can create intra module assignments, here is one
of the ways
i)
Enter cost of the shared services in the
resource section
ii)
Define the services of the shares service
function in the resource section. Actually they are processes or activities.
iii)
Calculate the unit cost of services. Resource-resource
assignment.
iv)
Assign those services cost to other functions
resource-resource assignment
Some solution
that do not have resource-resource assignment facility, but activity-activity assignment
facility
i)
Enter cost of shared service function in
resource section
ii)
Define services of shared service function in
Activity section.
iii)
Calculate the cost of the services
iv)
Assign those services to the activities of other
function that are consuming those services. Activity-activity assignment
Similarly the cost of Procurement
department has to be calculated as vendor wise-material wise and then takes as
additional cost of the material. This scenario will also require a big juggling
in creating the model in the solutions.
The absence of the other functionality
that of flowing cost in the reverse way i.e. cost-object-activity,
activity-resource (as a direct functionality) is creating a challenge. This is
especially when one has to create the ‘bottom-up’ model or Activity Based
Budgeting/Planning (ABB/P) model.
Activity based costing is based
on the concept of ‘cause-and-effect’ relationship. As such there should not be
any restriction on what is a source and destination. Actually I am suggesting
that there should not be a rigid concept of ‘resource-activity-cost object’.
All these sections should be logical. User should be able to create as many
sections as she wants and call them whatever she wants to. Once this
restriction goes then we call the solution as ‘Cause and Effect
Profitability Management Solution’.
This type solution can be used
for single level assignment of costs or multilevel assignment (2, 3 or even more).
One need not worry about the concept of whether it is resource or activity or
cost object. Just select ‘source’ and ‘destination’, link them, add driver and
driver quantities and calculate.
I have called this solution as
Profitability Management solution (not only cost) purposely. Profit is a
function of Revenue and Cost. Most of the solutions are built upon the concept
of cost assignment. What I mean is, those solutions allow us to create a flow
of cost. Revenue is directly entered against product-customer-channel
combination and profitability is calculated. This was based on the concept that
is related to manufacturing industry In the Telecom industry the revenue is
bundled for many services that are used by the consumer it is very difficult to
create a profitability scenario. A lot of free services (completely or
partially) are also included. There is also volume based revenue for certain
services. If we try to use the usual functionality of the software solutions,
it is very difficult to create this scenario. So the solutions should have the functionality
of calculating multiple measures (cost, revenue, discount etc.) based on ‘cause-and-effect’
relationship to calculate profitability at the end.
The flow of measures is based on ‘cause-and-effect’
and it contains the functionality to flow the information for all the measures
that contribute to Profit. Hence the solution should be ‘Cause and Effect
Profitability Management Solution’
The benefits this type of
solution is full flexibility of modeling for profitability. It could be single
level or multi-level. We can calculate standard costs (multi-level calculation)
and then compare with actual. More than the usual variances of quantity, rate,
mix etc. can be available. We will be able to use the same solution for Revenue
planning and it can become a real Profitability Management solution as it can
plan and get actuals to analyze the variances in Revenue, cost and hence,
profit.
Please
provide your comments or suggestions on this concept of the solution. I have
not seen all the software solutions in their current forms, so some of the
functionalities may be already available. Is there a solution already in the
market which can be called as ‘Cause and Effect Profitability Solution’?
