Fundamentals Activity-Based Costing (ABC):   – A method of assigning costs to products or services based on     the resou...
Fundamentals The “New & Revised” ABC/M Approach:  Beginning in 2005, the approach to ABC/M was modified to focus  on:  1....
Recommended Approach to ABC/M1. Develop a Cost Management Strategy:    Establish a Cost Management Task Force or Team   ...
Costs to Control & Assign                          Resource                           Costs    Non-Specific               ...
Activity Based Costing Approach                        Activity 1                         Activity 1                      ...
EFFECTIVENESS                                                                               EFFECTIVENESS                 ...
Strategy Development . . . Review and test your general ledger to identify which  accounts are allocated “what” costs and...
Step 2: Develop a Cost Model                Important Aspect . . .         Structure your operations via a         “Value-...
Cost Model Structure Cost Model is used to assign specific activity costs and as a  “tool” for management decision making...
Equipment Analysis Establish a Cost / Hour for all Primary Equipment:              Department Cost Allocations Allocate ...
Step 3: Determine Costs             Example . . . Contractor             - Cost & Profit per Job Analysis                 ...
Profit per Drop                                                                               Profits per Drop            ...
ABC/M Objective . . . Profitability by Customer                                                                           ...
Next Step . . . . . . Mobilize Definition: To make mobile or capable of movement. To  assemble, prepare, or coordinate fo...
Establish a Labor Force Strategy 78 million workers will leave the workforce over the next 16 years.  There are only 48 m...
ABC/M Road Map      Diversification        Strategy?“Would you tell me, please, whichway I ought to go from here?”asked Al...
In Conclusion . . . Incorporate a SMART Edge:  – Strategy - make sure your long term costing strategy remains    intact a...
What Does It Cost? Activity Based Cost Management
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What Does It Cost? Activity Based Cost Management

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Implementing an Activity Based Cost Management program.

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What Does It Cost? Activity Based Cost Management

  1. 1. Fundamentals Activity-Based Costing (ABC): – A method of assigning costs to products or services based on the resources they consume. – ABC is an alternative to traditional accounting in which a business’s overhead amounts (indirect labor, production facility, marketing, etc.) are allocated in proportion to an activitys direct costs. The concern . . . two activities that absorb the same direct costs can use or require very different amounts of overhead . . . . Fundamentals Activity-Based Costing (ABC): – ABC became popular in early 1980’s . . . The primary issues: 1. ABC requires that a business define, break-down and track cost details by individual business activities. 2. ABC requires Clean & Accurate DATA. 3. ABC was thought to be a replacement for traditional accounting methods . . .it’s a supporting Management Decision Tool . . . not a replacement. ABC is an “Approach” that provides an effective way to view and interpret information by measuring Cost and Performance of business processes and their outputs. 1
  2. 2. Fundamentals The “New & Revised” ABC/M Approach: Beginning in 2005, the approach to ABC/M was modified to focus on: 1. The Cost Per Time Unit associated with supplying resource capacity, and 2. The Unit Times of Consumption of resource capacity by products, services and customers. What does this mean? Determining and using Cost Drivers . . . examples would be: - Stamping Operation: $/Machine Hour by Cost Center - Food Distributor: $/Distribution Drop - Machine Fabricator: $/Direct Labor Hour - Specialty Meat Producer: Lb./Product Sold by Customer Type Fundamentals Benefits of an ABC/M Approach: – Provides decision makers with details regarding which products or services make or lose money. – Designed to provide profitability information for each segment of a product/service market matrix. – ABC/M is a Management Tool that can be used understand and address specific products, services or customers that make or lose money for your organization. – ABC/M highlights how efficiently & effectively activities are being performed and who are the benefactors of the activities performed. 2
  3. 3. Recommended Approach to ABC/M1. Develop a Cost Management Strategy:  Establish a Cost Management Task Force or Team  Map and analyze your Key Processes  Review, analyze, test and validate your General Ledger Detail  Collect and verify the accuracy of your Process Data2. Develop a Cost Model  Establish Fully Loaded Labor Rates  Establish Equipment Replacement Values and Rates  Incorporate Process Maps, Bills of Material, Service Steps, etc.3. Determine Costs and React  Establish unit costs for products or services by customer, product line, cost/machine center, department, etc. Step 1: Cost Management Strategy 3
  4. 4. Costs to Control & Assign Resource Costs Non-Specific Activity-Specific Costs Costs Activity-Based Unabsorbed Costs Costing Activity-Support Costs Customer Support Costs Traditional Costs ~ Manufacturing Perspective ~ LABOR + + ProcessCost perunit of output $/Unit(Total CostTotal Output ) 4
  5. 5. Activity Based Costing Approach Activity 1 Activity 1 Activity 1 Activity 1 Activity 1 Activity 1Activities and their drivers create a meaningful link Cost Driver 1 Customer Abetween products, Cost Driver 1 Customer A Cost Driver 1 Customer A Cost Driver 1 Customer Acustomers, and the Cost Driver 1 Customer A Cost Driver X Customer A resources they consume Product 1 Product 1 Product 1 Product 1 Product 1 Product 1Flow of Costs . . . Costs Activity Analysis Allocation Allocation Methods Methods Allocation Methods Activity driven by Internal Activities with products, services support no direct link & customers activity Activity costs assigned to Products specific products, Services Non-Specific services, customers, cost Costs Customers centers, etc. using the “Driver Volume” of each activity 5
  6. 6. EFFECTIVENESS EFFECTIVENESS Map your OF PROCESS = OF PROCESS = Ability to achieve “Value Streams” Ability to results desired achieve (Focus of ISO desired results 9001:2000) Input PROCESS Output PRODUCT “Set of interrelated or(Includes Resources) (“Result of a process”) interacting activities” EFFICIENCY EFFICIENCY OF OF PROCESS = MONITORING AND PROCESS = Results achieved MEASUREMENT OPPORTUNITIES Results achieved vs resources used vs resources used (Focus of ISO (Before, during and after the process) 9004:2000) Process Mapping – an examination of the expectations and requirements between departments . . . . includes both internal and external customers Value Stream Map Process 1 Process 2 Process 3 Value Stream Map Follow a “product” or “service” from beginning to end. Draw a visual representation of every process in the material & information flow. Identify Value-Added and Non-Value Added steps. Delivery 6
  7. 7. Strategy Development . . . Review and test your general ledger to identify which accounts are allocated “what” costs and then validate! Cost Center A Example: Account Cost$ Center B Cost Center C Account $ Employment Costs Account $ - Fully Loaded Costs: Salaries, taxes, pensions, etc. Occupancy Costs - Rent, utilities, repairs, etc. Equipment Costs - Lease, property tax, utilities Determine the most appropriate cost drivers to allocate the costs . . . . Assigning Base Costs to Activities . . . Costs General Activity-related costs are Ledger assigned to individual Activity-Specific activities on the basis of Costs rational allocation methods Allocation Methods Activity Analysis Example: Employment Costs: Hours worked per activity or % of time spent Occupancy Costs: Square feet of facility space used Network Costs: Log-on time, Processing time etc. 7
  8. 8. Step 2: Develop a Cost Model Important Aspect . . . Structure your operations via a “Value-Added” approach . . . VA = SR – (MC + OS) Incorporate aVA = Value Added “Checkbook” MentalitySR = Sales RevenuesMC = Material CostsOS = Outside Servicing Costs 8
  9. 9. Cost Model Structure Cost Model is used to assign specific activity costs and as a “tool” for management decision making. BOM Costing Model for Business Decisions Routers Product, Customer, Business Unit Cost Analysis Monthly Snap-Shot Labor Analysis Determine your “Fully Loaded” Labor Costs: 9
  10. 10. Equipment Analysis Establish a Cost / Hour for all Primary Equipment: Department Cost Allocations Allocate your Financial Data by Department, Cost Center, Etc. 10
  11. 11. Step 3: Determine Costs Example . . . Contractor - Cost & Profit per Job Analysis 11
  12. 12. Profit per Drop Profits per Drop 350.00 Example Project . . . Do we stay or do we go? - Food Distributor - In Business since 1967 300.00 - 11 delivery trucks - Next Generation Mgmt. - Breakeven - Where’s the future? 250.00 200.00 Breakeven P r o fits $121.19/Drop 150.00 100.00 50.00 0.00 1H 8M 3W 2T 2M 7W 7H 6F 1F 3M 8H 1M 8W 6W 7M 8T 1T 1W 2F 3T 8F 7F 2H 3H 2W Route Totrilla Chip - Production Cost $/Lb .vs. Selling Price $/Lb $0.0000 $0.5000 $1.0000 $1.5000 $2.0000 $2.5000 12-1# NS Tortilla Chips 1 # Display Tortilla Chip 12/14 oz Sea Salt Strips Sea Salt 12/13 oz Tortilla Chips Deli Style Guacamole Tortilla Chips - 12/13 oz Sea Salt 12/6 oz Tortilla Chips Deli StyleRestaurant Style 12/6 oz Tortilla Chips Deli Style Nacho Cheese Tortilla Chips 12/14 oz Lime 12/6 oz Tortilla Chips Deli StyleLime 12/6 oz Tortilla Chips Deli Style - Canadian Salsa Fresca 12/13 oz Tortilla Chips Deli StyleLime Habanero 12/13 oz Tortilla Chips Deli Style Total Cost $/Lb (Less Other Expenses) Leaving Plant Selling Price $/Lb 12
  13. 13. ABC/M Objective . . . Profitability by Customer Refine Processes to Convert or 160% Cultivate and Improve Profitability DisengageCumulative Profits (% of total profits) Grow 120% Profit 100% Distribution Curve 80% 60% 40% 20% 0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Most Profitable Customers Least Profitable Customers ABC/M Objective . . . Profitability by Customer  Identify and eliminate the unprofitable . . . Up to 30% of products, services or customers may not be profitable: - Determine how resources will be allocated - Understand the implications of “Elimination” - Manage the remaining costs . . . . Do Not Transfer!  30% to 40% of products, services and customers are marginally profitable or marginally unprofitable  Know which Products, Services, and Customers that drive profitability at your company 13
  14. 14. Next Step . . . . . . Mobilize Definition: To make mobile or capable of movement. To assemble, prepare, or coordinate for a purpose. Implement actions to shift to controllable revenues where unpredictability is the greatest. Maximize revenues for existing customers: – Mobilize your Sales Force . . .Position for Strategic Partnerships – Examine the value chain to increase revenues that can be earned from existing customer. – Look for Sustainable Cost Reductions verses Short-Term Cost Savings. Prepare to Transition & Position What’s our Market Position? – Develop a strategy to recognize merger, acquisition and potential market growth opportunities. – Position your company to understand current and future market segment, areas for growth, etc. – Options: • Stay as you are in your business and market nitch • Initiate a diversification strategy / program • Explore and initiate mergers and/or acquisitions • Identify and source resources overseas • Provide a strategic platform for foreign companies 14
  15. 15. Establish a Labor Force Strategy 78 million workers will leave the workforce over the next 16 years. There are only 48 million new entrants:  Look within for Critical Skills and Knowledge Key Questions to Ask:  Which segments of my workforce create the most value?  Which areas of our organization will be most impacted by retirements?  What skills do we need now?  What skills will we need in the next 5 years?  Are we actively developing workforce plans? Incorporate Productivity “Tools” & Methods Toyota Production System Lean Manufacturing Goal: Six Sigma To provide you and your ISO 9001:2008 management team with high- Balanced Scorecard quality data and business Activity-Based Cost Mgmt. information. Objectives: 1. Timely Decisions Business 2. Value-Added Insight 3. Maintain Control Improvement 4. Efficiency and Profitability Tools 15
  16. 16. ABC/M Road Map Diversification Strategy?“Would you tell me, please, whichway I ought to go from here?”asked Alice.“That depends a good deal on where you want to getto,” said the cat.“I don’t much care where,” said Alice.“Then it doesn’t matter which way you go,” said thecat. Lewis Carroll, Alice’s Adventures in Wonderland 16
  17. 17. In Conclusion . . . Incorporate a SMART Edge: – Strategy - make sure your long term costing strategy remains intact and focused. – Message and Measure - it is vital that your key people understand your cost strategy and know where you are heading. – Accelerate - the world is changing quickly and you have to change even quicker. This is the time to gain market share. – Reinvest – Look for opportunities, cost controls, process improvements, etc. – Talent - is a critical key to achieving and sustaining your business goals and objectives. Questions? THANK YOU! Alan Lund UHY Advisors, Inc. Farmington Hills, Michigan 48334 (248) 355-1040 Alund@uhy-us.com 17

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