e ar                                                                                                                  at r...
54                                                                      The Journal of Corporate Accounting & Finance / Ma...
The Journal of Corporate Accounting & Finance / March/April 2010                                                         5...
56                                                                       The Journal of Corporate Accounting & Finance / M...
The Journal of Corporate Accounting & Finance / March/April 2010                                                          ...
58                                                                            The Journal of Corporate Accounting & Financ...
The Journal of Corporate Accounting & Finance / March/April 2010                                                          ...
60                                                              The Journal of Corporate Accounting & Finance / March/Apri...
Upcoming SlideShare
Loading in...5
×

Who can win with PCM systems?

232

Published on

Published in: Business, Technology
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
232
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
6
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Who can win with PCM systems?

  1. 1. e ar at r ticl u e fe Who Can Win With a Cost and Profitability System?Raef A. Lawson, Toby Hatch, Denis Desroches, and William O. StrattonI n a previous article (NSB) group. The (“Decision Sup- What kinds of companies have successful cost and SB group included port—Do You Have profitability systems? The authors surveyed compa- 44 percent of respon-It?” Journal of Cor- nies from all over the world to find out. The results dents, while 18 percentporate Accounting show that significant investments in time and of respondents were& Finance, July/ in the NSB group. All money are required, but companies that succeedAugust 2009) we com- other respondents fellpared what organi- see significant benefits from their cost systems outside of these twozations wanted to and share some common traits. They have a culture classifications andachieve with their cost that encourages employees not only to understand were excluded fromand profitability sys- their costs and profits, but also to act on the infor- this analysis.tems (CPSs) to what mation. These companies often use activity-based The specificthey are actually real- costing and use their systems for operational, responses for theseizing. We also speci- financial, and strategic decision support. They can two groups werefied considerations also determine cost and profitability at all appropri- examined morerequired to success- ate levels—for activities, products, customers, and closely in an attemptfully support business departments. © 2010 Wiley Periodicals, Inc. to reveal why somedecisions using a organizations wereCPS. This article able to get significantexamines the differ- desired outcome of the study is benefits from theirences between organizations that to identify best practices in cost CPS and others were not. Toreceive significant benefits from and profitability measurement try to identify a profile of thetheir CPS and those that do not. used by successful organizations kind of a company that wouldWhat might a successful com- around the world. receive the most benefit frompany whose CPS is providing One question in our survey their CPS, we considered thesesignificant benefits look like? asked participants to indicate criteria: To study current practices in if they had received significantthe uses of cost and profitability benefits from their CPS. Those • technology used,systems, the authors conducted a who responded “Strongly Agree” • length of time using theircomprehensive study using a sur- or “Agree” were classified as system,vey instrument available at http:// the “Significant Benefits” (SB) • use of CPS information,www.bragstudies.com/. The group. Those that disagreed to • costing methodology,survey was sponsored by several any extent were classified as • functionality, andprofessional associations.1 One the “Non-Significant Benefits” • decision support.© 2010 Wiley Periodicals, Inc.Published online in Wiley InterScience (www.interscience.wiley.com).DOI 10.1002/jcaf.20580 53
  2. 2. 54 The Journal of Corporate Accounting & Finance / March/April 2010 Exhibit 1 Technology Type SB NSB Difference Developed using office tools (spreadsheets, etc.) 41% 53% –12% Developed/coded completely in-house (not 21% 24% –3% spreadsheet based) Purpose-built commercial package 32% 21% 12% Combination 6% 3% 3% TECHNOLOGY USED placed on CPSs by SB compa- Exhibit 2 confirms this for the nies, a willingness to dedicate implementation of a CPS as Companies have many soft- more financial resources to well—only 16 percent of the SB ware options for CPS—they can them, and perhaps the need for group have had their software use typical office tools, com- greater functionality (more on two years or less, compared with pletely develop it in house, use a this later). 35 percent for the NSB group. It purpose-built commercial pack- appears that you are not as likely age, or use some combination of LENGTH OF TIME USING to experience significant benefits these options. The NSB compa- THEIR SYSTEM until you have had your CPS nies were more likely to create for at least two years or more— their own CPS using office tools, When implementing any persistence pays! while the SB companies are management system, it can be more likely to purchase purpose- expected that there will be a lag USE OF CPS INFORMATION built, commercial CPS packages between implementation of the (see Exhibit 1). This latter result initiative and the point at which It appears that SB organi- may reflect a greater importance benefits become apparent. zations invest in their CPS to Exhibit 2 Length of Time Using a CPS 40% 35% 30% 25% Percent SB 20% NSB 15% 10% 5% 0% Less than 1 1-2 years 2-5 years 5-8 years More than 8 year yearsDOI: 10.1002/jcaf © 2010 Wiley Periodicals, Inc.
  3. 3. The Journal of Corporate Accounting & Finance / March/April 2010 55go beyond simply providing • helps them to make opera- COSTING METHODOLOGYresults—they also use these tional improvements.results to support many types of From our survey results, itdecisions. Including both opera- Only between 4 and 12 per- was very apparent that organi-tional and financial information cent of the NSB agreed they had zations use a variety of cost-in their CPS provides a broader received these same benefits. assignment methods in theirrange of decision support and While 69 percent of the SB CPSs. We asked the participantscould help to explain their will- group felt that their CPS gave to classify their main methodsingness to use these results to sup- them an accurate assessment of of costing. The optionsport decisions and therefore reap costs in their organization, none included:greater benefits from the CPS. of the NSB group felt that this For instance, results show was true for them. • equal allocation (resourcesthat 90 percent of the SB group Between 39 and 47 percent cost is apportioned equallyviewed their CPS as a key ele- of the SB group, compared to no to all objects that consumement in the management of more than 4 percent of the NSB, the resources);their organization, whereas only felt that they had attained these • output-based allocation44 percent of the NSB group benefits: (resources cost is allocatedfelt this way. And 95 percent of based on an output-relatedthe SB group used information • CPS provides accurate infor- driver [allocation basis]); andfrom their CPS to make signifi- mation on the costs of all • activity-based allocationcant financial decisions, activities in the organization; (resources costs are accu-86 percent to make signifi- mulated into activity pools;cant operational decisions, these cost pools are allo-and 75 percent to make sig- While 69 percent of the SB group cated to objects based onnificant strategic decisions. felt that their CPS gave them an how much of the activity isLess than 45 percent of the consumed by the objects).NSB group used their CPS accurate assessment of costs in theirto make any of these types organization, none of the NSB group Organizations can useof decisions. these methods individu- At least 80 percent of felt that this was true for them. ally or combine them toSB companies indicated suit their needs. Activity-that their CPS: based costing (ABC) has • accurately tracing the cost of been widely promoted as a more• is helpful for product/service overheads down to our final accurate costing methodology. profitability analysis and cost objects; and We found that organizations that• helps us perform budgeting, • accurately tracing the cost of received significant benefits planning, and evaluation. activities down to our final from their CPS are much more cost objects (e.g., customers, likely to use ABC, either on its No more than 15 percent of products/services etc.). own or in combination with thethe NSB respondents indicated other methods, than those that dothat they received these benefits. It is interesting to note that not receive significant benefits Between 70 and 75 percent this final group of benefits is (see Exhibit 3).of the SB group indicated that related to tracing overheads and As indicated in Exhibit 4,their CPS: understanding activity costs 54 percent of the NSB group has within the organization. If both either never considered using• provides good information operational and financial infor- ABC or has already chosen not for managerial decision mation is not included in a CPS, to use it. Thus, not only is there making, it would be impossible to get this a difference between the SB• helps them make product type of benefit. To delve more and NSB groups with regard to decisions (e.g., pricing, deeply into this question, we also their current use of ABC in their design, outsourcing), studied the costing methods of CPS, but the NSB companies• is helpful for customer the participants and what kinds of are also more likely to have not profitability analysis, costing decisions they made. Are considered using this technique• helps them control costs, and they purely financial in nature? in the first place.© 2010 Wiley Periodicals, Inc. DOI: 10.1002/jcaf
  4. 4. 56 The Journal of Corporate Accounting & Finance / March/April 2010 likely to calculate costs at all applicable levels, including to Exhibit 3 the activity, product/service, and Use of Activity-Based Costing customer levels. While most organizations indicated the desire 80% to calculate cost at all applicable 70% 60% levels, it is likely that the NSB organizations did not calculate Percent 50% SB 40% them, because they did not have 30% NSB the functionality (according to 20% 10% Exhibit 5) to be able to do so. 0% This lack of information could Only Activity Based Activity Based & Only Non-Activity- very well have caused the NSB Other Based organizations to make poor deci- sions and prevented them from achieving significant benefits from their CPS. FUNCTIONALITY of resources consumed by differ- PROFITABILITY FUNCTIONALITY ent customers was again a strong Major differences in CPS point for most SB organizations Just as there are differences functionality exist between the but eluded most NSB organiza- between SB and NSB companies SB and NSB organizations. tions. Significant differences in the level to which costs are Exhibit 5 shows that each of existed with many other func- calculated, there are differences the ten areas of functional- tions, but the three with the larg- in the levels to which profit- ity included in the survey was est differences were: ability is calculated. As indicated more frequently available for SB in Exhibit 7, SB companies are organizations than for those in • calculating the cost of much more likely to calculate the NSB group. For example, SB customer-facing activities, profitability for groups and indi- organizations were twice as likely • supporting a variety of cost- vidual products/services and for to report being able to accurately allocation methods, and groups of customers, and slightly identify which customers, prod- • supplying cost information at less likely to calculate the profit- ucts, and services were profitable all necessary levels. ability of individual customers. and which were not. Understand- Again, generally, the CPSs of SB ing the costs of their customer- As indicated in Exhibit 6, organizations appeared to possess facing activities and the amount SB organizations are much more the required functionality and Exhibit 4 Adoption of Activity-Based Costing SB NSB Difference Currently uses activity-based costing 52% 25% 27% Previously used activity-based costing, but no longer uses it 3% 4% –1% Is considering implementing an activity-based costing system 15% 17% –2% Has chosen not to use activity-based costing 11% 25% –14% Has never considered using activity-based costing 18% 29% –11%DOI: 10.1002/jcaf © 2010 Wiley Periodicals, Inc.
  5. 5. The Journal of Corporate Accounting & Finance / March/April 2010 57Exhibit 5 Functionality of CPSs for SB and NSB Organizations SB NSB Accurate identification of profitable and non- profitable products/services Accurate identification of profitable and non- profitable customers Cost information at all necessary levels Reporting cost behavior Ability to handle reciprocal costing Traceability of allocations and how they were assigned Calculation of the cost of our customer-facing activities Supports a variety of cost allocation methods Calculation of the proportion of resources consumed by each customer Calculation of channel, product, and regional profitability 0% 10% 20% 30% 40% 50% 60% 70% 80% 90%were able to calculate profitabil- zations use their CPS to support appropriate headcount levels,ity at all appropriate levels. the following types of costing and over 90 percent of SB orga- decisions (see Exhibit 8): nizations determine the pricingDECISION MAKING WITH CPS of products and services.INFORMATION • deciding on inventory levels, From a profitability per- • making outsourcing decisions, spective, the SB organizations The more timely and • planning process improve- reported being able to support allaccurate cost and profitability ments, and nine surveyed decisions (listed ininformation provided by SB • resource utilization and Exhibit 9) more frequently thancompanies’ CPSs gave them the capacity planning. the NSB organizations. For 84ability to enhance their decision percent or more of the SB organi-making, and they use this ability Even more impressively, zations, this meant that they werein numerous ways. Better than 86 percent of SB organizations more likely to use their profit-three-quarters of the SB organi- use their CPS to help them plan ability information to support© 2010 Wiley Periodicals, Inc. DOI: 10.1002/jcaf
  6. 6. 58 The Journal of Corporate Accounting & Finance / March/April 2010 Exhibit 6 Level at Which Costs Are Calculated SB NSB Individual or groups of activities Groups of products/services Individual product/service levels Customer groups Individual customers 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% product/service rationalization profile of a company that is • have a culture that encour- and development. And 70 percent more likely to experience sig- ages its employees to not or more of SB were more likely nificant benefits from its cost only understand their costs to support decisions concerning and profitability system. These and profits, but also act on customer and market, employee organizations: the information they receive; compensation, and acquisition. • use CPS results for opera- • have had their CPS for at tional, financial, and strate- SUMMARY least two years; gic decision support; • have a purpose-built system • appropriately apply activity- Our survey results allowed with supported functionality based costing for cost confi- us to begin to develop a and ongoing improvements; dence and decision support; • have a high level of func- tionality in their system, including the ability to: • determine cost and profit- Exhibit 7 ability at all appropriate Level to Which Profitability Is Calculated levels for activities, prod- ucts, customers, depart- SB NSB ments, and so on; • trace costs from their Groups of products/services overheads to their final Individual product/service levels cost objects; • understand how custom- h Groups of customers ers and products are con- suming resources; Individual customers • understand which custom- ers, products, and business 0% 20% 40% 60% 80% 100% partners are profitable and which are not; andDOI: 10.1002/jcaf © 2010 Wiley Periodicals, Inc.
  7. 7. The Journal of Corporate Accounting & Finance / March/April 2010 59Exhibit 8 Decisions Made With Costing Information SB NSB Inventory levels Outsourcing decisions Plan process improvements Pricing of products and services Resource utilization and capacity Plan appropriate headcount levels 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%Exhibit 9 Decisions Made With Profitability Information SB NSB Rationalization of products/services New product/service development Product line rationalization Rationalization of customers Targeting of new customers Employee compensation Targeting new markets Making acquistion decisions Employee performance evalutation 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%© 2010 Wiley Periodicals, Inc. DOI: 10.1002/jcaf
  8. 8. 60 The Journal of Corporate Accounting & Finance / March/April 2010 • use their cost and profitability yourself, “What action could be American Institute of Certified information to support a wide undertaken to move closer to this Public Accountants, the Chartered Institute of Management Accountants, range of decisions including profile and to the achievement of the Certified Management Accoun- financial, operational, prod- greater benefits from my CPS?” tants—Canada, the Consortium for uct/service, and customer. Advanced Management—International, NOTE the Institute of Management Accoun- If this profile does not tants, and Oracle Corporation. Sup- 1. The associations include the Association port was nonfinancial in nature. describe your organization, ask of Chartered Certified Accountants, the Raef A. Lawson, PhD, CFA, CMA, CPA, is vice president of research and professor-in-residence for the Institute of Management Accountants out of New Jersey. He has written extensively in the areas of Chinese cost management practices, performance scorecards, activity-based costing, and cost and performance management. Dr. Lawson can be reached at rlawson@imanet.org. Toby Hatch is a senior strategist for enterprise performance management with Oracle Corporation out of Toronto, Canada, and is involved with research, writing, and speaking about enterprise performance management topics. Previously, she was involved with supporting and implementing business scorecards and activity-based management solutions in companies around the world. She can be reached at toby.hatch@oracle.com. Denis Desroches is a principal for the enterprise planning field with Oracle Corporation out of Toronto, Canada. Since 1993, Desroches has supported organizations with the selection, implementation, and knowledge acquisition of scorecard, performance management, and activity-based management solu- tions. He can be reached at denis.desroches@oracle.com. William O. Stratton, PhD, CMA, is a professor of accounting at the Udvar-Hazy School of Business at Dixie State College of Utah. He has numerous publications in accounting and international business journals and is coauthor of a leading textbook on management accounting. Dr. Stratton can be reached at Stratton@dixie.edu.DOI: 10.1002/jcaf © 2010 Wiley Periodicals, Inc.

×