Be certain about profitability


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Be certain about profitability

  1. 1. On-demand best practices series Uncertain Times? Be Certain About What Is Profitable Best Practices for Managing Cost and Profitability Like no other time in recent his- This sponsored white paper Group (BRAG) has conducted tory, companies are turning to their explores why an effective cost and research on practices related to per- finance leaders, asking the ques- profitability system (CPS) can help formance management, including tion: Where are we profitable? The you answer the profitability ques- cost and profitability systems. From need to know where the business is tion today—and improve your com- March to November 2008, BRAG profitable—and where it’s not—is pany’s performance tomorrow. conducted an online survey of more no longer a quarterly or monthly than 400 organizations worldwide exercise, but a daily one. ABC vs. Standard Costing to assess the extent to which orga- The ability to make informed, Since its introduction in the nizations realize benefits from cost quick adjustments to accommodate early 1990s, activity-based cost- and profitability systems.1 ever-changing market conditions is ing (ABC) has been the subject of Costing accuracy appears to be a requirement for survival. Finance much acclaim, and has also received the most significant concern among organizations need accurate, timely its share of criticism. While ABC’s respondents, according to William insight into the costs and profitability popularity grew, it still is not as O. Stratton, Ph.D., CMA Professor of of customers and products in order to widely used as standard costing, par- Accounting, The Udvar-Hazy School confidently identify the true cost and ticularly in the production function of Business, Dixie State College of profit drivers in their business. of the value chain. Standard costing Utah, one of the architects of the allocates indirect costs based on stan- survey. “To be accurate, alloca- dard indirect-cost rates and volume. tions must be relevant, reliable andVIEW THIS ON-DEMAND WEBCAST FEATURING: ABC accumulates resource costs reasonable—those are the three ‘R’s’ into activity-cost pools and allocates of good costing,” he explains. “Cost William O. stratton activity-cost pools based on output allocations need to make sense, have Ph.D., CMA Professor of Accounting, measures consumed by cost objects. a valid cause-effect relationship, and The Udvar-Hazy School of Business, Although detractors maintain pass the cost/benefit test.” Dixie State College of Utah that ABC is too complex and cum- bersome to justify its use, research ABC Is a Clear Winner raef a. Lawson shows that when used in conjunc- Despite their concerns about Ph.D., CFA, CMA, CPA, Vice President of tion with a cost and profitability accuracy, survey respondents were Research and Professor-in-Residence, system, the methodology can pro- generally enthusiastic about ABC Institute of Management Accountants (IMA) vide significant value to manag- and cited many tangible benefits, ers and help companies allocate including better decision support, denis desroches resources more accurately and real- improved profitability analysis, Global Domain Leader in the Enterprise istically to better understand their easier budgeting and planning, and Performance Management field, costs and profitability, and ultimate- the ability to control costs and make Oracle Corporation ly improve the bottom line. operational improvements. Sponsored by But how can respondents agree The Three R’s of Good with so many benefits when there For more information, call 1-800-ORACLE-1 Costing is a lack of “accuracy” in assigning or click the “Have a sales rep contact me” button on For more than a decade, the activity and overhead costs to prod- Business Research and Analysis ucts or services? 1.
  2. 2. advertiser sponsored webcast/white paper “In many cases, costs are simply not n Able to provide cost information at organization is adjusted. Look for a sys-measured or not assigned to products or all necessary levels (customer, product/ser- tem that will reduce dependency on ITservices,” Stratton explains. “With the vice, key processes, key activities, etc.) professionals for building and maintain-exception of production-related costs, n More accurate calculation of channel, ing models, and allow business users toa significant proportion of costs are not product, and regional cost define the assignment of costs—let theassigned to cost objects—products, ser- n Able to calculate the proportion of technology generate the backgroundvices, and customers. But contrary to a resources consumed by each customer calculations.common belief, ABC is not a production- type and/or individual customer Companies should look for a systemspecific method: ABC methods can be n More accurate reporting of cost that offers user-controlled model valida-used across the entire value chain.” behavior (e.g., fixed and variable cost tion and data loading, with predefined So if ABC is such a clear winner, why characteristics) validation reports. Reports should pres-isn’t it used more often? n Improved traceability of cost ent “actionable” results in a variety of “Unfortunately, it often comes down allocations forms, including trend reporting, scenar-to a lack of senior management support,” n Better ability to handle reciprocal io results comparison, and dashboarding,says Stratton. “However, our survey costing and allow for ad-hoc drilldowns and dataresults refute claims that ABC is often n Timely data integration (data is always analysis.abandoned. Only 3 percent of the orga- up-to-date)nizations we surveyed had previously Oracle’s Profitability and Costused ABC but no longer use it—the vast “The fact is that most best-practice Management Solutionmajority of ABC systems that have been organizations are using ABC,” says Profitability and Cost Management isdeployed are still in place.” Lawson. “These companies know that a key component of Oracle’s Enterprise using activity-based costing helps them Performance Management System.Best Practice Companies: A understand their operations, improve Oracle Hyperion Profitability and CostComparison processes, and control costs better than Management (HPCM) provides flex- A primary objective of BRAG’s study standard costing alone. But detail is nec- ible methods for transforming costs andwas to discover the best practices in cost essary to reap these benefits—companies revenue from accounting sources, includ-and profitability measurement of success- must have an appropriate number of ing multiple stages of cost and revenueful organizations. “We identified ‘best activities and cost objects identified in assignments. The solution also supports apractice’ organizations—those that had their CPS.” wide variety of costing methodologies.realized significant benefits from their With Oracle HPCM, companies canCPS,” says Raef A. Lawson, Ph.D., Vice Considerations for a CPS gain confidence in cost allocations andPresident of Research and Professor- Companies that are looking to imple- revenue flows with graphical traceabilityin-Residence, Institute of Management ment a cost and profitability system maps, and can quickly validate modelsAccountants (IMA), another of the sur- should make sure that the systems they’re with user-defined business rules. Usersvey’s architects. “We found some major considering can reliably provide ongoing, can also define up to nine stages of trans-differences between those companies and relevant results in a reasonable manner— formations via an easy, template-drivencompanies using only standard costing.” Stratton’s three “R’s.” Key to this capa- approach. Oracle HPCM can handle The survey identified the following bility is a fourth ‘R’: reporting. Flexible reciprocal costing with ease, and isimprovements in organizations that had reporting capabilities are important to designed to integrate with other manage-used a CPS to provide useful information produce defensible results that support ment decision systems.for managerial decision-making for at business decisions. Using Oracle HPCM and activity-least one year: As previously mentioned, building based costing, companies can answer the and maintaining the system must be profitability question with confidence—n Accurate identification of which cus- reasonable, and allow for continuity and use that information to bolster thetomers are profitable and which are not of meaningful results as the business bottom line.For more information on this webcast go