Why activity based costing cannot be overlooked

ign="center">decision-making within the organization. Then it is
Why activity based costing cannot be overlookedessential to work back through activities, reallocations
A look into the managerial myth that activity-basedand cost pools and only add complexity when it is
costing is too much like hard work!required for allocating substantive amounts of cost
Activity-based costing (ABC) projects traditionallyusing different drivers. This is achievable using
create visions of armies of accountants lockingWeb-based ABC, and its Web-based functionality also
themselves away in darkened rooms, working forsimplifies data collection.
months on end to generate any meaningful results,The work management tools associated with
only to have them finally dismissed by line managersWeb-based activity-based costing allow administrators
as being out of date and unreliable.to design, schedule and monitor repetitive processes,
The time-consuming, cumbersome and costly processsuch as collecting non-system driver data from large
of manually collecting, and collating non-system datanumbers of office-based or remote branch
from a large number of contributors to refresh andcontributors. Once configured, the data collection
recalculate the ABC Model means that mostroutine can be scheduled time and time again, helping
management accountants cannot provide reports into expedite the collection of data to refresh the ABC
line with business managers' monthly managementmodels, with little or no human intervention required to
reporting cycles. Activity-based costing is thereforemanage the process
clearly failing to deliver, but why?In addition, if the ABC application is truly
The reason is clear. It is common with ABC to findmulti-dimensional and knows which activities are carried
activity dictionaries that run to many hundreds andout in which departments, a single screen design will
occasionally thousands of activities, as extraneoussuffice for a large number of contributors, only
activities that account for minute amounts of cost aredisplaying the activities and drivers that are relevant to
included into the ABC system on the basis that "youthem.
never know what you might need one day".Using wizards, administrators can map the data
Consequently, activity-based costing models becomecollection process, including such things as e-mail
too much hard work, over-complicated, and soreminders that Web books are awaiting completion or
complex that managers within the business no longerare overdue, alerts to contributor's superiors to review
trust the results and dismiss them - resulting in limitedtheir submission and even e-mail alerts that deadlines
benefit delivered to the organization.have not been met. ABC project managers can even
In addition, few responsibility centers carry out only oneinclude alerts to themselves to tell them that the data
activity. This means that increasing the number ofcollection is complete and the ABC model is now
activities in a model also increases the amount ofcalculating, having first run its own self-validation routine
non-system driver data that needs to be collectedto check that every piece of data is in place.
across the business, such as the proportion of timeWeb books can also be designed for reporting. Again
spent on each activity, or the number of staff carryingwith intelligent context, a single Web book may satisfy
out an activity. Traditionally, this data was collected bythe needs of many users, as it will only display
paper-based surveys and therefore required collatinginformation that is relevant to the user's responsibility
and re-keying into the ABC model.center or to which they have authorized access.
Furthermore, the information and insight generated byWhere there is a performance management or
activity-based costing is worthless until executives andbusiness intelligence portal already in place,
manager's right across the organization can access itorganizations may prefer to report through data
and use it to inform their decision-making. Typically thisintegration tools, such as OLE/DB for OLAP, to
means exporting the data out of the ABC applicationaccess the data from the ABC application.
into spreadsheets or a business intelligence tool beforeFurthermore, most organizations that have migrated
manipulating it and distributing to management in aactivity-based costing programs to Web-based
variety of different formats that are meaningful to theapplications focus on providing management with more
variety of stakeholders. If the project is supportingfrequent reports, moving from quarterly to monthly
multi-dimensional cost and profitability analysis, such asreporting in line with traditional management reporting.
product, customer and channel profitability, that isQuarterly management accounts allow managers to
usually only available to selected managers andtrack their expenditure on resources such as staff. But
requires strict levels of security. As a result the amountmonthly activity costs allow managers to understand
of time and cost expended in reporting can betrends in the unit cost of the activities that staff
extensive. So is it time to lay ABC to rest?perform and monitor the impact of initiatives designed
No. The rise of Web technologies has ultimately placedto improve productivity and reduce costs. This
ABC firmly back upon the corporate agenda.information is particularly important in departments that
Organized correctly, Web-based activity-based costingcarry out highly repetitive activities, such as customer
can substantially reduce the time, cost and resourcescontact centers.
traditionally associated with ABC.In addition, wider employee buy-in can also be gained
As a result, it has the potential to deliver frequentas Web deployment enables ABC reports to be
insight into what drives costs and profits across anquickly and easily distributed to a large community of
enterprise and can provide managers with informationusers. This allows managers to do their own analysis
that enables them to take the guesswork, risk andwherever they happen to be.
politics out of decisions such as pricing, key accountArmed with a deep insight into costs and profitability
negotiation and product strategy. So, how can this befrom Web-based activity-based costing, managers not
achieved?only make better decisions, but also make those
Rather than starting with the general ledger anddecisions faster, resulting in a more agile organization
working down through activities to cost objects suchthat will outperform its peers.
as products and customers, it is far more effective toWeb-based ABC removes many of the obstacles to
start with the cost objects themselves, andits wider adoption - the adage that activity-based
understand how the information will be used to supportcosting is hard work is now a managerial myth!