Customer Relationship Management

By PRWEB

Activity-based costing is a cost analysis and decision support tool that has been around for over 20 years and doesn’t require the use of expensive technology in order to benefit from it. This article recommends conducting a thorough manual ABC analysis before implementing any ABC software.

Activity-based costing is a cost analysis and decision support tool that has been around for over 20 years and doesn’t require the use of expensive technology in order to benefit from it.

Robert Scroggins, a principal in RWSMC, a Dallas firm providing ABC and other strategic consulting services says, “activity-based costing offers many benefits to those that employ it, and the benefits don’t depend upon high tech.”

Activity-based costing (or ABC) is a costing analysis and decision support tool developed in the 1980s by an industry consortium to help large industrial firms improve their product costing and business processes. ABC involves analyzing the activities that are required in accomplishing organizational objectives and then assigning direct and supporting costs to those objectives in a rational manner. According to Scroggins, “ABC has been used and refined for over 20 years now and is useful for all types and sizes of businesses and organizations.”

When asked to explain the ABC process, Scroggins says, “All organizations conduct activities, and activities consume costs. An ABC engagement starts with an activity analysis, which provides a deep understanding of what an organization does and what ‘drives’ its activities. When the activity analysis is completed, you are in a position to prepare a business model of the organization to understand the cost structure at the existing volume and mix of activities. This provides powerful information with all sorts of uses. Most organizations use the ABC information for pricing and profitability, but they can also benefit from using it as a decision tool for forecasting, analyzing business opportunities, and other ‘what if’ applications. Other important uses of ABC information are for cost reduction, performance measurement, and business process improvement.”

Scroggins continues, “We generally use Excel spreadsheets in our ABC engagements. You can buy dedicated ABC software with a minimum cost of about $4,000 up to hundreds of thousands of dollars. We believe, however, that you need to conduct a thorough manual ABC analysis before implementing any ABC software. We find that ABC software can be an impediment to a good analysis of an organization because there is a tendency when using it to spend too much time on the software and not enough time on the real job of business analysis. Small to mid-sized businesses will find it more cost-effective and hassle-free to use spreadsheets instead of software. They are readily available and don’t have steep learning curves.”

Scroggins concludes by saying, “Most small to mid-sized businesses should update the information in the ABC model every couple of years, or whenever there is a change in any major factor involved in business operations (labor, materials, financing, governmental requirements, etc.). That is practicing the art of management without depending upon complex and expensive technology.”