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Statements on Management Accounting

STRATEGIC COST MANAGEMENT

TITLE

Implementing
Activity-Based Costing

CREDITS

IMA would like to acknowledge the work of Gary Cokins
(gary.cokins@sas.com),performance management solu-
tions manager, SAS, on whose work this SMA is based
and Raef Lawson, research director, IMA, who served as
reviewer.

Published by
Institute of Management Accountants
10 Paragon Drive
Montvale, NJ 07645
www.imanet.org © 2006 Institute of Management Accounting
Statements on Management Accounting

STRATEGIC COST MANAGEMENT

Implementing Activity-Based Costing

TABLE OF CONTENTS

I. Rationale—What Leads to Interest Exhibits
in ABC? . . . . . . . . . . . . . . . . . . . . . . . . 1 Exhibit 1: Indirect Costs Are Displacing
II. Scope . . . . . . . . . . . . . . . . . . . . . . . . . 2 Direct Costs . . . . . . . . . . . . . . . .2
III. Defining ABC . . . . . . . . . . . . . . . . . . . . . .3 Exhibit 2: The Activity-Based Cost Management
IV. The Role of the Management Accountant .4 Framework . . . . . . . . . . . . . . . . . .9
V. Implementing ABC Involves Behavioral Exhibit 3: Each Activity Has Its Own Activity
Change Management . . . . . . . . . . . . . . .5 Driver . . . . . . . . . . . . . . . . . . . .10
VI. Planning for an ABC Implementation . . . . .6 Exhibit 4: Multi-Level Cost Assignment Flow .12
VII. Initial Design of the ABC System . . . . . . .8 Exhibit 5: ABC Cost Assignment Network . . .14
VIII. Strategic vs. Operational Cost Exhibit 6: Profitability Profile Using ABC—
Management . . . . . . . . . . . . . . . . . . . .15 “Profit Cliff” . . . . . . . . . . . . . . . .15
IX. Customer Profitability Reporting . . . . . . .18 Exhibit 7: Fully Traced Costs to a Cost
X. ABC Project Planning . . . . . . . . . . . . . .22 Object . . . . . . . . . . . . . . . . . . . .17
XI. Collecting ABC Data . . . . . . . . . . . . . . .22 Exhibit 8: ABC Profit Contribution Margin
Layering . . . . . . . . . . . . . . . . . . .19
XII. Implementing the Final ABC System . . .27
Exhibit 9: ABC Customer Profit & Loss
XIII. Ensuring Successful Use as a
Statement . . . . . . . . . . . . . . . . .20
Sustainable System . . . . . . . . . . . . . . .29
Exhibit 10: Migrating Customers to Higher
XIV. Commercial ABC Software . . . . . . . . . .29
Profitability . . . . . . . . . . . . . . . . .21
XV. Conclusion . . . . . . . . . . . . . . . . . . . . .30
Exhibit 11: Process View . . . . . . . . . . . . . . .25
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . .31
Exhibit 12: Final Cost Object View . . . . . . . . .26
Bibliography . . . . . . . . . . . . . . . . . . . . . . . .31
Exhibit 13: ABC Rapid Prototyping with
Iterative Remodeling . . . . . . . . . .27
STRATEGIC COST MANAGEMENT

I . R AT I O N A L E — W H AT L E A D S T O channels, and customers that cause those
INTEREST IN ABC? expenses to be incurred.
There is a growing desire among organizations to
understand their costs and the behavior of fac- Exhibit 1 illustrates one factor that has lead to
tors that drive these costs. Yet there is confu- interest in ABC. Indirect expenses are displacing
sion over how to go about understanding costs the direct expenses that make products or deliv-
and how to distinguish competing cost measure- er services to customers. When asked for the
ment methodologies (e.g., activity-based cost- cause of this displacement, most say that it is
ing, standard costing, throughput accounting, because of technology, equipment, automation,
project accounting, target costing, etc.). The or computers. In other words, organizations are
result is that managers and employees are con- automating what previously had been manual
fused by mixed messages about which costs are jobs. But this is only a secondary factor for
the correct ones. Upon closer inspection, the var- explaining the shift in the type of organizational
ious costing methodologies do not necessarily expenses. The primary cause for the shift is the
compete: they can coexist, be reconciled, and gradual proliferation in the types of products and
blended. service lines. Over the last few decades, most
organizations have been offering an increasingly
In an increasingly competitive business environ- greater variety of products and services and
ment, organizations seeking to maintain or using more types of distribution and sales chan-
improve their competitiveness need cost informa- nels. In addition, organizations have been servic-
tion that is accurate and relevant. In the past, ing more and different types of customers.
companies planned and controlled their opera- Introducing this greater variation and diversity
tions using accounting information that was (i.e., heterogeneity) creates complexity, and
assumed to accurately reflect the costs of their increasing complexity results in greater overhead
products and services (and, ideally, their channels expenses. The fact that the overhead component
and customers as well). In fact, this was often not of expense is displacing the recurring labor
the case. The costing systems of many compa- expense does not automatically mean that an
nies, with their broad averaging allocation of indi- organization is becoming inefficient or bureau-
rect costs, masked by an illusion of precision, cratic. It simply means that a company is offer-
were actually providing misleading information to ing more variety to different types of customers.
decision makers. This resulted in suboptimal deci- The problem with traditional costing is that the
sion making by these companies’ managers. increasingly large amount of indirect expenses
continues to be allocated using allocation fac-
In order to overcome the over-generalizations of tors that are typically unrelated to what causes
traditional costing systems, with their excessive- the costs to be incurred. The consumption of
ly simplified cost allocations and resulting lack resources needs to be traced and assigned as
of visibility for indirect costs, organizations have costs based on cause and effect relationships—
been adopting activity-based costing (ABC) sys- and that is what ABC does.
tems. These systems are based on cost model-
ing that traces an organization’s expenses—both Here is a simple way to understand the basic
direct and indirect—to the products, services, principles of ABC. Imagine that you and three
friends go to a restaurant. You order a small

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STRATEGIC COST MANAGEMENT

EXHIBIT 1. INDIRECT COSTS ARE DISPLACING DIRECT COSTS
Changes in Cost Structure

100%

Overhead Trace
(indirect expense) and assign,
Cost Direct
Components Material not
allocate.

Direct (recurring) Labor

0%
1950s 1990s

Old-fashioned Hierarchical Integrated

Stages in the Evolution of Business
Source: Gary Cokins.

salad and they each order the most expensive activity-based management. These organizations
item on the menu—a prime rib steak. When the use an understanding of their cost drivers—the
server brings the bill, the others say, “Let’s split measures of activity that are causal factors in
the check evenly.” How would you feel? You the incurrence of cost—to improve their opera-
would feel this is unfair and inequitable. This is tions. They use their improved understanding of
similar to the effect on the calculated cost of their cost structure, which is now more highly vis-
many products and service lines in a traditional ible, to proactively manage their resources to
cost accounting system where the accountants enhance the key elements of value from their
take a large amount of indirect expenses and customers’ perspective. (For more information,
allocate them as costs without any logic. There see IMA’s Statements on Management
is minimal or no relationship to how the products Accounting (SMAs) Implementing Activity-Based
or service lines uniquely consumed the expens- Management: Avoiding the Pitfalls and Tools and
es. This likely results in distorted product costs. Techniques for Implementing ABC/ABM.)
ABC avoids this problem. In the restaurant exam- Organizations involved in business process
ple, ABC is equivalent to the server providing reengineering, quality improvement, and lean
four individual checks—each patron is charged management initiatives use both the financial
for what he or she individually consumes. and nonfinancial insights from ABC as a
measurement system.
Many organizations have evolved beyond using
ABC solely for obtaining more accurate and rele- II. SCOPE
vant costing information. For these companies, This SMA provides an overview of the approach
the emphasis has shifted from ABC to ABM— to designing and implementing an ABC system.

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The principles contained in this SMA are applica- labor, the purchase cost of merchandise
ble to any organization, regardless of size or resold, or the number of days occupied.
industry. It provides those considering implement- These are broad averages that do not
ing an ABC system with information regarding: reflect causality for the indirect expenses.
● The roles and responsibilities of management The problem is that use of these alloca-
accountants in ABC projects; tion methods results in allocations that
● The need for behavior change management vary with changes in the allocation basis.
when implementing an ABC system; ABC systems recognize that individual
● How to design and implement an ABC system; products or customers do not consume
● How to plan an ABC project implementation; indirect expenses in those proportions.
● How to ensure sustainability of an ABC system; Instead, they focus on the work activities
and of people and equipment required to pro-
● How to evaluate ABC software. duce each product or provide each ser-
vice, and their consumption of each of
The information in this SMA will enable the read- those activities.
er to design and implement a sustainable ABC
system that provides a greater understanding of As an example of the cost distortion from apply-
product and customer costs, business process- ing broadly averaged overhead rates, consider a
es, and work activities. This understanding pro- semiconductor plant that once calculated its
vides an organization with the means for making product costs by taking direct labor and direct
better business decisions. material and then added 1600% of these costs
as an allocation of overhead costs. Compared to
III. DEFINING ABC this standard cost allocation method, however,
Traditional costing methodologies and ABC differ the company’s various products consumed the
in the following way: overhead very disproportionately. The result was
Traditional cost accounting techniques product cost distortions of over 500% relative to
allocate indirect expenses to products the organization’s beliefs. The profitability of the
(and to any cost object) based on charac- company’s various products and services was
teristics of a single allocation factor that very different from what it believed to be the
is typically not causally related to the type case.
and level of work consumed.1 Traditional
cost allocation factors include the num- ABC traces indirect costs (commonly called
ber of direct labor hours required to man- “overhead”) to products, services, and cus-
ufacture a unit, the cost of that direct tomers by identifying resource and their costs,
the consumption of these resources by activi-
1 A cost object is a function, organizational subdivision, con- ties, and the performance of activities to pro-
tract, product, or other work unit for which cost data is desired
and for which provision is made to accumulate and measure duce output. Examples of resource expenses are
the cost of processes, products, jobs, capitalized projects, salaries, operating supplies, equipment depreci-
etc. Intermediate cost objects are internal to a company,
while final cost objects are products, standard service lines, ation, and electrical power. They represent the
or the cost-to-serve customers that generally touch external capacity to perform work.
entities. Organizational sustaining final cost objects are those
not caused directly by suppliers, products, channels, or cus-
tomers. Senior management and regulatory bodies are exam-
ples. Cost objects can be thought of as for what or for whom
work is done.

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ABC gives visibility to work activities and their which they have a vested interest in maintain-
costs. Activities are a group of tasks in the same ing—is most likely producing inaccurate and mis-
function that are governed by the same driver leading costing information. It is essential that
and same intensity of resource consumption. adequate communication take place to demon-
The activities performed by an organization are strate to the accounting staff that a better alter-
identified using activity analysis. This involves native exists—one that provides operational-
determining what activities are done within the relevant information and enhances the quality of
department, how many people perform the activ- the information they provide to managers.
ities, how much time they spend performing the
activities, what resources are required to per- Management accountants can perform an impor-
form the activities, what operational data best tant role in the design of an ABC system. Based
reflect the performance of the activities, and the on their skills and training, they can help identify
value of the activities to the organization. what is appropriate for analysis (product, cus-
tomer, process, etc.) and explain the probable
With ABC, resources are traced to activities causes of an existing cost system’s deficiencies.
using resource drivers; these are used to calcu- In addition, based on their detailed knowledge of
late the cost of each activity that consumes the the information in their company’s costing infor-
resources. Activity costs are then traced, using mation systems, they are uniquely qualified to
activity drivers, to each product or service (i.e., judge the level of aggregation appropriate to the
cost object) that consumes a given activity. This ABC costing system. They can use their under-
is done by determining how many units of activi- standing of costing methods to recommend
ty output each cost object consumed during any appropriate methodologies for the assignment of
given period of time. (The topic of “drivers” can costs to activities and cost objects. Finally, they
be confusing; definitions and examples of “driv- will be able to use their understanding of the
ers” will be discussed in Section VII.) information and cost relationships to support
the system once it is implemented.
ABC originated in the manufacturing sector, but
subsequent implementations by organizations in A few notes of caution and a qualifier: ABC cal-
virtually every sector of the economy have culates historical costs to provide insights,
demonstrated its universal applicability. For understanding, and focus. ABC is basically full
example, many governmental units and compa- absorption costing but without violating rules of
nies in the financial services industry now use causality as is typically done with traditional cost
ABC systems to determine customer profitability. allocations of indirect expenses. But decisions
impact the future. To validate the expected finan-
I V. T H E R O L E O F T H E cial impact of a decision, one should apply man-
M A N A G E M E N T A C C O U N TA N T agerial economics that involve marginal cost
As with any new management technique, buy-in analysis that classifies the behavior of expenses
from the executive team is crucial to the imple- with respect to changes in mix and volumes as
mentation of an ABC system. Also essential is being variable, semi-variable, step-fixed, or fixed
the support of an organization’s management (or include that capability in the ABC model).
accounting staff. These professionals need to Such analysis should also distinguish the differ-
understand that their existing costing system— ence between capacity provided and capacity

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used and consider the presence of unused and ABC does not calculate the multi-period costs
available capacity. Full absorption costing in an across a life cycle, but its cost snapshots during
ABC context does not mean that 100% of a peri- each period can be used as inputs for life-cycle
od’s expenses are traced to customer-related costing.
products, services, and channels. Costs not
related to customers, including unused capacity V. I M P L E M E N T I N G A B C
expenses, are ideally traced to a final cost object I N VO LV E S B E H AV I O R A L
called “business sustaining costs” (described in CHANGE MANAGEMENT
Section VII). As with any new management technique or tool,
an effective change management process must
When the impact of decisions are less obvious be in place before implementing an ABC system.
and require validation, marginal cost analysis An objective of this process should be to ensure
methods (such as resource consumption that there is support for the system at all levels
accounting and activity-based resource planning) of an organization. This includes having a top-
or capital investment analysis using discounted level manager to champion the initiative, as well
cash flow (DCF) should be applied. With ABC, as acceptance by lower-level managers. The
marginal cost analysis and capital justification acceptance by these later managers often can
techniques apply various versions of past period be obtained by demonstrating that in most cases
costs that can be layered according to which the existing cost accounting system produces
resource expenses are to be included or exclud- distorted, and thus misleading, information. This
ed depending on the type of decision being made distortion often arises because an existing cost-
and the planning horizon. Determining which ing system does not reflect the increasing com-
expenses to include or not in decision analysis plexity of an organization and the products and
can be judgmental, such as the cost of unused services it offers. By implementing a costing sys-
capacity. This SMA addresses how to more accu- tem that reflects that complexity—and provides
rately calculate what something costs today and the operational information necessary for man-
gives insight as to what expenses may be aging a company’s operations—managers can
required in the future based on various forecasts. see the increased relevance of the information
It is the role of management accountants to provided for managerial decision making and
determine which assumptions to make as they enhanced performance management.
support their organization in decision analysis.
The change management process needs to
Another caution about limitations of ABC data specifically address the “people” issues that will
involves life-cycle costing. The descriptive view of arise in the implementation of the new costing
ABC typically covers a time period such as a system. This includes addressing commitment
month, quarter, or year. Products and customers, to the existing system that various managers
however, pass through life cycles. ABC may may have, and their reluctance to change. It is
measure unusually high product costs during a also important to address the effect of the new
product’s early stages, when it requires attention system on performance measurement and com-
to stabilize production. The product may appear pensation systems. New performance metrics
unprofitable today but be profitable in the future may need to be devised, or existing ones
as those costs subside. The lesson here is that revised, based on information obtained during

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the ABC system implementation. An example of ed from below 1 to above it (and very likely well
an effect of reporting the “new” cost data from above it).
ABC is the shift in costs among products. Some
products that were effectively subsidizing others One ABC implementation technique introduced
will now be reported with lower costs and higher in the 1990s that radically accelerated the time
profit margins. The opposite effect will occur with to implement ABC, improved the ABC model
other products, which will now show lower profit design, and minimized the risk that a project may
margins or even losses. run into problems caused by excessive detail
and complexity is called ABC rapid prototyping
Effective communication—at all levels of an with iterative remodeling. This technique
organization—of the need for change is essen- assures that the denominator in the benefits to
tial. An organization needs to communicate the cost ratio is kept small. It also raises the numer-
deficiencies of its existing costing system, the ator by revealing more unrecognized benefits.
effect of this distortion on managerial decision This approach is discussed in Section XII. ABC
making, how ABC costing principles can be used rapid prototyping can lead to a production ABC
to provide information that is more relevant for system being created in weeks, not years, and
managerial decision making, and the effect of with minimal support.
the new system on the evaluation and rewarding
of individual employees. Communication is a VI. PLANNING FOR AN ABC
two-way process, and employee concerns need I M P L E M E N TAT I O N
to be addressed. A guiding principle for an ABC initiative is to work
backwards, keeping the end in mind. Have a com-
Implementation of an ABC system needs to be pelling reason to reform the existing cost system.
justified on a cost-benefit basis, just as with any Know a type of decision or analysis the ABC sys-
other investment. Yet the value of having better tem will improve. In this way, an ABC implementa-
decision-making information can be difficult to tion is no different than implementation of any
measure—more so than, say, the benefits from other project: before you start, you need to know
an investment that is more tangible, such as the what you expect to be the final outcome. By fol-
purchase of a piece of machinery. The key is that lowing this principle, an organization can help
the benefits from having the improved costing ensure that the ABC system it ends up with has
information exceed the extra administrative been designed to meet its specific needs, and
effort to produce it. That is, the following equa- not those of some generic organization.
tion must be satisfied:
Numerous approaches can be taken when
Incremental benefits
Incremental administrative cost >1 designing and implementing an ABC system.
There is no generic approach that is universally
appropriate. In order to obtain “proof of con-
By demonstrating that the equation’s numerator cept,” many companies, especially larger ones,
is much higher than people realize and that the initially implement ABC using a pilot project
denominator can be kept low by being practical approach, where a segment of the organization
(e.g., using estimates and only minimal extra is selected for implementation of ABC costing
data collection), the perceived ratio can be shift- concepts.

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The pilot project can be implemented using actu- If the initial approach is a pilot ABC study of a
al revenues and expenses. If the main goal is to single department or process, then the organiza-
gain buy-in for ABC, budgeted or planned rev- tion should be cautious in that pilots address
enues and expenses may be used, but budgets only a subset of an organization’s activities.
and forecasts may be substantially different than Such an approach faces the danger of overlook-
actual results. Continuing with the pilot imple- ing activities or costs from departments, cost
mentation, activities and their interrelationships, centers, and functions in the organization not
cost drivers, and volumes are identified. Cost being studied. Activity analysis across multiple
attachment points are identified, and activity departments, and, ideally, organization-wide, is
costs are calculated. The consumption of activi- preferred by process consultants. Also, compari-
ties by cost objects (such as products or cus- son of the shift in product costs of the existing
tomers) is identified, and the drivers and vol- costs to ABC costs cannot be done validly by
umes identified. The successes of the pilot proj- including only a few departments or attempting
ect can also be used to validate the business to focus on only one or a few products.
case for implementing ABC company-wide and
provide “lessons learned” for subsequent rollout Various questions need to be addressed in the
of the methodology. design and implementation of an ABC system.
One of these relates to ownership of the ABC sys-
An organization can also opt to fully implement tem. While management accountants will calcu-
ABC from the start. In this case, the ABC rapid late the ABC information, in many cases it is
prototyping with iterative remodeling approach is desirable for the system to be “owned” by others.
strongly recommended. The structure of the ABC
rapid prototyping approach is similar to that The ownership of an ABC system should be con-
used in the pilot approach, but it includes more sistent with its primary objective. If, for example,
areas (ideally, the entire enterprise), more data, improving operations is the primary objective of
and more analysis. By exposing managers (for the system, it is best placed under the control of
which it is important to select advocates and operating personnel. Giving this area ownership
avoid nay-sayers or those who may feel threat- of the system instead of the accounting depart-
ened) to the quickly produced preview of the ment will help ensure that the system is used
reformed costs, buy-in will occur. Use of this and maintained properly. In practice, however,
approach enables an organization to achieve a this is often a challenge because the accounting
new awareness of cost system design through- department’s role historically has been to col-
out the organization, giving it the ability to rapid- lect, validate, and report accounting information
ly adopt these systems and use the enhanced and then analyze it. The result is that the
information to improve its performance. People accounting department typically ends up main-
do not know what they do not know. As these taining the ABC model.
models are iteratively scaled, managers will see
more outcomes that will stimulate what they Another issue that needs to be addressed is the
want to analyze. Seeing results accelerates this complexity of the system. In designing a costing
learning process. system, there is a trade-off between the cost of
the system and the detail, accuracy, and flexibil-
ity of the system. A guiding principle of ABC is

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that the level of detail and accuracy depends on accounting and becomes a primary source of
what decisions will be made with the information. information for improving business processes
The quest for precision is expensive. Ninety-nine and forward planning. Organizations use the
percent accuracy is not required. Those who have information as the basis for activity-based man-
completed an ABC implementation and look back agement (ABM); they use the understanding of
to compare their previous cost system’s inaccu- their activities and their cost drivers to improve
rate and flawed costs to their new, more substan- their processes and enhance their customers’
tially correct costs appreciate why the ABC com- satisfaction. In such cases, data collection is
munity proclaims, “It is better to be approximate- adjusted to meet the requirements of the ABC
ly correct than precisely wrong!” Reasonable system. The general ledger chart of accounts,
accuracy, produced economically, is usually “good cost center structure, inventory/cost of sales
enough,” particularly in light of the inaccuracies accounting procedures, interdepartmental
from an existing cost system. In general, systems charges, accounts payable and payroll cost distri-
that support strategic decision making use more bution practices, financial and management
aggregated data than those used for more opera- reports, or other cost-related facets of the
tional decision making. The need for additional accounting system remain untouched. ABC sim-
accuracy is a long-term issue to be analyzed ply repurposes the transactional information.
based on evolving business needs, and it may be Section XIV discusses commercial ABC software.
addressed as the model evolves. In some cases, In that section, the removal of interdepartmental
data collection can be scaled back as accuracy charges from the general ledger and their
requirements and the magnitude of expenses are replacement with proper activity-based costs is
better understood. described.

The question as to whether to integrate the ABC VII. INITIAL DESIGN OF THE
system with the financial accounting system is ABC SYSTEM
also an issue. ABC systems can be integrated An ABC system can be viewed in two different
into the financial accounting system or exist as ways: the cost assignment view and the process
stand-alone systems. In many organizations, a view. The cost assignment view provides infor-
well-designed, periodically updated ABC model mation about resources, activities, and cost
(e.g., quarterly, semiannually) is sufficient for objects. The process view provides operational
decision-making needs. An offline ABC imple- (often nonfinancial) information about business
mentation enables these organizations to obtain processes and the activities that belong to them.
improved costing information without disrupting These two views of ABC can be visualized as pic-
day-to-day information system activities. This tured in Exhibit 2.
approach to ABC modeling is especially appropri-
ate for small and mid-sized organizations. It can The cost assignment view of ABC can be seen in
also serve as a first step toward implementing the vertical portion of Exhibit 2, while the
ABC in larger organizations. process view is represented by the exhibit’s hor-
izontal portion. Work activities in the intersection
In situations where ABC is fully integrated into an are essential for both views. For purposes of
organization’s management information sys- measuring costs, the difference is:
tems, it goes beyond the traditional role of cost

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EXHIBIT 2. THE ACTIVITY-BASED COST MANAGEMENT FRAMEWORK
(THE CAM-I CROSS)

Cost Assignment View (ABC/M) What Things Cost

Resources
Resource
Drivers
Resource Driver
Assignment

Cost Measure and
Process
View Drivers Activities Manage
Processes

Activity Driver
Assignment
Activity
Final Cost Drivers
Objects
(Outputs)
Better
Why Things Decision
Have Cost Making
Source: Adapted from CAM-I

Source: Adapted from CAM-I.

● The cost assignment view transforms the comes from its measurement of the costs of the
expenses of resources (e.g., salaries, supplies) diverse types of outputs (cost objects) and the
into the costs of the work activities (for both driver-based consumption of activities they
people and assets) and ultimately into the final cause.
cost objects (e.g., products, customers).
● The process view sequences the work activi- The term “drivers” can be confusing. Resource
ties in time and accumulates the build-up of drivers for employees reflect the time they spend
activity costs from start to end of a business performing work activities. Resource drivers for
process. indirect material purchased items reflect their
usage by an activity, such as energy expense’s
More about the distinction between these two kilowatts by a machine. Activity drivers are a
views is contained in Section XI, which describes measure of the output of an activity. For exam-
the process/value stream mapping that ABC ple, for the customer-related work activity, “pro-
information can supplement. The emphasis of cessing a sales order,” the activity driver would
ABC is typically on the cost assignment view. be the number of sales orders processed. A cost
Although ABC is the acronym for activity-based object driver is where a final cost object con-
costing, much of the utility from its information sumes a mix of another final cost object, such as

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EXHIBIT 3. EACH ACTIVITY HAS ITS OWN ACTIVITY DRIVER
From: General Ledger To: ABC Data Base To: Cost Objects

Chart-of-Accounts View Activity-Based View
Claims Processing Department
Claims Processing Department
Key/scan claims $ 31,500 #of—
Favorable/ Analyze claims 121,000
Actual Plan #of—

Products/Customers
(unfavorable)
Suspend claims 32,500 #of—
Salaries $621,400 $600,00 $(21,400)
Receive provider inquiries 101,500 #of—
Equipment 161,200 150,000 (11,200) Resolve member problems 83,400 #of—
Process batches 45,000 #of—
Travel expense 58,000 60,000 2,000 Determine eligibility 119,000 #of—
Make copies 145,500 #of—
Supplies 43,900 40,000 (3,900)
Write correspondence 77,100 #of—
Use and Attend training 158,000 #of—
occupancy 30,000 30,000 ------
Total $914,500 $880,000 $(34,500) Total $914,500

$914,500
Resource
Activity
drivers drivers

Source: Gary Cokins.

when a customer purchases a mix of products. ers are generally cross-functional, they often
The costing principle for selection of all drivers is point to areas of improvement. While cost driv-
that the level of costs incurred should vary ers often are not quantifiable, they often provide
directly with quantity of the driver. the “why” when looking at ABC results.

The term cost driver can be ambiguous. It is The cost assignment view has evolved from the
more general than the driver types just two-stage ABC approach of the early 1980s to a
described. It can be described in words but not multiple-stage approach. We will first discuss the
necessarily with quantitative measures. For two-stage approach to appreciate some funda-
example, a severe storm is a cost driver that will mental principles of ABC, and then discuss the
cause insurance claims to be processed. One multiple-stage approach.
cannot easily measure a storm’s intensity, but
you can measure the number of claims Two-Stage ABC Approach
processed that resulted from it. ABC restricts Exhibit 3 illustrates the two-stage ABC approach.
itself to only measurable resource, activity, and Sub-accounts of the general ledger are distrib-
cost object drivers. Cost drivers are typically uted to the various activities in the appropriate
examined in ABC analysis. They are linked to proportions using what were originally called first-
processes or activities to stimulate discussion stage cost drivers and now are referred to as
about impact or potential impact. Since cost driv- resource drivers. The costs accumulated in these

10
STRATEGIC COST MANAGEMENT

activities are then distributed to cost objects activities that make up the sequential steps that
using what were initially called second-stage comprise a process. Again, the general ledger
cost drivers but are now called activity drivers. cost center report is structurally deficient to do
For example, costs such as unemployment insur- this. It has been said that when cost center man-
ance and equipment maintenance might be allo- agers receive their monthly reports comparing
cated to activities based on labor cost and actual to budget (or planned) spending, they are
equipment hours, respectively, based on either happy or sad, but rarely are they any
resource drivers. Costs accumulated in the vari- smarter! ABC information makes them smarter.
ous activities are then reassigned to products A more stinging commentary on the general
using activity drivers such as the number of ledger-based report is that it is at best useless
equipment setups, orders, purchase orders, (except for collecting transaction data) and at
equipment run minutes, direct labor hours, and worst leads to dysfunctional and misleading
so forth. decisions. The data needs to be transformed
into meaningful costs that reflect cause and
The left-side box in Exhibit 3 is the monthly cost effect behavior.
center spending report. An important reason as
to why ABC is being adopted is the realization Note the total expenses and costs are equal in
that, in this cost center, the responsibility report the resource, activity, and cost object views; they
using chart of account elements, such as must reconcile. The important message here is
salaries and supplies, is structurally deficient in that the general ledger’s view of the chart of
its ability to transform expenses to calculated accounts only answers what was spent. By trans-
costs. This is a strong statement. But it is not forming expenses into calculated costs in the
until the ledger expenses are restated in differ- next two views in Exhibit 3, there are more valu-
ent format—as activity costs—that the activity able and useful answers regarding why it was
drivers can be attached to activity costs in order spent, what caused the rate of it to be spent,
to reassign them to the activities’ outputs in pro- and for whom or what it was spent.
portion to their consumption of the resources.
This problem is compounded as companies flat- Multiple-Stage ABC Approach
ten and de-layer their organizations. Employees The multiple-stage approach represents an
from cost centers flexibly multitask, often work- advancement in ABC modeling. Rather than sim-
ing jointly on common activities, making the trac- ply tracing the cost of resources to activities and
ing of cost to products (or other cost objects) then to cost objects, the multiple-stage approach
more difficult, especially when using a traditional models cost flows in a manner that more close-
costing methodology. ly reflects the actual flow of costs through a
organization. This approach includes an under-
In other words, for business process owners— standing of the relationships between indirect
those individuals responsible for the perfor- work activities and other activities, as well as
mance of business processes that cross multi- between those activities and cost objects. Costs
ple cost centers—to see the costs of their are traced from activity to activity in a series of
processes, activity costs must first be translated stages, all based on cause-and-effect relation-
from expenses classified based on the general ships. (To simplify the size of the ABC model,
ledger. They must be reassembled based on the some organizations use the concept of resource

11
STRATEGIC COST MANAGEMENT

EXHIBIT 4. MULTI-LEVEL COST ASSIGNMENT FLOW

Resource Expenses Cost-driver Table
Resources
($70)
$10 $10 $30 $10 $10
Support $15
activities Resource *Inter- Final activity
$10 drivers mediate drivers
$30
drivers
Activities $5
*Intermediate activity drivers reassign
Direct Product Customer each activity’s cumulative input costs
Material $10 activities $15 activities $20 plus its own cost.

$10 $15 $20

Products Customers Business
Final cost $25 $25 $20 sustaining $25
objects
$45 $25

External Customers/Orders + Sustaining
Price $70
Source: Gary Cokins.

pools to accumulate similar expenses into cate- other activities based on the demand for those
gories before assigning them to activities.) activities, services, or resources.

For a manufacturing company, the activities “per- To some, this multiple-stage method of assigning
forming maintenance” and “operating the tool expenses may appear to be the traditional step-
room” will accumulate the costs directly related down cost allocation method of full absorption
to those activities. (Note that activities are best costing. ABC is more granular, however, tracing
described using an action-verb and noun gram- costs at the activity level and not at a depart-
mar convention.) Under the two-stage approach, ment level. The allocation of expenses at a
an activity (or second-stage) driver would be department level induced errors because it
used to allocate the costs of these activities restricted the allocation basis of those costs to
directly to cost objects. The multiple-stage a single activity driver. As a rule, all assignments
approach differs in that it recognizes that the in ABC are based only on usage and consump-
maintenance activity is not directly consumed by tion. If an activity does not use part of a
the final cost objects. The maintenance activity resource, it is not allocated any of that
supports other activities (including some activi- resource’s costs.
ties of the tool room). In general, an activity may
directly support both final cost objects and other Activity-to-activity cost assignments and an
activities; the latter are called intermediate cost entire enterprise-wide view of an ABC cost
objects. The costs accumulated in those activi- assignment network are illustrated in Exhibit 4,
ties are distributed to either final cost objects or where $70 of resource expenses are fully

12
STRATEGIC COST MANAGEMENT

absorbed as calculated costs into customer and tomers. ABC measures and detects this type of
business sustaining cost objects (the latter not-so-obvious relationship.
being traced mainly to senior management).
Note how the $30 of support activities is traced Exhibit 4 also shows that some final cost objects
to three other types of activities, which are then (e.g., the $25 of product costs) can be con-
traced to products, customers, or business sus- sumed by other final cost objects that use them.
taining cost objects. For example, customers consume (i.e., pur-
chase) uniquely different “baskets” of products
Business sustaining costs ($25 in Exhibit 4) are or services. In this example, the products are
activity costs not caused by making products or traced using “cost object drivers,” such as the
delivering services to customers. The consump- number of products purchased. Other examples
tion of these costs cannot be logically traced to include the type of order (e.g., special vs. stan-
products, standard service-lines, channels, or dard) or type of sales channel (e.g., truck vs. rail,
customers. (They can be arbitrarily allocated, but human bank teller vs. an ATM machine).
not with a causal relationship.) Examples include
the monthly “closing books” activity of the Also note that in the exhibit, the price for prod-
accounting staff and “file government regulatory ucts and service-lines enters as revenues only
papers” activity of the legal staff. The cost of after all of the costs have been assigned. A price
these activities should be traced to senior man- cannot be distinguished as to whether it is for
agement and the regulatory agency, respectively, the product or cost-to-serve costs (unless it is
as business-sustaining cost objects. While it is unbundled separately as a fee). This property
true that the business must recover these costs provides the insight that layers of profit contribu-
with its revenues, the point is that allocating tion margins (i.e., the profit and loss statement’s
them to products or customers is misleading bottom lines, not top lines) can be reported as
and would overstate their costs, sending the the various work activities ultimately are traced
wrong signals to employees who use product logically and causally to customers. It must be
cost information for decision-making purposes. understood that ABC deals with cost. Pricing is a
management decision that typically is market
The cost of customer activities is often called based. What ABC provides is a much more accu-
the “cost-to-serve.” These activities not only rate “middle” line so that the profit margin,
include examples such as processing sales derived from sales less traceable costs, can be
orders, call center assistance, and handling made more visible.
returned items, but also the sales force’s activi-
ty “making sales calls.” This last activity may Exhibit 5 disaggregates and expands Exhibit 4 to
appear odd since the customer may not initiate reveal a generic ABC structure that is a good rep-
a sales call, but the purpose of ABC is to meas- resentation of any universal costing model for
ure how much effort goes into work and where any organization. Note that direct material
that work is consumed. An important or difficult, expenses are sometimes traced directly to prod-
high-maintenance customer may consume sub- ucts. A more common modeling practice is to
stantial sales-call-related costs. These costs have direct material expenses “touch” a “pass-
may be a greater proportion of the customer’s through” intermediate cost objects in the Activity
revenues than smaller, less demanding cus-

13
STRATEGIC COST MANAGEMENT

EXHIBIT 5. ABC COST ASSIGNMENT NETWORK
Salary, Fringe Direct Phone, Rent,
Resources Benefits Material
Travel
Supplies
Depreciation
Interest, Tax
(general ledger)

Direct Material
Support
Activities

Work
People
Activities Activities

“cost-to-serve”
paths

Final
Cost Products
“Costs Measure the Effects”

Costs (2)

Services
Objects
(1) Demands on Work

Business
Suppliers Sustaining

Customers

Source: Gary Cokins.

view so that the three cost views equate in terms heads in Exhibit 5. This polar switch reveals that
of total costs (e.g., they all equal $70 in all expenses originate with a demand-pull from
Exhibit 4). customers. The calculated costs simply measure
the effect. Costs are always a measure of
To understand Exhibit 5, imagine the cost assign- effect—a basic principle in costing.
ment paths (the arrows) as pipes or straws
where the diameter of each path reflects the With integrated ABC software, the direct costing
amount of cost flowing. The power of an ABC of indirect costs is no longer an insurmountable
model lies in the fact that the cost assignment problem, as it was in the past. (Commercial ABC
paths and their destinations provide traceability software is discussed in Section XIV.) ABC allows
to segment costs from beginning to end, from intermediate direct costing to a local process, an
resource expenditures to each type of (or each internal customer, or a required component that
specific) customer—who ultimately are the origin is causing the demand for work. In short, ABC
for all costs and expenses. The cost assignment connects customers to the unique resources
network captures and reflects the diversity and they consume—in proportion to their consump-
variation in how cost objects uniquely consume tion. Visibility to costs is provided everywhere
resources and activities. To understand costing, throughout the cost assignment network.
it is useful to mentally reverse all the arrow-

14
STRATEGIC COST MANAGEMENT

EXHIBIT 6. PROFITABILITY PROFILE USING ABC—“PROFIT CLIFF”

$ 30.0 sales
– 28.2 expenses
= $ 1.8 profits

Cumulative Profit (Millions)
$8

$6
Net
Revenues
Minus $4
ABC Costs Unrealized profit revealed by ABC
$2
$1.8 profit

$0
Specific Products, Services, and/or Customers
Misleading profit data (ranked most profitable to least profitable)
from traditional cost
allocations.
Source: Gary Cokins.

V I I I . S T R AT E G I C V S . Strategic Cost Management
O P E R AT I O N A L C O S T After implementing ABC, organizations typically
MANAGEMENT experience shock. Their erroneous beliefs
There are two broad purposes for using manage- regarding the true profitability of their products,
ment accounting information: channels, and customers produced by the flawed
● Strategic cost management—to determine the and misleading costs of traditional costing have
right things to do, i.e., selecting the correct been replaced by knowledge of their true costs.
processes, suppliers, products, channels, and
customers. ABC reveals which products are over- or under-
● Operational cost management—to perform well costed, exposing the magnitude of sources of
on those things identified as strategic, improve profits and losses. Exhibit 6 presents a typical
productivity, and remove waste. scenario. This diagram is popularly called a
This section discusses both forms of cost “profit cliff.”
management.

15
STRATEGIC COST MANAGEMENT

Insights gained from answering questions that the unused capacity created must either be
are stimulated from analyzing the “profit cliff” filled with new, profitable orders, shifted to per-
are examples of strategic cost management. The form value-added work elsewhere, or altogether
insights can address rationalizing which prod- removed (e.g., closing an operation or terminat-
ucts, channels, and customers to develop, ing employees). The resource cost of freed up
acquire, grow, retain, and improve—and which unused capacity created by dropping unprof-
ones not to. But an organization must be careful itable products or customers should not be
not to improperly conclude what actions to take reassigned in the ABC cost assignment network
when analyzing ABC data. Ultimately, manage- to existing products or customers. They did not
ment accounting, including ABC, is a methodolo- cause it. It should be traced to a business sus-
gy for discovery and focus. Better management taining final cost object, “Unused Capacity.”
accounting does not provide all the answers. It Failure to assign expenses in this way results in
does not answer questions directly, but rather it over-costing the existing products and cus-
allows more and better questions to be asked. tomers, giving the illusion they have become
less profitable and, therefore, are new candi-
Here are three problems from reacting to ABC dates to drop. This has been referred to as the
data prematurely: “overhead death spiral.” Inappropriate deci-
● It must be recognized that measuring the costs sions to drop more products or customers due
and profits during a time period such as a to prior period removals, sometimes blamed on
month or quarter does not recognize the costs the use of ABC, is a result of flawed cost assign-
and profits of individual products, service lines, ment assumptions.
and customers during their entire life cycle.
Hence, servicing an apparently unprofitable Cost management must always be done in the
product or customer today may be done with the broader context of performance management,
intention of developing a very profitable one in which adds the dimensions of time, quality, risk,
the future. Life-cycle profitability must also be service levels, and other strategic goals to maxi-
analyzed (and ABC unit costs are essential for mize value from existing customers and potential
such an analysis). new ones.
● In some cases, a business will deliberately sell
some products at a loss to promote purchases Operational Cost Management
of other more profitable ones. Similarly, some Exhibit 7 illustrates how the activity costs (with
unprofitable customers may be retained or pur- each activity initially traced from its resource
sued to retain or attract profitable customers expenses) from Exhibit 6 are assigned to each
with which they have referral relationships. cost object and then summed or “stacked.” In
Retention of these customers is a management Exhibit 7, a product’s true cost is more than its
decision, but it is important to understand how price, creating a loss during that period. This is
much these customers are “costing” the firm. represented by the descending products located
● Abandoning unprofitable products and cus- on the right-hand side of the profit cliff depicted in
tomers reduces activity costs but not the Exhibit 6.
expenses of the resources—it merely frees up
capacity in those resources. To realize a profit Managers and employee teams are seeking more
impact from dropping products or customers, transparency and visibility of their costs. Having

16
STRATEGIC COST MANAGEMENT

EXHIBIT 7. FULLY TRACED COSTS TO A COST OBJECT
ABC provides insight for the product’s or service’s cost drivers and
driver quantities. Work
Activities
$

$ loss
each activity’s
$ driver quantity
X
unit activity
driver cost
(e.g., # of registrations)

Price/Fee Activity
(Revenue) Costs
Source: Gary Cokins.

reliable unit costs of their outputs of work using problem that requires an “inspection” in the first
ABC is useful for benchmarking best practices or place).
to report trends when measuring performance
improvement. Exhibit 7 visualizes how this need These three items are examples of how ABC
is met. It removes the illusion that overhead data leads to operational cost management.
costs are necessary and, therefore, appear to be Note how these actions support the continuous
free when in fact they are not. The exhibit also improvement principles of the Six Sigma quality
indicates that the costs of a cost object can be and Lean management initiatives that are
reduced (i.e., lowering the “stack”) by: embraced by the operations and quality commu-
● Reducing the quantity, frequency, and/or inten- nities. There is further discussion of
sity of the activity driver (e.g., a fewer number process/value stream mapping to improve oper-
of inspections reduces the “inspect product” ations and quality in Section XI.
activity cost).
● Lowering the activity driver cost rate from pro- ABC Attributes
ductivity improvements (e.g., shorten the time There is an added bonus to using ABC with com-
for each “inspect product” event). mercial ABC software. It can report another
● Understanding the sources and causes of dimension of costs—the “color of money” spent.
waste leading to nonvalue-adding activities to It applies cost attributes, usually to an activity, by
reduce or eliminate them (e.g., solve the tagging or scoring it with a code. This dimension
of cost does not exist in general ledger account-
ing systems because attributes are tagged to

17
STRATEGIC COST MANAGEMENT

activities or to cost objects, not to resource higher profits using “profit margin management”
expenses. techniques or, if that is not possible, they need
to be “fired.”
An example of a tag would be whether an activi-
ty adds value (value-adding) or not (nonvalue- If two customers purchased the exact same mix
adding). Another example is the five “cost of of products and services at the exact same
quality” (COQ) categories of work, which prices during the exact same time period, would
increase sequentially in their severity: error free, both customers be equally profitable? Of course
prevention-related, appraisal-related, internal fail- not. Some customers place standard orders with
ure work, and external work. Attributes do not no fuss, whereas others demand nonstandard
alter the cost of anything calculated by ABC, but everything, such as special delivery require-
they facilitate grouping activity costs into various ments. Some customers just buy your standard
categories that in turn help focus management product or service line, and you hardly ever hear
attention (e.g., nonvalue-adding costs) and can from them. Others you always hear from—and it
suggest actions. Commercial ABC software can is usually to change their delivery requirements,
keep track of a work activity’s attributes and inquire about expediting their order, or return or
trace it to cost objects. For example, one may exchange their goods. Some customers require
discover that the unit cost of delivering two sim- more post-sale services than others do. In some
ilar service lines is relatively the same, but one cases, just the geographic location of the cus-
service line consumes much more nonvalue- tomer makes a difference.
adding activity costs than the other. Presuming
operational improvements can reduce the What kinds of customers are loyal and prof-
nonvalue-adding costs, this means that one ser- itable? Which customers are only marginally prof-
vice line has a greater likelihood of having a itable or, worse yet, losing you money? Strategic
lower cost in the future. This could never be ABC is the accepted methodology to economical-
detected using the broad-averaged cost alloca- ly and accurately trace the consumption of an
tions of general ledger cost center reporting. organization’s resource expenses to the types
and kinds of channels and customer segments
I X . C U S T O M E R P R O F I TA B I L I T Y that place varying demands on the company. It is
REPORTING typical to find 10%-20% of your customers are
Some customers purchase a mix of mainly low- unprofitable; in some cases the percentage of
margin products. After adding the “costs-to- unprofitable customers is 40% or more, particu-
serve” those customers apart from the products larly with banks, where a minority of highly prof-
and service lines they purchase, these cus- itable customers carry less-profitable customers
tomers may be unprofitable to a company and to who have the potential to become profitable.
its extended value chain. Customers who pur-
chase a mix of relatively high-margin products Exhibit 8 decomposes the network of the ABC
may demand so much in extra services that they Cost Assignment Network’s final cost object mod-
also are unprofitable. How does one properly ule depicted in Exhibit 5. It displays two layers of
measure customer and supplier profitability? a “nested” consumption sequence of costs. A
After the less-profitable customers and suppliers metaphor for this consumption sequence is the
are identified, they need to be migrated toward predator food chain. The final cost object, which

18
STRATEGIC COST MANAGEMENT

EXHIBIT 8. ABC PROFIT CONTRIBUTION MARGIN LAYERING

SALARY & DIRECT CAPITAL NON-WAGE RELATED
MATERIAL (e.g., operating supplies)
RESOURCES
FRINGE BENEFITS (equipment-related)

RELATIONSHIP PURCHASES, *BRAND/PRODUCT- TRADE SHOWS, SALES CALLS,
MANAGEMENT RECEIPTS RELATED WORK,
MACHINES IMAGE ADVERTISING ORDER HANDLING,
*BRAND/PRODUCT- MAKE PRODUCT, FREIGHT WORK
RELATED ADVERTISING MOVE PRODUCT, ACTIVITIES
& MERCHANDISING SET-UPS # Sales calls
(examples)
# POs *FACILITIES COST # orders
# Receipts # shipments
FINAL
Facility costs COST OBJECTS

# Advertisements # Machine hours
SUPPLIER # Material moves SENIOR OSHA IRS
SUSTAINING MGT DOT
# Set-ups Etc.
Gvt. Regulators
ARBITRARY
UNIT & BRAND # Punds UNUSED
(for full absorption) R&D
Product-specific

BATCH SUSTAINING # Gallons CAPACITY
# Meters
LEVEL
# Shows
BUSINESS
# Advertisements
PRODUCT/SERVICE SUSTAINING
SUPPLIERS LINE SUSTAINING RELATED

SUPPLIER- CUSTOMER
UNIT &
RELATED SUSTAINING
BATCH
LEVEL UNIT & ARBITRARY
PRODUCTS/SKUs BATCH (for full absorption)
LEVEL
CUSTOMERS CUSTOMER-RELATED
PRODUCT & SERVICE LINE-RELATED

Source: Gary Cokins.

in this exhibit is the customer, ultimately con- some “shared” basis, such as sales unit-volume,
sumes all the other final cost object costs, with or be spread evenly.
the exception of the business sustaining costs.
As costs flow from one final cost object to anoth-
Each of the major final cost object categories er, each flow will consume the unique mix of the
(e.g., supplier, product/service line, and cus- upstream cost object. That is, an individual cus-
tomer) has its own “sustaining costs” that are tomer’s total costs (apart from its direct costs-to-
assignable to its end-product or customer. When serve) are inclusive of only the product quantities
tracing these “sustaining costs,” however, one and mix that it purchased. In the ABC cost assign-
cannot apply a measurable product- or customer- ment network, each product incurs its own activi-
specific quantity. For example, a product branding ty costs with a cause-and-effect relationship, not
program from the marketing department may ben- with an arbitrary indirect cost allocation. This
efit only a select group of products, but how much then creates layers of costs that produce many
of the branding cost should be charged to each profit margin layers.
specific product within the brand? Even though
there is no cause-and-effect relationship, these Exhibit 9 is an example of an individual customer
“product sustaining costs” can be traced using profitability statement. Using ABC, there can now

19
STRATEGIC COST MANAGEMENT

EXHIBIT 9. ABC CUSTOMER PROFIT & LOSS STATEMENT
CUSTOMER: XYZ CORPORATION (CUSTOMER #1270)

Sales $$$ Margin $ Margin
(Sales – oCosts) % of Sales
Product-Related
Supplier-Related costs (TCO) $xxx $xxx 98%

Direct Material xxx xxx 50% Product-
Brand Sustaining xxx xxx 48% related
Product Sustaining xxx xxx 46% costs
Unit, Batch* xxx xxx 30%

Distribution-Related
Outbound Freight Type* xxx xxx 28%
Order Type* xxx xxx 26%
Channel Type* xxx xxx 24% Customer-
related
Customer-Related costs
Customer-Sustaining xxx xxx 22%
Unit Batch* xxx xxx 10%

Business Sustaining xxx xxx 8%
8% Operating Profit
Capital Charge** xxx xxx 2%
(inventories, receivables) 6% Economic Profit
(for EVA)
* Activity Cost Driver Assignments use measurable quantity volume of Activity Output **Capital charges can also be directly
(Other Activity Assignments traced based on informed (subjective) %s) charged as imputed interest to products & cust.

Source: Gary Cokins.

be a valid profit and loss income statement for and cost of the work activities and materials
each customer and for logical segments or group- (“the bill of costs”).
ings of customers. A tremendous amount of
detail lies below and within each of these What does all this information reveal? First, it
reports. For example, individual product and ser- quantifies what everyone may already have sus-
vice lines can be examined in greater detail; they pected: All customers are not the same. Some
comprise a mix of high- and low-profit margin customers may be more or less profitable based
items based on their own unit costs and prices. strictly on how demanding their behavior is.
In other words, in a customer-specific profit and Although customer satisfaction is important, a
loss summary, the product or service-line profit longer-term goal is to increase customer and cor-
margin is reported as a composite average, but porate profitably. There must always be a bal-
details about the mix are viewable by “drilling ance between managing the level of customer
down” into the product mix information. In addi- service to earn customer satisfaction and the
tion, the user can “drill down” further within each impact that doing so will have on shareholder
product or service line to examine the content wealth. There is a difference between customer-

20
STRATEGIC COST MANAGEMENT

EXHIBIT 10. MIGRATING CUSTOMERS TO HIGHER PROFITABLITY

Very
Types of Customers
Profitable
High
(Creamy)

e
bl
ita
of
Pr

Product Mix
Margin

le
b
ita
of
pr
Low Un
(Low Fat)
Low High Very
unprofitable
Cost-to-Serve

Source: Gary Cokins.

focused and customer-obsessed. The best solu- the “composite margin” of what each purchases
tion is to increase customer satisfaction prof- (reflecting net prices to the customer), and the
itably. Because increasingly more customers will horizontal axis measures a customer’s “costs-to-
expect and demand customization rather than serve.” Exhibit 10 debunks the myth that the
standard products, services, and orders, under- company with the highest sales must also gener-
standing this balance is important. ABC data ate the highest profits.
facilitates discussions aimed at arriving at that
balance. Exhibit 10 also reveals that the objective is to
make all customers more profitable, graphically
There are two major “layers” of profit margin in the represented by driving them to the upper-left cor-
company profit and loss statement in Exhibit 9: ner. Although this is a partial list, making cus-
1. Mix of products and service lines purchased, tomers more profitable can be accomplished by:
and ● Managing each customer’s “costs-to-serve” to
2. “Costs-to-serve” apart from the unique mix a lower level;
of products and service lines. ● Establishing a surcharge for or re-pricing
expensive “costs-to-serve” activities;
Exhibit 10 provides a two-axis view of customers ● Reducing services;
with regard to these two major layers. Any single ● Raising prices;
customer (or cluster) can be located based on ● Increasing costs on activities that a customer
these two attributes. The vertical axis measures shows a preference for;

21
STRATEGIC COST MANAGEMENT

● Shifting the customer’s purchase mix toward An important element of a successful implemen-
richer, higher-margin products and service tation of ABC is training. Although it is not nec-
lines; or essary for management to become ABC experts,
● Discounting to gain more volume with low they must understand the need for ABC, its ben-
“costs-to-serve” customers. efits, and its key concepts. On the other hand,
members of the project team—those actually
An extreme action is to “fire” the customer— designing and implementing the system—do
terminate the relationship when one concludes it need to develop a thorough understanding of
will never be a profitable relationship. both the “hows” and “whys” of ABC. Because
ABC is as much an art as it is a science, it is not
Note that migrating customers to the upper-left enough to master the mechanics. The designers
corner is equivalent to moving customers from and implementers must comprehend the various
right to left in the profit profile in Exhibit 6. approaches and the levels of scope, accuracy,
Knowing where customers are located on the and detail that will result in the most cost-
matrix requires ABC data. Changes can be made effective system for their particular organization.
only by knowing the activity detail behind the Those who will be providing data input for the
numbers. system, both during its development stages and
its ongoing execution as a repeatable reporting
X. ABC PROJECT PLANNING system, must understand the significance of the
Once questions involving the initial ABC model data they provide.
design and construction are answered, planning
for the ABC project can move forward. Like any Finally, the system will not be effective unless its
major organization-wide systems project, a for- users understand the new information that ABC
mal project management structure and project provides. At some organizations, ABC will contra-
plan is necessary for an effective implementa- dict many of the beliefs about the organization’s
tion. The structure should include a steering costs and profit margins. For example, most
committee composed of upper management manufacturing firms have believed for decades
whose main role is to ensure that the ABC sys- that direct labor efficiency was the key measure-
tem is consistent with the organization’s busi- ment of productivity. Under ABC, many of these
ness strategy and needs and to ensure that firms found that direct labor may be an immate-
there is participation and cooperation from all rial component of the cost equation relative to
affected areas of the organization. The project indirect expenses, and focusing on direct labor
manager reports to the steering committee and efficiency drew attention away from important
is supported by a cross-functional team. The size issues. The project team must ensure that every-
of the team and level of involvement of the vari- one involved understands the new system’s out-
ous members would depend on the specifics of put and how it can best be put to use in improv-
the project. The important point is that all affect- ing the organization’s operations.
ed functions of the organization must participate
in the development and implementation of the X I . C O L L E C T I N G A B C DATA
ABC system in order to foster buy-in and commit- Two types of information are required for an ABC
ment throughout the organization and to improve project: conceptual and transactional.
its design. Conceptual information is needed to develop the

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STRATEGIC COST MANAGEMENT

overall design of the ABC system, and transac- a blanket purchase order? What activity costs
tional information is needed to simulate the cost comprise each, and what activity drivers cause
flows through the system model. Transactional each? In these cases, activities must be defined
information also serves as the raw data from more narrowly.
which to develop and validate some of the con-
ceptual information. Materiality will also impact activity aggregation
definitions. For example, an organization with
The goal of the data-gathering activity is to accu- only two individuals in the purchasing function
mulate the necessary information to: will not gain as much by dividing the function into
1. Identify the work activities performed by peo- 20 separate activities as will an organization
ple and equipment in the organization (for with 50 individuals.
both the cost assignment and process
views); 2. Identifying Elements of Cost
2. Identify the organization’s elements of cost Elements of cost are the expenses of the organi-
(for the cost assignment view) and perfor- zation’s resources, including labor salaries and
mance measures (for the process view); expenses of capital, machinery, buildings, mate-
3. Determine the relationships between the rials, supplies, equipment, and utilities. An orga-
various activities and elements of cost (for nization’s general ledger is typically the source of
the cost assignment view); and information about these cost elements, but it
4. Identify and measure the activity drivers that does not break those cost elements down by
determine the work load (for the process activity performed. That is why ABC reassigns
view) and cause accumulated activity costs those resource expenses into activity costs
to flow to other activities or to the organiza- using resource drivers.
tion’s products and services (for the cost
assignment view). 3. Determining the Relationship between
Activities and Elements of Cost
1. Identifying Work Activities The ABC system designer must assign the
Even a small organization can identify an almost expense data contained in the general ledger to
limitless number of activities. The work activity activities. This assignment is determined by the
identification exercise, however, should be guid- relationships between the various work activities
ed by materiality and the objectives of the ABC and the elements of cost. Mentioned earlier as
system. For example, if the objective is strategic an optional design, some ABC models first group
(e.g., product line profitability, pricing policies), similar expenses into categories or jobs, referred
the primary need is to accurately assign costs to to as resource pools. The elements of cost or
final cost objects. In such cases, activities can resource pools can be assigned to activities by
be broadly defined. If the intent is to improve assigning them in some directly measurable
operations (e.g., eliminate nonvalue-added manner (e.g., metering electric consumption,
processes), however, the need is for information charging maintenance via a work order, charging
about work activities and intermediate cost requisitioning activities for supplies) or through
objects. For example, in a purchasing depart- estimation (as determined through question-
ment, what is the difference between the unit naires and interviews).
costs of a special order vs. a standard order vs.

23
STRATEGIC COST MANAGEMENT

Arbitrary cost allocations, particularly those 3. IT systems provide data that measures the
using broad averages, should be minimized outputs produced. Collectively, the organiza-
whenever possible. This is because they do not tion’s IT systems should contain information
improve the understanding of the economics of about most of the cost objects and the
performing activities. In addition, over-averaging resource and activity cost drivers. For exam-
the allocations distorts the costs of cost objects ple, the number of invoices paid—a potential
by over-costing some while under-costing others. activity driver—should be available from the
(Remember that for past period costing, there accounts payable system.
must be zero-sum errors.)
Including representatives from the IT function on
4. Identifying and Measuring Activity the cross-functional ABC project team can help in
Drivers the determination as to whether the required
Activity drivers are the usage-based variables that information is already available in the transaction-
explain the behavior and magnitude of activity al and other IT systems. This will facilitate captur-
costs. They reflect the consumption of expenses ing and processing of information. Some of the
by activities and the consumption of activities by data used in developing the ABC system, howev-
other activities, products, or services. er, will come from interviews and questionnaires
directed to the organization’s personnel because
The quest for precision tempts ABC system they are the best source of this information.
designers to select too many excessively
detailed activities (effectively, tasks), each of It is important that the ABC project team be rea-
which will require an activity driver. Decisions sonable in its determination regarding the level
must be made as to the trade-offs between high- of detail needed to design the system properly.
er accuracy and administrative effort, as well as Knowledgeable estimates of the relevant items
the difficulties of operating a more complex cost- are preferable to precise calculations of irrele-
ing system. vant ones. As a result, team members must not
become too focused on details and should keep
Sources of ABC System Information the concept of materiality and Pareto’s “80-20”
There are three primary sources for the informa- rule (80% of an outcome can be explained by
tion needed to develop an ABC system: people, 20% of all the information potentially available)
the general ledger, and the organization’s infor- in mind at all times.
mation technology (IT) systems.
1. The people who perform the work can pro- The interview process can be supplemented with
vide information about the organization’s tools such as process mapping and value
activities, the resources consumed, and the chain/stream analysis, which help to document
performance measures used. the results of the data collection process and
2. The general ledger provides information organize the information to ensure it is com-
about an organization’s elements of cost. In plete, understandable, and can be readily ana-
some cases, the ABC system can directly lyzed. As mentioned in Section VII, these tools
extract data from the payroll and accounts are embraced by the operations and quality com-
payable systems that are summarized in the munities to remove waste, focus on value-adding
general ledger system. work, and improve productivity.

24
STRATEGIC COST MANAGEMENT

EXHIBIT 11. PROCESS VIEW

Resources
$ Work Activities are
CENTRAL to processes and
stakeholders.

Dept. 1 Dept. 2 Dept. 3
xxxxxxx xxxxxxx xxxxxxx
xxxxxxx xxxxxxx xxxxxxx
xxxxxxx xxxxxxx xxxxxxx Outputs
xxxxxxx xxxxxxx xxxxxxx
xxxxxxx xxxxxxx xxxxxxx

Process Measures
x = activities
= process
= cost drivers
Source: Gary Cokins.

Value chain/stream analysis, as it relates to distinguishing of the unit cost of processing a
activity-based costing, requires the subdivision of domestic invoice relative to an international
an organization’s processes into its distinct strate- invoice (where the latter is likely be a higher unit
gic activities. Basically this is the disaggregation cost due to the extra steps involved). Without dis-
of the end-to-end business processes into the aggregating the unit cost per processed invoice
work activities that belong to each of them. These for each type, the result will be an average unit
activities provide the building blocks by which the cost for the two types. ABC is in effect a de-aver-
organization creates value for its customers. aging technique. At some level, however, the
insights gained and the increased cost accuracy
Leveling business processes to a useful level of is not worth the effort. Typically, you do not want
detail can be a challenge, and accountants tend to divide activities into their tasks. Keep in mind
to excessively disaggregate them. Disaggregating that the level of detail and need for accuracy
is the result of refining the verb-noun grammar of depends on the decision for which cost data is
an activity. For example, the activity “process needed.
invoices” can be disaggregated into “process
domestic invoices” and “process international Strategic work activities should be considered
invoices.” For ABC’s purpose, the amount of time distinct and, therefore, isolated if they represent
and cost for each will sum to the higher aggre- a significant percentage of operating cost, the
gate, but dividing them provides better structure behavior of their cost is unique, they are different
to trace each activity using its own individual from the activities performed by competitors, or
activity driver. The result will be a more accurate

25
STRATEGIC COST MANAGEMENT

EXHIBIT 12. FINAL COST OBJECT VIEW

Resources
$ Work Activities are
CENTRAL to processes and
stakeholders.

Dept. 1 Dept. 2 Dept. 3
xxxxxxx xxxxxxx xxxxxxx
xxxxxxx xxxxxxx xxxxxxx
xxxxxxx xxxxxxx xxxxxxx
xxxxxxx
Outputs
xxxxxxx xxxxxxx
xxxxxxx xxxxxxx xxxxxxx

Process Measures
x = activities
Suppliers Sustaining
= process
= cost drivers Products

Orders
Customers

Source: Gary Cokins.

they have potential for differentiating the product In contrast, the process view of activities is mix-
or services in the market place.2 blind but time-sequence sensitive. Exhibits 11
and 12 illustrate this difference.
Process mapping sequences the activities across
time. It does not involve reassigning those activi- Other useful data can often be found in the
ties into their final cost objects—the bottom of records that support operating employees’ unof-
the three cost views in Exhibit 5. ABC does that. ficial systems—the ones they maintain because
In contrast, during any time period, ABC typically they do not believe the official accounting sys-
does not consider how activities relate in time— tem or because the data they need is not collect-
whether an activity occurs before or after another ed in that system. This data can be either finan-
one. In a sense, the ABC view for final cost objects cial or nonfinancial. Since these employees need
is time-blind but mix-sensitive. to get their job done in spite of an ineffective
cost system, often they will have accumulated a
2 For a more complete description of value chain analysis,
see John D. Shank and Vijay Govindarajan, “Strategic Cost wealth of relevant data that will support a prop-
Management and the Value Chain,” Journal of Cost erly designed ABC system.
Management, Winter 1992, pp. 5-21; and Shank and
Govindarajan, “Strategic Cost Analysis: The Crown Cork and
Seal Case,” Journal of Cost Management, Winter 1989,
pp. 5-16.

26
STRATEGIC COST MANAGEMENT

EXHIBIT 13. ABC RAPID PROTOTYPING WITH ITERATIVE REMODELING

Each iteration enhances the use of the ABC system.

ABC System
ABC Models (repeatable, reliable, relevant)

#0
#1
0 1 2 3 #2
#3

Source: Gary Cokins.

Finally, informed observation is a valuable was a big system and required devoting months
information-gathering tool. With a sound under- to build large components, such as the employ-
standing of the basic philosophy of ABC, an ee time collection systems, that were ultimately
observer can see inconsistencies between the all assembled and integrated. This approach
cost system and the real world when watching sometimes failed because executives began to
the organization’s product being manufactured or doubt if the result would be worthwhile, particu-
service being performed. larly with regard to the effort required to sustain
the model because the final result was so com-
XII. IMPLEMENTING THE FINAL plex that even the accounts could not under-
ABC SYSTEM stand it. The ABC rapid prototyping approach has
Exhibit 5, the multiple-stage cost assignment these benefits:
system, represents the generic structure at a ● It prevents over-design and excessive detail in
high level of what the ABC project team must the ABC system. The major determinant for
design, but scaled at a lower level. Think of this accurate costs is the design of the cost
as the scale model that must be inflated and dis- assignment path flow structure. That is, cost
aggregated to become a permanent, repeatable accuracy is much less influenced from having
production costing system. correct driver measures. Remember that the
period’s general ledger expenses to be trans-
Exhibit 13 illustrates the ABC rapid prototyping formed into calculated costs are basically
with iterative remodeling approach that has 100% correct. Having modest inaccuracies in
proven to be a successful implementation drivers from using employee estimates rather
approach, avoiding the failures of ABC systems than extracting more precise information from
in the 1990s. The prior approach presumed ABC data sources of other business systems typi-

27
STRATEGIC COST MANAGEMENT

cally has minimal impact, and most errors ments relative to the existing reported costs.
dampen out (i.e., error offsets) further down For example, a product manager may learn his
the cost assignment network. The result of not or her products are no longer the most prof-
understanding this property of costing (which itable, but are now actually much lower in prof-
admittedly is counterintuitive, but it becomes it ranking. These employees will be threatened
apparent after the ABC models are construct- and exhibit resistance to change.
ed) is excessive administrative effort to collect Implementing ABC is much more about behav-
the transactional input data and transform it ioral change management than it is about
into costs. doing the ABC math. By briefing select groups
● The initial models, although not yet attaining of managers with the early ABC prototypes, the
the needed accuracy requirements (which ABC project team and those managers can
should never be 100%) or the necessary levels develop risk-mitigation plans to deal with the
of disaggregation of activities, products, or expected resistance.
customers, accelerate the learning and shift ● Decisions based on the ABC information are
the focus from building a more perfect cost made sooner, increasing the ABC project’s
system to determining the best uses of the return on investment (ROI). Higher-level man-
improved cost information in decision support agers who are briefed on early ABC cost itera-
for profit margin analysis (strategic cost man- tions will find that the information both vali-
agement) and productivity improvement (oper- dates a conclusion they intuitively thought (but
ational cost management). This shifts atten- which was distorted on not disclosed by their
tion from squabbling about how the new costs existing cost system) and reports costs wildly
are derived to how the information will lead to contrary to their beliefs (formed by flawed
higher-profit-generating decisions. costs from their existing cost system). With
● Organizational learning by managers about both outcomes, they will likely make
ABC principles and how to use ABC informa- changes—decisions resulting from the prelim-
tion is accelerated simply because it is much inary ABC information. A major influencer that
more engaging to learn about ABC by applying increases the ROI of any investment or project
it to their own organization, where they are is how quickly cash inflows are generated
familiar with its current business problems (from revenue enhancements or cost savings).
and processes, than it is to learn from a case
study or examples using fictitious companies. Common sense assists with the remaining imple-
The theory becomes reality. mentation steps to convert the most recent ABC
● It is difficult to construct the final ABC system iterative model into a permanent, repeatable pro-
correctly to get the right levels, selection of driv- duction system. By that point in time, the cost
ers, determination of which drivers can be esti- assignment structure is designed and all the driv-
mated or require data extracts, and so on. The ers are identified—resource, activity, and cost
ABC rapid prototyping approach with iterations object drivers. In effect, the IT task of data
allows for mistakes early rather than later, requirements definition has been completed.
when they can be very expensive to correct.
● Some employees may fear the disclosure of The remaining tasks are to automate the import
the new cost information or feel adversely of data into the calculation model, routinize the
affected by the resulting shift in cost assign- procedures (e.g., a monthly cycle), and develop

28
STRATEGIC COST MANAGEMENT

reports. Fortunately, general ledger, sales order, vious system and how the new costing system
and operational systems (e.g., enterprise provides information that will enable each man-
resource planning or ERP systems) are common, ager to make better decisions. One way to
and they serve as the sources of raw transaction accomplish this is by developing new reports
data to program and feed the ABC modeling soft- with relevant data and eliminating old reports
ware. Driver data that may not be easily available that were published but rarely used.
or is not yet measured can be estimated by func-
tional employees who are familiar with their In planning the ABC implementation, it is useful
processes. Using reasonable estimates for to identify the key purposes for the ABC informa-
expenses or activity costs that are not substan- tion and work backwards with those ends in
tially large will not introduce significant costing mind. That is, have compelling reasons for using
errors that could potentially jeopardize good ABC data, such as obtaining better price quote
decision making. profit margin estimates. A well-designed ABC
system can also be the basis for improved budg-
XIII. ENSURING SUCCESSFUL eting, planning, and capacity resource planning.
U S E A S A S U S TA I N A B L E S Y S T E M Ultimately, management accounting information
The best ABC system will be useless if no one is used for many diverse purposes. If a few key
understands how to use the information. There purposes are satisfied, the rest will eventually be
is an anecdote of an untrained end-user who was accommodated, too.
given the ABC reports and replied, “I feel like a
dog watching television. I don’t know what I’m The ABC system must be kept current to prevent
looking at.” As important as it is to design and inaccurate costs from gradually creeping in.
implement a theoretically sound and properly When recalculating the model at periodic inter-
maintained system, it is just as important to vals (typically monthly), the general ledger
make sure that (1) management has been expenses used for the update are typically accu-
trained in the concepts and use of ABC, (2) man- rate. Not all the driver data needs to be recollect-
agement receives reports that are not only use- ed—only the data that experiences volatility. The
ful but understandable, and (3) the ABC informa- rest can be reanalyzed or re-estimated on quar-
tion is kept current. terly or semiannual cycles. This lowers the
denominator in the benefits to costs ratio, rais-
An important step in ensuring the sustainability ing ABC’s return on investment. Constant vigi-
of an ABC system is to get the buy-in and “sign- lance of the structural ABC model maintenance
ing on” of managers at the beginning of the proj- is necessary in regard to new processes, work
ect by convincing them that their old, flawed activities, products, channels, and customers.
methodology is incorrect and denied them the
ability to see and understand large portions of X I V. C O M M E R C I A L A B C
the company’s cost behavior. Again, the ABC S O F T WA R E
rapid prototyping methodology assists with Some organizations initially construct their ABC
securing buy-in. As the new system is developed model using a personal computer and spread-
and becomes usable, these individuals should sheet software. They aggregate general ledger
be shown how the new ABC system overcomes expense accounts into groups, as yet undefined
the deficiencies and related problems of the pre- activities into processes, and products and cus-

29
STRATEGIC COST MANAGEMENT

tomers into families and segments with similari- from disparate sources (although data sources
ties. The spreadsheet ABC model “hits the wall” can still be directly accessed). Since manage-
when it becomes apparent that: its columns-to- ment accounting is only one component in what
rows math logic is restrictive, multiple-stage are now popularly becoming called business
assignments are necessary, disaggregation is intelligence systems deployed for enterprise per-
required, and there are too many columns-to- formance management, there is synergy to hav-
rows calculations. It is also at this stage that it ing all components of a performance manage-
becomes apparent the ABC spreadsheet will ment portfolio linked, including customer rela-
never graduate from an ABC model to a reliable, tionship management analytics. The ABC system
repeatable ABC system. Consequently, the selec- produces key performance indicators (KPIs) for
tion of a commercial ABC software package the increasingly popular scorecard and dash-
becomes the only option. board applications, and the ABC information not
only helps monitor the KPI dials of dashboards,
Commercial ABC software is designed to inter- but, more importantly, it also moves them.
face with general ledger, sales, and operating Systems integration is no longer required, and
systems, such as ERP. The software itself is these systems also provide powerful, Web-based
designed to calculate the multiple-stage cost query and reporting capabilities.
assignment network. After that, raw transaction-
al data is loaded, and the laborious calculation X V. C O N C L U S I O N
of costs is automated. ABC is a powerful management tool that has
evolved in response to the ineffectiveness of tra-
Some ERP software packages include an ABC ditional cost accounting and cost management
module, but much of the driver data may come practices. Advocates of ABC have been won over
from a multitude of disparate data sources out- following their realization that the general
side of the ERP system. Also the priorities of an ledger’s cost center and chart of account
ERP software vendor are typically transaction- expense data is structurally deficient in calculat-
based operations and control. The trend of com- ing costs and providing cost visibility and driver
mercial ABC software is toward advanced model- understanding. They realize that broad-based
ing capabilities. These packages typically pos- cost allocations create grotesquely distorted and
sess functionality to report multidimensional misleading costs compared to tracing costs with
views of costs and to display visual cost assign- ABC principles.
ment paths that can be quickly and flexibly
remodeled. As ABC software modeling capabili- The adoption rate of ABC is propelled by increas-
ties advance to reflect expense and cost behav- ing proliferation of all businesses outputs
ior with regard to volume and mix changes, there (including types of suppliers, products, services,
will be further improvements in reliability of fore- channels, and customers) that cause increased
casting and predictive analytics to evaluate what- complexity and increased indirect expenses to
if scenarios. manage the complexity. Appeals by quality and
Lean management to their sales colleagues to
The premier commercial ABC systems reside on “standardize” cannot overcome customers’
top of a single, integrated information platform demand for customization. Operations managers
that has already extracted and cleansed data tasked with streamlining processes and remov-

30
STRATEGIC COST MANAGEMENT

ing waste recognize that ABC data is useful for COST DRIVER—A measure of activity that is a
comparable benchmarking and quantifying the causal factor in the incurrence of cost to an
magnitude of nonvalue-added costs and of entity. Examples include direct labor hours,
profit-reducing costs of quality. machine hours, beds occupied, computer
time used, flight hours, miles driven, and
The need to measure customer profitability and contracts.
value, in which most companies rarely go beyond COST OBJECT—A function, organizational subdi-
product costing, is escalating. For most compa- vision, contract, or other work unit for which
nies, products are becoming commodities, and cost data is desired and for which provision
they must shift to differentiating services for dif- is made to accumulate and measure the
ferent customers in order to gain a competitive cost of processes, products, jobs, capital-
edge and to maximize shareholder wealth. It is ized projects, etc.
no longer about simply growing sales, but rather COST OBJECT DRIVER—The best single quantita-
it is about profitably growing sales. ABC princi- tive measure of the frequency and intensity
ples can also be applied to expenses below the of demands placed on a cost object by other
product gross margin line, and customer-related cost objects.
cost-to-serve costs may be arguably more critical RESOURCE DRIVER—A measure of the quantity
to understand than product costs. of resources consumed by an activity (e.g.,
the floor space occupied by the activity).
As important as it is, however, ABC is not a
panacea. As mentioned earlier, cost management BIBLIOGRAPHY
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STRATEGIC COST MANAGEMENT

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33