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Cost Systems Typically Pass Through Four Stages. Stage 1 Systems Broken. Stage 2 Systems Finl. Reporting Driven. Stage 3 Systems Customized; Stand-alone. Stage 4 Systems Integrated. Systems Aspects. Data Quality. No surprises Meets audit standards. Shared databases - PowerPoint PPT Presentation
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Cost Systems Typically Pass Through Four Stages
Systems Aspects
Data Quality
External Financial Reporting
Product/Customer Costs
Operational and Strategic Control
Many errors Large variances
Inadequate
Inadequate
Inadequate
No surprises Meets audit
standards
Tailored to financial reporting needs
Shared databases Stand-alone
systems Informal linkages
Stage 2 System maintained for financial transactions and periodic reporting
PC-based ABC for costing activities, products, and cost to serve customers
Kaizen costing; Pseudo profit centers; Timely non-finl. feedback
Fully linked databases and systems
Stage 1 Systems
Broken
Stage 2 SystemsFinl. Reporting Driven
Stage 3 SystemsCustomized; Stand-alone
Stage 4 Systems
Integrated
Inaccurate Hidden costs and
profits
Financial feedbackonly; variances
Delayed, aggregate
Financial reporting systems
Integrated ABM systems
Operational & Strategic Performance measurement sys
©1996 Robert S. Kaplan
Stage IV Management Reporting & Control Systems
Vision: Stage IV Management Reporting and Control Systems will be fully integrated, with a common set of information, entered once and accessible to all, supporting both internal and external reporting. The management systems will provide performance information for operational and strategic control, and accurate measurement of product and customer profitability.
Robert S. Kaplan
Stage 2: Yesterday’s Cost Systems were Dependent upon the External Financial
Reporting Systems
Financial Reporting Systems
Financial Reporting Systems
Product Costing Systems
Product Costing Systems
Performance Measurement and Variance Analysis
Performance Measurement and Variance Analysis
Customer Costing Customer Costing
Stage 3: Today’s Cost Systems are Activity Based, and Break the Linkage from Financial Reporting Systems
Financial Reporting Systems
Financial Reporting Systems
Product Costing Systems
Product Costing Systems
Operational Feedback for Learning and Improvement: Yields, Defects, Cycle Time, Throughput, Actual Resource
Consumption (quantity and cost)
Operational Feedback for Learning and Improvement: Yields, Defects, Cycle Time, Throughput, Actual Resource
Consumption (quantity and cost)
Activity Based Management
Systems
Activity Based Management
Systems
Stage III: ABC with Fungible ResourcesCustomer Administration Department Activities Performed
¨ Handle Customer Orders
¨ Process Customer Complaints
¨ Perform Customer Credit Checks
Stage III ABC System
1. Estimate Costs of Resources Supplied $560,000
2. Estimate Percentage of Time on Each Activity
3. Determine Quantity of Activity Performed
4. Calculate Activity Cost Driver Rates
Activity Percentage Assigned Cost Activity CostDriver Quantity
Activity CostDriver Rate
Handle Customer Orders 70% $392,000 7,000 $ 56/order
Process Customer Complaints 10 56,000 200 $280/complaint
Perform Credit Check 20 112,000 350 $320/creditcheck
Total 100% $560,000
Stage IV: Capacity Costing with Fungible Resources
Stage IV ABC System
1. Estimate Cost of Resources Supplied$560,000
2. Estimate Practical Capacity of Resources Supplied 8,000 hours
3. Calculate Cost of Unit of Capacity $70/hour
4. Estimate Unit Times to Perform Each Activity
5. Calculate Capacity-Based Activity-Cost Driver RatesActivity Unit Time Activity Cost
Driver RateActivity Cost
Driver QuantityActivity
TimeActivity
Costs
Handle Customer Orders 0.72 hours $50.40/order 7,000 5,040 hours $352,800.
Process CustomerComplaints
3.60 hours $252/complaint 200 720 50,400.
Perform Credit Check 4.10 hours $287/check 350 1,435 100,450.
Used Capacity 7,195 hours $503,650.
Unused Capacity 805 hours 56,350.
Total 8,000 hours $560,000.
Multi-Dimensional Profitability:Products
Product 1 Product 2 Product 3
Product Line P1 Product 4 Product 5 Product 6
Product Line P2 … Total
Sales xxx xxx xxx xxx xxx xxx xxx xxx xxxUnit-Level Expenses Materials xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx Direct Labor xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx Machine Time, xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx Other Unit-Level xxx xxx xxx xxx xxx xxx xxx xxx xxx xxxBatch-Level Expenses Setups xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx Material Movement xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx Purchases xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx Order Handling xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx Other Batch-Level xxx xxx xxx xxx xxx xxx xxx xxx xxx xxxProduct-Sustaining Design & Development xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx Engineering Changes xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx Product Maintenance xxx xxx xxx xxx xxx xxx xxx xxx xxx xxxTotal Product Costs xxx xxx xxx xxx xxx xxx xxx xxx xxx xxxProduct Profits xxx xxx xxx xxx xxx xxx xxx xxx xxx xxxProduct-Line Expenses xxx xxx xxxUnused P. Line Capacity xxx xxx xxxProduct-Line Profitability xxx xxx xxxOther Expenses Customer-Related xxx Unused Capacity xxx Facility Sustaining xxx Region/Business Unit xxxTotal Profits xxx
Multi-Dimensional Profitability:Customers
Customer 1-1 …
Customer 1-n
Segment 1
Customer 2-1 …
Customer 2-m
Segment2 … Total
Sales xxx xxx xxx xxx xxx xxx xxx xxx xxxUnit-Level Expenses xxx xxx xxx xxx xxx xxx xxx xxxBatch-Level Expenses xxx xxx xxx xxx xxx xxx xxx xxxOrder Expenses xxx xxx xxx xxx xxx xxx xxx xxx xxxContribution Margin xxx xxx xxx xxx xxx xxx xxx xxx … xxxCustomer-Sustaining Exp. xxx xxx xxx xxx xxx xxx xxx xxx … xxxCustomer Profitability xxx xxx xxx xxx xxx xxx xxx xxx … xxxSegment-Specific Expenses xxx xxx xxxSegment Profitability xxx xxx xxxOther Expenses
Product/Brand/Product-Line Sustaining xxxUnused Capacity xxxFacility-Sustaining xxxRegion/Business Unit Sustaining xxx
Total Profits xxx
Activity-BasedCosting
StrategicView
OperationalView
Resources
Activities
Business processes
Cost drivers
Product costs
Customer costs
Product design Product-line and customer mix Supplier relationships
Customer relationships
- Pricing- Order size- Delivery- Packaging
Market segmentation Distribution channel
Activity-Based Cost Management: Strategic Decisionsand Operational Improvements
What activities should we perform?
Activity management Business process reengineering Total quality
Performance measurement
What drives activity cost?
©1996 Robert S. Kaplan
ABC Implementation Steps
Identify Purpose of ABC Project
Select Project Sponsor
Develop Executive Awareness (e.g., ABC Seminar/ Videos)
Establish Senior Management Steering Committee
Select and Train Multi-function Project Team (Operations, Finance, Engineering, Marketing, I/T)
Conduct Interviews
Choose Activities, Business Processes, Activity Cost Drivers
Access Company Data Bases; Select ABC Software
Calculate: Activity Costs, Driver Costs, Product and Customer Profitability (Whale Curves)
Change Product Pricing, Mix, and DesignModify Customer/Channel/Supplier RelationshipsAchieve Process Efficiencies
Increase RevenuesReduce Operating Expenses
1
2
3
4
STAGE ACTION ACTIVITIES
INITIATE
ANALYZE
ACT
EXPLOIT
Action Implications from ABC Model
• Perform fewer activities:
– Pricing
– Change product mix
– Change customer mix
– Minimum order quantities
– Fewer changes (ECNs, delivery terms)
– Improve product designs:
• Fewer parts
• More common parts
Action Implications from ABC Model (cont.)Perform activities more efficiently
• Improve business processes (TQM, kaizen, JIT)• Improve quality
• Reduce setup and process cycle times
• Improve layout
• Focus operations
• Reengineer
•
Invest in information technologies:
• Customer and supplier information systems
• Computer-aided-design and engineering (CAD/CAE)
• Computer integrated manufacturing (CIM)
• Electronic data interchange (EDI)
Action Implications from ABC Model (cont.)
Planning for the future
• Budgeting: authorize spending on resources based on projected demands by products, customers, and facilities
• Target costing
Organizing an ABC Project
• Analysis: ABC --
“Show me the numbers”
• Action:ABM -- “Show me the Money”
Phase Advocate TargetSponsor Agent
Individual and Organizational Resistance to ABC Information
– Threat and embarrassment caused by revelation of error:
• Unprofitable products and customers
• Poorly designed products and inefficient processes
• Costly supplier relationships
• Excess capacity
– New technical theory: Contradicts teaching and experience of past 30 years
– New role for finance organization:
• From objective, historical scorekeeper to information provider for operational and strategic decision-making
Daily, Actual Activity-Based Costs with an Enterprise Resource Planning Package
Day Activity Expense Quantitiy (of ACD) Activity-Cost Driver Rate
Monday $12,468 253 $49.28
Tuesday 13,491 228 59.17
Wednesday 19,514 262 74.48
Thursday 9,882 280 35.29
Friday 14,533 239 60.81
Daily, Actual Activity-Based Costs with an Enterprise Resource Planning Package
THIS IS MADNESS!!! Random variation in numerator (which expenses hit general ledger each
day?) Random variation in denominator (number of orders handled daily) Random variation in process efficiency
Day Activity Expense Quantitiy (of ACD) Activity-Cost Driver Rate
Monday $12,468 253 $49.28
Tuesday 13,491 228 59.17
Wednesday 19,514 262 74.48
Thursday 9,882 280 35.29
Friday 14,533 239 60.81
Stage 4: Tomorrow’s Cost Systems will be integrated with each other and with Financial Reporting Systems
Financial ReportingSystems
Actual Utilizationand Efficiencies
Operational andStrategic PerformanceMeasurement Systems
Activity BasedManagement
Systems
Planning andBudgeting
ABM
ABB is a reversal for the relationship set up in an ABM model
Products
ResourcesResources
ActivitiesActivities
ABB
Products
ResourcesResources
ResourceDrivers
ResourceDrivers
ActivitiesActivities
Activity CostDrivers
Activity CostDrivers
ResourceDrivers
ResourceDrivers
Activity Cost Drivers
Activity Cost Drivers
PlaceOrder
PlaceOrder
ProduceProduct
FinancialReports
ProduceProduct
FinancialReports
Set up &Run
Machine
Set up &Run
Machine
Pack & ShipProduct
Pack & ShipProduct
Causality allows for accurate budgeting
Required Resources
Activity CostDriversActivities
# of orders
# of orders
# of product
lines
# of product
lines
# of production
batches
# of production
batches
# of shipments
# of shipments
Products
Characteristics of ABB
• Expected demands collected from forecasted product/ customer volume and mix
• Determine activity cost driver quantities • Association between cost drivers and demand
for activities• Linking activity demands to supply and
spending on resources • Recognition of excess capacity
Spending patterns are different for different resources
Customer Support Labor
Building/Plant Supplies
Stage 4: Tomorrow’s Cost Systems will be integrated with each other and with Financial Reporting Systems
Financial ReportingSystems
Actual Utilizationand Efficiencies
Operational andStrategic PerformanceMeasurement Systems
Activity BasedManagement
Systems
Planning andBudgeting
Cost Systems Typically Pass Through Four Stages
Systems Aspects
Data Quality
External Financial Reporting
Product/Customer Costs
Operational and Strategic Control
Many errors Large variances
Inadequate
Inadequate
Inadequate
No surprises Meets audit
standards
Tailored to financial reporting needs
Shared databases Stand-alone
systems Informal linkages
Stage 2 System maintained for financial transactions and periodic reporting
PC-based ABC for costing activities, products, and cost to serve customers
Kaizen costing; Pseudo profit centers; Timely non-finl. feedback
Fully linked databases and systems
Stage 1 Systems
Broken
Stage 2 SystemsFinl. Reporting Driven
Stage 3 SystemsCustomized; Stand-alone
Stage 4 Systems
Integrated
Inaccurate Hidden costs and
profits
Financial feedbackonly; variances
Delayed, aggregate
Financial reporting systems
Integrated ABM systems
Operational & Strategic Performance measurement sys
©1996 Robert S. Kaplan
