Activity Based Costing (ABC) Ladislav Šiška Why Activity Based Costing? l“You can have any colour, las long as it's black.“ l l l v. Today? Why Activity Based Costing? l lTrends like lcomplex structure of products lmultiple orders and shor delivery times lquality requirements lshortening of product life-cycle ldifferentiation and customisation of products l l l l l=> Innovations in Management Accounting (MA) l1980s Criticism of MA developmnet lH. Thomas Johnson, Robert S. Kaplan minimal progress after 1925 lMain concepts: lActivity Based Costing / Management (1980s/1990s) lTarget Costing (Japan, 1990s) lLife Cycle Costing lBalanced Scorecard (1996) lin German speaking countries – Controlling (Controllership) l Activity Based Costing linitiated by CAM-I l„Consortium of Advanced Management International“ (originally Industrial) lhttp://www.cam-i.org/ lwide spread through consultants lGerman-speaking countries lProzesskostenrechnung, Aktivitätskostenrechnung § R.S.Kaplan, R.Cooper (1989) Traditional Costs Allocation Direct Costs CZK 43,615,285 Wardrobes Tables Drawers 5 000 pcs. 7 000 pcs. 8 080 pcs. CZK 11,412,943 CZK10,441,548 CZK 21,760,795 Indirect Costs CZK 47,952,293 How to assign indirect cost? ? CZK ? CZK ? CZK Manufacturing centres Service centr. Distrib. and admin c. 1st stage 2nd stage Logic of Activity Based Costing Direct Costs CZK 43,615,285 Wardrobes Tables Drawers 5 000 pcs. 7 000 pcs. 8 080 pcs. CZK 11,412,943 CZK10,441,548 CZK 21,760 Indirect Costs CZK 47,952,293 ? CZK ? CZK ? CZK Manufacturing centres Service centr. Distrib. and admin c. Processing Repairs Customer Care Machine set-ups Assembly… Acc.… HR ... … allocation of other activities costs Activity Cost Drivers (ACD) Resource Cost Drivers (RCD) Activities 1st stage 2nd stage ABC terminology lActivities lparts of the whole company process l= sub-processes lCost objects lCost drivers lanalogy to allocation bases lCost pools lanalogy to cost centres (Drury, 2012) lcollection of activities cost l l Designing ABC systems (1/2) 1.Identify the major activities : lreasonable level of aggregation lmax 5 % of resource capacity [Kaplan, Cooper (1998): Cost and Effect] lChoice of activities influenced by lthe total cost of the activity centre and lthe ability of a single cost driver to provide a satisfactory determinant of the cost of the activity. 2.Assign costs to cost pools (cost centre) for each activity: lCosts assigned to activity cost pools include ldirect and lindirect costs - resource cost drivers (RCD) used to assign them 3. Designing ABC systems (2/2) 3.Determine the activity cost driver for each activity: lthey should: lprovide a good explanation of costs of each activity pool. lbe easily measurable lthe data easy to obtain and identifiable with the product. lACD classification: ltransaction ACD lduration ACD lintensity ACD 4.Assign the cost of activities to products l A comparison of traditional and ABC systems lTraditional cost systems ltwo-stage allocation process lthe first stage to allocate costs to departments lthe second stage: smaller number of usually volume-based cost drivers (typically direct labour hours DLH or machine hours) ltraditional systems often rely on arbitrary allocation bases lActivity-based systems ltwo-stage allocation process lthe first stage to allocate costs to activities (ABC systems tend to have more cost centres/cost pools) lthe second stage: ABC systems use many second stage cost drivers. lABC systems seek to use only cause-and-effect Multistage Activity Based Costing Zdroj: Nekvapil, Tomáš. Jak změnit dva problémy v jednu přednost: příklad TRW Autoelektronika, s.r.o., 2006. (dostupné též na http://abcosting.biz) Indirect cost Procurement Warehouse IT Quality Maintenan. Admin HR Mngt Production Marketing Support Unused Capacity Products 20M € 20M € vlevo, nahoře a dole – vstupy vpravo - výstupy ABC Effects: AB management lABC can be used for a range of cost management applications besides product costing. l FIG10-15 „CAM-I Cross“ ABC Effects: Classification of activities (1/2) lUnit-level activities: lPerformed each time a unit of goods is produced. lResources are consumed in proportion to the number of units of the product or service produced or sold. lExamples: lDirect materials and labour, energy costs,expenses consumed in proportion to machine processing time lBatch-related activities: lPerformed each time a batch of goods is produced. lCosts vary with the number of batches made. lExamples: lset-ups, purchase ordering, first-item inspection activities. ABC Effects: Classification of activities (2/2) lProduct/service sustaining activities: lPerformed to enable the production of individual goods lExamples: lactivities related to maintaining an accurate bill of materials, preparing engineering change notices lFacility-sustaining (or business-sustaining) activities: lPerformed to support the organization as a whole. lExamples: lplant management, property costs, salaries of general administrative staff, general selling and marketing expenses lCommon to all products and services => not allocated to products/services Model ABC l ABC Effects: Different cost objects „potravní řetězec“ á la Cokins in this exhibit is the customer, ultimately consumes all the other final cost object costs, with the exception of the business sustaining costs. Each of the major final cost object categories (e.g., supplier, product/service line, and customer) has its own “sustaining costs” that are assignable to its end-product or customer. When tracing these “sustaining costs,” however, one cannot apply a measurable product- or customerspecific quantity. For example, a product branding program from the marketing department may benefit only a select group of products, but how much of the branding cost should be charged to each specific product within the brand? Even though there is no cause-and-effect relationship, these “product sustaining costs” can be traced using some “shared” basis, such as sales unit-volume, or be spread evenly. Cost object: customer lpodle účelu může být vhodnější retrográdní vzorec Zdroj: Drury (2012) Customer profitability ABC Effects: Customer Profitability lmanufacturing costs of typical products are customer independent lMSDA (=Marketing, Selling, Distribution, Administrative) overheads allocated: lusually the cost objects are customers not products ltraditional allocation: l l l lActivity-based allocation: l l l Allocation base Customer MSDA caused by Department Activity Customer MSDA caused by Resource Resource Cost Driver Activity Cost Driver Customer Profitability Example ltraditional allocation of MSDA Expenses l l l l l l Allocation base Customer MSDA caused by Department Customer Profitability Example lActivity based allocation of MSDA Expenses l l l l l l Activity Customer MSDA caused by Resource Resource Cost Driver Activity Cost Driver Customers’ segmentation lHigh Cost-to-Serve Customers lOrder custom products lSmall order quantities lUnpredictable order arrivals lCustomized delivery lChange delivery requirements lManual processing; high order error rates lLarge amounts of pre-sales support (marketing, technical, and sales resources) lLarge amounts of post-sales support (installation, training, warranty, field service) lPay slowly (have high accounts receivable) lLow Cost-to-Serve Customers lOrder standard products lHigh order quantities lPredictable order arrivals lStandard delivery lNo changes in delivery requirements lElectronic processing (EDI) with zero defects lLittle to no pre-sales support (standard pricing and ordering) lNo post-sales support lPay on time (low accounts receivable) Customer porfolio visualisation Zero-profit line Whale curve •80–20 law applies wel to sales revenues: Whale curve 80-20 law does not apply to profits! Whale curve •A graph of cumulative profits versus customers •The hump (or maximum height) of a cumulative profitability curve generally hits 150% to 250% of total profits, and this height is usually achieved by the most profitable 20% to 40% of customers Customers’ segmentation Opportunities to transform loss customers into profitable ones 1.Process Improvements lImprove the processes used to produce, sell, deliver, and service the customer. 2.Activity based pricing lmenu-based pricing to allow the customer to select the features and services it wishes to receive and pay for. 3.Managing Relationships lEnhance the customer relationship to improve margins and lower the cost to serve that customer. lCustomer life-time value (CLV): 4. => avoiding „price waterfall“ 4.Use more discipline in granting discounts and allowances l Opportunities to transform loss customers into profitable ones Thank you for your attention!