Learning the ABCs of Cost Analysis

Bradley S. Litt

Until recently, corporate accounting was the last place an operational manager would look for help in accessing the health of a business process. Over the past decade, as the complexity, variety and diversity of business has escalated, the cross-functional behavior of business processes and the shifting patterns of cost have left traditional approaches to process and cost/benefit analysis distorted and grossly inadequate. In addition, traditional accounting systems generally exist to satisfy external reporting requirements, not internal project metrics, and usually fall short in helping project managers detect process-related problems or potential solutions. 

ADVERTISEMENT

Trending Articles

Preparing A Project Plan Quickly and Efficiently (Korean Translation)

by Mark Waldof

모든 프로젝트에는 일정 유형의 계획이 필요합니다. 계획 구성 요소에 대한 일반적인 이해가 존재하지 않기 때문에 계획을 준비하는 것이 프로젝트 팀에게는 어려울 수 있습니다. 이 세미나는 이러한 단점을 해결합니다.

Topic Teasers Vol. 68: Living Through Overload (Korean Translation)

by Barbee Davis, MA, PHR, PMP, PMI-ACP, PMI-PBA

질문 : 나는 진정으로 불평하는 사람이 아니지만, 내가 얼마나 열심히 일하는지, 또는 얼마나 많은 시간을 보내고도 과부하의 전환점에 도달했다고 생각합니다. 나에게 할당 된 프로젝트를 처리 할 수없는 것처럼 보이지 않고이 상황을 어떻게 극복 할 수 있습니까?

Making Better Project Decisions More Often (Korean Translation)

by Eric Wright

활발한 대화 형 워크샵에서 참석자는 의사 결정 및 계획 수립에서 사용하는 주요 정신적, 정서적 편견에 대한 올바른 이해를 개발하고 프로젝트 결정에 대한 이러한 편향의 영향을 완화 할 수있는 방법을 설명 할 수 있습니다. 더 나은 프로젝트 결정을 할 수 있습니다.

As businesses have become more complex, the elements of cost/benefit have shifted and become mixed. Overhead costs are replacing the direct costs of labor and purchased materials. These overhead costs increasingly comprise technology and the specialists who are needed to sustain the gains in productivity and manage the complexity of production. As managers attempt to understand and manage cross-functional business processes, organizations are finding that traditional approaches for managing these costs are ineffective. So how do you get decent cost analysis?

Activity based costing (ABC) is an accounting technique that utilizes cost attachment rather than cost allocation to determine the actual cost of products and services. While not a new concept, ABC is quietly changing the way organizations view and manage their business. Although ABC is only data, it has the ability to clearly define the critical attributes of today’s business processes. Through data, ABC is able to act as an enterprise-wide change agent, enabling organizations to build awareness, make better decisions and effectively support enterprise-wide improvement initiatives.   

The real beauty of an ABC model is that it forces organizations to adopt a cost management paradigm that focuses on understanding their processes.  Once an organization accepts this paradigm, they soon recognize that their products or services are produced through cross-functional business processes and not functional silos.  These processes contain a wide variety of activities that not only define the process, but more importantly, reflect how effectively the process performs. It is these activities that actually consume organizational resources (cost).  They are the central focus and foundation of ABC.  

Without an effective focus on activities, ABC would be just another cost accounting system.  Focusing on activities rather than departments or functions makes it possible for ABC to provide the information necessary to not only effectively manage business processes but also to improve them.  Ensuring a smooth running business process is critical in maximizing the perceived and actual value your customers receive.   As a result, it's not uncommon for organizations beginning an ABC implementation to simultaneously be involved with improvement initiatives centered on defining and measuring core business processes and related activities.

Another way ABC adds value is that it avoids two significant problems associated with traditional cost allocation methods: 1) misallocation of cost and 2) the masking of the true drivers of cost. Within an ABC implementation, business processes are mapped to ensure that the appropriate boundaries for each process are defined.  Through this mapping process, activities and associated drivers are identified and their relationships tested. This verification process ensures a concise attachment and not an allocation of cost to processes and products.

While ABC can be complex and confusing, organizations can reduce the complexity by building a strong process orientation through the definition and mapping of core business processes prior to introducing ABC.  Studies have found that companies with a strong cross-functional process orientation tend to experience fewer false starts and less anxiety with their ABC implementation.  Not only are the implementations more successful, but the organization as a whole is better prepared to understand the basic structure of ABC.

From a strategic perspective, ABC’s value lies in its ability to correct product-cost distortions. Once product-cost distortions are corrected, organizations can better understand which products are actually profitable and adjust pricing and product lines accordingly to maximize profitability.

From an operational perspective, ABC’s value can be found in its ability to link up-to-date financial metrics of resource-cost consumption to improvement processes.  Managers who understand ABC realize that accurate, relevant cost data enables them to identify and achieve innovation and continuous improvement.

The strength of ABC is its ability to measure and organize data at an extremely fundamental level where the resource consuming activities are actually performed.   ABC also makes it easier to understand variable cost behavior and cost-of-quality for activities and processes.  Finally, ABC can provide project managers with accurate cross-functional cost data ensuring reliable cost related decisions and consistent monitoring throughout their projects. 


Want more content like this?

Sign up below to access other content on ProjectManagement.com

Sign Up

Already Signed up? Login here.

Related Content

Reviews (1)

Login/join to subscribe
ADVERTISEMENTS

I have made good judgements in the past. I have made good judgements in the future.

- Dan Quayle

ADVERTISEMENT

Sponsors