The purpose of this article is to make a small inventory of the most common doubts and to provide an answer for each one, from the perspective of those who believe that ABCosting can be one of the most effective solutions when it comes to reversing difficult results within the business.
You are probably in need of a cost calculation system for your products and services that allows you to know with high accuracy which ones are truly profitable or deficient, or which are your best customers or those that only make you lose money.
Perhaps you have already learned that the ABCosting cost system is the most effective method to carry out those calculations that will allow you to establish more realistic prices for your products or services.
However, many professionals have doubts when deciding whether to adopt an ABCosting system in the company or not.
The purpose of this article is to make a small inventory of the most common doubts and to provide an answer for each one, from the perspective of those who believe that ABCosting can be one of the most effective solutions when it comes to reversing difficult results within the business.
Let's look at the most common myths:
1. ABCosting is too difficult to implement and maintain
This myth is based on the fact that ABCosting uses cost inductors to accurately determine the amount of resources that the activities demand to be carried out.
Logic suggests that the more information is needed, the more complex and expensive the costing system will be.
It is true that determining new inductors creates more work. Inductor information is required for each group of activities or cost objects.
For example, the “number of receipts” inductor will have to be opened by type of customer and by type of service. This openness can mean thousands of new data even for a small company.
Experience teaches us, however, that most cost professionals tend to overestimate the search for new information on inductors.
Looking at it most of the inductors already have some form of registration within the accounting and operating system of the company and this information can be easily captured and ordered to be taken automatically by their ABCosting program.
The current Business Intelligence programs are of great help to those in charge of building ABCosting cost models; acting in a complementary way and with little effort, you can search the database and find the appropriate series of records, and then filter, order and extract the exact information that represents the inductor. Then, by one program or another, the capture of said data can be automated, so that the initial loading work is simplified and easily surveyed.
What is important is that the administrators of the ABC model receive training on how to determine the inductors and do not fall into complex formulas for their determination.
Furthermore, the latest trend in inductors is related to the use of so-called time inductors, which lead to the use of a single type of driver (time) for all activities. This has brought a great deal of simplification to the ABCosting build and implementation process.
2. It is preferable to improve the current accounting systems to obtain the correct information that we need
Many of ABCosting's critics argue that it is preferable to insist on conventional accounting methods for determining costs before incurring the ABC system.
It is true that any improvement can help, but the advantages of ABCosting over conventional accounting as an accurate cost calculation method is evident, especially for the following reasons:
to. Most indirect costs can only be assigned to products or services through the use of inductors. Any standard distribution base distorts the true consumption of resources and generally the most punished are massive products or services, with low unit cost but high volume of activity.
b. In modern production systems it is very difficult to identify the direct working hours that can be assigned to a product or service. Unlike what happened in the past, internal support departments (IT, Human Resources, administration, finance, etc.) are more important in modern companies, but their costs can only be assigned to products or services using drivers. appropriate.
3. We don't need any more cost calculations
In reference to the calculation of costs, whoever leads an ABCosting project may find opinions such as "the accounting information we have is sufficient", or "having more accurate information is irrelevant because our salesmen know from experience how costs are formed".
Product managers or vendors know very well how unexpected situations can influence costs. In fact, a complex product will always cost more than a simple one; Furthermore, a demanding client will always demand more attention resources than a more conformist one.
The problem, however, is that managers or vendors don't know how much those higher costs are.
The problem lies in giving intuition greater importance than it has. You may know that one complex marketing product is more demanding than another, but sometimes that difference can be 500% when you estimate only 50%. It is a usual distortion and ABCosting makes this difference evident.
4. The cost scheme plays a minor role when designing the improvements in the processes.
On other occasions, it is considered that although ABCosting is a good tool to determine the costs of the activities, it has a limited role in designing an improvement in those activities.
This opinion is generally found among those who believe that process improvement should be based on the strategic benefits of improvement rather than cost reduction.
This view is true of ABCosting's goodness in producing valuable information that leads to cost reduction.
The use of drivers or inductors explains how costs flow to cost objects (product, services, customers, etc.), explaining how they are accumulated until reaching them.
It even explains how simple decisions can become huge “snowballs” in terms of the accumulation of costs that these products and services must later bear.
But ABCosting doesn't just provide cost information. It allows simulations to be carried out to improve processes and order them within the cost parameters that these improvements can support.
Thus, the analyst will have a very powerful real basis to propose process improvements based on both strategic and cost aspects.
