Background
A study was recently conducted among Better Management members to determine the status of Activity Based Costing. 528 participants from companies from various industry sectors, sizes, geographic locations, and job levels were asked to complete an online survey. The specific objective of the research was to determine how Activity Based Costing was used in their respective organizations.
Findings
Who completed the survey
Industry. The study participants came from a variety of industries. The manufacturing industry was the one with the highest representation with 24%, followed by the financial services industry with 18%, the public sector with 16% and the communications sector with 18%. The rest of the industries represented less than 5% each. (Appendix A).
Income. Small companies with less than $ 100 thousand pesos of income represented the largest group in the study sample (42%). Medium-sized companies (from $ 100 to $ 1 million) made up an additional 33%, while companies with revenues of more than $ 1 million accounted for 25%. A good portion of the survey participants (10%) reported an annual income from their companies of more than $ 10 million. (Appendix B).
Activity Based Costing Status
More than half of the participants (55%) indicated that their companies were using Activity Based Costing either actively or in a pilot program, while another third (32%) indicated that they were considering using it. Only one in ten (11%) had not evaluated the use of ABC. A very small portion of the companies (2%) had stopped using Activity Based Costing. (Figure 1)
It was not surprising that the use of Activity Based Costing increased along with the size of the company.
While only 42% of small companies use Activity Based Costing pilot programs, 58% of medium-sized companies and 71% of large companies use some form of ABC. Overall, about nine out of ten companies of all sizes are spending money on ABC or are evaluating whether to do so. (Graph 2).
Graph 1: What is the best description of the Activity Based Costing Status in your company?
Graph 2: Currently use or consider using ABC (By company size)
The use of Activity Based Costing also varies by industry, as reported by study participants.
Financial and communications entities are more likely than the rest of the industries to have an active and based Activity Based Costing program. It seems that manufacturing companies lag behind in the adoption of ABC, with equal proportions in the pilot phase and in the active phase (24% each). However, many companies in this industrial branch are considering acquiring an Activity Based Costing system and a large percentage of them (41%) are considering one in particular.
Public sector companies appear to be somewhat less determined. While 52% report using a certain type of ABC system, 19% of public sector organizations are not considering an ABC system and apparently are not looking for one. (Graph 3).
Graph 3: Currently use or consider using ABC (By type of Industry)
Main uses of Activity Based Costing
Participants were asked how they used Activity Based Costing and were given the opportunity to provide a single answer. The main use of ABC among a little more than four in 10 companies (43%) is for calculation and cost control. A fairly similar percentage uses Activity Based Costing primarily for process improvement (17%), product profitability (17%), or customer profitability (14%). (Graph 4)
Figure 4: Primary Use of ABC
Graph 5: Main use of ABC (By company size)
The study revealed some slight differences in the main uses of ABC by company size. Costs and cost control was mentioned by more respondents than any other use, regardless of the company's income. However, a high percentage (22%) of medium-sized companies, higher than in other sizes of companies, indicated the profitability of the product as its main use. Small businesses are more likely than their larger counterparts to use Activity Based Costing primarily for process improvement (21%). (Graph 5)
The primary use of Activity Based Costing differs widely by industry. In the public sector, the main focus is on cost calculation and control (60%) and, as would have been expected, with no emphasis on profitability. Among manufacturing companies, the primary use of ABC is for the calculation and control of costs, by 44%, but the improvement of products and the profitability of products are the main uses in the same proportion (21%). Among communications companies, process improvement is less central than in other industries (8%). The two main uses in the financial services industry are cost calculation and control (33%) and, unsurprisingly, product profitability (31%). (Graph 6)
Graph 6: Main use of ABC (By Industry)
Group responsible for initiating Activity Based Costing in the organization
The Finance area initiated Activity Based Costing in half (50%) of the companies that participated in the study. Operations was the responsible area in one in five (20%) and multifunctional teams from various areas make up the remaining 14%. Marketing or Sales divisions started ABC in a small number of companies. (Graph 7)
Graph 7: Which Department first implemented ABC in the company?
The responsibility for the initiation of Activity Based Costing in the different companies does not differ mainly by company size. The Finance area was responsible for starting ABC in fewer small companies, as opposed to large ones. (Graph 8)
Small differences between the different industries are verified. The Finance area started ABC in approximately four out of five companies in all industries. In the public sector, multifunctional teams from various areas played a more important role than in the rest of the industries (24%) and the Operations areas an even less significant role (13%), since, naturally, the areas of Marketing does not constitute a factor of importance within these organizations. The Marketing area was responsible for starting more Activity Based Costing programs than in other industries (Graph 9)
Graph 8: Which Department first implemented ABC in the Company? (By company size)
Graph 9: Which Department first implemented ABC in the Company? (By type of Industry)
Main results obtained with ABC
Respondents were asked what they use their ABC results for and were given the ability to provide a single answer. Six out of ten respondents indicated that their ABC reports mainly support the organization's performance management, a fact that correlates with the use of ABC for cost calculation and control. One in five companies (19%) indicated that ABC reports mainly supported pricing. Fewer companies indicated that the main result supported by ABC was customer intelligence or measures of marketing performance (7% and 5% respectively). (Graph 10)
Graph 10: What are the results obtained by ABC used for?
Entre los distintos tamaños de compañía, la mayor diferencia en el principal resultado respaldado por Activity Based Costing se encuentra en las empresas de gran tamaño. La administración de desempeño de la organización es el principal resultado respaldado entre más empresas de gran porte (63 %) en comparación con empresas medianas y pequeñas, mientras que el establecimiento de precios es el resultado menos respaldado por estas empresas (10 %). (Gráfico 11)
Among the various industries, the largest references in the main supported results are in the public and manufacturing sectors. Organizational performance management in the public sector is the main result supported by a higher percentage of companies than in other industries (69%), while price setting was cited less frequently as the main result in this group. Conversely, only 50% of manufacturing companies indicated the organization's performance management as the main supported result, while the price setting was significantly higher (33%) in this branch compared to others. (Graph 12)
Graph 11: What are the results obtained by ABC used for? (By company size)
Graph 12: What are the results obtained by ABC used for? (By industry type)
Measure Marketing performance Improve Organization Performance
Determine Sales Prices Business Intelligence (Market Segmentation)
Others
Using Activity Based Costing for decision making
In four out of ten (39%) of the companies represented in this research, it appears that all C-level managers rely on the information provided by ABC. The CEO or COO are the main users of the information in 15% of the companies, followed by the CFO in 14% and a small number, 1%, indicates that the CMO uses the information. Interestingly, 10% of respondents did not know who relied on ABC data to make decisions, and 13% indicated that others did so.
Graph 13: Who uses ABC information for Business Decisions?
There are a few notable differences in the use of ABC information based on company size, but the most significant is that as company size increases, the use or reliance on information provided by ABC by C-level managers to make decisions is reduced. This is likely due to the high personal involvement of C-level managers (sometimes owners) in small businesses. Small businesses with incomes of less than $ 100,000 are also more likely to know who is based on information from ABC. (Graph 14)
In the various industries there are slight differences in who is based on ABC. In the public sector, fewer C-level individuals are reported to be based on ABC information, and a significantly higher percentage of respondents did not know who based this information within their organization. In the communications industry, a lower percentage of C-level managers relies on information from ABC, and a larger number chose the answer 'Other'. Many of the "Other" responses refer to people from various areas within the company, suggesting that the use of ABC is not necessarily restricted to the C-level function. (Figure 15)
Figure 14: Who uses ABC information for Business Decisions? (By Company Size)
Figure 15: Who uses ABC information for Business Decisions? (By Industry Type)
Main challenge in the implementation of Activity Based Costing
The main challenges companies face in implementing ABC vary. Fewer than half of respondents indicated challenges related to model manipulation: designing and building the model (30%) or updating and maintaining the model (18%). A third of respondents suggested that the biggest challenge is data-related: gathering the data (22%) or integrating and loading the data (11%). Only one in 10 (10%) indicated that the generation and distribution of the reports was the main challenge of the ABC instrumentation. (Graph 16)
Graph 16: What is the Objective when implementing ABC?
The challenges of implementing Activity Based Costing vary according to the size of the company. The most frequently cited problem among respondents from large companies is data collection (28%). In medium-sized companies, the main challenge seems to be the design and construction of the model (37%), while small companies have difficulties in collecting the data and in designing and building the model (31% and 27% respectively). (Graph 17)
Among the public sector entities, relatively similar percentages were found between the challenges posed by the design and construction of the model (35%) and data collection (33%). The challenge most frequently posed by companies in the manufacturing sector was to design and build the model (43%). In the communications sector, the main reported problems were the design and construction of the model, as well as the maintenance of the model (25% each), closely followed by the collection of information (21%). In the financial services sector, the design and construction of the model was the most important challenge with a percentage of 26%. (Graph 18)
Graph 17: What is the objective when implementing ABC? (By Industry Type)
Graph 18: What is the objective when implementing ABC? (By Industry Type)
Model approach used for ABC
The operational model, which includes numerous activities and «drivers» (cost inductors) is the one most frequently used in Activity Based Costing (54%). Only slightly more than one in five companies (22%) reported the use of a model that is limited to a specific function or business unit, and a slightly smaller number (20%) indicated the use of a strategic model with fewer of activities and drivers. (Graph 19)
Graph 19: What type of Model do you use at ABC?
Limited
model Model to a Strategic unit - business
Numerous Activities and Drivers; 54%
Model approaches vary slightly across different sized entities. While businesses of all sizes indicate that they use an operational model more frequently, this trend decreases with company size as the use of a strategic model increases. (Graph 20)
Among the various industries, the most significant difference in the use of model approaches is found in the public sector.
Two thirds (67%) of companies in this industry sector use an operating model, a significantly higher percentage than in any other industry. These organizations are also less likely to use a model limited to a specific business unit or function (16%) (Graph 21)
Graph 20: What type of Model do you use at ABC? (By Company Size)
Graph 21: What type of Model do you use at ABC? (By Industry Type)
Cost allocation methodology used
Half of the study participants reported using a combination of quantity allocation and driver consumption as drivers of cost use. One in four (25%) use the allocation method, and one in five (20%) use the driver consumption approach.
Figure 22: What cost allocation methodology do you use at ABC?
Cost allocation methods vary slightly by company size. Large companies are more likely to use a combination of methods. Those that use one or the other method do so in uniform proportions. Small businesses are more likely than medium-sized companies to use a combination of both methods (52% vs. 43%), but their use of quantity allocation is greater than that of driver consumption (27% vs. 16%).. (Graph 23)
There are slight differences in the allocation of costs between the various industries. Among all industries, a combination of quantity allocation and driver consumption was reported as the most frequently used cost allocation method. Public sector and finance companies are more likely than other industries to use a top-down approach, and much less likely to resort to consuming drivers. A greater use of the driver consumption approach was reported among manufacturing companies than their counterparts. (Graph 24)
Figure 23: What Cost Allocation Methodology do you use at ABC? (By company size)
Graph 24: What methodology of Cost Allocation do you use at ABC? (By type of Industry)
Graph 25: Has training been included in the implementation of ABC?
By company size, the only difference is between large companies, which are interestingly less likely than smaller organizations to include and report on training in the model. (Graph 26)
Regarding industries, the public sector group is less likely to include and report training on the model than other industries (18%), while manufacturing is more likely (37%). (Graph 27)
Graph 26: Has training been included in the implementation of ABC? (By company size)
Graph 27: Has training been included in the implementation of ABC? (By type of Industry)
APPENDIX
Graph A: What type of Industry does your company belong to?
Chart B: How big is your Company?
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