Have you ever wallpaper a wall? Has it not happened to you that after a short time the edges or key points begin to peel off? It usually happens in weeks or sometimes days. If this has already happened to you then you know that a correct preparation, installation and selection of materials are critical steps so that this does not happen and your wallpaper lasts a long time. The activity-based costing system (ABCosting) has already proven to be more than just a passing fad. In the last decade it has become the most relevant methodology not only to control costs but also to improve the profitability of products and services, increase revenue, improve customer relationships and achieve greater accuracy with budgets, for not to mention the improvements that can be achieved on the operational side of business.
But then why hasn't ABCosting spread widely among companies yet? The answer is simple: because most companies do not understand the long-term nature of ABCosting. Let's see some of the most frequent mistakes that are made when dealing with an ABCosting system:
1. Approach ABCosting only as a project
In general, companies start an ABCosting project to solve some thorny problem, such as low profitability per client, or an escalation of costs in a certain department. But once the ABCosting project ends solving the original problem, it tends to be abandoned; little or no effort is made to maintain it or to expand it to other areas of the company. As a result the company reverts to its old costing system and eventually ends up encountering the same problems it had before ABCosting. That is the problem of conceiving ABCosting only as a project and not as a system of continuous improvement.
2. Underestimate your strategic potential
ABCosting is often viewed as a costing technique implemented for certain purposes rather than as a tool for measuring both past and future costs.
For example, one of its most important but generally unknown uses is in the area of strategic planning. When your company's strategic plans change, ABCosting can determine exactly what impact it will have on costs. Companies that have little experience with ABCosting tend to underestimate the consequences of these critical changes, such as increased sales, increased services provided to clients in related departments such as Human Resources, Systems or Operations.
It is known that the system for calculating costs through conventional accounting does not offer all the answers that those responsible for the company need to know. For example, if a growth strategy is adopted, not all fixed costs remain unchanged, but many of them are also dragged by a higher volume of sales; Or the company may be embarking on this growth strategy without knowing if its administrative or operational structure is able to support the higher level of activity.
A good ABCosting model will link the present cost structure with the highest future revenues and will establish the weak points where the strategy can fail
3. Collect data overwhelmingly
The mistake is usually made of expecting ABCosting to provide an answer to all the problems that the company has and therefore many initial objectives are defined, which causes a considerable effort to search for information. Then the team responsible for ABCosting notices that the job of keeping the model up to date becomes overwhelming. The amount of data required is so great that the system collapses under its own weight.
This is particularly true if you use a manual data entry system in your ABCosting model. A manually developed ABCosting model can be useful as a starting point in the use of this technique, but it is unsustainable if it is to be incorporated continuously in the company. As your ABCosting model progresses, you will need to find a way to integrate it automatically with established systems.
4. Use inconsistent information
Companies that inert their efforts at ABCosting often have data integration problems. Inconsistent information produces disparate interpretations of accounting terms such as income that yield different values depending on the departments that report them.
This affects the ABCosting model, which requires standardized common terms for the entire company.
5. Coexistence of two types of information
One of the obstacles that the company must overcome is the existence of two types of cost information, one provided by conventional accounting and the other by ABCosting. Instead of seeking its complementation and integration, companies tend to return to traditional accounting and gradually abandon ABCosting.
6. Failure to transfer acquired knowledge
Frequently, the ABCosting system is due to the initiative of an official with a desire for improvement and dynamism to inject new analysis techniques into the company. However, if that official leaves the company, the ABCosting project is abandoned.
7. Resistance to accept the conclusions
ABCosting reveals with astonishing accuracy how costs originate within the organization. This information may not sit well with some managers or managers, who may feel threatened in their position within the company due to these ABCosting findings.
For example, it may be determined that the company's largest client is in deficit due to the large number of commercial or service concessions that have been made to it. Let's imagine that these conclusions will not go down well with those responsible for serving said customer.
Some ways to solve these problems:
1. Link ABCosting with other permanent improvement systems
The true contribution of ABCosting should not be limited to obtaining results for a department or business unit, but it is in the way in which it can interact with other improvement techniques that are applied throughout the organization.
For example ABCosting offers much better and interesting results when complemented with EVA or Balanced Scorecard or ISO quality measurement systems. ABCosting can provide correct cost information for performance measurement, which is the clearest management trend towards which management techniques are heading.
2. Create a Data Warehouse
To avoid the problems of coexistence of two cost systems, it is necessary to integrate the ERP system (administrative accounting) with ABCosting. The information registered via ERP must be exported to ABCosting. This can be done electronically and automatically which avoids the cumbersome problem of manual data entry. With the same source of information, your ABCosting model will be able to offer “what if…” reports, analysis under different scenarios, planning and budgeting, etc. But a word of caution: do not forget that it is important to be able to compare "pears with pears", that is, to give consistency to the data.
3. Set realistic goals
The best ABCosting models are those that can be updated without involving an intolerable workload for those responsible for carrying them out. Limit your model to calculating costs for those cost objects that you are actually able to handle. The biggest mistake is wanting to allocate all costs with a high degree of detail. The workload will be so great that the greatest efforts will be in the current update of the model and not in the analysis of the results.
4. Define managers and sponsors
When an ABCosting initiative is endorsed by someone, the senior board has a much better chance of coming to fruition. Also key is the figure of the leader in ABCosting, who will put the energy necessary to develop the system.
5. Use the Activity Dictionary
The dictionary must contain the description and definition of all the activities of the model, including Cost Drivers, supplier information, customer information and all input and output of information. The purpose is that all users receive the same concepts; This avoids mistakes and misunderstandings.
6. Limit yourself to a single ABCosting system in the organization
Some companies present two or more ABCosting systems coexisting together as a result of initiatives taken in different areas. To make the leap towards a single integrated ABCosting system, all the models must be standardized into one that is capable of responding to the needs of the different areas.
7. Make ABCosting a real thing for your people
The current technology in ABCosting models is so developed that it is capable of sending cost information of each activity on a daily basis to users who require it, allowing them to guide them on their performance with respect to departmental or general objectives. This information is particularly useful and motivating when there is a system of rewards and benefits according to the performance of the agents. The underlying incentive encourages improvement in the quality of ABCosting models.
Conclusion:
Take these precautions to plan and start your ABCosting model and make it a sustainable and useful tool over time. Your benefits are important and the biggest concerns will be with your competitors.
