Activity Based Management - Dispelling the myths - Part II

16 June 2008 |

This is a Guest Post by Rajendra Patil, Pune, India

Profile: View Rajendra Patil's profile on LinkedIn A technocrat with 17 years of proven success in ERP Implementation, Business Analysis, Consultancy Assignments in Strategic Cost Management, Profitability Analytics, Performance Management and Business Process Management in conjunction with the enterprise wide BI solutions. Currently working as an independent consultant in the area of Performance Management and Profitability.

This is the concluding part of earlier post Activity Based Management - Dispelling the Myths - Part I

Myth: Cost systems play a limited role

Fact:

Traditionally this has been true and it has its own reasons. The calculations were not accurate. As it was based on putting overheads as ‘peanut butter’, it did not reflect the changes in the business scenario into the costs.

ABM benefits the organization in various ways like

  • Information for effective decision-making

  • Information to continuously improve processes and reduce costs

  • A focus on significant costs

  • A relationship between organizational cost and organizational value

  • Methods to measure performance with accountability

  • ABM can be used strategically to understand and improve profitability of the organization, operational performance and resource planning.

Myth: We cannot do anything about fixed costs;

Fact:

We can look at fixed costs in couple of ways

  • Fixed costs are fixed eternally. If we take into consideration a longer time horizon, then we can see the fixed costs are also changing. In that case we have to understand the reasons that are changing the ‘Fixed’ costs.

  • Fixed costs are generally attached with corresponding capacities. The investment should match with the required capacity. Alternatively the organization should look for the business that uses maximum if the installed capacity.

  • These fixed costs have to be taken to the products, customers or channels according to the ‘Cause-and-Effect’ relationship.

Myth: Only manufacturing costs are product costs; and Product costs are not useful for managing overhead activities.

Fact:

ABC is based on the ‘Cause-and-Effect’ relationship. The costs can be caused by product, customer, vendor, channel etc. We have to trace the expenses to the proper origin. This helps us to understand the relationship of the costs with the business scenario. With the help of this information we can take current business decisions as well as plan our costs in the future.

The companies that have implemented SAS Activity Based Management Solution

  • Lakshmi Machine Works
  • ING Vysya Life Insurance

On MS Excel

  • Kirlosakar Brothers
  • Thermax
  • Suzlon Energy
  • NCDEX
  • Wockhardt Hospitals
  • Kores
  • Syngenta
  • Merck
  • Crompton Greeves

If you have any questions on Activity Based Management and its implementation, you may post your comments on this blog post or write to Rajendra Patil on rajendra@appsconsulting.in on specific issues or concerns.

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