This is a Guest Post by Rajendra Patil, Pune, India
Profile: 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 a reply to the earlier post on “Activity Based Costing – How to collect information“. Rajendra answers few questions:
Q. How would a management accountant gather information and set rules for cost allocation ?
A. There are various techniques experts have created to collect the information starting from interviewing people, surveys, story-boarding to auto data transfer from the back-end processing business applications. The rules are defined in the paper model that is created for the organization. This paper model depends on the objectives that the organization has decided for the assignment. This model is different for different objective like profitability, cost improvement, resource planning etc. Sometimes the main model remains the same but multiple small models can be created for specific business pains. The logic for flowing the costs depends on the objective and the model.
Q. If the company has the good information system (ERP), then setting the rules are important. Then it would be an overnight job to run to allocate the costs based on set rules. Otherwise ABC will be labour-intensive with Management Accountants spending lot of time gathering the information rather than analysis them.
A. Yes if the organization has a good OLTP then collecting the data from the system is comparatively easier. Now we have various ETL tools to get the data. Some of the ABM solutions have created their own adapter for the ERPs like SAP or Oracle etc. Even if the organizations has any ERP, there is some part of the data that is still not available in those systems like the time spent on various activities or the no.of visits to a prospect (if CRM is also not present). This data has to come from various persons in the organization. Hence, the success of this assignment lies in the participation of the key personnel from various departments.
Technically this kind of data can be collected via web-based survey systems. The organization has to spend some time in the initial model creation and data collection systems, once that is done then the frequency of data collection is once in a quarter. So the people get ample time to analyze the data.
There are implementation methodologies like ‘Rapid Prototype’, where a first model which is very raw can be build in as less as two days. Then this model is expanded as required by the organization in those areas only. In the modeling the definition of the driver (the logic with which the cost flows) should be as accurate as possible. The corresponding data may not be accurate to start with. The accuracy of the data can be improved, but only when it is required. One should not wait for the accuracy for the data to the last minute or Re etc. This is used take business decisions and 80% accuracy in primary data is also good enough.
Now-a-days this collection of data and processing of it is being outsourced and various KPO organizations are eying that business.
Q. Or is ABC feasible for a company ?
A. Yes, it is feasible for all the organizations, which have multiple products, customers, channels, locations etc. These type of multiple options create the overheads in the organization which ABC puts using cause-and-effect logic. It would be easier if one takes professional help in the initial implementation as well as using commercial software for the same. It helps the internal team on understanding how to analyze the data. The calculation of the numbers is better left to the software application.
I hope these answers will help you to understand the practical solutions for the implementation as well to create new questions in your mind. Do let me know and I will try to answer them.
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 firstname.lastname@example.org on specific issues or concerns.
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