Why Use ABC?
Why Use Activity Based Costing
Why Use Activity-Based Costing (ABC)?
Gary Cokins, CPIM
Analytics-Based Performance Management LLC
Cary, North Carolina USA www.garycokins.com
919 720 2718
Copyright 2019 www.garycokins.com Analytics-Based Performance Management LLC 1
Why Use Activity Based Costing
Founder, Analytics-Based Performance Management LLC
B.S. Industrial Engineering & Operations Research; Cornell University, 1971
M.B.A. Finance & Accounting; Northwestern University, Kellogg School of Management, 1974
Why Use Activity Based Costing
Traditional Overhead Cost Allocations are Flawed and Misleading
When CFOs “allocate” indirect expenses (i.e., overhead) to products and standard service-lines, they spread it like “butter across bread”.
CFOs violate cost accounting’s universal “causality principle.
Activity-based costing (ABC) resolves this by “tracing and assigning” expenses based on cause-and-effect relationships for how products consume work activities, which in turn consume the expenses.
Why Use Activity Based Costing
The ABC Framework- The CAM-I Cross
Why Use Activity Based Costing
ABC Cost Assignment Network
Why Use Activity Based Costing
Standard Costing Over- and Under-Costs Products
Why Use Activity Based Costing
Organizational shock from the truth
Why Use Activity Based Costing
More important than a better costing methods are its results.
Why Use Activity Based Costing
Take Actions to Raise the “Whale Curve”
Source: Alireza Sarraf; permission to use granted
ABC Quotes
“It is better to be approximately correct than precisely inaccurate !”
“In the land of the blind, the one-eyed man is King.”
Why Use Activity Based Costing
Why Use Activity Based Costing
Why Use Activity Based Costing
In this graph 17% of a supplier’s customers generate 93% of their profitability.
Why Use Activity Based Costing
Customers tend to cluster. Medium-volume customers can be much more profitable than large-volume customers!
Why Use Activity Based Costing
ABC Provides the Data for ABM
Why Use Activity Based Costing
Typical Excuses Preventing Being Progressive
We are profitable, so why does it matter?
We will purchase software that will fix our problems.
We already know our “true” costs from our general ledger financial reporting system.
We have done it this way forever. And we don’t do that here.
We already know everything. It is in our heads.
We are a small organization. We’ll worry about better methods when we get larger.
All this hype is just made up stuff from highly paid consultants.
No one looks at the reports I create, so there is no point generating better reports.
We cannot afford better software to fix our problems.
We are way too busy doing other things. We don’t know where to start or how to get started.
Source: William Vaughn Company CPAs; IMA conference, June 20, 2019
Why Use Activity Based Costing
Most CFOs take the left-side path!
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Copyright 2019 www.garycokins.com Analytics-Based Performance Management LLC
Why Use Activity Based Costing
How I became an expert with ABC
Why Use Activity Based Costing
Why Use Activity Based Costing
Balancing Levels of Accuracy with Effort
Why Use Activity Based Costing
Balancing Levels of Accuracy with Effort
Why Use Activity Based Costing
“Are Accountants Homo Accounticus?”
Thank You
Gary Cokins, CPIM
Analytics-Based Performance Management LLC
Cary, North Carolina USA
www.garycokins.com 919 720 2718