Organizational management is a vast and complex field, and the diversity of software available to support operations is remarkable. Each type of software plays a unique role, serving specific needs. Therefore, MyABCM stands out as a specialized solution that excels in addressing specific challenges of cost and profitability management in companies, not as a substitute for BI tools, despite having embedded BI to benefit companies without a BI solution.
While BI generates dashboards that merely compile and display information obtained from other software and data sources, MyABCM processes and transforms information cubes, cross-referencing and calculating from various sources to then generate new data that can serve as a basis for cost and profitability management, providing vital reports for decision-making. Thus, it plays a more strategic role, offering features that enable understanding the actual costs of the business across different dimensions, such as channels, customers, activities, and specific products, etc.
In other words, the goal here is to minimize the use of cost allocations throughout the organization and, consequently, eliminate the terrible distortions linked to these allocations that can be very dangerous for companies, impacting various managerial decisions on pricing, sales commissions, discounts, etc.
A BI, on the other hand, seeks existing data in the organization such as Accounting Accounts, Production and Billing Volumes, periods, and others, and presents this information in an organized and didactic way. However, note that here there is no transformation of information, and therefore, the allocations continue to occur. For this reason, Prof. Bala Balachandran from Kellogg University in the United States often comments that “these increasingly sophisticated BI systems allow extremely misguided decisions to be made very simply and quickly!” which is a danger!
Let’s see an example:
Imagine a factory that produces various products from the same raw material: plastic. The ERP records data such as the value of input purchases, payroll, accounting entries, production and billing volumes by product and customer. Potentially, we have here a flawed cost model, since allocations were used for the costs of support areas and, although we know precisely the billing customer by customer, this information is of little use when we want to understand the result customer by customer, after all, we do not have information on the “costs of serving”, we did not allocate marketing and sales expenses for these customers and channels and we do not even know to which areas the IT expenses are being allocated in the organization.
MyABCM, in turn, allows for a sophisticated modeling of costs and profitability, which essentially consists of designing a structure where the various accounting accounts of the company are allocated using allocation criteria that make sense and respect a cause-and-effect relationship through multiple levels until reaching the dimensions necessary for the client to manage their company. These dimensions may include Products, Customers, Channels, Markets, Projects, Businesses, Segments, etc., and also include the costs of support areas. In this way, we have a complete snapshot of costs with full traceability that allows managers to make the best business decisions based on facts.
And if you already have or intend to use a BI, do not worry. MyABCM integrates with all of them.
MyABCM stands out for its ease in the process of construction and data loading in the cost modeling structure. While BI software generally requires complex and extensive configurations, MyABCM is a ready-made calculation engine that requires only parameterization, without the need for development, simplifying implementation.
MyABCM has a robust calculation engine, optimized specifically for the requirements of cost and profitability management. Designed with a specialized distribution mechanism, it is capable of in-memory calculations, optimizing appraisal time.
The scenario-building function allows users to create and explore various hypotheses, providing a broader view of the financial implications of different situations.
Within the scope of scenario simulations, we have another important differentiator of MyABCM: push and pull simulations. The push simulation involves the sequential propagation of changes in variables throughout the model, to understand what the final result would be if some variables were changed. The pull simulation, on the other hand, goes back to identify the initial conditions necessary to achieve specific results, identifying bottlenecks and capacity constraints, and acting as a true sophisticated planning component in organizations.
This approach provides a deeper insight into the financial implications of different scenarios, allowing not only to anticipate changes but also to retroactively understand the factors that led to certain outcomes. This capability goes beyond the possibilities of BI’s, which do not perform such detailed and sophisticated analyses.
MyABCM offers detailed cost monitoring in different contexts, including Actual, Budgeted, Standard, and Goal, providing a holistic view of financial performance.
MyABCM is the only solution on the market that manages reciprocal costs in all modules and with optimized performance at the computer processor instruction level, an essential resource in interdependent organizational environments. By allowing allocations between sectors that share services and resources, MyABCM offers a more accurate and realistic view of costs.
As an example, imagine here that the IT area works for HR and also for Production; already the HR area also works for IT and for Production; note that between HR and IT we have a simultaneous cost allocation that must be calculated in order to avoid distortions in costs – MyABCM deals with this transparently and with extreme agility.
This process goes beyond the cost calculation tools offered by BI’s. The ability to handle interdependencies between sectors, essential for the financial health of the business, is not contemplated in BI’s, precisely because it does not align with their objectives.
BI software is powerful in generating reports. However, they depend on other tools to generate advanced calculations for cost management. MyABCM, on the other hand, offers the ability to create specific reports, tailored to the needs of cost and profitability management of the organization. This allows for a more in-depth and targeted analysis, optimizing the decision-making process.
Moreover, MyABCM offers integrations with other systems, such as ERPs and BI’s themselves, facilitating use in conjunction with various tools employed in the organization.
Ultimately, when choosing between BI software and a specialized solution like MyABCM, organizations should consider their specific needs for cost and profitability management. With its focused approach, advanced functionalities, and ability to provide precise insights, MyABCM stands out as a strategic choice for companies seeking more accurate and efficient financial management.
Learn more about how MyABCM can help your organization. Fill out the form below and talk to our experts!
Cost management is an essential but often complex discipline that challenges both students and business administration professors. Going beyond theory and showing how the process is done in the reality of an organization may not be an easy task, but it adds value to teaching and helps prepare students for the realities of the job market.
Therefore, we have developed our academic program with the aim of promoting good practices in cost management and helping educational institutions prepare their students for professional life. See what Professor Alex, who uses MyABCM at Universidad Católica Boliviana San Pablo Regional La Paz, has to say.
“Over the past few years, I have been using MyABCM to teach cost management to my students. This program has completely transformed the way I present and analyze cost information in the classroom.”
One of the key features of MyABCM is the ability to create customized cost models that simulate real businesses. Professor Alex emphasizes, “I can configure different costing systems, such as job order costing, process costing, and activity-based costing. This allows students to experiment with different costing strategies and understand the financial impact of each decision.”
MyABCM stands out for its intuitive interface and ease of use, even for students with little experience. The Professor emphasizes, “The platform generates automated reports and charts that facilitate the analysis of results. This helps students develop critical thinking skills and interpretation of accounting data.”
In summary, MyABCM has significantly improved the effectiveness of Professor Alex’s classes. He highlights, “It allows students to learn by doing, rather than just reading texts and abstract theories. I would definitely recommend this innovative software to any cost accounting lecturer looking to make their classes more interactive and engaging.”
Professor Alex’s testimonial highlights the transformative impact of MyABCM on cost accounting teaching. By providing a practical and interactive experience, our platform not only simplifies complex concepts but also inspires critical thinking and prepares students for the challenges of the professional world. Together, we are raising the standard of cost management teaching, empowering the next generation of financial professionals.
In the dynamic landscape of education, innovative tools play a crucial role in enhancing teaching. In this article, we delve into the experience of Professor Laura Ghezzi, a Certified Public Accountant with a degree in Administration, who chose MyABCM to enrich her classes on Costing and Activity-Based Management.
Professor Laura Ghezzi shared with us why she chose MyABCM for her classes: “In the Costing and Activity-Based Management course, the professors were already familiar with the MyABCM tool from previous implementations in professional development and its previous academic use. This made it the first choice when thinking about a tool that demonstrates the application of the specific theme of the course.”
One of the main contributions of MyABCM to Professor Ghezzi’s classes is its ability to provide students with a concrete view of the implementation of ABC costing in business practice. “Being able to observe firsthand how the ABC system is implemented in real life is very enriching for students. This allows them to have a concrete idea of its application and the possibilities for subsequent analysis based on the data loaded into the software.”
When asked how MyABCM supports the teaching and learning process, the professor emphasizes: “In the course, we navigate directly through the tool in a case application in one of the classes. In another, we show the different tables and graphs obtained for the analysis of information for decision-making.”
Professor Laura Ghezzi’s experience highlights MyABCM as an essential tool in her cost management teaching process. By providing a practical perspective on ABC costing, MyABCM not only enriches students’ learning but also offers a tangible approach to understanding and applying concepts.
Professor Ghezzi’s commitment to choosing a tool that not only meets academic needs but also has practical application in the professional world positions MyABCM at the forefront of business management education.
Entel, a leading technology and telecommunications company, is transforming its cost management with the assistance of MyABCM. The organization, with operations in Chile and Peru, is renowned for its more than 20 million mobile subscribers and an extensive fiber optic infrastructure spanning approximately 11,000 kilometers, ensuring the continuity of interurban and international communications in both countries.
With the growing expansion of its services, technologies, and coverage areas in recent years, Entel has faced significant challenges. Managing an increasingly vast volume of cost information became essential, as well as providing an integrated and agile view of this data for relevant departments and decision-makers.
In response to this need, the company sought a solution capable of optimizing cost management and enhancing the traceability of cost information across its various activities.
The solution came in the form of MyABCM, chosen by Entel for meeting its specific needs. Firstly, it offered the ability to trace costs to the most granular levels, providing a detailed view of cost sources in all company operations, linking them to relevant service revenues and offering a precise visualization of the organization’s cost structure.
Furthermore, the tool provided users with the autonomy to explore and use its functionalities. This reduced dependence on external support and facilitated integration with other technologies used by the organization.
Another benefit of MyABCM was the agility in consolidating data and generating reports. With it, Entel accelerated the processing of analyses and data availability, making access to information faster and more efficient. This provided a clear and immediate view of costs, enabling more informed and agile decision-making.
MyABCM also brought greater transparency and reliability to the obtained data. The solution eliminated dependence on spreadsheets and ensured the integrity of cost information, essential for effective management.
By centralizing cost information and reducing the time needed for analysis issuance, Entel gained greater autonomy in operating its cost model and obtaining analyses. With the support of MyABCM, the company is charting a successful path in cost management and making strategic decisions for the future of telecommunications in its coverage region.
Almost 30 years ago, in February 1997, the main headline of Forbes Magazine featured an article by Prof. Srikumar S. Rao from Columbia University, which showed that the lack of control over rising indirect costs could bring organizations to an end.
In the article, Prof. Srikumar cited the real example of a giant American company that found a growth opportunity with the bankruptcy of its main competitor. However, contrary to what it expected, it started making losses instead of increased profits!
Upon further investigation, this company surprisingly discovered that its “flagship” product was unprofitable, and other products it considered unprofitable were, in fact, the most profitable ones for the organization. This happened due to a poor allocation of indirect costs.
How could such a large and intelligent company make such a basic mistake? It was revealed that the organization was allocating depreciation and other indirect costs based on the direct labor cost.
A product that consumed 20% of direct labor also ended up taking 20% of depreciation and overhead costs. However, there was a major flaw here: labor doesn’t depreciate, machines do.
In areas where there is high labor consumption, less machinery is usually required. The moral of the story: products that consumed a lot of labor should have received less depreciation and overhead costs – exactly the opposite of what was calculated.
The danger lies in the fact that direct costs are easy to appropriate: it’s straightforward to know, for example, how much raw material is used in a product or how much cash is in a specific bank account. But what about indirect costs? How do we allocate them correctly and coherently, respecting a cause-and-effect relationship?
A failure in this process, in the medium and long term, is often the cause of business ruin. Improperly allocated indirect costs can be detrimental to your business.
It’s crucial to exercise caution with any cost modeling that mechanically allocates indirect costs.
And remember: depreciation is just one of many indirect items! Indirect costs can include everything from toilet paper in the bathroom to IT, HR, and support area costs. The “lazy” solution is to allocate them proportionally to production volumes, transactions, or revenue.
To complicate matters, these indirect costs are becoming more significant for several reasons. Among them, we can mention an increase in automation, which entails a clear “replacement of people with machines.” Additionally, the growing diversity of products, services, customers, channels, suppliers, and machinery (i.e., increased business complexity) results in higher indirect costs due to the increased administrative effort – the management effort needed to handle this complexity.
Historically, these indirect costs only increase. Consequently, the distortions caused by arbitrary apportionment also increase. It is common to find situations in companies where a product, believed to be the “flagship,” is unprofitable. On the other hand, products considered unattractive are often the most profitable for the company, responsible for maintaining the company’s margins in the black.
Imagine three friends decide to go out for dinner. The first one is on a diet and orders a salad with mineral water. The second friend orders a delicious steak with wine, and the third orders lobster with sparkling wine and dessert. At the end of the dinner, they split the bill equally among the three friends.
Does this splitting seem fair to you? It is easy to identify and even find these distortions absurd. However, these distortions happen every day in many companies worldwide!
Now, if you were to ask for separate bills for each friend, where each one pays only for what they consumed, we’re talking about ABC, “activity-based costing,” which potentially eliminates these distortions in organizations and adequately addresses these indirect costs.
With some practical examples, it’s easier to visualize the weight of indirect costs and understand how activity-based costing allows us to identify and allocate them more accurately.
Take a simple billing activity: its total cost consists of the combined salaries and benefits of the people involved in this activity.
Traditionally, this total cost would have gone into a pool of “general expenses” to be arbitrarily allocated. However, with ABC, you divide this value by a non-financial measure, such as the number of invoices generated Thus, you obtain the cost per invoice. Count the number of invoices generated per product, multiply by this value, and allocate it to each product – this is the value of the “Billing” activity for each of your products. In addition to eliminating distortions, we achieve an important KPI (key performance indicator) for business management: the value of invoicing per issued invoice.
With this data, cost reduction studies, possibilities for outsourcing, and even monthly monitoring can be applied – something that simply would not be possible before activity-based costing.
The cost of this activity relates to the HR department’s effort specifically involved in hiring employees. It must be separated from other activities, such as payroll processing, employee evaluations, training, etc.
Suppose that, in a given period, 10 people were hired. Out of these, 5 were for Production, 2 for Maintenance, and 3 for Sales. Therefore, the costs of this “Employee Hiring” activity should be distributed as follows: 50% to Production (which will subsequently be allocated to products, also by activities), 20% to Maintenance, and 30% to Sales.
Apart from being able to allocate the costs of this activity, we obtain a critical KPI for decision-making: the cost of hiring per employee – this value can be compared with the monthly expenses of the previous months, the company’s target, or even the cost of outsourcing this activity.
The potential here is not limited to indirect costs! Several direct costs, for example, production or customer service costs, can (and should!) be broken down by activities, as we will see in the examples below:
Imagine you work in a manufacturing company and have been tasked with cutting costs by 10%. What would you do?
The natural path here is to try to understand which actions you would implement for this cut, and for this, it is essential to understand how costs are currently distributed.
With a lot of creativity, some possible options to reduce costs could include:
Note that all these cost reduction options are linked to the information provided by the company. And since the only managerial information we have is the amount spent on these costs and expenses, we are limited to actions related to this!
Now… imagine for a moment if these same costs were broken down by activities, considering their direct and indirect costs. Some of them would undoubtedly include:
Note that some possible actions now include:
Notice that instead of focusing on specific expenses, we are now also managing by activities, understanding how much each one contributes to the company’s results, proposing improvements, and conducting much more efficient management.
Now, imagine the same previous example, but applied to a bank and with an activity breakdown as follows:
After calculating the activities, including the correct assessment of indirect costs, it was discovered that the “Credit Analysis” activity cost $900,000 per year. If the total number of analyzed credits was 3,000, we can understand that the cost of each analysis is $300.
The first question to ask is: what is the value of each credit analysis? This is because the cost of the process is often more expensive than the actual cost of the credit being granted!
next, it is essential to consider ways to reduce these costs. Out of the $300 for each credit analysis, it was discovered that $50 was spent only on employees’ overtime while entering the credit requests into the bank’s old credit system. This specific task of entering requests could be outsourced for $10 per credit. With just this activity, a cost reduction of $120,000 is achieved.
Other options include rethinking the entire process, digitizing the requests, and even benchmarking between units to try to improve. And mind you, we are talking about a single activity. Learn more about how to develop a cost-reduction project.
Imagine this potential now applied to all the activities in your company – the possibilities are infinite!
While arbitrary allocation of indirect costs can be fatal for a company, accurate allocation can lead to significant increases in profitability through cost cuts based on precise data.
Just like the companies in our examples, your organization can also benefit from cautious and safe cost reduction by observing the costs of each activity in great detail to expand profit margins.
Fill out the form below and find out how!
ABC costing analyzes costs related to each activity in product manufacturing or service execution. Resources are allocated based on these activities to different products, services, markets, etc., providing a clear view of the company’s costs. In this way the company gains a more precise understanding of how each activity impacts operating costs, enabling better profitability management.
Studies and documentation indicate that large US industries used some form of ABC costing in the 1950s. However, the methodology only really became known with the dissemination and popularization of the studies of Professors Robert Kaplan and Robin Cooper in the United States in the early 90s.
These two professors identified that, for several reasons that we will present later, the method used to cost the various products and services no longer reflected the reality of what occurred in organizations, causing great distortions and greatly damaging the results of companies.
In their studies, Prof. Kaplan and Cooper identified 3 independent and simultaneous factors that justified the implementation of ABC costing:
Previously, direct labor accounted for around 50% of total product costs, with materials and raw materials at 35%, and overhead at 15%.
Nowadays, overhead can reach up to 60% of product costs, with raw materials at approximately 30%, and direct labor below 10% (in Service and Government organizations, overhead is even higher).
While using direct labor hours for cost allocation might have been acceptable until the mid-20th century, it no longer makes sense in today’s cost structure.
The number and level of competitors have changed significantly over time. Consequently, many organizations have experienced declining margins year after year, making efficient cost control extremely important.
In this context, implementing the ABC costing methodology enhances cost control, leading to increased competitiveness and improved profit projections.
The cost of implementation and measurement has significantly decreased due to the advancement and widespread accessibility of information technology. In the past, implementing an effective ABC costing system was prohibitively expensive and feasible only for companies with access to large applications running exclusively on mainframes and large computers.
As computer technologies advanced, the methodology became accessible to a broad range of organizations. Thus, the main reason why this costing system only became popular at the time of the publications of professors Kaplan and Cooper was the advance of computer resources (hardware and software). These technological advances allowed the system to move from theory to practice, especially in the implementation of cost models in more complex organizations that required greater detail.
The missing trigger for this popularization coincides with the emergence of mini and microcomputers in the late 1980s and the development of graphical software interfaces through the Windows (Microsoft), OS/2 (IBM), and Mac (Apple) operating systems.
In this way, applications that had previously been intended only for use on mainframes and large computers could be implemented in any organization, making them accessible to the various users and departments of a company.
Thus, today, many organizations have successfully used ABC costing in various segments, such as manufacturing, government, services, telecommunications, banking, logistics, etc. Its use, contrary to what many imagine, is not limited to large corporations, but can also be implemented in medium and small companies, whether public or private. Here, we’ll provide you with comprehensive information about this system, its benefits, and the implementation process. Take a look!
Traditional costing systems have emerged mainly to meet tax and inventory valuation requirements. However, these systems have several flaws, especially if used as management tools.
Traditional costing methodologies focus on the company’s various products, apportioning total costs to them based on the assumption that each item/SKU consumes organization resources in proportion to the volume produced.
In this way, the various “volumetric” drivers such as a number of direct labor hours, machine hours, and raw material value are used as cost allocation criteria to settle overhead costs.
However, this approach results in figures that only reflect an average estimate. Despite the complexity of the calculation, it doesn’t precisely align with the specific characteristics and processes of each company.
These volume-based drivers also fail when dealing with diverse product shapes, sizes, and complexities. Additionally, there is no direct relationship between production volume and the efforts or costs consumed by the organization.
As a result, many managers of companies providing diversified products and services, when applying these traditional models, are making extremely wrong decisions regarding prices, product and service mix, and even processes.
Unlike traditional costing systems, activity-based costing centers on the organization’s processes and activities. It also provides special attention to often overlooked aspects in companies, such as the cost of different customers, channels, markets, and regions – essential for making accurate decisions.
In the beginning, costs from each activity are tracked within the company. Then, these costs are allocated and analyzed to determine how each activity impacts the final costs, enabling a precise assignment of expenses.
Thus, the various costs are allocated from the various activities to the various Products, Customers, Channels, etc. based on the use of these by each activity of the organization. In this way, overhead is allocated appropriately, always respecting a cause-and-effect relationship and not using “volumes” as the basic apportionment criterion.
Once the activities have been costed, the organization can begin to manage them, frequently questioning why each one is influencing or impacting the costs of the various products, customers, channels, and services in the company. With this system, the costing process becomes more accurate and precise at the same time.
What makes this costing model an extremely efficient methodology is something that starts with the way of thinking about cost. What was treated by other models as an indirect expense linked to a product becomes a direct expense. The focus then becomes the activities performed, not the products that come from them.
The crucial aspect lies in recognizing that each product, service, customer, or channel results from a variety of activities. Treating them individually enhances the description and conversion of their specificities into more accurate values.
The effectiveness of this costing methodology relies on its capacity to establish logical traceability for expenses. As it’s not bound by the temporality of each process, ABC costing can identify and assign each expense to a specific activity.
In this way, even if certain expenses are grouped under the same cost center, they will be organized according to the activity to which each one is linked.
This optimization of cost control delivers multiple benefits to the company across various sectors, as we’ll demonstrate below.
There are several advantages to implementing ABC costing in a company, extending beyond accurate cost definition for products, services, customers, and channels.
Below, we will describe some of the most important ones to highlight how this methodology enhances the company’s profitability and empowers managers in decision-making.
After creating a model with studied cost allocation criteria and defined future implementations, decision-makers gain access to better and more precise information.
This improves the company’s planning and decision-making processes. Managers gain more power in forecasting future profits and expenses and have well-founded arguments for effective decision-making, including product and service pricing, product mix, outsourcing or internalization choices, research and development investments, automation, marketing, campaigns, and more!
In this item, we can mention not only the collection of more transparent data on expenses in each sector but also a review of internal controls and greater visibility of each process.
With comprehensive information about various processes and their impact on Products, Services, Customers, and Channels, the company can make more confident decisions. Managers gain additional tools to manage team expenses and access data for auditing and expense analysis.
With a clear understanding of activity costs, managers can base decisions on business processes and activities. Moreover, by assigning “labels” to mapped activities, they can analyze which ones add value and which ones do not, for instance.
Describing the specificities and costs of each process enables a multidimensional analysis of expenses in each activity, from a global perspective to detailed visualization of each activity’s cost and its impact on profitability. This identification allows adjustments to reduce unnecessary expenses and revise planning to align with actual costs.
Achieving an increasing cost reduction, then, becomes only a matter of time, as each manager will have access to more accurate information to analyze these processes.
Additionally, it’s essential to note that the methodology’s effectiveness in controlling expenses makes it efficient for both small and large companies, regardless of their area of operation.
The implementation of an ABC costing system may seem complicated and will vary slightly depending on the size and complexity of each company’s activities, products, and services.
But to facilitate the process and enable the implementation of the ABC methodology to be carried out effectively, you can use the steps listed below as a reference.
They apply to all sizes of companies and business models, helping to create an activity-based budget and promoting greater control over the organization’s costs and profitability.
Sophisticated cost modeling demands a dedicated system. While some companies use spreadsheets for costing, others attempt ERP customization or believe BI can address management costing challenges.
However, the auditing and consulting company Ernst & Young (EY) does not recommend any of these options. According to EY, “Model development can be performed in Excel, Access, or even in-house development, but this can only be done for very simple models and even these simple models will present severe restrictions when more elaborate analysis is required. Not to mention specific issues of integration with existing systems, traceability, auditing of the model, and the security of the data itself.”
As for ERP implementation, we know how expensive and complicated it is to customize these systems. In addition, they provide a static and plastered view, which does not provide the flexibility required by such an implementation.
As for BI systems, these are platforms for presenting the information that already exists in the organization. But as we know, such cost modeling requires deep transformations from the point of view of allocations, including reciprocities and understanding of costs at multiple levels and dimensions, something not so easily or virtually impossible to implement in a BI.
By addressing these practical implementation issues, the MyABCM product suite stands as the global leader in managerial costing solutions. Offering multidimensional analyses, it empowers organizations to model, analyze, and simulate with great flexibility, security, and, most importantly, full integration with corporate systems.
It is crucial to determine the objectives of an ABC costing project. Does it aim to determine costs for Products only? What about Customers, Channels, Markets, Regions, or Projects? Defining clear project objectives is essential to avoid mid-project changes in assumptions.
Additionally, creating an implementation agenda is crucial, including defining the desired depth of the project, possible criteria, ideals, and implementation milestones.
Efficient implementation requires intelligent activity mapping. In such projects, managers often aim to map hundreds, thousands, and, at times, tens of thousands of activities, sometimes even at the task level.
This is an attitude of great inefficiency, since by mapping many activities, the effort will certainly be too great to result in a small benefit, especially for those activities that are not very relevant. In addition, modeling too much complexity in the first round makes the initial integration of the model with corporate systems a major challenge.
“Best practices involve modeling in stages, increasing complexity as the model evolves while considering the relevance of the mapping. As noted by Cost Management expert Gary Cokins, ‘Organizations must assess their performance in what is crucial and relevant to the business.”
Here it is necessary to define the initial costs, expenses, cost centers, accounting accounts, possible groupings (Cost Pools) to be established, and Revenues that will be the initial Resources to be allocated.
This part of the planning is important so that each Resource is linked to a process and this is identified according to its relationship with the activities linked to a product, service, customer, channel, or project.
After defining Resources and Activities, establish cost drivers and the criteria for their utilization.
In this way, the calculation process will make sense, as there will be a link that represents a cause-and-effect relationship between sources and their destinations.
Once the model is defined, it is time to calculate it, generate simple and complex cubes (which will later support the various analyzes through dynamic tables), and create a system that allows simple and advanced simulations (what-if).
By applying and analyzing reports, it is possible to evolve the system, effectively tracking an increasing number of relevant activities for the company.
Implementing an ABC costing system provides better control over the organization’s costs. The methodology develops precise cost tracking and allocation models, identifying values associated with each process and activity, and their impact on company profitability.
This enables an efficient activity-based management system, facilitating resource reallocation and structured cost reduction, promoting high profitability even in a highly competitive environment.
Moreover, the system empowers confident decision-making, providing secure pricing and comprehensive analysis and control of products, markets, channels, customers, etc.
Thus, its implementation culminates in greater profitability in the medium and long term, thanks to a detailed view of organizational processes and the resulting increase in the company’s competitiveness.
By considering the tips in this article, you can efficiently implement the activity-based costing methodology, leading to continuous growth for your company.
In this context, MyABCM software is specially designed to offer activity-based management, enhancing cost control and business profitability.
Hence, employing a system like MyABCM solution surpasses the activity and cost management capabilities of other software. The systems are tailored to address the specificities of businesses of all sizes, offering resource allocation in multidimensional analyses that cover all relevant company activities, adapting to various complexities, and ensuring the constant evolution of costing models.
Interested in learning more about our solutions and how ABC’s costing methodology can boost your business profitability? Fill out the form below to get in touch with our experts!
Universidad Alberto Hurtado is a public, non-profit institution of higher education with its primary campus in Santiago, Chile. Member of AUSJAL and FLACSI, two large groups consisting of over 200 educational organizations in Latin America, the university has great prestige and offers undergraduate and graduate programs in more than 20 areas of disciplinary areas in the humanities and exact sciences, as well as exchange programs.
Throughout its structure, the institution employs around 500 teachers and serves a community of more than 6 thousand students across its multiple faculties located on two campuses. Confronted with the challenge of providing quality education by effectively managing the resources received from its benefactors, Universidad Alberto Hurtado was looking for a solution to identify the primary cost drivers and allocate investments to strategic areas of the institution.
MyABCM arrives at Universidad Alberto Hurtado at a very special moment. With a structured strategic plan consisting of 13 goals to be achieved by 2030, the institution has chosen our solutions to manage resource allocation and facilitate the achievement of its plans. The goals for the near future include topics in the educational and administrative spheres, such as:
In this context, comprehending the financial collection process and which of your activities consume the most resources “is the initial step in balancing investment distribution and achieving all the strategic objectives within the designated timeframe.
Using MyABCM, Universidad Alberto Hurtado will be able to have a clear view of how resources are utilized in each teaching and research activity. In this way, it can confidently make critical decisions and strategic allocations, investing in resource-needy areas that provide growth potential for the institution and its activities.
It will be possible, for example, to understand how much investment is needed to achieve the goals of new students and campus expansion and to eliminate or adjust possible deficit activities to reallocate resources to them and obtain better results. These resources are expected to support the institution in providing high-quality education while expanding its operations into essential areas.
Samara Lima e Andrade
Captain Intendant
Head of the Production Division of the Pirassununga Aircraft Farm
This case study aims to present how the Pirassununga Aeronautical Farm (FAYS), a Military Organization based at the Air Force Academy (AFA), employed cost analysis as a beacon for the optimization of management and public spending. The entire project aimed to meet the organizational demand of maturing public management and had as its scope the knowledge of the historical unit cost of assets produced in the fiscal year 2019. The analysis used the ABC (Activity Based Costing) method to prepare the report and sought to serve as a subsidy to assist management in making more assertive decisions to improve public spending.
Founded in 1942, FAYS has an area of 6,502 hectares in the State of São Paulo. It is a Military Organization of the Brazilian Air Force, whose mission is the productive occupation of the lands of the Pirassununga Air Force Garrison with agricultural activities, which result in the production of food products sold internally and externally to the organization, according to the Strategic Planning in force.
Public opinion has become increasingly demanding as to the efficiency of public management and the optimization and improvement of public spending, culminating in the strengthening of the cost culture as a promising solution to achieve these goals. In this context, to meet the organizational demand for knowledge of the historical unit cost of assets produced by the Treasury, FAYS has engaged in a survey of the costs of processes and macro-processes developed within the OM, studying the possibilities of tracking indirect costs, to produce useful information to assist management.
The first decision to be made for the preparation of the report was what will be the focus of the cost accumulation system, considering that it can occur either by project or by activity. Project costs must be accumulated by order, and are those related to the provision of services or production of goods linked to specific projects, with scheduled start and end dates; whereas activity costs must be accumulated by process, and refer to activities of a typical nature, which occur continuously. In the case of the FAYS project, the accumulation system by process was applied, setting as the analysis scope date of the Plant Production Unit the period from 06/01/2018 to 05/31/2019 and as the scope date of the Animal and Industrial Production Unit the period from 01/01/2019 to 12/31/2019.
Considering that, unlike the legal practices in the private sector, the choice of the public sector costing method is not restrictive, it was necessary to choose which costing method would be used in the analysis. Taking into consideration that previous FAYS projects have already used the Activity Based Costing method, the ABC method was the most favorable for the execution of this project.
With the costing method defined, the organizational structure of FAYS was analyzed and it was established that the work would be dedicated to the analysis of the primary processes of the entire organization, these being considered those essential for the fulfillment of the institutional mission, i.e., the processes that relate directly to the farm’s production complex, which is divided into three Production Units: Plant, Animal and Industrial. Along with these three units, the commercial aspect of the mission, which is the distribution of goods produced or processed on the farm, makes commercial activities also included under the list of primary processes. For the other non-primary processes, such as personnel management and infrastructure activities, the costs were registered as expenses.
Under the optics of this approach, it became essential, to ensure the continuity of the engagement in the Cost Accounting area with the desired fluidity, the acquisition of a software that could optimize the work required for the project. In this search, a temporary license of the MyABCM software was hired.
As recommended by the Cost Information Manual of the Federal Government (MIC), it is from the development of their own modeling that organizations begin to advance in the cost culture. In this sense, to optimize the analyses and understand the logic of the calculations to be performed, it became necessary to elaborate cost flowcharts (with cost sub-centers) that reflected the interrelationship between the activities that comprised the processes of the FAYS Productive Complex in the referenced scope.
Once the Cost Sub-Centers that reflect the consumption of resources by activities were known and their interrelation understood, it became necessary to calculate the monetary values cumulatively spent in the processes to calculate the unit cost of the objects of interest.
Therefore, the following order of priority was considered for the allocation of costs to the activities and objects of interest: direct allocation (when there is an objective identification of the sacrifice of resources for the development of an activity or an activity for the delivery of a product); tracing (when a cause and effect relationship is sought through the use of drivers); and apportionment (a more arbitrary criterion that should be avoided from the management point of view).
After completing the preliminary steps, the desired result was obtained by processing the application itself. This has the parameter of calculating the Unit Cost by dividing the costs that were accumulated in the allocations, by the “Volume Entered” of each verification object, i.e., by the total quantity of units produced during the period considered.
In this context, to optimize the managerial analyses, “triggers” were created along the cost modeling to enable a certain roll of results based on the same input. Thus, it was decided to name the different compositions to improve the understanding of the coming analyses, which are Basic Cost, Budgeted Cost, Production Cost and Cost Price.
Basic Cost:
Comprised of the consumption of materials used in production, and the settlement of services applied in production activities.
Budgeted Cost:
Comprised by the consumption of materials used in production; the settlement of services applied in productive activities; and the depreciation of permanent assets allocated to productive sectors in the asset controls of SILOMS (Integrated System of Logistics of Material and Services).
Production Cost:
Composed by the consumption of materials used in production; the settlement of services used in productive activities; the depreciation of permanent material allocated to productive sectors in SILOMS; and the labor allocated in productive sectors in SIGPES (Personnel Management Information System).
Its main application is the optimization of the Organization’s horizontal vision, providing an opportunity for process analysis and improvement, using activity performance improvement, and it can also be used as a benchmark for pricing items intended for external sale and the Reimbursable Section.
Cost Price:
Composed of the consumption of materials used in production; the settlement of services applied in production activities; the depreciation of permanent material allocated to productive sectors in the asset controls of SILOMS; the military manpower allocated to productive sectors in SIGPES; and the commercialization expenses.
With this in mind, in addition to guiding public pricing, the valuation of production stocks, the retro-analysis of operational practices employed in the production chain, the promotion of improved performance by managers through benchmarking actions, product reengineering, waste reduction, as well as the feasibility of changes to the current portfolio, the practice of measuring unit costs of goods produced by the Treasury can certainly be employed as a continuous improvement tool for the organization.
From the theoretical approach and the analysis of the results obtained through the implementation of a cost management model using the ABC methodology, it is expected that the proposed objective has been achieved and it is suggested that FAYS continues to pursue continuous improvement in terms of Cost Accounting, focusing on the goals of quality public spending.
To begin, let’s briefly clarify what cost-to-serve is.
Cost-to-serve, widely referred to as CTS, is the sum of all the costs required to provide a product or service to your customer.
The fact that all costs are fully considered is what makes this analysis a high-performance strategy when looking at a customer’s profitability.
We usually associate a good customer with a customer who buys a lot from us – or with the one where we have a significant volume of services and transactions. But this only shows the one where we have had the most sales, not the one where we have made the most money, i.e. the most profitable! A customer with high turnover certainly requires a series of trade-offs and efforts that are often “expensive” to meet.
A study published in the Harvard Business Review showed that on average 20% to 30% of customers are very good from a profitability point of view – bringing between 150% and 300% of the company’s total profitability; on the other hand, between 50% and 60% are neutral (i.e., we do not make or lose money) and approximately 20% are unprofitable.
The big challenge is to understand which ones they are, and in which layer each one is located. Eliminating the clients that we lose money is not enough, as by doing this immediately other clients that are neutral and even those that make some profit start to become unprofitable – after all, our fixed costs don’t disappear, requiring us to make some adjustments in our installed capacity.
Now when we bring into the equation, in addition to the cost of serving each client, the profitability we have with each one and the time we will be serving to this client, we will certainly find situations in which that extremely profitable client will migrate to the competition in the short term; others that are extremely loss-making will continue to drain the organization’s resources. Bad scenario, isn’t it?
The question is, “what should we do?” The first thing to do is to be aware of the need to measure things. As we know, it is impossible to manage what you cannot measure – so measuring and then deciding is key!
“Firing clients”, + the end: those clients who are loss-making often help pay the fixed costs, and if there is no change in the structure of the organization, their “firing” may bring a terrible consequence, which is that clients who are neutral today may start to be unprofitable (and the very profitable ones may become not so profitable). There are companies that have already bankrupted just because of failure in this criterion, and they were excellent “producers”, with well-rounded production lines, equally good product costs, but they neglected this very important detail, which is to understand and act correctly with the costs-to-serve.
During the development phase, it is determined what the cost object is, what the cost of meeting this object will be and how it will be mapped, what the drivers for allocating the aggregate cost will be, and what IT systems will be used to calculate and maintain the analysis of its operation after the development of the customer’s profitability.
On one occasion a large national bank did a project and discovered that it had loss-making clients: What did they do? They eliminated these clients from their portfolio. The result: the clients that were neutral became unprofitable. What did they do then? They eliminated these new unprofitable clients, resulting in a huge loss with this operation. The issue of capacity/idleness must ALWAYS be taken into consideration for cost analysis!
It is also important to know that it is not by firing employees that we reduce costs – at least not indiscriminately. In fact, there are studies that show exactly the opposite: according to the US Conference Board, of the companies that tried to reduce costs, 30% actually had higher costs! Another study by Deloitte showed that 75% of the companies that laid off employees to reduce costs had to rehire others for the same positions within 1 year. And finally, McKinsey showed in a survey that only 10% of cost reduction projects are successful within 3 years of its implementation. Reducing costs is not simple, it demands effort and measurement (measure!) to make the best decisions afterwards.
Check out our content that fully explains the Activity-Based Costing system
The first step is to understand how the organization’s efforts are aimed at serving the various customers and channels; this includes information that must necessarily come from the CRM, but also from interviews with the sales and customer service areas.
Through the metrication of the main activities involved in serving these customers and channels it is possible to understand the effort spent to serve them individually and therefore make specific analyses that allow the understanding of cost and result, customer by customer, channel by channel.
For example: a very common activity of the commercial team is “Meet with Customers”. The cost of this activity is the sum of the commercial area’s efforts (salaries plus salespeople’s benefits and the whole area) including the support areas such as HR (that last month hired 2 new salespeople), the IT area (that this month gave 5 supports related to the new HR system) and also the value of the internal support systems (such as CRM itself); that said, now it’s time to allocate these costs of Meeting with clients – which are not necessarily Product and Service related costs but rather Client related costs (as a periodic maintenance and follow-up activity for these clients); this allocation should be done using the criteria “number of meetings with clients” (assuming that these meetings have an average time approximately equal to each other) or ” meeting hours” if this value varies a lot.
Of course, this allocation must be done taking into consideration the materiality of what is being allocated (that is, many times the effort in collecting and applying this information is not worth it, given the small costs of this activity compared to the other activities of the company) but in many cases it is very well worth it!
This done we have the cost of each customer only with the activity “Meet with Customers” – if we do that with all the activities of the Commercial and Customer Service areas, we will have an interesting suggestion of efforts to be analyzed and surely many surprises will appear, with activities that we never imagined would be so expensive and that would influence so much the costs of each Customer and Channel, and even others that we thought would be expensive, but that in the end turned out to be not very significant.
The set of mapped activities, on one hand their interconnections with the chart of accounts, cost centers, and areas, and on the other hand with the various Products, Services, Clients, and Channels, is called a cost model – and this modeling, if well executed with method and process, allows a vision never before seen in organization!
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Cost analysis in the IT sector basically consists of carrying out a strategic planning whose actions are aimed at meeting specific business demands. To that end, it is essential that all departments have tools and methodologies to apply the cost reduction.
In simpler terms, we are referring to the multidisciplinary and continuous process of IT governance. Its goal is to integrate not only the expenses, but also support-related services and projects.
By employing good cost analysis practices, it is possible to add value to the business and provide unique solutions to the audience. And that is what we’ll talk about in this post, read on to check it out!
Planning the costs of a company is one of the best ways to ensure its survival and growth in the market, even when dealing with the most complex economic scenarios.
This is because the cost analysis aims to consolidate data on financial performance and the execution of corporate activities. Based on this information, managers are able to make more assertive decisions regarding the expenses that can be eliminated and what actions to take to foster the profitability of the business.
Now that you understand the importance of carrying out IT cost analysis, we’ll show you some tips on what you can put into practice in your business. Check it out below!
Determining the costs to be analyzed, that is, mapping them in an organized, functional, and intelligent way, will allow the finance department to account for expenses and investments with the infrastructure needed to carry out the business activities.
We know that much of the work done by the IT sector takes place in the digital environment and, therefore, has a series of intangible costs, such as the acquisition of ERP and CRM software, APIs, plugins, etc. In addition to these, it is necessary to consider aspects such as productive time, customer loyalty and delivery times.
When it comes to a tangible IT structure, it is no different, as it is also necessary to invest in hardware (computers, mobile devices, equipment, etc.) and labor, for example.
Finally, cost analysis can be optimized by using innovative technological tools that can automate repetitive tasks that were previously carried out by employees.
In addition to reducing the workload of IT professionals with minor issues, business management software have a wide range of resources that support the accounting and finance department.
After all, unlike human workers, these systems have algorithms that are not susceptible to failure and order issues, such as forgetfulness, fatigue, or misunderstanding. In other words, they minimize the margin of errors, rework, and productivity losses.
As you can see, cost analysis for the IT sector encompasses a series of practices and the use of technological tools that contribute to the company’s development, making it easier for managers to make strategic decisions.
Do you want to know more about the MyABCM solutions for cost analysis using technology in your company? Then contact our team so that we can show you the very best in digital innovation for your business!
