1. Activity-Based Costing (ABC)

2. Our Clients Often Lack an Understanding of Profit Factor Trade Offs Needed for Decision Making As – Is Decision Making… Can't lose Customer X poundage Covering contribution margin is most important Need to gain market share Accept/reject decision by Marketing Management …often relies on mental rules of thumb To – Be Decision Making… Accept/reject decision …can incorporate price/terms modeling to optimize profitability and business decision making A centralized, information based transaction analysis model and management process can improve decision making and profitability. A centralized, information based transaction analysis model and management process can improve decision making and profitability. Expert System ? Billing factors Competitor pricing Activity based product costing Customer profitability Alternative transaction profitability ? Background

3. Activity-Based Costing (ABC) Enables Managers to Accurately Determine Product and Customer Costs Activity-Based Costing Framework ACTIVITIES CustomerProduct Attribution Customer SegmentProduct Line Actions Identify all activities performed and their resource consumption Attribute dollars to products and customers based on activities performed Act on findings (e.g., reallocate resources, modify pricing, refocus efforts) RESOURCES Cost Drivers Background

4. The Objective of ABC Is to Allow Management To Make More Informed Decisions In the A&D phase, depending on the client situation, your primary objective is to create senior management understanding and appreciation for the benefits and impact of ABC for their business In the A&D phase, depending on the client situation, your primary objective is to create senior management understanding and appreciation for the benefits and impact of ABC for their business Objective Objectives Deliverables Enhance understanding of Business Division costs Identify unit contribution Develop decision rules for resource allocation Contribution of products, product lines, customers, and customer segments Cost performance metrics for activities Costing of activities Key cost drivers of activities

5. Development of a High Level ABC Model Can Be an Effective Selling Tool Hypotheses on the value and opportunity to apply ABC modeling to client situation. Understand business cost structure and determine major activities performed. Identify selected high impact cost drivers for those activities. Interview key clients to build model and identify cost drivers. –Marketing Managers–Plant Managers –Sales Reps–CFO and staff –Cost Accountants (HQ and Plants)–IS function Build dynamic PC-based model for selected sample of transactions, products and customers. Analyze outputs, and demonstrate value of ABC methodology. Identify the quantitative and qualitative benefits of ABC stream for results delivery project. Approach A&D Worksteps

6. Results Delivery Implementation of ABC Consists of Several Stages Step 2: Developing ABC Product Costs Outcome Proposed Workplan Draft Months 1234567891011 Step 1: Launching the Effort Step 5: Implementing Systems Step 3: Determining Profitability Step 4: Designing a Business Decision Model Appoint Steering Committee Appoint Natural Work Team Agree on Workplan Initiate ongoing communi- cation Gain consensus and buy-in Identify key cost drivers Highlight performance improvement opportunities Determine methodology for new product resource requirements Develop actionable product costs Product profitability Product mix and pricing strategy Customer profitability Customer mix strategy Coordinate information gathering and updating Streamline interfaces Align decision model with existing processes Implement ABC system Train staff Link ABC with other financial/planning tools Roll-out of the model to the entire operation