The Benefits of Using Activity Based Costing to Manage Costs
Costs are an important part of the business. Let them spiral out of control, they will affect both your profitability and cash flow. In meeting the needs and wants of customers, organisations have to employ the use of processes and activities. These processes and activities are critical for creating customer value.
However, to effectively and efficiently manage business costs, one has to have a thorough knowledge and understanding of all the activities and processes employed within the business to create value. In addition to that, knowledge of cost drivers is very critical. A cost driver being a factor influencing the level of cost.
One technique that can be used to analyse and manage your business costs is Activity Based Costing (ABC). This is a cost management technique which measures the cost and performance of activities, resources and the objects which consume them in order to generate more accurate and meaningful information for decision making.
As the modern business has become complex, it is no longer meaningful to assume that overheads are a function of volume only. Businesses now have multiple cost drivers, many of which are transaction-based rather than volume-based. Most organisations have moved and some are still in the process of moving from managing vertically to managing horizontally. What this means is that, there is a shift from a function orientation to a process orientation so as to effectively and efficiently meet changing customer needs and wants.
This focus by management on process or horizontal view of their organisations to remain competitive is supported by ABC since it provides cost and operating information that mirrors the horizontal view.
The benefits of implementing ABC include:
o It helps you identify all the overheads caused by the same activities.
o One can easily identify the cost drivers for each activity thereby allowing you to control costs at their source.
o It can help you identify, for example, profitable products, services, processes, activities, customer segments, distribution channels, contracts and projects. This should help you when making pricing, product/service mix and design decisions.
o ABC allows for continuous improvement. By thoroughly measuring and looking at the costs and cost drivers of different processes and activities, improvements can be made. For example, by knowing the cost drivers, cost reduction can be achieved, either through outsourcing particular activities or moving to different areas in the industry value chain.
Activity Based Costing Overview
Dave Packard Chairmen of Hewlett-Packard said "Tell me how a person is measured and I'll tell you how they will perform."
Business Metrics are tailored performance measures that promote the strategic goals and objectives of the organization.
The spectrum of business measurements spans a wide variety of Management Accounting methods. Traditional financial measures, such as Work in Process (WIP) and piece rates, are rapidly being replaced by time based measures, like Raw and In-Process (RIP) and rate based planning.
As competition and the internal search for improved performance becomes more critical, the development of time-based measures has become a cornerstone of the World Class Manufacturing paradigm.
There are several recent business measurement innovations that this series of articles will cover. We begin this series with "What is Activity Based Costing (ABC)".
Traditional cost accounting systems measure the cost of a product by spreading all of the overhead costs over the direct labor costs based on production volumes.
For example:
Product A takes 3 hours/unit of DL
Product B takes 7 hours/unit of DL
DL = Direct Labor
If quantity one of each is produced:
Product A receives 30% of overhead Product B receives 70% of overhead
Therefore if Total overhead cost was $100 and the labor rate was $10/hour, then the costs would be:
Product A (3* 10) + (.3* 100) =30+ 30= $ 60/unit
Product B (7* 10) + (.7* 100) =70+ 70= $140/unit
ARRIVING AT THE CORRECT PRODUCT COST
Under Activity Based Costing the concept of cost drivers is developed to clearly define which costs are associated with each product. An example of a cost driver might be the number of parts in a product, or the number of set-ups needed to produce the product, or the number of change orders after release to production.
To clarify the above example:
Product A requires 45 component parts Product B requires 5 component parts
Each part is purchased from a separate vendor. The cost to generate a Purchase order is $70. If we assume that we issue purchase orders and receive and pay for material once per month the costs of the products would be:
Product A (45 parts x $70) = $3150
Product B ( 5 parts x $70) = $ 350
Total Purchasing cost= $3500
Under the traditional cost allocation procedures the $3500 purchasing overhead would be divided as follows:
Product A: $3500 x .3 = $1050
Product B: $3500 x .7 = $2450
As you can see the purchasing cost of the products are significantly different using the traditional cost accounting method.
Developing a Simple ABC system
To begin we must start with a few new definitions. Overhead Activities are divided into Cost Pools. An example of a cost pool would be the Sales Department. Cost pools contain cost elements. An example of an overhead cost element would be order processing.
Once the overhead cost pools are established, Activity Cost Pools are developed. An example would be product support which is volume dependent. Activity Cost Pools, known as Cost drivers, contain cost elements also. An example of an Activity Cost element would be product test.
Finally, there are Product Cost Objects. An example of a product cost object is a product line. Product Cost Objects also contain cost elements. An example of a Product Cost element would be a specific product within the product line.
Hewlett-Packard's Roseville Division manufactured printed circuit boards. They implemented ABC as part of a Total Quality Control (TQC) project that focused on Design for Manufacturability. The new costing data allowed design engineers to make more effective cost tradeoffs which reduced the total cost to manufacture new products. Roseville developed 12 cost pools that impacted product cost. In Purchasing, the cost drivers are the number of active parts and the complexity of the part. In the Product Planning and Production Engineering areas, the cost driver is the number of assemblies in the product. In printed circuit board loading areas the cost driver is the number of insertions, an insertion being a component that is soldered to a printed circuit board. The Support cost pool is sub-divided into several smaller groups, such as Test Engineering and IT. The cost driver for Support is % of Usage.
In the traditional accounting system only one measure is used to allocate overhead costs, Direct Labor Hours. Using ABC we can create hundreds of cost drivers. There is however, a diminishing return. Data collection costs usually increase faster than the benefit gained by the improved precision of the allocation. Some companies in Europe have as many as 50 - 150cost drivers. In the United States approximately 6-25is more common. Europe has been using ABC longer than the U.S.; this may account for the wide difference in the number of cost drivers.
"Firms facing intense competition and having both high product diversity and low measurement cost are best suited to taking advantage of the increased accuracy of an activity-based Costing system." Robin Cooper, Harvard Business School
By prioritizing the Overhead costs you can focus on those with the biggest potential for causing the product cost to be inaccurate. As with all projects of this nature a multifunctional team is required to effectively cover the wide variety of business activities related to product costs.
Cost drivers should be developed for those activities that contribute to product cost on both a volume and volume independent basis. For example a set-up would be volume independent if the order quantity was changed. Warehouse activity, on the other hand, is directly related to the volume of product being handled.
Chapter 4 of MEASURING UP by Hall, Johnson, and Turney provides a good basic understanding of ABC. This book is available from Amazon: Measuring UP
For more information on the current evolution of ABC see the Robert Kaplan article from the Harvard Business Review: [http://hbswk.hbs.edu/item/4587.html]
Automating ABC
The EasyABCPlus ™ program is divided into three major areas. The first is overhead; here your company General Ledger can be entered. This can be done either by typing in the Overhead Accounts, or by reading a file from your accounting package, or a spreadsheet. The second area is activities; this module is the core of the system. It defines the Cost Drivers and the allocation methods from the Overhead module to the third area, Cost Objects. In the Cost Object area the actual products to be costed are linked to the activities used to produce them.
Let's review each module in a little more detail. Within the overhead module you can see the structure of the accounts, with actual and budget amounts for each. There is also a block map showing where you are in the system. As you move from module to module the three boxes are highlighted to show where you are in the program. There are also three icons or graphic symbols that represent different views of the data. The icons are available in all three modules. They are: Decomposition, Allocation and Tabular. Each presents the information in that module using the same data, but with a different perspective.
Data entry in the modules is primarily via menus selected using a mouse. A mouse is a small device attached to your PC that moves the cursor on the screen. Clicking a mouse button activates the function that the cursor is covering.
An example of data for the Overhead Module would be:
Sales Department with a cost center Product Support.
The Activity Module contains the cost drivers and other resources used by the product. A typical structure might include a Support Activities group. This could have within it activities such as Testing, Engineering Support, and Phone Support.
The Product Support cost center is linked to the Testing, Engineering and Phone Support Activities. This means that a structure similar to a bill of material is created. The allocation methods are by percentage or cost driver. The allocation method is comparable to the quantity per in a bill of material.
The Cost Object module is where the products are defined. After entering Product A and Product B, we select which Activities and how much of each activity is used by each product. The Activities such as Testing might be the number of Test hours, Engineering Support is the number of Engineering Change Orders, and Phone Support is measured by the number of phone calls.
We are now ready to run the model. The model can be run for any number of periods. It can also be run by module to observe the effect of changes at each level. To see the results click on the icon in front of the product. This brings up a screen that shows the actual cost and budget of each of the activities used.
The Attribute Costing report summarizes the costs of all value added and non-value added activities. This is especially useful in Lean process improvement programs.
On-line help is available for each area in the system.
This completes the Activity Based Costing overview.
Before Making A Money Transfer Know What The Restrictions Are
Various forms of foreign exchange controls exist but you do not have to know all the details of a particular foreign exchange regime. The important details related to money transfers include: whether a restriction on the amount of currency that is transacted is in force and is there a restriction on who can conduct foreign currency exchange deals (in some countries only state or government-approved companies can be engaged in the exchange of foreign currency). A stricter form of a foreign exchange control can impose restrictions on the use of possession of foreign currency.
A00-270 If your money transfer is to be processed by a state-controlled foreign exchange dealer, there is a greater chance to get an unfavourable exchange rate or to be subject to additional fees and commissions. A form of a special currency regime is the currency board but the existence of such a monetary authority protects and supports the local currency so it is in advantage to a foreign currency sender in general.
At this stage you must turn to a reputable money transfer specialist who is familiar with the local specifics of the beneficiary's country. Unfortunately, the number of countries where strict exchange controls are in force is constantly changing in the process of globalisation and economic liberalisation.
Some major countries, which still exercise some kind of foreign exchange controls, include Argentina, Brazil, China, Egypt, India, Malaysia, Morocco, Nigeria, Tunisia and Venezuela. However, this list is largely incomplete and you will need to delve into the specific type of foreign currency regime in force for that particular country. Your money transfer expert will provide you with a more populated list of countries and will be able to explain to you all the details related to a certain country.
A00-280 A complicated situation can occur when a country allows only "reasonable" foreign currency transactions to be conducted. "Reasonable" is a flexible term and unless explicitly specified it will be up to a government official or a designated state body to decide what amount of foreign currency money is a "reasonable" sum. Although only a few countries impose such a restrictive foreign currency regimes, they still exist and you must consider it before sending funds to such a country. Growing number of world governments liberalise foreign currency exchange regulations but taking an expert advice will help you familiarise with all applicable regulations.
Becoming a CPA
Education and Credits Needed To Become a CPA
There are different methods available to those who want to become a CPA. The first method is by attaining a bachelor's degree. While attaining this degree, the candidate must also have at least 24 semester units in an accounted related subject. The same amount of credits is needed in the business subject. The other step is to pass the Uniform CPA Exam. An ethics course will need to be taken. It is advised to try to get at least 2 years of accounting experience with a firm that is monitored by a CPA (licensed). This experience will be able to land you jobs.
What It Takes To Be a Successful CPA
A00-212 There are a set of characteristics a person must have in order to be a CPA such as;logical thinking, good at math, strong communication skills (verbal and oral), solid computer skills and ability to synthesize. CPAs must also be good with team work. Many accountants start out working for firms or teams. As you gain more experience, you will be able to be in charge of other departments. It also helps to be tech savvy. Modern accountants are very good at using accounting software such as Quickbooks and Peachtree. This software is ever involving and expanding thanks to the advancement of technology. It may help to take a couple of computer classes while pursuing a Bachelors degree in accounting or other related fields.
What You Will Be Doing As a CPA
A00-250 Most Certified Public Accountants deal with auditing citizens. However, these jobs are not really desired by CPA. The employee will need to be prepared to do this type of work whether they like it or not. It is not the only type of work available to a CPA, however, it does make a big portion of the field. The accountant will need to have a certain number of audit hours in order to gain experience. Accountants can also get the opportunity to team up with other large international accounting firms. This would look great on a resume and it is also a good idea to gain experience. Other jobs offered with this degree include; payroll manager, budget manager, tax specialists and financial reporter.
Other job fields include internal controls, financial analysis and International accounting. An accountant does not have to stick with one type of job. Accountants also are known for starting their own firms once they get the hang of being a skilled CPA.
Become Debt Free - No Bankruptcy, No Debt Relief
C_TFIN52_65 Financial Debt is a situation nobody desires to enter into but many struggle to get out of by the end of the day. Queer!
Getting out of debt is a constant struggle many will continue to contend with for as long as scarcity of funds and resources continue to prevail at the expense of increasing needs and demands.
Many debt situations arise as a result of overdrawn credit facility with financial institutions such as banks and credit card companies, loss of employment or unemployment, divorce, business failure, falling victim to fraudsters (though in many instances greediness for some free and 'easy-pickings' money contributed greatly to being cheated, swindled or duped), college bills or tuition fees, loans and advances, defaulting on loan repayment, medical, legal, and emergency bills, loss of income, to mention a few.
Knowing what option to choose between debt relief and declaring bankruptcy leaves untold emotional stress in addition to the combined weight of financial indebtedness and bad credit rating on the mind. Taking the future into consideration and the after effects of any choice made pose an additional challenge.
C_TFIN52_05 Becoming debt-free in a world rife with empty promises and hopes dashed is indeed possible. A good start point is to take into account the status of debts owed or one's financial situation. Having this in perspective helps seeing any options or solutions proffered can be carefully considered before any decision to become debt free is taken.
