A couple of weeks ago I posted a blog on my top three ‘must haves’ when looking at procuring activity based costing software. My top three were:
- the ability to report on not only the beginning and end of your model (the inputs and outputs), but all stages in-between;
- the ability to track multiple cost types through the model; and
- the ability to automate as much of the model allocation and maintenance as possible.
That blog looked at the first point – unlimited modules and reports. Today I thought I would tackle the second point – the ability to have multiple costs types in your ABC model.
So what do I mean by multiple cost types? Imagine a relatively large model containing around 15,000 general ledger accounts, 3,000 personnel, a few hundred assets, about the same number of activities, around 4,000 products and about 500 services.
Now imagine the types of reports that users would like to get out of this model. Because the model takes advantage of multiple modules (refer to my last blog post!), we can report on each stage of the model separately, so reports can be generated that look at the GL contribution to products, the personnel contribution, the asset contribution, and so on. But if all those resources had the same cost type (“cost”), then we would still have difficulty reporting on the different contributions, say when looking at the Activity to Product report. If you had assigned employee expenses from the GL to Personnel, and then Personnel to Activities, and had also assigned depreciation to Assets and then Assets to Activities, the Activity to Products report would show one big bundle of costs and it would be impossible to differentiate where the costs came from (unless you did separate GL to Activity, Personnel to Activity and Asset to Activity reports).
My solution? Insist on software that enables you to have as many cost types as you need – like having unlimited modules, it will provide you with the utmost flexibility from both a modeling point of view as well as a reporting point of view. So what cost types would I have?
- Revenues (it is hugely beneficial to be able to report on revenues separately rather than just as a negative expense)
- Personnel (both expenses and head count or full time equivalent (FTE))
Other options may include:
- Balance sheet costs
- Alternative asset costs (such as historical costs versus current costs)
You can even have different periods as unique cost types, for example Expenses (2010), Expenses (2011), Budget (2012), and so on.
What are the benefits? Your reporting suddenly becomes super easy. Instead of seeing just one ‘total’ cost, you get to see all the unique cost inputs as well as the total cost.
In addition, you can create drivers that are based on unique cost types. For example:
- a CAPEX cost driver that allocates out certain costs to assets or activities based on their consumption of CAPEX (but no other cost type);
- a Revenue cost driver that allocates out certain finance activities to products based on their respective use of revenue; or
- a Personnel Cost driver that allocates out nominated GL costs to activities based on the activities’ use of personnel.
The diagram below illustrates how a specific cost and cost type (“cost”) can be tracked through a model.
So it doesn’t matter where the cost ends up, by using separate identifiable cost types, you will always be able to see exactly how that cost type has flowed through the model, and not just where it originated from.