Accurate and relevant cost information is critical if a business is to make sound, fact-based decisions. Accurate means that the calculated costs are a reasonable estimate of the economic facts of a situation or a cost objective being measured. Relevant means that the type of costs calculated are appropriate for the decision at hand. There are three basic types of "relevant" costs that managers need if they are to make sound decisions:
In addition to having cost information that is accurate and relevant, decision makers who use the information, or whose performance is measured by it, must also understand and "believe in" the way those costs are determined. If they do not, costs will just be a collection of meaningless numbers generated by accountants that will either be ignored or overridden when those managers make decisions.
the "abc" solutionTM is a process that facilitates a company's decision makers and their support personnel through the development of easy to use and understand costing tools that reflect the true economic behavior of their organization and meet the decision makers' support needs.
The process involves the company's decision makers from beginning to end. First, it provides them with a simple, activity-based structure for organizing the work performed by the business in a way that highlights costing issues and the relationships that need to be incorporated into the business' cost model. It then helps these executives use their detailed knowledge of the business to design a model that will include all essential costing elements as well as the relationships among those elements. The objective is to insure that when costs are calculated, the methodology results in cost information that "makes sense" to the decision makers and meets their decision support needs.
Once the conceptual model is established, an Excel-based Cost Accumulation and Distribution Model is developed that parallels the methodologies developed by the business' executives in that conceptual model. The model starts with measures of the volume and mix of activities the business performs and then accumulates the cost of operating the business at that level and mix of business. It then proceeds to distribute costs as required by the conceptual model and turns the resulting activity costs into rates that can be used to assign costs to individual products, services, and/or customers - all in accordance with the conceptual model created by decision makers, the ultimate users of the model's output. In addition to the Cost Accumulation and Distribution Model, the process also develops one or more Product/Customer Costing Templates that use the activity cost rates generated by the model to cost individual products, services, and/or customers.
The final step in the process is educating the appropriate support personnel in the operation of the model and template(s). All decision makers should be cognizant of the model's design, but only a few individuals need to know how to manipulate the physical, Excel-based tools. In addition to the basics of loading the model and using the template(s), the educational sessions include exercises for developing and using all three types of relevant cost information; fully-absorbed, incremental, and activity/process. At the conclusion of the process, both the conceptual and physical models are documented to serve as a reference and assist in educating future users.