The ABC (ACTIVITY BASED COSTING) of Rocket Ship accounting - Russell Colbourne

Russell Colbourne - "Your Money Machine"

Introduction
Your business is Your Money Machine. In this Episode we take a look under the hood of your business engine and show you how to fine tune your operations. Get ready for lift off as we add rocket fuel to your engine.

ABC or Activity Based Costing is simply a way or assigning overheads or fixed period costs to either production costs or servicing costs. ABC divides production or services into core activities, defines costs for those activities, and allocates those costs to products or services based on consumption of the activities.

ABC allows business managers to better understand product, service and customer profitability. This provides the business with better information to make value-based and therefore more effective decisions.

Have a great business week.
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Show Objectives
Very seldom does all of this tedious but necessary process improvement work provide such a clear benefit. One of the most  important decisions you will make in Stage III is accurate pricing. You still have the dance of what price the market will allow but now you can work backwards to identify ways to decrease costs (time, non-value added steps, waste, etc.) and make a profit. Also you can look at the amount of work required for each account and determine whom to replicate and whom to replace.

Key Issues - ​Owner Perspective:

1. Processes must be mapped to start - completing the "Processes Under Control" effort.
2. Which are our most profitable products & services - stop guessing.
3. Who are our most profitable customers?
4. How well have we priced our offer - can we raise prices to improve profitability?

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What You Need to Know

1. Who are our most profitable customers?
2. What are our most profitable products (services)?
3. Are our products (services) correctly priced?

What You Need to Do
​One assumption we make when starting on this topic is the major or core processes related to production (or service delivery) have been mapped. Make sure you break down your processes down into stages before undertaking ABC.

1. Create a visual map of every major process - both internal and external.
2. Look for economies, improvements, reduction in steps in every process; we call it removing non-value - update the map.
3. Assign costs to each step - fixed costs (like power, rent, office staff etc) and variable costs (materials, labor, equipment maintenance).
4. Assign a margin to each step - start at 30% and if that makes the price too high, back off 1% at a time. If you have to go below 25%, go back and look for more economies in the process. Hint: the best companies are operating at 40+ margins.
5. Compute the total cost and gross margin (target price) for the specific product or service.

Shows

• Previous: F3.02.3 Reporting Rhythms as certain as day follows night
• Next: F3.04.3 Mission Control Value Mapping 

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F3.03.3AA