WHAT IS ABC (ACTIVITY BASED COSTING)? - Celia Powell

Celia Powell - "By the Numbers"

​Introduction
New week with  sharper focus

Welcome back to the work week. Hopefully you had an opportunity to fall off the grid and reconnect to what matters to you most!  With a couple of days of attentiveness to life outside of business and serving clients, I found myself being slightly tuned into the current events and catching up on the latest COVID-19 news, as it appears to be showing signs of increased spread.  I began to process this scenario that we may be facing, and decided to begin taking inventory of my personal affairs and household needs to prepare for another form of restriction, even if it’s self imposed!

Which brings to mind that being passive and waiting to take action once you have needed information, will put you out of business, only you and your customer have that right. We are glad you are here joining us.

IBGR is committed to your success and our programming is designed to give you the tools and resources as well as the motivation to keep pushing to meet your goals and the reason you created your business.  We offer you high value with minimal or no cost but for you to take action on what you’ve learned. A proven and trustworthy business resource that has your back, your front and all the way around. 

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. Whom are our most profitable customers - necessary to Top Grade Accounts (EPISODE C5.002 AUDIT AND TOP GRADE ALL ACCOUNTS) and move into adjacent markets.
4. How well have we priced our offer - can we raise prices to improve profitability?

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What You Need to Know

What is Activity Based Costing?  ABC/Activity Based Costing is a methodology used in costing products and services and a function of Managerial Accounting.  Managerial accounting is the process of identifying, analyzing, interpreting and communicating information to managers to help managers make decisions within a company and to help achieve business goals.

Key concepts and definitions:

1. Overhead: costs that are shared amongst objectives(dept, products, etc.)
2. Cost Pools: cost groupings, such as ( rent, maintenance, equipment, admin)
3. Cost Drivers: The activities that are causing the expense to occur
4. Cost Objectives: Products, service, programs

Questions that need answers    

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 Five Steps to  Maximizing Pricing with ABC 

​One assumption we make when starting on this topic is the major or core processes related to production (or service delivery) have been mapped (see EPISODE A.021 THE OPERATIONS ELEMENT). If you have not broken your processes and made progress on updating, ABC is a waste of time.

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: EPISODE F3.002 WHAT STORY ARE YOUR FINANCIAL REPORTS TELLING ABOUT STAGE II?
• Next: EPISODE F3.04.3 What are the Results from Value Mapping fixed cost processes?

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