Organizations that adopt the practice of 'lowering the costs incurred in processes' rather than opting for the 'revenue generating methodologies' will be following what is commonly known as Activity based costing (ABC). However, the changed thought asks for a 'measurable' and 'quantitative' method to keep an eye on the proceedings. The various directions that offer help in this regard are- 'Cost driver Analysis', 'Internal Operations', 'Employees experience and Learning' and 'Performance'. Cost Drivers can be analyzed using KPIs like 'types of cost drivers', 'cost driver identification index', 'cost driver effectiveness ratio' and 'cost drivers creating non-required activities'. Internal operations can be obtained using Parameters like 'types of resource drivers', 'rework costs', 'Technological barriers to ABC implementation: Total Barriers' and 'Unit Cost variation'. Employee experience and learning Perspective can be attained with metrics such as 'Number of Training Sessions held', 'Employee participation Level', 'Experience enhancement ratio' and 'Workforce Alignment Index'. Lastly, Performance Perspective can be had with metrics like 'Rise in -successful decisions- ratio', '% drop in -wastage- managed', '-Best Practices- adoption rise' and 'Average Time decline'.
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Activity based costing is concerned with allocation of costs to products and services as per the consumption by those. This requires figuring out the costs that goes into each activity and later putting the fraction of costs to various products and services that are produced or rendered. This 'cost apportionment task', which uses both the direct and indirect costs in the process is implemented with activity based costing scorecard.
This cost allocation method was devised and shaped up in 1970s and 1980s in manufacturing sector of US.
The activity based costing model utilized enables the organization in identifying and distinguishing the 'profitable' and 'non-profitable' product lines. Further, one can filter the 'not-so-profitable' ones from the complete lot to make a more beneficial portfolio.
The activity based costing tool makes it possible to understand the relationships shared by 'product', 'customer cost' and 'profitability'. Moving on, with a better understanding about these entities as made possible by the activity based costing approach, one can improve the operations to not only provide better value to customers but also achieve optimum utilization of resources within the organization.
Generally, ABC has been employed to make decisions in issues related to 'outsourcing', 'pricing', 'identification of initiatives used for process improvements'.
Summing it all, this methodology of activity based costing has the potential to answer the 'cost assignment' woes of organizations.
This is the actual scorecard with Activity Based Costing Dashboard and performance indicators. The performance indicators include: cost driver analysis perspective, types of cost drivers, cost driver identification index, cost driver effectiveness ratio, cost drivers creating non-required activities, internal operation perspective, types of resource drivers spotted, rework costs, technological barriers to abc implementation: total barriers, unit cost variation, employee experience and learning perspective, number of training sessions held, employee participation level, experience enhancement ratio, workforce alignment index, performance perspective, rise in successful decisions ratio, % drop in wastage managed, best practices adoption rise, average time decline.
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