Who's
Driving?
by Tom Pryor
"Teenage
drivers account for a disproportionate number of car crashes", according
to statistics reported by Reuters News on April 2, 2001. Teens were involved in
19% of car accidents, even though they account for less than 6% of licensed drivers.
If you were implementing
Activity Based Costing (ABC) in an insurance company, "Number of Teen Drivers"
would
be a good predictor of claims process activity. Linking causes to effects
is one of the primary objectives and benefits of an ABC system. ABC systems use
drivers to identify root cause and effect relationships between cost (labor and
overhead expenses) and cost objects (products, services, customers). ABC
systems use three types of drivers: -
Resource
Drivers...are the basis
for assigning general ledger cost to activities or activity pools. The basic principle
of Activity Based Management (ABM) is "activities consume cost". Typical
Resource Drivers include Time Percent, Headcount, Square Footage, Number of Terminals,
and Kilowatt Hours.Resource Drivers provide activity cost information that can
be immediately used to identify and prioritize cost improvement opportunities.
-
Activity
Drivers...are the basis
for assigning activities and activity cost pools to cost objects. The basic principle
of ABC is "Activities consume costs and products consume activities".
ABC systems use activity drivers (also referred to as Cost Drivers) for the costing
of product lines, products, services, customers or projects. Examples of Activity
Drivers include Number of Parts, Number of Units, Number of Set-ups, Number
of Orders and Number of Deliver.
Activity
Drivers provide product, service or customer Bills of Activity that can be used
for costing, pricing, customer profitability analysis, target costing, shared
services or strategic planning.
-
Revenue
Drivers...are the factors
whose change causes an increase or decrease in the revenue of a product, service
or customer. Many implementers of ABC have overlooked this driver. In addition
to the volume of units sold, typical Revenue Drivers include Number of Sales Price
Changes, Number of Advertising Placements and Number of Defective Orders. Managers
can model combinations of cost drivers (type 1 and 2 above) with Revenue Drivers
to analyze and predict profitability.
Revenue
Drivers provide managers a tool to improve forecasting, reduce budget cycle time
or perform what-if analysis.
Research
studies show that teen drivers are more likely to have fatal crashes when more
teens are in the car. In a similar vane, ICMS case studies have shown that ABC
implementations tend to crash proportionally with the number of activities and
drivers in the software model. Too many activities and drivers create unnecessary
complexity resulting in crashes for both the software model and the managers using
ABC reports. ABC should be a starter kit for simpler work, not the root cause
for more work. For
example, when the international air express company DHL implemented ABC in 1994,
they initially defined 85
activities and 47 potential activity drivers. As
they continued their rollout to twenty-five countries, the number of activities
increased to 106 but the number of activity drivers was reduced to 15. Most manufacturing,
service or government organizations can create effective ABM/ABC systems with
200 or fewer Activities, 10 or less Resource Drivers, 15 or less Activity Drivers
and 10 or less Revenue Drivers. For more ABC case studies, I recommend the following
three
books: (1) Cornerstones of Decision Making, (2) Activity-Based Information
Systems and (3) Activity-Based Costing
& Activity-Based Management for
Health Care. Who
is driving your ABC cost system? Is the person a youthful novice full of good
intentions? Or a seasoned veteran who's hesitant to drive a process of change?
Whomever your organization selects, make sure that person has a clear understanding
of your organization's intended destination of needs, well trained in ABC techniques,
driving a proven software tool, holding a roadmap of instructions, guided by an
experienced driving instructor. And remember... don't let too many back seat cost
drivers distract them from the destination of cost and profit improvement!
--------------------------------------------- E-mail
your comments on this article to Tom Pryor at TomPryor@icms.net This
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