Recognizing the potential of activity-based management, many organizations began implementing ABM projects in the 90s. In fact, a 1992 survey by the Institute of Management Accountants found only 100 implementation projects under way at that time, compared to over 20,000 at the end of 1998. Then, starting in 2000, ABM dropped off sharply. This was due in part to the millennium bug and, later, to the introduction of Bill C-198 in Canada and its American counterpart, the Sarbanes-Oxley Act.
ABM and production costing in general are currently experiencing a renewed surge of popularity, partly due to increased foreign competition and also concerns about transparency. Read on to learn more about this system’s basic premises and a methodology for best implementation practices.
Steps for a successful implementation:
Make sure upper management is on board
A production cost system is only effective insofar as it fits with the needs of upper management. If it fails to do so, managers will neither accept it nor use it and turn to other sources of information instead. The result? Your production cost model will cease to be a strategic tool for your organization.
Ensure costing methodology is accepted
Over the past three decades, a number of production costing techniques have emerged. By and large they are all valid as long as they suit the type or organization, or the internal team or champion responsible for implementing them. The types of cost management include:
- Activity costing
- Capability costing
- Process costing
- Target costing
- Theory of constraints
- Standard costing
- Complete costing
Make sure the production cost model will last
It is quite common for some costing models to last only one or two years, usually due to an unsustainable environment. This is unfortunate since a great deal of time and effort has been expended on these systems, and managers and employees alike have high expectations of them.
You can avoid losing your investment by taking the following steps:
- Ensure the production cost model is aligned with management’s expectations;
- Ensure that the model is not too complicated and easy to maintain;
- Ensure that your entire budget—and your variance analyses in particular—are based on the model;
- Finally, ensure that the production cost model is an integral part of the budgeting process.
How to achieve sound strategic modelling
Best practices for implementing an effective production cost solution which enables managers to improve their organization’s financial performance
Introducing best practices for implementing a production cost system includes a few key steps which must be performed for the project to be a complete success:
- Ensure management is committed to the project and prepared to provide ongoing support,
- Select a champion within the organization who also has good communication skills,
- Ensure a sufficient quantity of good resources, both internal and external,
- Ensure well-defined objectives,
- Plan a realistic schedule and stick to it,
- Have an effective reporting tool.
A production cost project has several phases:
- Collecting data
- Building models
- Validating processes
- Generating results and creating reports
- Last but not least: communicating and managing change
The modelling phase creates a dynamic relationship between the organization’s operations (activities) and the necessary resources (cost behaviour).
- Variable and fixed costs, capabilities
- Performance standards, ETC value
- Links between operations depending on volume (cascade based on the volume of products and services)
- Costs for major processes
- Disbursement accounts vs. fiscal accounts (amortization)
- Expense accounts vs. funding
- Types of operations (primary activities, sub-activities, associated activities, projects)
This initial modelling phase must be completed as quickly as possible; if the process of defining activities and cost objects and then collecting data takes too long, the organization may fail to achieve the anticipated results.
The data to be collected must already exist. Even the best theoretical drivers are not always the best choice.
In some situations it may be more appropriate to start with simple modelling and gradually progress to more complex processes.
We recommend bringing certain users up to speed on the tool right away so that the modelling and subsequent phases can be implemented more easily. The training should therefore be ongoing throughout the project.
The modelling should also include graphics. These will make the project easier to understand and will become a communication tool as the project evolves. Graphic modelling also means users do not have to start over again in the computer-based tool.
Successfully implementing production costing means:
- Understanding the organization better and acquiring a better grasp of processes;
- Management reports that take all costs into account (and have drill-down capability);
- Making operations managers more aware of the costs generated by their unit and their service costs;
- A management tool for making strategic and operational decisions more quickly;
- Project acceptance by all managers since they all approved the model;
- A tool that makes budgeting easier.