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.
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:
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:
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:
A production cost project has several phases:
The modelling phase creates a dynamic relationship between the organization’s operations (activities) and the necessary resources (cost behaviour).
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.
Activity-based Management brochure