Dickeson--Activity-based Costing Gets Results
March 1999
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Are you, or is any printer you know, using activity-based costing (called ABC)? Please let me know. I've been making a few inquiries and have drawn blanks thus far.
The reason for my interest stems from the number of reports I've reviewed from companies in other industries currently utilizing ABC. Many get good results with the cost techniques of this system. Why hasn't the method been used in printing? Or has it? Or is it? I don't know.
Each business has its own resources to use—capital, plant, equipment, inventories, raw materials, skilled people. These resources are consumed and recognized as costs, according to ABC theories. The result of this consumption is a product or a service. Consuming resources is caused by some "activity" taking place in the business to provide the product or service.
Activities, as resource-consumers, are called the cost "drivers." It is the "activity" that consumes resources, provokes "costs." ABC advocates suggest that we focus primary attention on these activities, the cost drivers, rather than on the costs themselves. If you want resource consumption to decrease—costs to decline—you look to the activities that brought about those costs.
Seems to make good sense, doesn't it? If we're determined to reduce our costs and make our business more efficient, we don't start out by dumping a resource such as experienced people, chopping "heads" as we say. Yet that's precisely the way many of us address cost problems.
Don't Treat the Symptom
"Treat the symptom rather than the disease" is the approach. At least it was the approach until the 1980s, when ABC began to develop. Concurrent with the growing adoption of ABC, we began "changing the business model," "reengineering," "outsourcing," etc. Which came first, the chicken or the egg? ABC or fundamental business change?
When they began analyzing by cost-drivers—the activities that consume resources—people began asking fundamental questions like:
In each question, ABC analytic disciplines provided decision support for conclusive answers and action. ABC furnished the rationale for changing the business model, for shifting prevailing paradigms.
The reason for my interest stems from the number of reports I've reviewed from companies in other industries currently utilizing ABC. Many get good results with the cost techniques of this system. Why hasn't the method been used in printing? Or has it? Or is it? I don't know.
Each business has its own resources to use—capital, plant, equipment, inventories, raw materials, skilled people. These resources are consumed and recognized as costs, according to ABC theories. The result of this consumption is a product or a service. Consuming resources is caused by some "activity" taking place in the business to provide the product or service.
Activities, as resource-consumers, are called the cost "drivers." It is the "activity" that consumes resources, provokes "costs." ABC advocates suggest that we focus primary attention on these activities, the cost drivers, rather than on the costs themselves. If you want resource consumption to decrease—costs to decline—you look to the activities that brought about those costs.
Seems to make good sense, doesn't it? If we're determined to reduce our costs and make our business more efficient, we don't start out by dumping a resource such as experienced people, chopping "heads" as we say. Yet that's precisely the way many of us address cost problems.
Don't Treat the Symptom
"Treat the symptom rather than the disease" is the approach. At least it was the approach until the 1980s, when ABC began to develop. Concurrent with the growing adoption of ABC, we began "changing the business model," "reengineering," "outsourcing," etc. Which came first, the chicken or the egg? ABC or fundamental business change?
When they began analyzing by cost-drivers—the activities that consume resources—people began asking fundamental questions like:
- "Does this activity add perceived value to our product or service?" If not, eliminate or minimize it.
- "Is there a better way to do this activity?" Let's do it. "Can others do this better, more efficiently, than we can?" Outsource it.
- "Is this activity consistent with our core competence?" If not, sell it or spin it off.
- "Is this activity disproportionately consuming our vital resources?" Why don't we just stop it?
In each question, ABC analytic disciplines provided decision support for conclusive answers and action. ABC furnished the rationale for changing the business model, for shifting prevailing paradigms.
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