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ABC (Activity Based Costing) Costing for ERP Projects : Implementation , Impact on the Organization & Business Benefits

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ABC (Activity Based Costing) Costing for ERP Projects : Implementation , Impact on the Organization & Business Benefits

Post by skpandey on Tue Dec 13, 2016 12:01 pm

The purpose of ABC costing is to provide management with information for decision support and planning. The use of ABC costing by itself usually has little or no impact on the structure of the company's financial accounting reports (income statement, balance sheet, or cash flow statement). Basketball

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Re: ABC (Activity Based Costing) Costing for ERP Projects : Implementation , Impact on the Organization & Business Benefits

Post by skpandey on Tue Dec 13, 2016 12:04 pm

Management is moved to adopt ABC by the desire to improve costing accuracy—get closer to the true cost and true profitability—of individual products and services, or to understand better the true costs and return on investment from projects or other initiatives. ABC pursues these objectives essentially by making direct costs out of many costs that traditional cost accounting treats as indirect costs. Examples below show how this is done.
Organizations that use ABC consistently and effectively are said to practice activity based management, or ABM. Here, management turns to activity based costing to support decisions about pricing, adding or deleting items from the product portfolio, choosing between outsourcing and in-house production, and evaluating process improvement initiatives. For more on ABM, see the section below "What is activity based management?"
The percentage of organizations currently using activity based costing varies greatly from industry to industry. Various surveys in the period 2010-2016 report the highest percentage of organizations using ABC in manufacturing (20%-50%), followed by financial services (15-25%), public sector (12-18%), and communications (6-12%).

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Re: ABC (Activity Based Costing) Costing for ERP Projects : Implementation , Impact on the Organization & Business Benefits

Post by PRITAMSINGH on Mon Dec 26, 2016 4:22 pm

Activity-based costing (ABC) is an accounting method that allows businesses to gather data about their operating costs. Costs are assigned to specific activities—such as planning, engineering, or manufacturing—and then the activities are associated with different products or services. In this way, the ABC method enables a business to decide which products, services, and resources are increasing their profitability, and which are contributing to losses. Managers are then able to generate data to create a better budget and gain a greater overall understanding of the expenses that are required to keep the company running smoothly. Generally, activity-based costing is most effective when used over a long period of time, as opposed to shorter-term solutions such as the theory of constraints (TOC).

Activity-based costing first gained notoriety in the early 1980s. It emerged as a logical alternative to traditional cost management systems that tended to produce insufficient results when it came to allocating costs. Harvard Business School Professor Robert S. Kaplan was an early advocate of the ABC system. While mainly used for private businesses, ABC has recently been used in public forums, such as those that measure government efficiency... lol!

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Re: ABC (Activity Based Costing) Costing for ERP Projects : Implementation , Impact on the Organization & Business Benefits

Post by umanglunia on Mon Dec 26, 2016 4:25 pm

ABC contrasts with traditional costing (cost accounting), which sometimes assigns costs using somewhat arbitrary allocation percentages for overhead or the so-called indirect costs.

The surprises that seem to infect all ERP projects are "Scope Creep" and budgetary constraints based on business climate. In these days of acquisitions and consolidations, the original design you began the project with changes to accommodate the new business landscape. The duration of an ERP project is long enough that a company's structure can -- and often does -- change. Managing an ERP project through these times requires a focused effort and a design that accommodates these "bumps" along the way.

Obstacle that you commonly run into is an immature consulting arm. Often, consulting resources assigned to a project have limited exposure to typical business processes. This can cause great delays in the project while translating business process to "ERP-speak" and worse, adversely impacts knowledge transfer when the project is over and the consultants are moved to their next assignment.

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Re: ABC (Activity Based Costing) Costing for ERP Projects : Implementation , Impact on the Organization & Business Benefits

Post by subhampareek on Mon Dec 26, 2016 4:29 pm

ABC was first defined in the late 1980s by Kaplan and Bruns. It can be considered as the modern alternative to absorption costing, allowing managers to better understand product and customer net profitability. This provides the business with better information to make value-based and therefore more effective decisions.

ABC focuses attention on cost drivers, the activities that cause costs to increase. Traditional absorption costing tends to focus on volume-related drivers, such as labour hours, while activity-based costing also uses transaction-based drivers, such as number of orders received. In this way, long-term variable overheads, traditionally considered fixed costs, can be traced to products.

Managers from companies of all sizes have read about activity-based costing (ABC) or even attended conferences about ABC. Many are now trying to reap the benefits that ABC offers. But the rush to understand and implement ABC has caused some issues to be poorly understood. To summarize these issues, this article identifies some questions people often ask about ABC. Companies that answer these questions before implementing ABC are more likely to have successful ABC systems.

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Re: ABC (Activity Based Costing) Costing for ERP Projects : Implementation , Impact on the Organization & Business Benefits

Post by p15075 on Mon Dec 26, 2016 4:30 pm

Activity based costing for ERP project

There are a number of costing models used in the domain of business and Activity-Based Costing is one of them. In activity-based costing, various activities in the organization are identified and assigned with a cost.
When it comes to pricing of products and services produced by the company, activity cost is calculated for activities that have been performed in the process of producing the products and services. In other words, activity-based costing assigns indirect costs to direct costs. These indirect costs are also known as overheads in the business world.
Let us take an example. There are a number of activities performed in a business organization and these activities belong to many departments and phases such as planning, manufacturing, or engineering. All these activities eventually contribute to producing products or offering services to the end clients.
Quality Control activity of a garment manufacturing company is one of the fine examples for such an activity. By identifying the cost for the Quality Control function, the management can recognize the costing for each product, service, or resource. This understanding helps the executive management to run the business organization smoothly.
Activity-based costing is more effective when used in long-term rather than in short-term.

Implementation

When it comes to implementing activity-based costing in an organization, commitment of senior management is a must. Activity-based costing requires visionary leadership that should sustain long-term. Therefore, it is required that the senior management has comprehensive awareness of how activity-based costing works and management's interaction points with the process.
Before implementing activity-based costing for the entire organization, it is always a great idea to do a pilot run. The best candidate for this pilot run is the department that suffers from profit making deficiencies.
Although one might take it as risky, such departments may stand an opportunity to succeed when managed with activity-based costing. Lastly, this would give the organization a measurable illustration of activity-based costing and its success. In case, if no cost saving occurs after the pilot study is implemented, it is most likely that the model has not been properly implemented or the model does not suit the department or company as a whole

Impact on the Organization

Sometimes, organizations face the risk of spending too much time, money and resources on gathering and analysing data required for activity-based costing model. This can eventually lead to frustration and the organization may give up on ABC eventually.
Failure to connect the outcomes from the activity-based costing usually hinders the success of the implementation. This usually happens when the decision makers are not aware of the "big picture" of how activity-based costing can be used throughout the organization. Understanding the concepts and getting actively involved in the ABC implementation process can easily eliminate this.
If the business organization requires quick fixes, activity-based costing will not be the correct answer. Therefore, ABC should not be implemented for situations where quick wins are required.

Business Benefits

Activity-based costing is a different way of looking at an organization's costs in order to optimize profit margins.
If ABC is implemented with the correct understanding for the correct purpose, it can return a great long-term value to the organization.
Cost accountants know that traditional cost accounting can hide or obscure information on the costs of individual products and services—especially where local cost allocation rules misrepresents actual resource usage. As a result, the move to ABC is usually driven by a need to understand the "true costs" of individual products and services more accurately. Companies implement activity based costing in order to:
 Identify individual products that are truly unprofitable.
 Find the true costs of products so as to support pricing policy.
 Reveal truly unnecessary costs that can be eliminated.
When the organization uses ABC consistently to pursue these objectives, the practice is known as activity based management ABM.
Note that the purpose of ABC is to provide management with information for decision support and planning. The use of ABC by itself usually has little or no impact on the structure of the company's financial accounting reports (income statement, balance sheet, or cash flow statement). However, ABC sometimes brings improvements in reported margins and profitability. These outcomes follow when ABC reveals unnecessary or inflated costs, or when ABC shows where to adjust pricing models, work flow process, or the product mix.
This article further defines, explains, and illustrates activity based costing using example calculations to contrast ABC with traditional cost accounting, in context with related costing terms and concepts

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Re: ABC (Activity Based Costing) Costing for ERP Projects : Implementation , Impact on the Organization & Business Benefits

Post by yogesh.kha3 on Mon Dec 26, 2016 4:32 pm

Activity-based costing provides a more accurate method of product/service costing, leading to more accurate pricing decisions. It increases understanding of overheads and cost drivers; and makes costly and non-value adding activities more visible, allowing managers to reduce or eliminate them. ABC enables effective challenge of operating costs to find better ways of allocating and eliminating overheads. It also enables improved product and customer profitability analysis. It supports performance management techniques such as continuous improvement and scorecards.

Traditional costing focuses on outputs or products and on full-absorption costing.  ABC by contrast, focuses on inputs or activities and on relevant costs.  ABC is consistent with the operational philosophies of total quality management (TQM) and just in time (JIT).  All three focus on processes and activities; all three also encourage the elimination of waste.  In layman's terms, ABC, TQM, and JIT focus on the work of the organization rather than on outputs.

Implementation:
It provides the decision-making information absent from traditional costing methods. While ABC costing is not limited by business unit boundaries, it can not fully supplant traditional costing methods as it often fails to meet financial reporting requirements for businesses. It focuses on costs contributing to production of a product. It does not attribute other general costs that do not have at least an indirect relationship to the product. While traditional costing systems focus on direct costs and burden a product with other fixed costs, activity based costing increases accuracy of indirect cost assignment.

Impact on the Organization:
The effect of strategic posture and organizational structure on the adoption and implementation of general forms of activity management (AM) approaches. To explain the decision to adopt and implement AM, theories of strategy and of innovation in organizations are drawn upon. Employing a survey methodology, a questionnaire was used to collect data on the organizational determinants and business strategies of a sample of strategic business units in Canadian manufacturing firms. The questionnaire also collected data on the AM approaches these SBUs had adopted and implemented in the last two years.

Business Benefits:
Cost accountants know that traditional cost accounting can hide or obscure information on the costs of individual products and services—especially where local cost allocation rules misrepresents actual resource usage. As a result, the move to ABC is usually driven by a need to understand the "true costs" of individual products and services more accurately.


Last edited by yogesh.kha3 on Mon Dec 26, 2016 5:34 pm; edited 1 time in total

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Re: ABC (Activity Based Costing) Costing for ERP Projects : Implementation , Impact on the Organization & Business Benefits

Post by parth on Mon Dec 26, 2016 4:34 pm

1. Is top management outwardly committed to ABC? ABC is not only the concern of your accountant. Once an ABC system is initiated, management must be prepared to support that implementation by providing additional short-term resources. When management shows this level of commitment, the organization will begin to believe that it "must be important, or they wouldn't be spending money on it."

2. Is the firm ready for change? Be prepared to initiate some tests prior to implementing ABC. Stable organizations may resist change at any level. Use pilot projects to test your readiness. Employees must believe that changes to ABC will improve matters. Instill and promote education. Educating your work force about ABC before the change is also important. In any implementation of ABC, operational data must be collected. Reassignments may also be a part of the changes that naturally occur within your organization.

3. Do performance measurement and reward systems take ABC into account? As far as employees know, the company is changing the rules of the game when it introduces ABC. Until the reward system demonstrates that rewards are tied to the new performance evaluation rules, employees will experience confusion and dissonance. The ultimate goal is for employees to gain confidence that using ABC will cause the company to make better decisions based on more equitable and meaningful allocations cost.

4. Do performance measures help you manage the "forest" or the individual? One of the weaknesses of traditional management practice is the demand for efficiency in each department, which too often leads to increased work-in-process and ending inventories -- and, thus, to higher inventory costs. Optimizing each activity does not necessarily lead to a more productive company as a whole; often the contrary is true. Companies must therefore establish overall performance measures that monitor and encourage both managers and employees to take the "forest" view rather than the "tree" view.

5. Does the cost system emphasize managing activities rather than managing costs? Probably the most exciting difference between traditional costing and ABC is the direct influence ABC can have on non financial operations management. The notion that managing activities efficiently will reduce total costs is fundamental to ABC.

6. Have you "kept it simple"? An ABC system should be as accurate as it reasonably can be, but the costs of implementing the system must justify the desired improvements in managing the business. For this reason, companies should do a cost-benefit analysis that considers the costs of:

Data collection;
Data maintenance;
Time required to keep the ABC system up-to-date;
Staffing; and
Computer and software requirements.
7. Are you prepared to reassign or terminate personnel as excess resources are identified? Employees need to have the correct skills; they must not spend their time performing non-value-added activities. Managers and employees must use ABC to identify value-added functions and eliminate functions that do not directly relate to the company's success. The good news is that ABC implementations take time -- as do retraining, re deployment, and thoughtful terminations.

8. Do you understand ABC is a management system -- not a costing system? ABC is not in accordance with generally accepted accounting principles (GAAP), and for a good reason: All costs need not to be absorbed or included in product costs under ABC, because ABC costs are not intended for use in inventory valuation. Instead, the purpose of ABC costs is to provide information for managing the business.

Summary: Reviewing these questions should make it clearer the primary issues involved in ABC implementation are management issues, not costing issues. An ABC system does not replace the company's cost accounting department, because ABC is a management system, not a costing system.

ABC supports a shift in how businesses operate to a much more humanistic approach. ABC should bring rewards to those organizations that commit the time and resources required to view the workplace from the ies.


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Re: ABC (Activity Based Costing) Costing for ERP Projects : Implementation , Impact on the Organization & Business Benefits

Post by Ruchi on Mon Dec 26, 2016 4:35 pm

Impact on the Organisation:-
Expensive Implementation
Setting up an ABC system can be expensive and time-consuming. As business activities are analyzed, they must be broken down into each activity’s individual components.
Misinterpretation of Data
Reports produced by an ABC system contain information, such as product margins, that vary from the information reported for a traditional cost method. It’s also possible that some act for example, ABC does not conform to accounting standards and should not be used for external reporting. Since traditional cost figures tend to be the norm, interpreting ABC data along with regular accounting information can be confusing and lead to bad decision-making. The use of software can streamline the process of maintaining an ABC system and simplify its integration with regular cost accounting information.

Business Benefits:-
Improves Business Processes
An ABC system allocates indirect costs based on a product’s cost driver, or the factor that creates the cost. As costs are allocated per product, a picture starts to emerge of which business processes are performing well and which ones need to be improved.
Identifies Wasteful Products
The ABC method accounts for costs similar to the way production work is performed, allowing your business to better understand where overhead costs are going. The data can identify wasteful products and unnecessary costs, so that resources can be used productively


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Re: ABC (Activity Based Costing) Costing for ERP Projects : Implementation , Impact on the Organization & Business Benefits

Post by sinnykedia on Mon Dec 26, 2016 4:36 pm

Activity-based costing (ABC) is a method of assigning costs to products or services based on the resources that they consume.With ABC, a company can soundly estimate the cost elements of entire products, activities and services. That may help inform a company's decision to either:

Identify and eliminate those products and services that are unprofitable and lower the prices of those that are overpriced (product and service portfolio aim) Or identify and eliminate production or service processes that are ineffective and allocate processing concepts that lead to the very same product at a better yield (process re-engineering aim.
In a business organization, the ABC methodology assigns an organization's resource costs through activities to the products and services provided to its customers. ABC is generally used as a tool for understanding product and customer cost and profitability based on the production or performing processes. As such, ABC has predominantly been used to support strategic decisions such as pricing, outsourcing, identification and measurement of process improvement initiatives.

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Re: ABC (Activity Based Costing) Costing for ERP Projects : Implementation , Impact on the Organization & Business Benefits

Post by Akshat Jhalani on Mon Dec 26, 2016 4:38 pm

Implementation

When it comes to implementing activity-based costing in an organization, commitment of senior management is a must. Activity-based costing requires visionary leadership that should sustain long-term. Therefore, it is required that the senior management has comprehensive awareness of how activity-based costing works and management's interaction points with the process.
When the organization uses ABC consistently to pursue these objectives, the practice is known as activity based management ABM.
Note that the purpose of ABC is to provide management with information for decision support and planning. The use of ABC by itself usually has little or no impact on the structure of the company's financial accounting reports (income statement, balance sheet, or cash flow statement).

Quality Control activity of a garment manufacturing company is one of the fine examples for such an activity. By identifying the cost for the Quality Control function, the management can recognize the costing for each product, service, or resource. This understanding helps the executive management to run the business organization smoothly.
Activity-based costing is more effective when used in long-term rather than in short-term.

An ABC system should be as accurate as it reasonably can be, but the costs of implementing the system must justify the desired improvements in managing the business. For this reason, companies should do a cost-benefit analysis that considers the costs of:

*Data collection;
*Data maintenance;
*Time required to keep the ABC system up-to-date;
*Staffing; and
*Computer and software requirements.

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Re: ABC (Activity Based Costing) Costing for ERP Projects : Implementation , Impact on the Organization & Business Benefits

Post by Poorvajain on Mon Dec 26, 2016 4:39 pm

Implementation- The first thing a business must do when using ABC is set up a team that will be responsible for determining which activities are necessary for the product or service in question. This team should include experts from different areas of the company (including finance, technology, and human resources) and perhaps also an outside consultant.

After the team is assembled and data on such topics as utilities and materials is gathered, it is then time to determine the elements of each activity that cost money. Attention to detail is very important here, as many of these costs may be hidden and not entirely obvious. As Joyce Chutchian-Ferranti wrote in an article for Computerworld: "The key is to determine what makes up fixed costs, such as the cost of a telephone, and variable costs, such as the cost of each phone call." Chutchian-Ferranti goes on to note that even though in many instances technology has replaced human labor costs (such as in voice-mail systems), a business manager must still examine the hidden costs associated with maintaining the service. Nonactivity costs like direct materials and services provided from outside the company usually do not have to be factored in because this has previously been done.

Once all of these costs are determined and noted, the information must be input into a computer application. Chutchian-Ferranti explains that the software can be a simple database, off-the-shelf ABC software, or customized software. This will eventually give the company enough data to figure out what they can do to increase profit margins and make the activity more efficient.

After a business has had enough time to analyze the data obtained through activity-based costing and determine which activities are cost effective, it can then decide what steps can be taken to increase profits. Activities that are deemed cost prohibitive can then be outsourced, cut back, or eliminated altogether in an effort to make them more profitable. The implementation of these changes is known as activity-based management (ABM).

Impact- focuses attention on cost drivers, the activities that cause costs to increase. Traditional absorption costing tends to focus on volume-related drivers, such as labour hours, while activity-based costing also uses transaction-based drivers, such as number of orders received. In this way, long-term variable overheads, traditionally considered fixed costs, can be traced to products.

BENEFITS- Activity-based costing provides a more accurate method of product/service costing, leading to more accurate pricing decisions. It increases understanding of overheads and cost drivers; and makes costly and non-value adding activities more visible, allowing managers to reduce or eliminate them. ABC enables effective challenge of operating costs to find better ways of allocating and eliminating overheads. It also enables improved product and customer profitability analysis. It supports performance management techniques such as continuous improvement and scorecards.
Razz Shocked Basketball study

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Re: ABC (Activity Based Costing) Costing for ERP Projects : Implementation , Impact on the Organization & Business Benefits

Post by jitinsharma on Mon Dec 26, 2016 4:40 pm

• This ABC model is used to capture direct costs and variable overheads, which were
lacking in the SOE’s traditional costing systems.
• The ABC experience has successfully induced standardisation in their working
practices and processes. Standardisation was not a common notion in Chinese
culture or in place in many Chinese companies.
• ABC also acts as a catalyst to Xu Ji’s IT developments – first accounting and office
computerisation, and later the ERP implementation.
• The common ‘top-down’ management style and organisational culture among SOEs
worked well when instigating innovative ideas and inducing corporate-wide learning.
• Top management’s commitment to trying out new management ideas and investing
in new technology has been the unique feature in this research organisation.

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Re: ABC (Activity Based Costing) Costing for ERP Projects : Implementation , Impact on the Organization & Business Benefits

Post by akriti on Mon Dec 26, 2016 4:43 pm

Activity-based costing (ABC) is a method of assigning costs to products or services based on the resources that they consume.With ABC, a company can soundly estimate the cost elements of entire products, activities and services. That may help inform a company's decision to either:

Identify and eliminate those products and services that are unprofitable and lower the prices of those that are overpriced (product and service portfolio aim) Or identify and eliminate production or service processes that are ineffective and allocate processing concepts that lead to the very same product at a better yield (process re-engineering aim.
Implementation

When it comes to implementing activity-based costing in an organization, commitment of senior management is a must. Activity-based costing requires visionary leadership that should sustain long-term. Therefore, it is required that the senior management has comprehensive awareness of how activity-based costing works and management's interaction points with the process.
Before implementing activity-based costing for the entire organization, it is always a great idea to do a pilot run. The best candidate for this pilot run is the department that suffers from profit making deficiencies.
Although one might take it as risky, such departments may stand an opportunity to succeed when managed with activity-based costing. Lastly, this would give the organization a measurable illustration of activity-based costing and its success. In case, if no cost saving occurs after the pilot study is implemented, it is most likely that the model has not been properly implemented or the model does not suit the department or company as a whole.
The surprises that seem to infect all ERP projects are "Scope Creep" and budgetary constraints based on business climate. In these days of acquisitions and consolidations, the original design you began the project with changes to accommodate the new business landscape. The duration of an ERP project is long enough that a company's structure can -- and often does -- change. Managing an ERP project through these times requires a focused effort and a design that accommodates these "bumps" along the way.

Obstacle that you commonly run into is an immature consulting arm. Often, consulting resources assigned to a project have limited exposure to typical business processes.

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Re: ABC (Activity Based Costing) Costing for ERP Projects : Implementation , Impact on the Organization & Business Benefits

Post by BennettElias on Mon Dec 26, 2016 4:51 pm

The first most question is what is Activity base costing. The answer is as follows.

Activity-based costing (ABC) is a costing methodology that identifies activities in an organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each.

Chartered Institute of Management Accountants defines ABC as an approach to the costing and monitoring of activities which involves tracing resource consumption and costing final outputs. Resources are assigned to activities, and activities to cost objects based on consumption estimates.

With ABC, a company can soundly estimate the cost elements of entire products, activities and services. That may help inform a company's decision to either:

Identify and eliminate those products and services that are unprofitable and lower the prices of those that are overpriced (product and service portfolio aim)
Or identify and eliminate production or service processes that are ineffective and allocate processing concepts that lead to the very same product at a better yield (process re-engineering aim
The objective of ABC is as follows.
In a business organization, the ABC methodology assigns an organization's resource costs through activities to the products and services provided to its customers. ABC is generally used as a tool for understanding product and customer cost and profitability based on the production or performing processes. As such, ABC has predominantly been used to support strategic decisions such as pricing, outsourcing, identification and measurement of process improvement initiatives.

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Re: ABC (Activity Based Costing) Costing for ERP Projects : Implementation , Impact on the Organization & Business Benefits

Post by ShubhamJain on Mon Dec 26, 2016 4:55 pm

ABC was first defined in the late 1980s by Kaplan and Bruns. It can be considered as the modern alternative to absorption costing, allowing managers to better understand product and customer net profitability. This provides the business with better information to make value-based and therefore more effective decisions.

Activity based costing for ERP project
There are a number of costing models used in the domain of business and Activity-Based Costing is one of them. In activity-based costing, various activities in the organization are identified and assigned with a cost.
When it comes to pricing of products and services produced by the company, activity cost is calculated for activities that have been performed in the process of producing the products and services. In other words, activity-based costing assigns indirect costs to direct costs. These indirect costs are also known as overheads in the business world.
Let us take an example. There are a number of activities performed in a business organization and these activities belong to many departments and phases such as planning, manufacturing, or engineering. All these activities eventually contribute to producing products or offering services to the end clients.

Impact on the Organization
Sometimes, organizations face the risk of spending too much time, money and resources on gathering and analysing data required for activity-based costing model. This can eventually lead to frustration and the organization may give up on ABC eventually.
Failure to connect the outcomes from the activity-based costing usually hinders the success of the implementation. This usually happens when the decision makers are not aware of the "big picture" of how activity-based costing can be used throughout the organization. Understanding the concepts and getting actively involved in the ABC implementation process can easily eliminate this.
If the business organization requires quick fixes, activity-based costing will not be the correct answer. Therefore, ABC should not be implemented for situations where quick wins are required.

Improves Business Processes
An ABC system allocates indirect costs based on a product’s cost driver, or the factor that creates the cost. As costs are allocated per product, a picture starts to emerge of which business processes are performing well and which ones need to be improved.
Identifies Wasteful Products
The ABC method accounts for costs similar to the way production work is performed, allowing your business to better understand where overhead costs are going.

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Re: ABC (Activity Based Costing) Costing for ERP Projects : Implementation , Impact on the Organization & Business Benefits

Post by Akshay Sharma on Mon Dec 26, 2016 5:06 pm

Activity based costing ABC is a method for assigning costs to products, services projects, tasks, or acquisitions, based on the activities that go into them and the resources consumed by these activities.

When it comes to IT, the first decision is usually between buy versus build. The ABC allocation model is more or less standard; the Off-the-shelf (OTS) ABC software have matured during the last decade; and building an advanced ABC model is too cumbersome - are the strong arguments in favor of buy option. The build option should be considered only when there is a very strong reason for this. Like - the ABC model is too simple or highly customized or is required to be monolithically integrated with other in-house systems etc.

Talking about the OTS option, the choice can be between specialized ABC software and ABC module of ERP packages. ABC module of ERP package is ideal where ABC is required for operational decision making and most of the data is available within ERP itself.

ABC in ERP An ABC system allocates indirect costs based on a product’s cost driver, or the factor that creates the cost. As costs are allocated per product, a picture starts to emerge of which business processes are performing well and which ones need to be improved. ABC can be used to identify non-valued added activities and can help to better allocate resources to efficient and profitable activities. The use of ABC can also add value to the continuous improvement of business processes.

The ABC method accounts for costs similar to the way production work is performed, allowing your business to better understand where overhead costs are going. The data can identify wasteful products and unnecessary costs, so that resources can be used productively. The method also helps to fix the price of products or services that are excessive or incorrect. Overall product and service quality can improve as ABC’s data details production and cost issues that need to be resolved.

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Re: ABC (Activity Based Costing) Costing for ERP Projects : Implementation , Impact on the Organization & Business Benefits

Post by Saurabh28 on Mon Dec 26, 2016 5:12 pm

Discovery and Planning
This first phase begins during the sales process and then continues post-sale. During this period, the project team will be created. There will be initial meetings and documentation developed as the team works to identify current issues and potential solutions. An important part of this phase is constructing the project plan, which will serve as a guide throughout the rest of the project. More detail on the Discovery and Planning phase.

2. Design
We’re not talking about painting the office or rearranging furniture. Instead, what will the new enterprise-wide system look like and how will it be used in the organization? In the ERP Design phase, the project team and implementation team will be working out the various configurations for the new system, defining roles, and documenting standard procedures. Read more on the Design phase.

3. Development
The purpose of the development phase is to prepare the entire system for going live. This includes activities such as completing any necessary customizations, developing user trainings, and importing data. With ERP implementations, like any custom software development projects – “First, Solve the problem. Then, write the code.” Get a better look at the Development phase.

4. Testing
Is the system’s functionality aligning with the set requirements for the project? The Testing and Development phases will often overlap, as the implementation and project teams jump between the two – constantly fine tuning the configuration. By the end of this phase, project team members will be comfortable doing their jobs in the new system. This is the final step before diving into the live system. Check out more on the Testing phase.

5. Deployment
The project team and implementation team will assess the situation and make the final go or no-go decision. Prior to going live, the final data will be loaded and validated. The project team will train other employees who will then start working in the new system, and completely stop using the old one. Read the article on the Deployment phase.

6. Ongoing Support
Once the ERP system has gone live, the purpose of the project team will shift. Over time, as the way the users work within the system evolves, adjustments and changes to the system configuration may be needed. Get more info on Ongoing Support.

We have included all of these steps in much greater detail in the free e-book which you can download below. PC Bennett has been implementing ERP systems and providing ongoing ERP support for companies since 2002 and we are happy to assist as we know it can be a large endeavor.

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Re: ABC (Activity Based Costing) Costing for ERP Projects : Implementation , Impact on the Organization & Business Benefits

Post by gautamsurana on Mon Dec 26, 2016 5:16 pm

What benefits does ABC provide?
Activity-based costing provides a more accurate method of product/service costing, leading to more accurate pricing decisions. It increases understanding of overheads and cost drivers; and makes costly and non-value adding activities more visible, allowing managers to reduce or eliminate them. ABC enables effective challenge of operating costs to find better ways of allocating and eliminating overheads. It also enables improved product and customer profitability analysis. It supports performance management techniques such as continuous improvement and scorecards.

Objective

To associate elements of overhead cost to those products that cause them by applying the cost at the points of transition in the procurement, manufacturing and sales cycle.

The Value of Activity Based Costing
Adopt a migration approach, recovering additional overheads according to an implementation plan
Attach user-defined elements of costs to transition points in the purchase, production and sale of products
Appropriate pre-production costs as stock is received from purchasing
Apportion manufacturing costs as stock is eceived from Work in Progress
Distribute post-production costs through cost of sales as the final item is invoiced
Calculate single batch or item based activities
Matching Activity Based Costing to your business
Define the cost elements required that are to be allocated to stock
Assign the drive quantities for each element
Run Activity Based Costing parallel to traditional costing during implementation
Estimate appropriate recovering rates using system generated estimates
Integration
Integrates with the following modules:
Bill of Materials (Essential)
Inventory (Essential)
General Ledger
Sales Orders
Purchase Orders
Work in Progress
Audit trails and reporting
The ABC costing variance account is designed to accumulate rounding errors that can arise during processing of a receipt into stock
The Recoveries Estimate Report program produces a report of the expected overhead recoveries relative to the quantity of the stock item processed
The ABC Analysis Report program prints a report listing of all the recoveries made against various elements according to a specific ledger period or all ledger periods
Impact on the Organization
Sometimes, organizations face the risk of spending too much time, money and resources on gathering and analysing data required for activity-based costing model. This can eventually lead to frustration and the organization may give up on ABC eventually.
Failure to connect the outcomes from the activity-based costing usually hinders the success of the implementation. This usually happens when the decision makers are not aware of the "big picture" of how activity-based costing can be used throughout the organization. Understanding the concepts and getting actively involved in the ABC implementation process can easily eliminate this.
If the business organization requires quick fixes, activity-based costing will not be the correct answer. Therefore, ABC should not be implemented for situations where quick wins are required.

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Re: ABC (Activity Based Costing) Costing for ERP Projects : Implementation , Impact on the Organization & Business Benefits

Post by anchal on Mon Dec 26, 2016 5:18 pm

hen it comes to implementing activity-based costing in an organization, commitment of senior management is a must. Activity-based costing requires visionary leadership that should sustain long-term. Therefore, it is required that the senior management has comprehensive awareness of how activity-based costing works and management's interaction points with the process.
When the organization uses ABC consistently to pursue these objectives, the practice is known as activity based management ABM.
Note that the purpose of ABC is to provide management with information for decision support and planning. The use of ABC by itself usually has little or no impact on the structure of the company's financial accounting reports (income statement, balance sheet, or cash flow statement).

Quality Control activity of a garment manufacturing company is one of the fine examples for such an activity. By identifying the cost for the Quality Control function, the management can recognize the costing for each product, service, or resource. This understanding helps the executive management to run the business organization smoothly.
Activity-based costing is more effective when used in long-term rather than in short-term.

An ABC system should be as accurate as it reasonably can be, but the costs of implementing the system must justify the desired improvements in managing the business. For this reason, companies should do a cost-benefit analysis that considers the costs of:

*Data collection;
*Data maintenance;
*Time required to keep the ABC system up-to-date;
*Staffing; and
*Computer and software requirements.

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Re: ABC (Activity Based Costing) Costing for ERP Projects : Implementation , Impact on the Organization & Business Benefits

Post by jitinsharma on Mon Dec 26, 2016 5:18 pm

Activity-based costing (ABC) is a costing methodology that identifies activities in an organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each. This model assigns more indirect costs (overhead) into direct costs compared to conventional costing.

CIMA (Chartered Institute of Management Accountants) defines ABC as an approach to the costing and monitoring of activities which involves tracing resource consumption and costing final outputs. Resources are assigned to activities, and activities to cost objects based on consumption estimates. The latter utilize cost drivers to attach activity costs to outputs.
With ABC, a company can soundly estimate the cost elements of entire products, activities and services. That may help inform a company's decision to either:

Identify and eliminate those products and services that are unprofitable and lower the prices of those that are overpriced (product and service portfolio aim)
Or identify and eliminate production or service processes that are ineffective and allocate processing concepts that lead to the very same product at a better yield (process re-engineering aim
In a business organization, the ABC methodology assigns an organization's resource costs through activities to the products and services provided to its customers. ABC is generally used as a tool for understanding product and customer cost and profitability based on the production or performing processes. As such, ABC has predominantly been used to support strategic decisions such as pricing, outsourcing, identification and measurement of process improvement initiatives.

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Re: ABC (Activity Based Costing) Costing for ERP Projects : Implementation , Impact on the Organization & Business Benefits

Post by tabassumrani on Mon Dec 26, 2016 5:21 pm

Application of Activity Based Costing
ABC has proven its applicability beyond academic discussion.

ABC:

is applicable throughout company financing, costing and accounting:
is a modeling process applicable for full scope as well as for partial views.
helps to identify inefficient products, departments and activities.
helps to allocate more resources on profitable products, departments and activities.
helps to control the costs at any per-product-level level and on a departmental level.
helps to find unnecessary costs that may be eliminated.
helps fixing the price of a product or service with any desired analytical resolution.

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Re: ABC (Activity Based Costing) Costing for ERP Projects : Implementation , Impact on the Organization & Business Benefits

Post by abhishek.tiwari on Mon Dec 26, 2016 5:27 pm

Activity-based costing (ABC) is an accounting method that identifies the activities that a firm performs and then assigns indirect costs to products. ... Indirect costs, such as management and office staff salaries are sometimes difficult to assign to a particular product produced.
Activity based costing (ABC) assigns manufacturing overhead costs to products in a more logical manner than the traditional approach of simply allocating costs on the basis of machine hours. Activity based costing first assigns costs to the activities that are the real cause of the overhead.

Activity-based costing (ABC) is a costing methodology that identifies activities in an organisation and assigns the cost of each activity with resources to all products and services according to the actual consumption by each. This model assigns more indirect costs (overhead) into direct costs compared to conventional costing.

CIMA (Chartered Institute of Management Accountants) defines ABC as an approach to the costing and monitoring of activities which involves tracing resource consumption and costing final outputs. Resources are assigned to activities, and activities to cost objects based on consumption estimates. The latter utilize cost drivers to attach activity costs to outputs.
With ABC, a company can soundly estimate the cost elements of entire products, activities and services. That may help inform a company's decision to either:

Identify and eliminate those products and services that are unprofitable and lower the prices of those that are overpriced (product and service portfolio aim)
Or identify and eliminate production or service processes that are ineffective and allocate processing concepts that lead to the very same product at a better yield (process re-engineering aim
In a business organization, the ABC methodology assigns an organization's resource costs through activities to the products and services provided to its customers. ABC is generally used as a tool for understanding product and customer cost and profitability based on the production or performing processes. As such, ABC has predominantly been used to support strategic decisions such as pricing, outsourcing, identification and measurement of process improvement initiatives.It helps an organisation in following manner:-

1.Discovery and Planning
This first phase begins during the sales process and then continues post-sale. During this period, the project team will be created. There will be initial meetings and documentation developed as the team works to identify current issues and potential solutions. An important part of this phase is constructing the project plan, which will serve as a guide throughout the rest of the project. More detail on the Discovery and Planning phase.

2. Design
We’re not talking about painting the office or rearranging furniture. Instead, what will the new enterprise-wide system look like and how will it be used in the organization? In the ERP Design phase, the project team and implementation team will be working out the various configurations for the new system, defining roles, and documenting standard procedures. Read more on the Design phase.

3. Development
The purpose of the development phase is to prepare the entire system for going live. This includes activities such as completing any necessary customizations, developing user trainings, and importing data. With ERP implementations, like any custom software development projects – “First, Solve the problem. Then, write the code.” Get a better look at the Development phase.

4. Testing
Is the system’s functionality aligning with the set requirements for the project? The Testing and Development phases will often overlap, as the implementation and project teams jump between the two – constantly fine tuning the configuration. By the end of this phase, project team members will be comfortable doing their jobs in the new system. This is the final step before diving into the live system. Check out more on the Testing phase.

5. Deployment
The project team and implementation team will assess the situation and make the final go or no-go decision. Prior to going live, the final data will be loaded and validated. The project team will train other employees who will then start working in the new system, and completely stop using the old one. Read the article on the Deployment phase.

6. Ongoing Support
Once the ERP system has gone live, the purpose of the project team will shift. Over time, as the way the users work within the system evolves, adjustments and changes to the system configuration may be needed. Get more info on Ongoing Support.

We have included all of these steps in much greater detail in the free e-book which you can download below. PC Bennett has been implementing ERP systems and providing ongoing ERP support for companies since 2002 and we are happy to assist as we know it can be a large endeavor.

Abhishek Tiwari
P15002







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Re: ABC (Activity Based Costing) Costing for ERP Projects : Implementation , Impact on the Organization & Business Benefits

Post by digyasoni on Mon Dec 26, 2016 5:31 pm

Activity Based Costing (ABC) looks at relationships in allocating and reporting costs. Consequently, many of the distortions occurring in traditional cost systems are eliminated due to an itemized allocation approach. Additionally, the ABC Model can be designed to provide profit information by customer, by product, etc. This in turn leads to be better pricing of products and services. It also results in increased profits since resources (such as marketing staff) are redirected where the profits are the highest.

ABC can also fit with other re-engineering and information improvement projects. Implementing ABC isn't easy since it requires extensive analysis of activities, building a three layer cost model, and maintenance after implementation. However, given the increased distortions in traditional systems and with so much emphasis on company improvement projects, ABC needs to be given serious consideration where process improvement is critical.

What are the benefits of ABC?

Cost accountants know that traditional cost accounting can hide or obscure information on the costs of individual products and services—especially where local cost allocation rules misrepresents actual resource usage. As a result, the move to ABC is usually driven by a need to understand the "true costs" of individual products and services more accurately. Companies implement activity based costing in order to:

Identify individual products that are truly unprofitable.
Find the true costs of products so as to support pricing policy.
Reveal truly unnecessary costs that can be eliminated.
When the organization uses ABC consistently to pursue these objectives, the practice is known as activity based management ABM.

Note that the purpose of ABC is to provide management with information for decision support and planning. The use of ABC by itself usually has little or no impact on the structure of the company's financial accounting reports (income statement, balance sheet, or cash flow statement). However, ABC sometimes brings improvements in reported margins and profitability. These outcomes follow when ABC reveals unnecessary or inflated costs, or when ABC shows where to adjust pricing models, work flow process, or the product mix.

Why do companies and organisations use activity based costing?

Management is moved to adopt ABC by the desire to improve costing accuracy—get closer to the true cost and true profitability—of individual products and services, or to understand better the true costs and return on investment from projects or other initiatives. ABC pursues these objectives essentially by making direct costs out of many costs that traditional cost accounting treats as indirect costs. Examples below show how this is done.

Organizations that use ABC consistently and effectively are said to practice activity based management, or ABM. Here, management turns to activity based costing to support decisions about pricing, adding or deleting items from the product portfolio, choosing between outsourcing and in-house production, and evaluating process improvement initiatives. For more on ABM, see the section below "What is activity based management?"

The percentage of organisations currently using activity based costing varies greatly from industry to industry. Various surveys in the period 2010-2016 report the highest percentage of organisations using ABC in manufacturing (20%-50%), followed by financial services (15-25%), public sector (12-18%), and communications (6-12%).

Happy Reading! drunken rendeer

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Re: ABC (Activity Based Costing) Costing for ERP Projects : Implementation , Impact on the Organization & Business Benefits

Post by AadilKhan on Mon Dec 26, 2016 5:36 pm

Limitations:
Applicability of ABC is bound to cost of required data capture. That drives the prevalence to slow processes in services and administrations, where staff time consumed per task defines a dominant portion of cost. Hence the reported application for production tasks do not appear as a favorized scenario.

Tracing Costs
Even in ABC i.e activity based accounting , some overhead costs are difficult to assign to products and customers, such as the chief executive's salary. These costs are termed 'business sustaining' and are not assigned to products and customers because there is no meaningful method. This lump of unallocated overhead costs must nevertheless be met by contributions from each of the products, but it is not as large as the overhead costs before ABC is employed.

Although some may argue that costs untraceable to activities should be "arbitrarily allocated" to products, it is important to realize that the only purpose of ABC is to provide information to management. Therefore, there is no reason to assign any cost in an arbitrary manner.

Transition to automated Activity-based costing accounting[edit]
The prerequisite for lesser cost in performing ABC is automating the data capture with an accounting extension that leads to the desired ABC model. Known approaches for event based accounting simply show the method for automation. Any transition of a current process from one stage to the next may be detected as a relevant event. Paired events easily form the respective activity.

The state of the art approach with authentication and authorization in IETF standard RADIUS gives an easy solution for accounting all workposition based activities. That simply defines the extension of the Authentication and Authorization (AA) concept to a more advanced AA and Accounting (AAA) concept. Respective approaches for AAA get defined and staffed in the context of mobile services, when using smart phones as e.a. intelligent agents or smart agents for automated capture of accounting data .

Public sector usage
When ABC is reportedly used in the public administration sector, the reported studies do not provide evidence about the success of methodology beyond justification of budgeting practise and existing service management and strategies.

Usage in the US Marine Corps started in 1999.[15][16][17][18] Its use by the UK Police has been mandated since the 2003-04 UK tax year as part of England and Wales’ National Policing Plan, specifically the Policing Performance Assessment Framework.

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Re: ABC (Activity Based Costing) Costing for ERP Projects : Implementation , Impact on the Organization & Business Benefits

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