ABC's of activity-based costing, The

Journal of Bank Cost & Management Accounting, The, 1998 by Capps, Bart T, Timlin, Peter S

by Bart T. Capps* and Peter S. Timlin**

Leading institutions are implementing Activity-Based Costing (ABC) systems that allow them to better understand resource consumption and the profitability of the products and services they offer their customers. A great deal has been written on the use of Activity-Based Costing as a viable cost management concept for modem businesses. What is lacking, however, is a thorough treatment of the critical success factors integral to the successful implementation of an ABC system.

Depending on the size of the institution, an ABC project would typically take twelve to fifteen months to complete. Based on our experience, the first ninety days of the project are critical and serve as the foundation for the project. We will expand below on how meticulous attention given to the successful completion of critical milestones will contribute to a highly successful ABC project. The critical milestones for success are as follows: the creation of a shared vision, the development of a short term plan, the assembling of a competent team, the tools, the development of a long term plan, the proper maintenance approach, and the plan for uses/training education.

THE CREATION OF A SHARED VISION

More important than the actual words used in a mission or vision statement is the ownership that the entire organization has of the common goal. Every person who touches the process, from the President to administrative assistants, has to be totally committed to it. A shared vision was crafted by conducting a series of business information requirements meetings. During these meetings, the focus should be on building consensus and enthusiasm for the project. An important element of this is demonstrating how the specific uses and benefits of ABC's would satisfy identified business requirements. For example:

Process Reengineering -- Identifies processes which result in the highest payback from reengineering

Profitability Analysis -- Provides building-block concept for flexibility and credibility

Pricing Analysis - Can be used to help set standard prices, as well as help in competitive bid analysis

Intra-bank Charges -- Enhances the accuracy and credibility of intrabank charges

Cost Comparisons -- Highlights those centers that have achieved efficiencies which can be mirrored in other centers

Capacity management -- Provides a better understanding of resource utilization and the impact of volumes on profit, processing, and service centers

During these meetings, we also began to identify key members across the institution who would serve on the ABC working group. In addition, we started the process of prioritizing which areas of the institution would be studied first. At this point we were in a position to finish crafting our shared vision statement:

"Foster an Activity-Based Management Culture that enhances the institution's core competences and contributes to the attainment of best bank status. "

THE DEVELOPMENT OF A SHORT TERM PLAN

Once the decision is made to move forward with Activity-Based Costing, it is essential to "hit the ground running." Accordingly, we created a threemonth plan that addressed strategies for continuing information requirements and communications meetings; collecting organization sizing information; finding, hiring, and acquiring resources; establishing an ABC working group; selecting a consulting firm; presenting plans to the bank's Management Committee; training the team analysts; and then "hitting the ground running" with database implementation.

As the information requirements and communications meetings progressed, members of the bankwide working group were identified. Perspective from across the organization was vital, and representation was secured from areas such as Audit, Bank Card, Capital Markets, Commercial, Controllers, Management Reporting, Central Operations, and Real Estate. This group's mission was to provide insights into their respective business or staff units and resolve significant issues. Members also served as communications vehicles between their respective business or staff units and the ABC project team.

The ABC working group also assisted in identifying and selecting a consulting firm with which to work. If there is a requirement to engage a consultant firm to assist with "hitting the ground running," that firm should meet the following criteria:

Extensive experience in implementing Activity-Based Costing

Value of proposed implementation methodology

Ability to assist in meeting aggressive implementation schedule

Ability to assist in linking Activity-Based Costing to integrated reporting system

The typical role of consultants on an ABC project is as follows:

Assist with conducting classroom training and provide technical materials

Assist with supplying software and templates for ABC database development

Assist with providing technical guidance in the field

Assist with ensuring quality control of extensive analytical work

Assist with attaining self-sufficiency

THE ASSEMBLING OF A COMPETENT TEAM