Hyperion activity-based management software: A tool for analyzing costs and operational processes

CPA Journal, The, May 2000 by Blankley, Alan I, Bain, Craig E

UNDER AN ABM APPROACH, the cost of each activity is measured and assigned to products using appropriate drivers.

CPAs in industry, accountants, controllers, and other financial manlagers need to be able to make business decisions quickly. They need to offer practical, accurate information on matters of cost and cost allocations, customer and product profitability, and the expected results of important business decisions. Furthermore, they need to be able to link their financial analyses to their firms' strategic objectives. Activity-based management (ABM) provides accountants and financial professionals with the tools and information to help managers make better decisions. ABM not only provides more accurate costing for activities and processes than traditional accounting methods, but it also allows for thorough operational analysis, constraint checking, and sensitivity analysis.

Organizations must perform certain activities to provide the products and services they sell. Each of these activities consumes resources. Under an ABM approach, the cost of each activity is measured and assigned to those products or services requiring the activity, using appropriate assignment bases (drivers). This provides an accurate picture of the real cost of producing each product (many users find that costs have been miscalculated or misallocated). Thus, ABM provides powerful insights into not only the costs associated with company operations, but also the nature and efficiency of company operations.

The software described in this article is effective for both large and small companies. It is the first analytic application to combine activity based costing, ABM, capacity planning, constraint analysis, scenario planning, and a graphical tool in one package, providing users with a realistic view of the drivers of business performance and their financial effects. performance and their financial effects.

The Software

The software was developed by Sapling Corporation, a wholly owned subsidiary of Hyperion Solutions Corporation. Now called Hyperion Activity-Based Management (ABM), the software uses a process-modeling approach focusing on the flow of work through an enterprise. The model forms the basis for cost accumulation, which allows cost modeling and analysis, analysis of activities and resources, and business process analysis, while also recognizing physical or operational constraints. The software supports an iterative decision process of evaluating multiple business scenarios and comparing alternatives to improve business performance.

The Process

The process of establishing an ABM system with Hyperion ABM can be distilled into four steps:

Define the Project Initially, the scope of the project, including its "reach," must be defined. In other words, does the project extend firmwide or simply across a particular division or line of business? Also, the time period over which the implementation will extend and the time period being measured will need to be determined. Is the business more suited to monthly, quarterly, or annual measurement? In general, this step also requires analysis of the major activities of the business, including the appropriate units of measure for each activity, as well as resources and demands.

Develop the Operational Schematic The schematic is a graphical representation of the operational activities from step 1. The model is developed from the bottom up in consultation with key members of the functional areas. Each operation or activity and its supporting resources are identified and placed in context. The model clarifies the interrelationships among the demands, activities, and resources of the project. The end result is an accurate model of the entire business process.

Collect the Data The schematic from step 2 helps pinpoint the data needed. At this stage data is gathered concerning charges, operational efficiency, and costs. Such data could include, for example, the volumes produced by various machines, how long each machine runs, the downtime associated with each machine, the cost of operators, and the average number of order lines associated with orders for particular goods.

Build the Model and Validate Results. The operational model developed in step 2 is entered into the software and the various details captured in step 3 are linked to each component of the model. For example, if order processing is identified as an activity in step 2, then the average number of lines per order by product line would be linked to the activity, as well as the number of order processors and their salaries and benefits.

The goal is to take the entire operational model and reproduce it in the software, linking every component of the model to relevant operational and financial details. Once the model has been built and validated, it can be used to evaluate unlimited "what-if' scenarios.

Example

To illustrate the process described, we took a potential business situation that could benefit from activity based management, then developed the model. Our example includes a partial schematic, screen capture shots showing the results of the model, and finally, the results of scenario playing.