Activity Based Costing

1. Process wise cost collections is also one of the key management requirements for the purpose of cost monitoring and control,
2. Per unit of cost of services for each of the processes and departments is also the key management requirement to analyze the quantum of cost spent on a particular processes.
3. Common expenses / Overhead expenses are also one of the contributing factor for the costing of the distribution cost which need to be accounted for at the time or per unit service cost calculations.

Basic costing module should be there in place

Complex questions as how to control the cost can be answered by defining the total work into processes and cost driver for each of the processes.
Cost per unit of the cost driver can help to understand the quantum of cost involved in the same.
It would be applicable for Manufacturing and Service industries.

Approach:
1. Design the business process and cost driver for each of the business processes
2. Assign the business process for each of the head where the cost is getting incurred : FI expenses posting, PO Process etc.
3. Common cost allocations to respective business process
4. Per unit price calculations for each of the cost driver.

Assumptions:
1. Business support required for defining the Business proceses and cost driver.
2. PO processes for cost capturing would be changed from cost center to business process route.

Designing the business processes and identifying the cost driver for the organization as a whole.

Business Deliverables:
1. Cost per unit for each of the cost drivers and business processes
2. Trend of the cost movement for the services over a period of time.
3. Avenues of cost control and saving opportunity
Project Deliverable:
1. Business Solutions Documents

We suggest to go with System and business process study step as first :- Which enables to understand the expectations and design the solutions in a better way.
After that we will give the detail solution document with executions steps and benefits with processs change if required.
Next we will configure the required settings to carry out the Month end closing and reporting in a smooth way with ABC Costing in place.
Carry out one month end closing in production system with business users by Hand Holding and giving the end user manuals for the same for future purpose. and generate the reports for ABC Costing Module

2 weeks time for Business process and system study:
2 weeks for identification of the business processes and cost drivers for ABC Costing
2 weeks for drafting the solution document and process change discussion with business team
3 weeks for realization and testing
1 week for training to the end users for ABC Costing
1 week for preparation activities
Go Live
4 weeks for the support and hyper care post go live

In total : 10 to 11 weeks for implementations and 4 weeks of support

There are high amount of saving potential with the use of ABC costing, we can create the opportunity for saving the cost for each process by monitoring them at micro level and calculating the cost for each of the services in terms of value of that from the business point of view

For example : We may be raising the bills to customer on regular basis through the billing department: and there are 4 persons working for the same with other fixed expenses on a monthly basis, Here we are not able to understand that are we expensive or very expensive for each bills : In the same way if we analyse the expenses incurred for each of the bills to customer : Say we raise 500 bills to customer in a month and incurred total fixed cost of 3,00,000/- for the billing department in this case the cost for each of the bill would be : 3,00,000/500 = 600/- , So we can understand if it is viable or can we cut the per bill cost by 50 /- or 100/- for next month and it will create the saving potential among the depratment and organization as a whole,

Based on my experience we can save almost 100 Cr on annual basis if we implement the ABC costing all across the department in an organization with a turnover of close to 2000 to 3000 crore.

The investment we are making to create this saving opportunity is just negligible and it is only the Intention of the managment is the key:

1 Business Solution Architect: + 1 Senior Consultant + 1 Consultant
11 weeks + 4 weeks of Support = 15 weeks

M1 – System study
M2 – Solution Document
M3 – UAT Sign off
M4 – Go Live
M5 – Completion of 4 weeks of Post go live support

INR 7,00,000/-

7 lacs vs. 100 Crore saving opportunity and assured cost reduction