A Management Accounting Framework: A Taxonomy
4. Development of a Three-Dimensional ABC/M Cross Through Leveling and Disaggregation
Ten Advances in ABC/M Model Design and Thinking 65 The expanded ABC/M model’s vertical cost assignment view reveals how the segmenting of activities relates to the variation and diversity in the mix of products and services produced, type of distribution channel, and end-customers (i.e., the final cost objects). It has been said that to use ABC/M’s vertical cost re- assignment view, “One must adjust one’s thinking.” You may now better appre- ciate why.
As a summary, in the ABC/M Cross, the total cost of the same activities going horizontally (i.e., total business process costs) and the total costs being as- signed and causally traced vertically (i.e., total product, customer, receiver, or business infrastructure-sustaining costs; see “Identification and Treatment of Or- ganizational Sustaining Costs” in this chapter ) must equal each other.
∑(Activities) = (R=A=FCO) [horizontal view] [vertical view]
Although the ABC/M Cross is intended to communicate this phenomenon, its simplicity often eludes this subtlety. This is because tracing and measuring costs to their cost objects involves a different combination of activities than chain- linking those same activities and their costs in time along business processes.
4. Development of a Three-Dimensional ABC/M
sustaining an ABC/M system. Controlling the levels (i.e., depth) and size of an activity-based costing system is an important ABC/M system design decision that affects how easily an activity-based costing system can be maintained for up- dated reporting.
A well known and painful lesson about activity-based costing is that when an system implementation fails, it is often because the system was over-engineered in size and detail. The ABC/M system usually quickly reached diminishing re- turns in extra accuracy for incremental levels of effort, but this was not recog- nized by the ABC/M project team. The system was built so large in size that the administrative effort to collect the data and maintain the system was ultimately judged to be not worth the perceived benefits. These are “death by details”
ABC/M projects; they are unsustainable.
The three-dimensional view is a logical extension of the ABC/M Cross. It can visually suggest that the dual cost-equivalence of the total cost assignment and process costs exists. The Cross can be displayed as layers that lie immedi- ately below the single “boxes” for each of the expanded ABC/M model’s three cost modules. The view in Figure 2.16 reveals what the Cross looks like with depth and layers of detail. Not only are there always two or more specific re- sources, activities, and final cost objects, but any one of these can be decomposed (or disaggregated, as in an indented “bill of cost”).
Looking closely at Figure 2.16, the level of detail in the Cross’s pyramid for any one of the five “boxes” from the expanded ABC/M is displayed at a differ- ent level of depth. The level of detail for each module depends on the use of the data. (“ABC/M’s Achilles Heel: The Leveling Problem” in this chapter discusses that problem in the context of ABC/M model design and architecture.)
Cost Object View
Process View Cost Drivers
Resources
Cost Objects Aggregated
Disaggregated Too disaggregated
FIGURE 2.16 Leveling and Disaggregation Brings about a Three-Dimensional ABC/M Cross
Ten Advances in ABC/M Model Design and Thinking 67 5. Time-Phasing of Activity-Based Costing into
Activity-Based Management for a Process View
After an organization understands how the diversity and variation of its outputs cre- ates its cost structure, the same activity costs can be oriented with the time-based horizontal process view. This facilitates “process analysis.” Figure 2.17 indicates that organizations should first perform cost assignments vertically to discover how diversity and variation in products, service lines, and customers relates to com- plexity and thus higher support costs. With that knowledge, they can next view the same activity costs in the context of the business process flowcharts.
With ABC/M’s cost assignment view, employee teams can first examine the work activity costs on a per-unit cost element of the output basis. Comparisons can be made between and among identical work activities and their costs, on a per-unit-of-work basis, as well as for different kinds of outputs. Some approaches that were practiced when the BPR movement was at its high point simply calcu- lated a one-step allocation of the general ledger into activity costs—and stopped there. The activity costs were immediately applied as costs across the processes, but they were without the emotional charge from also seeing the unit costs of the variety and mix of the outputs from those same business processes.
Some organizations have business process flowcharts on their team meeting conference room walls, yet many of them have not committed to significantly
Focus
• Manage Processes
• Remove Waste
• Raise Productivity
FINISH
• Performance Measurements START
• Answer where you make or lose profits
• Get senior management attention
• Revise pricing and rationalize (products, service lines, channels, customers) Activities
FIGURE 2.17 Time-Phasing ABC into ABM for a Process View to Manage
changing their processes. When ABC/M data reveal the true per-unit cost of each output, including intermediate outputs, “organizational shock” often sets in. Then genuine “root-cause analysis” problem solving begins. Fortunately ABC/M pro- vides fact-based data at this point to assist the project teams.
After activity-based costing data have been analyzed, the project teams can dive deeper into the cost structure to better manage the organization’s activities and business processes.