Example Cases

Learn valuable lessons from these organisations:

ABM process used to identify areas for budget cuts

In 1996, TransEuro, an oil exploration and production company, was faced with profit problems and a need for development funds which required severe budget cuts. A team established to tackle cost improvements used ABM to determine what departments were doing and the costs involved. Because management believed that costs in service departments such as Business Management (BM) were way out of proportion with the costs in core business - oil exploration and production- the team first examined the BM department and followed these steps to identify the costs of performing each of the department's diverse sub-processes and activities:

In conducting the analysis the team carried out the following steps:

• Existing cost information and reports on the department were obtained;

• Activities involved in the various processes were determined and activity flows and all tasks detailed and documented;

• Resources used (people, machinery, supplies, space, and so on) were identified by activity;

• Financial and/ or non-financial output measures for each major activity were defined;

• Financial and/ or non-financial performance measures for each major activity were developed;

• Actual performance (quality, and/or cost, and/or time) was recorded against the selected performance measures;

• Performance measures were used to assess how well the activity was performed;

A New Zealand based agriculture services sector organisation decided to implement ABM to answer calls for greater accountability. The organisation had never had management accounting systems for cost management and budgeting so it focused its implementation strategy on efficiency, total quality, and effectiveness. The following process was followed:

Outcomes included:

The National Bank provided a Managed Asset Programme in the form of an accounts receivable factoring service in which the bank purchased invoices that its customer had billed to a third party. The bank gave the customer cash for the invoices, less a fee, and held an amount in reserve against bad debt. ABC methodologies were used to determine the profitability of this arrangement. The bank developed a model outlining the various activities associated with the provision of the managed services and assigned cost drivers to these. The data which was gathered revealed that the programme was indeed very profitable, and enabled analysis to be carried out at individual customer levels. The key areas controlling the costs of the programme were identified, enabling pricing structures to be examined along with ways of improving services, efficiencies, and profitability. (Franklin & Kocakulah, 2002)

Co-operative Insurance Services (CIS) realised that traditional costing techniques could not provide reliable information within its complex multi-product, multi-channel business. After an initial ABC pilot study which demonstrated the inadequacy of using simple spreadsheets, a proprietary ABC software system was implemented which aimed at showing end-to-end operational costs in the CIS business model. Accurate product costing was a key requirement for CIS. Constant checks and reviews of procedures by the department managers improved the level of accuracy of the driver data. This also helped to obtain support from its major business functions, because they were better able to identify with a project to which they had contributed. CIS used ABC data to assign Information Technology (IT) costs to departments, and to the products that generated the activities. The IT department itself carried none of these costs. (Booth, 2003)

To correctly allocate costs across its 535 retail stores Rona employed proprietary software systems in 2003 which integrated supply chain management and ABM capabilities. Previously average cost allocations were used to determine the expenses associated with moving products from its suppliers to the stores. Some products took a lot more time to handle but there was no practical way to monitor this. The ABM system enabled complex options to be easily modelled. With the specific breakdown of costs Rona was able to look at how each product or product family moved through its distribution system and the total costs involved. This enabled more sensible decisions to be made concerning the use of warehouses, satellite sites, or cross-docking and shipping directly. These systems helped to bring cost transparency into the supply chain operation and facilitated making better business decisions. (Colman & Demers, 2004)