| ABM Customer
Contribution. |
Revenue less the product costs less the costs
of servicing the customer gives the ‘ABM Customer Contribution’.
The sum of all the customer contributions has to pay for all those
remaining costs that are not associated with the current products
or customers, such as New Product Development and Statutory Accounting.
Anything left after that is the Profit. It is at the level of ‘ABM
Customer Contribution’ that we use the term ‘Customer
Profitability’ as it is at this level that meaningful comparisons
can be made between customers. It is this type of analysis that exposes
small or negative values prompting a serious review of which customers
to keep, or at least take action to try and turn the relationship
into one that provides positive contributions. |
| ABM Model |
A representation of resource costs during a time
period that are consumed through activities and assigned to products,
services, and customers or to any other object that creates a demand
for the activity to be performed. |
| ABM Product Contribution. |
Revenue less the real costs to produce the products
based on an ABM analysis gives the ‘ABM Product Contribution’.
It is at the level of ‘ABM Product Contribution’ that
we use the term ‘Product Profitability’ as it is at this
level that meaningful comparisons can be made between products. It
is this type of analysis that exposes small or negative values prompting
a serious review of which products to keep, or at least take action
to try and turn them into positive contributions. |
| Activity |
Work performed by people, equipment, technologies
or facilities. Activities are usually described by the “action-verb-adjective-noun”
grammar convention. Activities may occur in a linked sequence (a process). |
| Activity Analysis |
The process of identifying and cataloguing activities
for detailed understanding and documentation of their characteristics.
An activity analysis is accomplished by means of interviews, group
sessions, questionnaires, observations, and reviews of physical records
of work. |
| Activity Based Budgeting (ABB) |
An approach to budgeting where a company uses
an understanding of its activities and driver relationships to quantitatively
estimate workload and resource requirements as part of an ongoing
business plan. Budgets show the types, number of and cost of resources
that activities are expected to consume, based on forecasted workloads.
|
| Activity Based Costing (ABC) |
A methodology that measures the cost and performance
of cost objects, activities and resources. Cost objects consume activities
and activities consume resources. Resource costs are assigned to activities
based on their use of those resources, and activity costs are reassigned
to cost objects (outputs) based on the cost objects’ proportional
use of those activities. Activity-based costing incorporates causal
relationships (cost drivers) between cost objects and activities and
between activities and resources. |
| Activity Based Management (ABM) |
A discipline focusing on the management of activities
within business processes as the route to continuously improve both
the value received by customers and the profit earned in providing
that value. ABM uses activity based cost information and performance
measurements to influence management action. |
| Activity Dictionary |
A listing and description of activities that provides
a common or standard definition of activities across the organisation.
An activity dictionary can include information about an activity and/or
its relationships, such as activity description, business process,
function source, inputs, outputs, supplier, customer, output measures,
cost drivers, attributes, tasks, and other information as desired
to describe the activity. |
| Activity Driver |
The best single quantitative measure of the frequency
and intensity of the demands placed on an activity by cost objects
or other activities. It is used to assign activity costs to cost objects
or to other activities. |
| Allocation |
A distribution of costs using calculations that
may be unrelated to physical observations or direct or repeatable
cause-and-effect relationships (eg using Overhead Recovery Rates).
Because of the arbitrary nature of allocations, costs based on cost
driver analysis (as in ABM) are viewed as more relevant for management
decision-making. |
| Assigning |
The practice of relating resources, activities
and cost objects using the drivers underlying their cost causal relationships.
The purpose of assigning is to observe and understand how costs are
arising in the normal course of business operations. |
| Assignment |
A distribution of costs using causal relationships
(cost drivers). Cost causal relationships are viewed as more relevant
for management decision-making and are the basis of ABM analysis
approaches. |
| Attributes |
A label used to provide additional classification
or information about a resource, activity, or cost object. Used to
extract data from the model by the attribute. Attributes are used
to define the process in which the activity takes place, a characteristic
of the type of cost or work being done or any other dimension of interest
to analyse. |
| Budgetary Accounting |
The tracking of costs to a budgetary account
is often combined with cost centre accounting. In this case, the
major concern of the spenders of resources is to ensure that their
total expenditures do not exceed the allocated budgetary amounts. |
| Cost Centre |
A sub-unit in an organisation that is responsible
for costs. |
| Cost Centre Accounting |
A method for applying resource costs to an organisation. The accounting
system identifies each of the organisational parts of the traditional
functional structure and applies the identifiable costs to that part
of the structure. |
| Cost Driver |
Any situation or event that causes a change in
the consumption of a resource (resource driver) or activity (activity
driver). |
| Cost Driver Analysis |
The examination, quantification, and explanation of the effects of
cost drivers. The results are often used for continuous improvement
programmes to reduce throughput times, improve quality, and reduce
cost. |
| Cost Element |
The lowest level component of a resource (items
on the ledger). |
| Cost Management |
The management and control of activities and drivers to calculate
accurate product and service costs, improve business processes, eliminate
waste, influence cost drivers, and plan operations. The resulting
information can be used in setting and evaluating an organisation’s
strategies. |
| Cost Object |
Any product, service, customer, contract, project,
process or other work unit for which a separate cost measurement is
desired. |
| Cost Object Driver |
The best single quantitative measure of the frequency and intensity
of demands placed on a cost object by other cost objects. |
| Cost Pool |
A logical grouping of Resources or Activities
aggregated to simplify the assignment of resources to activities or
activities to cost objects. (eg aggregating stationery consumables
costs with salaries prior to assigning costs to activities to reduce
the number of assignments in the model) |
| Cross-Charges |
Cross-charges are used in an attempt to link services from one department
to another based on an estimate of the work done. However, as the
underlying drivers of the activities are never the focus of a meaningful
discussion between departments, cross-charges become an emotive issue
and source of much wasted argument. |
| Customer Profitability |
(see ABM Customer Contribution) |
| Direct Assigned Cost |
A cost that can be directly assigned to a cost object since a direct
or repeatable cause-and-effect relationship exists. A direct assigned
cost uses a direct assignment or cost causal relationship to transfer
costs. (eg An external delivery charge) |
| Direct Costs |
In a manufacturing business direct costs are conventionally
used to describe the raw materials that go into a product and the
labour content to manufacture piece parts and assemblies. |
| Embedding |
Constructing an ABM model starts the process of obtaining new benefits.
To ensure that the ABM approach is used in the longer term requires
technical and management embedding. Technical embedding automates
the links between the model and the organisation’s transaction
systems. Management embedding is the process of getting ABM to be
a natural way of understanding the business and acting on the information
ABM provides. |
| Enterprise-Wide |
ABM A management information system that uses
activity-based information to facilitate decision making across an
organisation. |
| Frontline Activity |
An activity that has something to do with producing the primary
product or service and any activities that interface with customers.
Frontline activities have a direct cause-and-effect relationship to
products and customers through cost drivers. |
| Functional Silos |
A term used to suggest that functions exist in
virtual isolation with high walls around them. |
| Gross Margin |
The gross margin is the difference between revenue and the direct
costs. When this margin is positive it is deemed to be making a contribution
towards the costs of the overheads. However, an ABM analysis often
shows that the real costs of the overheads for a particular product
or customer are so high as to be greater than the gross margin. In
these cases, increasing sales would erode profit contrary to the indication
from the gross margin, which would infer that more volume brings more
contribution to overheads. |
| Hook Curves |
A graph that plots cumulative profitability of
either products or customers, starting with the highest profitability
through to the lowest. When the lowest are negative the curve describes
a characteristic hook shape. The Hook Curve with generally show the
Pareto Rule holds true (eg 80% of the final profit comes from 20%
of the customers). However, the Hook Curve exposes another rule in
that 125% of the profit comes from 75% of customers, the final 25%
of customers eroding the profit to the overall corporate figure. |
| Indirect Assigned Cost |
A resource or activity cost that cannot be directly assigned to
a final cost object since no direct or repeatable cause-and-effect
relationship exists. |
| Indirect Costs |
In a manufacturing business indirect costs are
those activities, departments or functions that support the direct
manufacturing activities, such as the Quality Department or Materials
Handling. |
| Internal Service Costs |
Typically, training, recruitment, current use of IT networks are
examples of internal services to all the other departments in the
organisation. There are no direct relationships to current products
and customers other than through the frontline activities that are
supported. The key here is to understand and then assign the internal
service costs and activities in an appropriate manner to all the other
areas of the business that are supported. |
| Ledger |
The ledger lists all the resources in an organisation.
The cost elements on the ledger are those things that provide the
means so work can be done in the organisation. Cost elements would
include salary costs for the people doing the work, accommodation
costs so people can work in buildings, utilities so people can see
what they are doing and keep warm, vehicles so goods can be delivered
and customers visited. In some cases, the list of types of resources
on the ledger may seem endless. |
| Legal Entity Costs |
Legal entity costs exist because the organisation must fulfil specific
tasks. The annual audit and financial reporting would fall into this
category. Such costs are largely independent of the product or service
being provided. They are the costs of being in business. These costs
and activities have no causal relationships to current or future products
and services. The level of costs is unlikely to change with say throughput
volumes or number of customers. |
| Overhead Costs |
All costs that are not defined as direct are overheads.
The term overhead is unhelpful as it lumps together a wide range of
disparate costs and activities, all of which describe the rich diversity
of the many functions in the business. The word ‘overhead’
and the American term ‘burden’ imply that overheads are
in some way bad for the business. The key is to understand all the
activities and how essential they are, or otherwise, to producing
products and servicing customers. ABM very specifically analyses the
overheads and through causal relationships links these costs to the
products and services and onwards to customers. |
| Pareto
Analysis |
An analysis that compares cumulative percentages of the rank ordering
of costs, cost drivers, profits or other attributes to determine whether
a minority of elements have a disproportionate impact. For example,
identifying that 20 percent of a set of independent variables is responsible
for 80 percent of the effect. |
| Performance Measures |
Indicators of the work performed and the results achieved in an activity,
process, or organisational unit. Performance measures are both non-financial
and financial. Performance measures enable periodic comparisons and
benchmarking. |
| Process |
A series of activities that are linked to complete a specific output.
|
| Product Profitability |
(see ABM Product Contribution) |
| Profitability Analysis |
The analysis of profit derived from cost objects with the view to
improve or optimise profitability. Multiple views may be analysed,
such as market segment, regions, distribution channel, customer segments,
individual customers, product families, products and so forth. |
| Resource Driver |
The best single quantitative measure of the frequency
and intensity of demands placed on a resource by other resources,
activities, or cost objects. It is used to assign resource costs to
activities, and cost objects, or to other resources. |
| Resources |
Cost elements applied or used in the performance of activities or
to directly support cost objects. They include people, materials,
supplies, equipment, technologies and facilities. Resources feature
on the ledger. |
| Surrogate Cost Driver |
A substitute for the ideal driver but is closely
correlated to the ideal driver. A surrogate driver is used to significantly
reduce the cost of measurement while not significantly reducing accuracy.
|
| Sustaining Costs |
These costs are essentially an investment to achieve a return in
the future. Organisations need to have funds to pay for the current
costs of the people doing, say, new product development, but the benefits
are expected to be derived in the future. The current product throughputs
or current customers do not directly influence these activities. The
organisation has a choice over the level of Sustaining costs it wants
to have. A reduction in Sustaining costs would transfer directly to
the bottom line, but it would risk the future of the business. It
could be argued that Sustaining costs should be made specifically
visible to shareholders as they are investments in the business made
out of retained profits that could have been distributed. |
| Tasks |
The breakdown of the work in an activity into
smaller elements. |
| Unit Cost |
The cost associated with a single unit of measure underlying a resource,
activity, product or service. It is calculated by dividing the total
cost by the measured volume. Unit costs can be used for benchmarking
or to construct models of new scenarios for running the business.
Also used for Activity Based Budgeting. |
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