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Is your budget
obsolete in two months? The traditional corporate
budget process focuses on what managers are allowed
to spend to accomplish their goals and not what
resources they require. Budget plans can be costly
to prepare, starve departments that have valid
needs, incorporate last year’s inefficiencies
and fail to identify waste and respond to a business’
strategic objectives. However, companies can develop
more realistic, dynamic budgets based on predictive
planning. One way to do this is to use activity-based
costing (ABC)—basing company plans on fluctuating
needs related to demand rather than on historical
data.
Here are some
budgeting tips to keep in mind that incorporate
ABC principles.
- Don’t limit
yourself to the current situation defined by
predetermined spending limits. Begin the budget
equation with the outcomes you expect—profit,
for example—measured against customer and management
demands that vary in mix and volume over time.
Don’t let your budget stay frozen; revisit it
as needed in response to marketplace conditions.
- Budget management
and cost management are not synonymous, so don’t
confuse them. Formulate budget strategies according
to two questions: What should we be doing, and
how should we do it?
- Then inject
costs into the equation. Using activity-based-cost
estimating helps you relate what-if scenarios
over time to the overall impact of expenses
on the organization. For example, are you going
to open a new warehouse? To estimate the level
of spending required in the future, you should
match future capacity (what’s currently available
vs. what’s required) with estimated needs (forecasted
customer demand).
- Activity-based-cost
management is not a replacement for general
ledger accounting. But if your general ledger
software does not convert spending into useful
managerial information, use an ABC model—based
on resources, work activities, process costs
and final cost objects—to reflect market, product,
service-line, channel and customer-oriented
decisions.
- No one knows
in advance how simple or complex a company’s
first ABC model needs to be. Many make the mistake
with their initial ABC system of plugging in
too many details before learning how to apply
the data or what the accuracy requirements are.
Instead, improve the usefulness of the results
by understanding that such predictive planning
depends on constructing a cost-assignment network
that traces how outcomes—such as products or
orders—consume resource expenses with a cause-and-effect
relationship.
- Organizations
always want to understand where they make and
lose money. To get a better picture of this,
design budgets that do not inhibit managers’
flexibility to meet objectives. Develop plans
that are feasible, determine what specific resources
are needed to execute them, then compare the
plans’ projected results with current performance
to manage profit margins.
- Successfully
implementing ABC depends to a large degree on
managing organizational behavior. Avoid resistance
from employees and managers that can jeopardize
the acceptance of the new methodology or technology
by following these rules:
- Use a rapid
prototyping pilot program to quickly implement
a summarized ABC model. Don’t necessarily
start with your most technologically sophisticated
employees; this will stigmatize the project
by making it look like it’s for tech gurus
only.
- Get the
support of an executive sponsor and find
a champion to create interest in ownership
of the information and its uses.
- Make sure
there are end-users who really need the
data—design the system with the ends in
mind.
- Don’t be
afraid to combine art, craft and science
in constructing your ABC model. One that
is successfully prototyped can quickly be
redone with more detail and accuracy so
users readily begin to see how the ABC data
relate to the problems they are trying to
solve. ABC models can provide valuable insights
within weeks that aren’t visible from traditional
data
Gary Cokins
is the author of Activity-Based Cost Management—An
Executive’s Guide, John Wiley & Sons
Inc., Hoboken, New Jersey, 2001. His e-mail address
is gary.cokins@sas.com.
Copyright 2000 © 2001 AICPA, Inc. All Rights
Reserved.
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