Activity Based Costing - ABC

At Considium we have worked with ABC analysis since the early 90's. Our focus related to ABC has been on smaller and medium sized companies using ABC as a tool to increase profitability. Combining Activity Based Costing (ABC) and Result Assurance have proved to be a very strong concept, bringing analysis and action together. ABC analysis bring forward facts related to customers, market channels, products and suppliers as well as information about the efficiency of internal processes. Result Assurance focuses on completing the agreed tasks at the agreed time, with clear responsibilities. The two concepts give strong support to sales, marketing and purchasing units of the company.

We do not believe in implementing complex ABC models, because the project easily ends up as an EDP project and not an ABC project. Findings in Swedish research also show that companies using fairly simple models have been most successful.

What does it mean in practical terms to work with fairly simple ABC models:

Already in 1997 we abandoned special ABC software and choose Excel to build our ABC models (supported by Access; the case in 30% of our projects). This means that we do not work with ABC towards companies with high transaction volumes where special ABC software will be needed (e.g. banks).
For most companies, doing ABC analysis annually or every second year will be sufficient. Action based on ABC is often about strategy or changing behavior (customers, suppliers etc), matters that do not change from one month to the other. For more frequent follow ups, identifying the KPI's needed is sufficient to monitor the business critical issues. (In most companies, the information can be taken direct from the ERP system)
We have seen many examples where so called simplifying meant "not doing the activity analysis", but still call–ing it ABC. Such simplification is rather oversimplifying and can lead to the wrong conclusions and the wrong actions. The "Activity analysis" is essential if you want the true picture on how customers or products tax the company's resources.

For some businesses ABC can be an effective tool, for others we do not recommend using the concept. Even if your business as such should be suitable for ABC, the company culture or business model can make it very difficult to benefit from ABC. In such situations ABC should not be used.

Project businesses, as an example, have other tools to ensure good management control (Result Assurance⁄ Project Assurance).

At Scandinavian business schools the responsibility for ABC analysis will typically be found in the "Department of Accounting and Auditing". We feel that this have created some limitation on the development of the ABC concept.

For Considium the work by Oliver E. Williamson (2009 Nobel Price in Economics) on "Transaction cost economics" has been a key element in our approach and use of ABC. This gave us a broader view, bringing the application of ABC into areas such as strategy, business modeling, environmental issues, marketing and data driven marketing.

For questions or comments please contact Frode Pedersen

Telephone: +47–66 85 24 80

E–mail: pedersen@considium.no


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Activity Based Costing - ABC At Considium we have worked with ABC analysis since the early 90's. Our focus related to ABC has been on smaller and medium sized companies using ABC as a tool to increase profitability. Combining Activity Based Costing (ABC) and Result Assurance have proved to be a very strong concept, bringing analysis and action together. ABC analysis bring forward facts related to customers, market channels, products and suppliers as well as information about the efficiency of internal processes. Result Assurance focuses on completing the agreed tasks at the agreed time, with clear responsibilities. The two concepts give strong support to sales, marketing and purchasing units of the company. We do not believe in implementing complex ABC models, because the project easily ends up as an EDP project and not an ABC project. Findings in Swedish research also show that companies using fairly simple models have been most successful. What does it mean in practical terms to work with fairly simple ABC models: Already in 1997 we abandoned special ABC software and choose Excel to build our ABC models (supported by Access; the case in 30% of our projects). This means that we do not work with ABC towards companies with high transaction volumes where special ABC software will be needed (e.g. banks). For most companies, doing ABC analysis annually or every second year will be sufficient. Action based on ABC is often about strategy or changing behavior (customers, suppliers etc), matters that do not change from one month to the other. For more frequent follow ups, identifying the KPI's needed is sufficient to monitor the business critical issues. (In most companies, the information can be taken direct from the ERP system) We have seen many examples where so called simplifying meant "not doing the activity analysis", but still call–ing it ABC. Such simplification is rather oversimplifying and can lead to the wrong conclusions and the wrong actions. The "Activity analysis" is essential if you want the true picture on how customers or products tax the company's resources. For some businesses ABC can be an effective tool, for others we do not recommend using the concept. Even if your business as such should be suitable for ABC, the company culture or business model can make it very difficult to benefit from ABC. In such situations ABC should not be used. Project businesses, as an example, have other tools to ensure good management control (Result Assurance⁄ Project Assurance). At Scandinavian business schools the responsibility for ABC analysis will typically be found in the "Department of Accounting and Auditing". We feel that this have created some limitation on the development of the ABC concept. For Considium the work by Oliver E. Williamson (2009 Nobel Price in Economics) on "Transaction cost economics" has been a key element in our approach and use of ABC. This gave us a broader view, bringing the application of ABC into areas such as strategy, business modeling, environmental issues, marketing and data driven marketing. For questions or comments please contact Frode Pedersen Telephone: +47–66 85 24 80 E–mail: pedersen@considium.no
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