How necessary is a software solution for Activity Based Costing?

9 December 2014

Steve Mainprize

Steve Mainprize


In an earlier post - A worked example for Activity Based Costing - I showed an example of how calculations work in an Activity Based Costing (ABC) exercise.  From that example, you’d see that the maths that underpins ABC isn’t so complicated, and that the whole approach is based on basic principles that are easily grasped.

The example I used, though, was about as simple as it could have been and – sorry for stating the obvious – in the real world the application is going to be bigger and more complex.

In the real world, although the ABC principles remain the same, dedicated software tools are really important to handle the heavy lifting.  I’ve seen attempts to implement ABC in spreadsheets and databases, and they quickly outgrow either the limits of the software, or the developer’s ability to maintain the solution. Or both.

It’s certainly possible to build a basic prototype in Excel or Access, but such solutions don’t scale and are very difficult to modify and maintain.  Auditing is almost impossible, and when the developer moves on the solution is usually impenetrable to the poor person who has to pick it up.

Dedicated software is vital to handle the heavy lifting

You should be looking for a solution that provides:

  • Reliability. A package that has been used over many years by many different organisations will have been tried and tested in real-life situations.  There’s really no need to reinvent the wheel
  • Scalability. It’s surprising how quickly the data in an ABC solution can grow.  A dedicated package will be optimised to deal with the volume, and the sparsity, that accompanies a typical ABC model
  • Maintainability. The model will definitely change over time, either because your modelling becomes more sophisticated, or because the business itself changes.  In order for the model to remain relevant, it must be possible for changes to be made easily
  • Traceability. Stakeholders wanting to understand or question the results of the model should be able to do so.  The premise of ABC is that it allocates costs in a fair manner, which implies that the allocation should be open and transparent
  • Good development tools. Building an ABC solution consists of putting together (and, over time, changing) a model of the business, and it’s really helpful if the modelling tool has the ability to easily define the items that make up the model, and the relationships between them
  • Multi-user access. It’s important that multiple developers can work on the model simultaneously, because models tend to be complex and are developed by teams rather than individuals.  It’s also often necessary for multiple users to enter data at the same time, particularly in terms of the collection of driver data.

I have a number of clients implementing Activity Based Costing using SAP’s Profitability and Cost Management (PCM), and it’s where most of my experience is. 

If you have a different solution that you prefer, that’s great too.  The point is: there are hurdles to overcome with building an activity-based costing solution, and that the tools already exist to help you overcome them.

My advice is: don’t make it too hard for yourself!

Bluefin and SAP S/4HANA - welcome to the one horse race

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