The Portable MBA in Finance and Accounting, 3rd Edition

Activity-Based Costing 133

company’s costs often are found within another company in the value system.

Although this may sound confusing, I will of course show you examples as we

analyze your costs.

Let’s start with what I think will be the easiest process—customer cap-

ture.Exactly what activities do you perform that result in a capture, which we

defined as a signed contract?

Again, the discussion went on for at least an hour. Denise nearly drove the
group crazy asking the most basic questions, “ Why?” and “How?” By the end,
all three agreed that the first activity was customer identification.This was
accomplished either through cards filled out at trade shows or responses from
their advertising campaign. The next activity was customer qualification,
which entailed basic research on these companies to identify those with
enough size and creditworthiness to pursue. And the final one was customer
sale,where an inside salesperson first made contact with each customer to see
if there still was interest. Few were ready to sign contracts at this point, and
often multiple site visits were necessary before contracts were signed to assure
the customer that ETN/ W understood their business.
Denise then gave them a template to be filled in for the next meeting (see
Exhibit 4.3).

What you have to do is reformat the way your costs are compiled. For external

reporting your financial statements are sufficient, but for decision making and

communicating your business model they are worthless. As I have drawn in the

template, we need to build the total costs for each activity we identified above.

To do this, some of my past clients estimated as best they could from historical

data, and others, if they perform the activity frequently enough, develop the

EXHIBIT 4.3 Activity-based costing process.

General Ledger Cost Format ABC Cost Format

Customer identification

Customer qualification

Customer sale

Activity n

Corporate costs

Labor costs

Marketing costs

Outside consultants

Sales costs

Travel costs

$XXX

$XXX

$XXX

$XXX

$XXX

$XXX

$XXX

$XXX

$XXX

$XXX

$XXX