Activity-Based Costing 135steps. First, we drilled down from a high-level value system view to a process
map and then ultimately into an activity and subactivity analysis. I have only
one question: After identifying subactivities, why did you pool the costs to-
gether; why not analyze them separately?”
“ We initially did it separately but then found that there was no additional
value to this added work. Ultimately, we were concerned with what it cost us to
generate a lead, and, since we found that the subactivities were not mutually
exclusive, we think the $730 number is sufficient,” Dave replied.
Let that be you first lesson. ABC involves pooling costs from various functions
within the company into homogeneous activity pools, as you have just done. The
$875,000 ref lects your best estimate of the total customer identification cost
pool for the last 12 months. ABC analysis is often done at too fine a level of de-
tail. You could have tried to identify the cost of identifying each customer by
having your people keep a log and entering the exact time they spent with each
customer—in essence, 1,200 cost pools. Would this additional level of accuracy
be worth the effort? Certainly not. The first key to ABC is to find the correct
level of disaggregation of cost information: too little and the system does not
provide relevant information; too much and the system becomes too complex
and hard to communicate. I once saw a system installed by a consulting group
with over 6,000 cost pools. No one understood it but the consultants that de-
signed it, and when they left no one was able to explain the information from it
or update it. It died in less than six months. Okay, what was your next step?Carol had done the customer qualification analysis. “This was an easy
one. We outsource this function to a credit agency that gives us a report on
each lead—credit history, sales history, and any other relevant information. We
paid them about $210,000 for the 1,200 reports—about $175 per report, which
is about the contract rate.”
Denise thought, “Can I do one more lesson without overreaching? Why
not try?”
Note the difference between these two cost pools. This pool is very much a
variable cost—the more customer reports, the greater the total cost pool. And
the manner in which we apply the total costs to the object we wish to cost—a
customer cost report—is obvious—the number of cost reports, since each is the
same. ABC is a two-step process. First we identify the appropriate level of dis-
aggregation—that is, the cost pools—and then we identify the appropriate “dri-
ver” for each pool. A driver is the method we use to take the total cost pool and
trace it to the object we wish to cost. It’s the causal factor for the cost pool. For
customer qualification, the total pool of $210,000 was spread over its causal fac-
tor, the 1,200 cost reports, to arrive at the $175 per cost report. This is what it
costs to qualify a customer, the cost object. ABC is nothing more than pools and
drivers. Are you totally comfortable with our first two analyses?”Dave answered: “ We did argue about this. Now I think we are beginning
to understand. The first activity we discussed, customer identification, is more
a fixed cost pool—it doesn’t vary with the number of customer leads. Once we
agree on how many trade shows we will present at and what our budget is with
the ad agency, this cost is relatively fixed. Maybe one person more or less might