Activity-Based Costing 145strategic cost systems were more often under the responsibility of the en-
gineering rather than the finance department in Japanese companies.
When done after the strategy implementation stage, ABC be-
comes ABM. Much research has demonstrated that about 85% of costs
for a new product are committed in the design stage. As a result, it can be
argued that performing an ABC analysis after this point is of little
value—once a system is in place, operational efficiency should be the
goal.^6 The challenge is to maximize output given the constraints of the
system.^7 Note that by optimizing output, the fixed costs are minimized on
a per-unit basis leading to the lowest-cost situation and the best possible
shareholder value position. Since pricing is not cost dependant, detailed
cost information is not really necessary.^8 This is not quite correct since
no business situation is static. Note in the ETN/ W example, we did do an
ABC analysis after the fact. But also note that the final result of the
analysis was not an ABC model. The key to the analysis was the manager-
ial decisions that were implemented to make ETN/ W more competitive.
When done after the fact, the focus of ABC is not costing—it is to gain
transparency of the business model so that it can be reengineered to cre-
ate additional shareholder value. When done after the fact ABC necessar-
ily leads to ABM, activity-based management.
The value of ABC analysis is the “journey ” rather than the final
result.As was stated in the ETN/ W example, the purpose of ABC is ul-
timately to gain business-wide transparency of your business model. It is
important that every function within the organization understand the
strategic logic of how your company is going to create shareholder value.
This includes how it is positioned in the industry-level value system, how
its processes link to those of upstream and downstream partners, as well
as a detailed activity-by-activity understanding of internal processes. The
steps are as follows.
- Develop a cross-functional team to do the analysis and assign owner-
ship of the final ABC system to one function within your organization.
If an outside consulting group is used, its role should be facilitator
rather than designer of the system. It is important that ownership of
the ABC model be internal since it will have to be updated on a regu-
lar basis. Because this is a strategic tool, ownership need not reside in
the finance function. Many companies have found that, since this
analysis requires business-wide vision, the strategy function is a more
appropriate owner. - Begin with a map of the industry-level value system that shows all
participants in the value creation process. Before moving to the next
step, ensure that each member of the team understands and agrees
with the strategic positioning logic for your company. This is neces-
sary because all members must agree upon the strategic underpin-
nings of the analysis. In addition, cost drivers for one company often