Activity-Based Costing 147“objects” we developed costs for in the ETN/ W example—capturing
and loading a customer onto the network and processing a transaction.- For variable cost pools, drivers should be usage basedsince this is
the causal factor for a variable cost. Note how we used Outsourced
Credit Reports as a driver for the customer-qualification cost pool. - For fixed-cost pools, the driver should be capacity based since this
is the causal factor for a fixed cost. Capacity drivers are often more
complex than usage drivers. Since fixed-cost pools are “chunkier”
than variable ones that increase in a proportionate fashion,^11 idle
costs are often a problem. Only that portion of the fixed cost pool
that is “useful ” to a cost object should be charged to it—note how
peak demand was used to define that portion of the transaction-
processing system that was deemed idle in the ETN/ W example.
- Develop the final cost estimates for your system. Understand that
there are no right answers. Since this is a strategic analysis, the long-
run value of your results is dependent upon actions of rivals. For
ETN/ W we found that the current cost for each transaction processed
was $0.175. Can it make any money at this cost level? Probably there
are a few customers who understand that their costs are higher than
this and would be willing to pay ETN/ W a price today that is in excess
of the $0.175. But in the long run, rivals could enter and provide ser-
vices at a lower price. Given that ETN/ W set its pricing target in the
$0.10 to $0.15 range, it understands that it currently has no sustainable
advantage. By figuring out how to better manage the peak problem, it
thinks it can attain that advantage. The main goal of an ABC analysis
is a set of activity-based target costs that everyone in the organization
may see. The message should be: “If we as an organization achieve
these, we will be successful.” Progress towards these goals is the key
strategic performance indicator.
FOR FURTHER READING
Br imson, James, Activity Accounting: An Activity-Based Costing Approach(New
York: John Wiley, 1997).
Cokins, Gary, Activity-Based Cost Management: Making It Work: A Manager’s Guide
to Implementing and Sustaining an Effective ABC System(Chicago: Irwin,
1996).
Forrest, Edward, Activity-Based Management: A Comprehensive Implementation
Guide(New York: McGraw-Hill, 1996).
Kaplan, Robert, and Robin Cooper, Cost and Effect: Using Integrated Cost Systems to
Drive Profitability and Performance (Cambridge, MA: Harvard Business
School Press, 1997).
Player, Steve, and David Keys, Activity-Based Management: Ar thur Andersen’s
Lessons From the ABM Battlefield,2nd ed. (New York: John Wiley, 1999).