Activity Based Costing
Many businesses do not understand the costs of supporting particular customer groups or products while others are keen to obtain better visibility of their channel dynamics. Working with our strategic partner, CAW, we use techniques such as Activity Based Costing (ABC) to develop a detailed understanding of an organisation’s cost base and profitability.
Our work focuses on activity based costing examples in a business, thereby enabling the implementation of activity based costing models. Generally based on and linked to the core value chain of the business, our analysis provides a thorough understanding of the cost of delivering the core processes along the value chain. This can then be viewed in a variety ways e.g. by product, channel, process, etc.
Understanding the advantages of activity based costing
- Cost allocation – Using activity based costing techniques we provide businesses with new insights into their cost base and identify improved methods of allocating costs. By implementing activity based costing, we have helped clients allocate costs more accurately to products, channels and customer groups. Within the Life and General sector, these costing techniques have helped to gain a better understanding of the cost of acquisition and maintenance and to help product development teams design products within specific cost constraints.
- Shared service costing – with the advent of shared service centres, many of our clients have asked us to help them improve their understanding of the cost of services provided by internal service providers. These include, finance, HR, IT and other centralised service functions. Using activity based costing techniques it is possible to cost the various activities undertaken within each shared service area and to use this as the basis for transfer pricing or re-charging. The power of the activity based costing approach is that it is possible to see the local costs plus the cost of the overheads associated with delivering the services.
Understanding product, customer and channel profitability
- Once the use of activity based costing has been implemented with costs allocated to products, customers and channels, the focus tends to move towards profitability. We have developed a range of techniques and tools to allocate income to customers and channels so that the total lifecycle profitability can be better understood. In some businesses it is very difficult to allocate income to specific channels as customers may use a variety of channels and media for servicing their products. We work with businesses to ‘unravel’ these issues and build models that help them understand the true dynamics of their business.
- These approaches have been successfully developed and deployed within retail banking branch environments where businesses have needed to understand the value derived from branch customers both in terms of income from new business as well as income from the ‘back-book’.
