Presented by Gary Cokins and Carlos Pulido
Ultimately costing principles, such as the causality principle, must be converted into practical practices with supporting tools. This webcast will examine how cost modeling has evolved over the last century. This webcast will describe the trends and obstacles that have helped or delayed developments. These evolving areas and trends include:
The expansion from product costing to include channel and customer profitability reporting and analysis
The integration of management accounting with other enterprise and corporate performance management (EPM/CPM) methods (e.g., the balanced scorecard with KPIs, risk management, supply chain management)
The shift from historical reporting to predictive accounting (e.g., marginal / incremental costing; capacity-sensitive driver-based rolling financial forecasts, performance-based and driver-based budgeting)
Imbedding analytics into management accounting (e.g., correlation and segmentation analysis, recursive partitioning with decision trees)
Acceptance of two or more co-existing management accounting methods
Recognition of barriers slowing the adoption rate of advanced management accounting (e.g., resistance to change, being held accountable, weak leadership) to gain buy-in
Attend this live webcast with FI/CO experts, Gary Cokins and Carlos Pulido, to learn the following:
How these trends have expanded accountants from “bean counters” to “bean growers”
How to calculate profit and loss statements for customers displaying profit margin layers
How to perform “predictive accounting” for capacity-sensitive driver-based budgets / rolling financial forecasts, what-if analysis, and outsourcing decisions
How to imbed statistics and analytics into product, channel, and customer profitability analysis
How SAP software supports progressive management accounting trends
How to overcome implementation barriers such as behavioral resistance to change and fear of being held accountable
Q&A
Q: What has been a major lesson learned by organizations implementing progressive management accounting methods?
A: There is substantial resistance to change with managers and employees, that is human nature, and fear of others knowing the truth, fear of being measured, and fear of being held accountable. Therefore one needs the soft skills of behavioral change management to get their buy-in to progressive management accounting methods like activity-based costing (ABC).
Q: Why have some organizations stumbled when trying to implement activity-based costing (ABC)?
A: They initially construct an ABC model that becomes a permanent and repeatable ABC production system that is too large and complex. Few can understand it, and it is not maintainable. What is needed is a less complex ABC system that is right-sized before getting to diminishing returns of accuracy relative to the administrative effort to calculate the costs. It is better to be approximately correct than precisely inaccurate.
Q: What is a major determinant that contributes to the high accuracy of calculated cost information in an activity-based costing system?
A: The major determinate for accuracy is the multistage cost assignment network. Much lesser influencers of accuracy are the resource divers to the activity costs and the activity drivers from the activity costs to the final cost objects (e.g., products, service lines, distribution channels, and customers).
Q: How can I cover that gap by using ABC?
A: We are unsure what is meant by “gap”. But if what is meant is GAAP, for generally accepted accounting principle used for external compliance financial reporting for government regulatory agencies (e.g., the USA’s SEC), the solution is that it is okay to have two sets of accounting books: (1) external reporting for compliance; and (2) internal management accounting information for insights and to make better decisions.
Q: If I'm not using SAP-SD for invoicing and I have integration to a specific industry sales solution, do I have options to use PaPM? If so, is there a huge gap in the functionality if I'm not using SAP-SD?
A: There will not be any gaps in the functionality of PaPM by not having the SAP SD module. If you are not using SAP SD (Sales and Distribution module), you do have the option to use PaPM. You can always import sales and distribution data from any data source/system, even manually. Once you have all the sales/distribution related information in the system, you can complete the cost/profitability processes to finalize the model.
Q: Does SAP PaPM require an additional License?
A: Yes it does. Prices are calculated based on the capacity units needed which are relative to the size of the model/transactions. SAP has a calculator to estimate these costs. This process is part of the presales phase, and it is handled by SAP. We as consultants support the sizing requirements for the model to be built.
Q: How can the PaPM system calculate product and purchase price in the future? What is the main data driver? For example, can I know what the copper and aluminum price will be in December 2024? As another example, how does the system calculate FX rates forecast?
A: PaPM calculates costs or forecasts expenses/costs. The estimated price would have to be entered into the system to generate what if simulations. The system can then calculate cost and profitability of products, customers, and channels based on the estimated/future price of the cost objects.
Q: Have you seen any client moving to ABC, and later back to where they were before?
A: This rarely happens. Once the organization sees how substantially better the ABC information is with higher cost accuracy and visibility, they realize how deficient their prior traditional costing method was. The only case where ABC is abandoned is if a new CFO relaces the CFO who implemented ABC, and the new CFO has the misbelief that ABC is not worth the effort, they sadly pull the plug on the ABC system and return the managers and employee teams to the old inaccurate, flawed, and misleading cost information.
Q: How long has been the fastest and the slowest ABC adoption?
A: Using the 2-day ABC rapid prototyping workshop to construct the ABC Model 0, followed by several iterations decomposing the ABC structure and replacing many of percentage (%) estimates with extracted driver data from the business systems (e.g., ERP), the ABC system can be implemented in 3 weeks, not in 6 months which is the old wasteful method to implement ABC.
Q: Who has been typically the major resistor to implement ABC?
A: Not surprisingly, the least resistance comes from the line managers and employee teams who need and use the management accounting information for insights and to make better decisions. The major resistors are the CFO and the accountants who view ABC as extra work for them and do not care as much about the users of the management accounting information.
About the Speakers
Gary Cokins is an internationally recognized expert, speaker, and author in advanced cost management and performance improvement systems. He is the founder of Analytics-Based Performance Management, an advisory firm located in Cary, North Carolina at www.garycokins.com . Gary received a BS degree with honors in Industrial Engineering/Operations Research from Cornell University in 1971. He received his MBA from Northwestern University’s Kellogg School of Management in 1974.
Gary began his career as a strategic planner with FMC’s Link-Belt Division and then served as Financial Controller and Operations Manager. In 1981 Gary began his management consulting career first with Deloitte consulting, and then in 1988 with KPMG consulting. In 1992 Gary headed the National Cost Management Consulting Services for Electronic Data Systems (EDS) now part of HP. From 1997 until 2012 Gary was in business development with SAS, a leading provider of enterprise performance management and business analytics and intelligence software.
His authored books are Performance Management: Finding the Missing Pieces to Close the Intelligence Gap (ISBN 0-471-57690-5); Performance Management: Integrating Strategy Execution, Methodologies, Risk, and Analytics (ISBN 978-0-470-44998-1); Activity-Based Cost Management – An Executive’s Guide (ISBN 0-471-44328-X); Predictive Business Analytics (ISBN 978-1-118-17556-9); and Supply Chain Costing and Performance Management (ISBN 978-1-119-79363-2). They are published by John Wiley & Sons.
Carlos Pulido has been a business consultant for 27 years. During the first seven years of his career, he worked for Arthur Andersen's Business Consulting Division, where he completed projects related to performance management and profitability improvement for organizations in different industries. Carlos is currently part of Bintech, a management consulting firm specialized in SAP performance management related services where he continues to provide the same management consulting services. He has led more than 85 process and profitability improvement projects, helping organizations maximize performance and improve efficiency.
Carlos has extensive experience with all types of costing and profitability methodologies, from internal collections, input for external prices, capacity planning, scenarios, simulations, and process improvement.
Carlos is part of CAM-I's Cost Management Group and sits on the Board of the Greater Miami Chamber of Commerce, where he can share his experience as a management consultant.
Carlos' experience includes Business Intelligence and Analytics, Corporate Performance Management, Activity-Based Costing and Lean Six Sigma. Carlos studied at the University of Notre Dame where he completed an MBA and a B.S. in Business Administration from Saint Michael's College in Vermont.