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The preceding example provides a number of key lessons for building an ABC system. First and
foremost, building the system requires an intimate knowledge of the operations. This is why more and
more accountants are being moved from corporate headquarters to the regional business that they are
supposed to support. Operations require resources; resources support activities; and it is only through
a hands-on knowledge of how the activities consume the resources that one can understand the
underlying cost model. The first step in building the ABC system is a high-level mapping of the
processes and the activities that they entail.
When building these systems, the overriding criterion is the cost-benefit ratio. If total accuracy was
desired for Company Z, one could examine the costs in minute detail and build a cost report for every
customer targeted. This, however, would have been extremely time consuming and costly. As was
discussed, a simple segmentation of “knowledgeable” versus “not so aware” was probably sufficient
to provide actionable cost information with an acceptable level of accuracy. Getting the right balance
of accuracy versus cost is a difficult decision to make and often a function of the level of competition
in the marketplace. 2
Microeconomics is based on the short-run assumption that all costs either are fixed or vary with
units of output. The Company Z example shows that this is not true and demonstrates that costs are
much more complex and can vary with many factors. For example, the cost to capture and load a
customer varies with the knowledge of that customer, with the less aware customer segment costing
35% more ($127,500 + $15,000 v. $158,500 + $33,600). Exhibit 13.7 demonstrates the depth of
analysis that was required at the activity level to support this conclusion. For a knowledgeable
customer, a salesperson and a technician would spend three days on the road, typically one for travel
and the other two at the client site demonstrating the system. A second trip by the salesperson was
typically necessary to close the sale, as well as a call from the CEO of Company Z to discuss and
authenticate the company‟s capabilities. This call required a bit of preparation work on the client for
the CEO prepared by the sales rep. Salary costs, travel, and lodging were estimated from travel
reports. A like analysis supports the third activity for the customer loading process, implementation
and certification, which together with the data in Exhibit 13.7 revealed the higher costs for the
unaware customers. In general, an ABC analysis reveals four types of costs:
1. Those that truly vary with output, which, in the case of Company Z, if output is defined as
transactions processed, there are none.
2. Those that vary with the number of setups or batches, which in this example equates to
the front-end costs of capturing and loading a customer. In some instances, these costs can be
uniform, as for instance the $175 paid for the customer qualification or the $5,000 system design,
which were the same for all potential customers. In other cases, such as the two segments of
customers, one must seek more information, as discussed in Exhibit 13.7.
3. Those that vary at the product level. In the discussion earlier, Company Z had only one
product, a transaction, but it is far more common to have a diverse mix of products, and this
requires a careful analysis of which expenses can be traced to product-level activities. For
instance, in the semiconductor industry, this may entail clean room facilities required for some
products.
4. Those that are traced to capacity decisions for infrastructure investments (discussed next).
Exhibit 13.7 Cost of a customer sale.