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Beneath The Surface

Suspicious not all areas of your company are bringing in a profit? Break it down with activity-based costing.

Among the 1,500 plant varieties Bluemount Nurseries Inc. stocked, Nick Pindale suspected that some yielded profits and some only losses. Unfortunately, Pindale, the CFO and grandson-in-law of the founder of Monkton, Maryland-based Bluemount wasn't sure which was which.

Pindale sought answers from an accounting technique called activity-based costing, or ABC. Dividing nursery tasks into categories such as potting and planting, he assigned costs to each. Then he determined which ones Bluemount performed cost-effectively and which would be better outsourced, trimmed or omitted. The information identified the most profitable plants and even helped provide documentation for a bank loan needed to boost production of moneymaking lines.

Bluemount bloomed with ABC. "Five years later, not one of our original greenhouses is still standing," says Pindale of the 65-person nursery. "We've added state-of-the-art machinery in our potting line. And we've doubled in size."

By focusing on such activities as "processing invoices" instead of departments such as "payables," ABC differs from traditional cost accounting. Advocates say it's an improvement, providing information of far more use than customary ledger reports. Its ability to help companies find and trim money-losing products, customers and processes, as well as identify those with profit potential, has led to its adoption by well-known companies, including Mobil, Fidelity Investments and Coca-Cola.

"Within 10 to 20 years, everyone will have some form of ABC," predicts Gary Cokins, author of Activity-Based Cost Management: Making It Work(McGraw-Hill) and director of industry relations for ABC Technologies Inc., a leading ABC software and services firm in Beaverton, Oregon. "It's a matter of when, not if."

Mark Henricks is an Austin, Texas, writer who specializes in business topics and has written for Entrepreneur for nine years.

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This article was originally published in the October 1999 print edition of Entrepreneur with the headline: Beneath The Surface.

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