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."
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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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