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Gary Cokins and the ABC of Costing Gary Cokins - the internationally recognized expert, speaker and author in advanced cost management and performance improvement systems in addition to being the Strategist in Performance Management Systems at SAS Institute Inc., was at S. P. Jain Institute of Management and Research, Mumbai on Sunday, 17th August 2003. He is in India for three 2-days lecture-series on Corporate Management Performance, conducted by SPJIMR in association with SAS. Sunday was a day exclusively reserved for students of the institute, who were exposed to the technicalities of Activity Based Costing (ABC) - an improvement over the traditional methods of "overhead-allocation" costing. The lecture was an eye-opener for the students. The session exposed the students to traditional fallacies in Costing and how they might be righted using newer methods. The cheeseburger example- where an unwitting customer pays more than his share for a meal he had consumed just because his friends consumed more and insisted on equally splitting afterwards truly depicted what is happening in Indian companies on the costing front. Mr. Cokins emphasized that the traditional methods of costing unfairly allocated more than a fair share of overhead costs to products, which did not entail these very costs. So as a result products with high profitability margins suffer. Also the new mantra of minimizing inventory levels using JIT, etc., needs organizations to be cognizant of the relevant costing effort. ABC takes care of all this. ABC data enhances the Total Cost of Ownership (TCO) measure by revealing hidden costs and allowing them to be assigned to each vendor; then ABC re-assigns those costs into the purchased items, combining them with the purchased price - hence the TCO. By applying TCO to its vendors, an organization can assess how inter-firm relationships affect its own costs. But the pressures for improvement to the entire supply chain costs are forcing organizations to each now look outside their four walls - at the entire value chain. Mr. Cokins defined Performance Management (PM) as an umbrella management system, which is going to redefine business space just like Business Process Reengineering had done in the past. PM is all about strategy in business and re-inventing the importance due for strategy. PM concentrates on executing strategy rather than inventing it. In addition, PM also concentrates on Decision Support enhancement using control and assessment reports generated on SAS software systems. Mr. Cokins emphasized that firms need to move away from Cost Measurement to Cost Uses in the domain of Managerial Accounting. ABC translates Ledger data entries into key verbs, which are easily understandable as per activities, which incurred those costs. ABC splits up cost flow into Resources, Work Activities and Final Cost Objects. Final cost objects are finally split into outputs, channels and users. ABC also gives accountants the facility of customer differentiation as opposed to product differentiation in identifying and allocating costs. ABC's multidimensional and arterial network model is the one that gives max accuracy in profit calculation. ABC tells the strategic team where each customer is in terms of profit margins, service and maintenance costs. ABC gives the management useful hints in reducing activity costs and also tells employees, "How am I doing on what is important". The Balance Scorecard tells employees how effectively their time is getting spent on activities. which are identified as strategic with respect to the profit drivers. PM is split into learning, internal processes, strategies and profits. Continuous learning and feedback increases efficiency of internal processes which lead to better strategies and finally to an increase in profits. The guiding light behind PM is, "Your success depends on how well and how fast the right information gets to the right people". Empowerment is also a motive in PM, which allows the business leader who is the key strategist to take calculated risks. Such were the radical learnings that the students were exposed to. They infused a breath of fresh air into the musty corridors of traditional accounting. Mr. Cokins' wit was an added instrument in accelerating the process of understanding the revolutionary concepts. His astounding statement at the onset, "There are no experts anymore, I am merely proficient at what I do" gave the students an estimate of what true greatness is. Contributed by - |
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