A Simplified Solution to Better Costing

Activity-Based Quoting: GDC’s Solution to Costing for Small Manufacturers


Abstract: Activity-Based Quoting (ABQ) product moves the company away from using a peanut butter approach of allocating overhead costs to products. This article discusses GDC's approach to costing that simplifies and adapts ABQ for use by small manufactures. The ABQ model uses activities as the basis of product costs and is an Excel-based model that is customized to the company and can be easily updated and maintained by the company. A description of how this is accomplished and details of successful implementations is given.

Introduction
Today, the smaller manufacturers are facing a variety of challenges in keeping a foothold in the market. They must be adept at competing for jobs based on not only time and quality, but also on cost. Companies with numerous overhead allocations associated with the cost of their products are finding themselves out in the cold. Typically, these companies use traditional cost accounting strategies to price their products and services. The problem is that traditional costing systems are based on direct labor, which in current manufacturing environments is only a small percentage of the total product cost. In addition, with traditional systems, when factory overhead costs are applied, often over 50 percent of the product cost may be overhead. GDC – Total Business Solutions is helping these companies find an alternative way to cost their products and stay not only healthy, but very competitive.

GDC is an organization dedicated to increasing the competitiveness of Michigan’s small and medium size companies in the marketplace. They recognize that one way for a firm to become more competitive is to have good information about the cost of its products and services. The Activity-Based Costing Unit at GDC, helps companies do just that. It implements Activity-Based Quoting systems that provide companies with the information needed to better cost their products. With this data, companies can bid on or reject jobs that really improve their bottom-line!

In the past, although the concept was well received, ABC implementations in the larger companies were often doomed to failure. This was because ABC was a high-cost system that required expensive and difficult-to-maintain software. ABC was truly out of reach of the small manufacturer. However, that is not the case with the GDC solution. GDC does not focus on a full-fledged ABC model for the smaller company, but rather an Activity-Based Quoting (ABQ) product. The ABQ product’s sole purpose is for quoting jobs. GDC’s solution accomplishes two themes: it moves the company away from using a peanut butter approach of allocating overhead costs to products and provides a customized Excel-based activity-based costing model. The ABQ Excel model can be easily updated and maintained by the company. Additionally, GDC’s quoting model is used alongside the company’s financial accounting system. It does not disrupt or replace that system.

Moving From the Peanut Butter Approach

In GDC’s terms, the Peanut Butter Approach to costing is simply spreading the overhead costs of doing business on top of the manufacturing costs of the product. The idea with ABQ is to move the costs that don’t relate to the manufacturing process out of your product costing. For example, in purchasing, this would be the cost to maintain customer orders. Put simply, ABQ is based on the premise that activities consume resources and products consume activities.

It is important to remember that the GDC ABQ model is not a full ABC model. The only purpose for the ABQ implementation is to provide a quoting spreadsheet. This quoting template is only a very high level view of the organization’s major activities, whereas the ABC system looks at detailed activities throughout the company. If at a later time the company wants to move into looking at continuous improvement via Activity-Based Management (ABM), GDC will use the ABQ data as a basis for it.

For companies who are a bit skeptical, one of the first questions the GDC costing team poses to the client is, “How much do you trust your cost accounting system?” Does your current system consider the impact of small quantity higher complex parts have versus ordinary orders; difficult customers; diverse markets? For example, do you have a customer that requires additional or different activities that others don’t? Perhaps this customer requires you to send the order out in several shipments vs. just one shipment or the requirement might be to ship your current product but add and additional operation this one time. In a traditional quoting model, these costs cannot be separated easily, but with in an ABQ system they are easily identified and included in the quote.

There are four steps in GDC’s approach to assisting a company to implement an ABQ. We first work with the company’s management to determine the main company activities, the next step is to identify the cost groupings, selects the best drivers to link costs to activities, and develops the costing model. The key in doing this is to use an appropriate allocation base for each activity. For example, the set-up costs are allocated to products using set-up time; shipping costs are allocated using number of shipments required, order costs are allocated using the average numbers of orders in a month, and so on.

A Software Model You Can Maintain
A significant benefit of GDC’s solution for the small manufacturer is that the ABQ is developed as an Excel-based costing model. This means that companies are not required to purchase special software or maintenance contracts, and for most companies there is little training needed. When Excel training is required it is easy to obtain. GDC provides follow-up training on how to use and maintain the ABQ model.

Conclusion
Advantages of ABC are that it does not interrupt your financial model and it provides organizations with a simple yet effective way to identify cost and quote your product. The sole purpose of the Activity-Based Quoting implementation is to provide a quoting spreadsheet for the company. Many companies with ABQ systems have an interest in later expanding to a more full-blown management model or tool (ABM). ABM provides the company with cost reduction areas, improves analysis capability by products and customers, and also provides a tool to better run the business. It can also link to other initiatives like ISO 9000:2000. GDC’s tips for successful implementation are that they include the companies key decision makers in the initial meeting, keep the number of activities and cost pools to the most logical minimum number, and use software that does not require special training for updating and maintenance.

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