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How can IT help in implementing Activity Based Costing (Part 1 of 2)?

My previous blogs series- “Why do you need profitability analysis?” and “Activity based costing for profitability analysis” highlights  the need for profitability analysis and discusses the challenges expected in ABC implementation. As a next step, this blog discusses the role of IT in adoption of Activity Based Costing (ABC) methodology.

Traditionally critics have argued that ABC is too costly and complex to implement and the cost involved in implementing and maintaining ABC based system exceeds the benefits gained. However the advancement in IT has significantly brought down the information processing cost. While the information processing cost has reduced, the cost of poor information leading to poor decision has significantly increased owing to the competitive pressure.

When it comes to IT, the first decision is usually between buy versus build. The ABC allocation model is more or less standard; the Off-the-shelf (OTS) ABC software have matured during the last decade; and building an advanced ABC model is too cumbersome - are the strong arguments in favor of buy option. The build option should be considered only when there is a very strong reason for this. Like - the ABC model is too simple or highly customized or is required to be monolithically integrated with other in-house systems etc.

Talking about the OTS option, the choice can be between specialized ABC software and ABC module of ERP packages. ABC module of ERP package is ideal where ABC is required for operational decision making and most of the data is available within ERP itself.  

However, specialized ABC software should be considered in the following cases:
1) ABC is required for tactical or strategic decision making.
2) Multi-dimensional analysis of overheads are required
3) Underlying data is stored in heterogeneous systems
4) ABC model is required to be flexible as frequent changes are expected.

SAP suite of products has both the offerings - SAP ERP has a sub-module for ABC in SAP Controlling (SAP CO-ABC). SAP BusinessObjects Profitability and Cost Management (SAP PCM) is specialized software for ABC from SAP suite of products.

Right tool selection plays a very important role in the success of ABC. In the subsequent blogs let’s look at some of the important evaluation criteria for ABC software selection, implementation methodology and other related topics. In the mean time, please leave your comments and suggestions Smile.

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