Adding Time to Activity-Based Costing

Here’s an interesting article from the Harvard Business School newsletter on some relatively simple ways to incorporate time into Activity-Based Consting (ABC) estimates. ABC is great in theory, but getting reasonably accurate data and then keeping them up to date is a big challenge. If you can use good heuristic estimates, you can incorporate useful cost information into your pricing models. This is powerful stuff, since the better you know your costs, the better you can optimize profit, which happens at a different price than the price that maximizes revenue.

For example, in financial services, customers who use a lot of support time may be much less profitable than customers with smaller balances who rarely require assistance. Understanding how these factors contribute to overall profitability guides the appropriate pricing to attract the right customers at the right price points.

In other industries, complex orders or special shipping requirements may dramatically alter the actual profitability of orders that appear to have the same gross margin in the ERP system.

Comments are closed.