Who can win with PCM systems?

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© 2010 Wiley Periodicals, Inc.Published online in Wiley InterScience (www.interscience.wiley.com).DOI 10.1002/jcaf.20580

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Raef A. Lawson, Toby Hatch, Denis Desroches, and William O. Stratton

In a previous article (“Decision Sup-port—Do You Have

It?” Journal of Cor-porate Accounting & Finance, July/August 2009) we com-pared what organi-zations wanted to achieve with their cost and profitability sys-tems (CPSs) to what they are actually real-izing. We also speci-fied considerations required to success-fully support business decisions using a CPS. This article examines the differ-ences between organizations that receive significant benefits from their CPS and those that do not. What might a successful com-pany whose CPS is providing significant benefits look like?

To study current practices in the uses of cost and profitability systems, the authors conducted a comprehensive study using a sur-vey instrument available at http://www.bragstudies.com/. The survey was sponsored by several professional associations.1 One

desired outcome of the study is to identify best practices in cost and profitability measurement used by successful organizations around the world.

One question in our survey asked participants to indicate if they had received significant benefits from their CPS. Those who responded “Strongly Agree” or “Agree” were classified as the “Significant Benefits” (SB) group. Those that disagreed to any extent were classified as the “Non-Significant Benefits”

(NSB) group. The SB group included 44 percent of respon-dents, while 18 percent of respondents were in the NSB group. All other respondents fell outside of these two classifications and were excluded from this analysis.

The specific responses for these two groups were examined more closely in an attempt to reveal why some organizations were able to get significant benefits from their

CPS and others were not. To try to identify a profile of the kind of a company that would receive the most benefit from their CPS, we considered these criteria:

technology used,• length of time using their • system,use of CPS information,• costing methodology,• functionality, and• decision support.•

What kinds of companies have successful cost and profitability systems? The authors surveyed compa-nies from all over the world to find out. The results show that significant investments in time and money are required, but companies that succeed see significant benefits from their cost systems and share some common traits. They have a culture that encourages employees not only to understand their costs and profits, but also to act on the infor-mation. These companies often use activity-based costing and use their systems for operational, financial, and strategic decision support. They can also determine cost and profitability at all appropri-ate levels—for activities, products, customers, and departments. © 2010 Wiley Periodicals, Inc.

Who Can Win With a Cost and

Profitability System?

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54 The Journal of Corporate Accounting & Finance / March/April 2010

DOI: 10.1002/jcaf © 2010 Wiley Periodicals, Inc.

Exhibit 2 confirms this for the implementation of a CPS as well—only 16 percent of the SB group have had their software two years or less, compared with 35 percent for the NSB group. It appears that you are not as likely to experience significant benefits until you have had your CPS for at least two years or more—persistence pays!

USE OF CPS INFORMATION

It appears that SB organi-zations invest in their CPS to

placed on CPSs by SB compa-nies, a willingness to dedicate more financial resources to them, and perhaps the need for greater functionality (more on this later).

LENGTH OF TIME USING THEIR SYSTEM

When implementing any management system, it can be expected that there will be a lag between implementation of the initiative and the point at which benefits become apparent.

TECHNOLOGY USED

Companies have many soft-ware options for CPS—they can use typical office tools, com-pletely develop it in house, use a purpose-built commercial pack-age, or use some combination of these options. The NSB compa-nies were more likely to create their own CPS using office tools, while the SB companies are more likely to purchase purpose-built, commercial CPS packages (see Exhibit 1). This latter result may reflect a greater importance

Technology Type

SB NSB Difference

Developed using office tools (spreadsheets, etc.) 41% 53% –12%

Developed/coded completely in-house (not spreadsheet based)

21% 24% –3%

Purpose-built commercial package 32% 21% 12%

Combination 6% 3% 3%

Exhibit 1

0%

5%

10%

15%

20%

25%

30%

35%

40%

Less than 1

year

1-2 years 2-5 years 5-8 years More than 8

years

Pe

rce

nt

SB

NSB

Exhibit 2

Length of Time Using a CPS


The Journal of Corporate Accounting & Finance / March/April 2010 55

© 2010 Wiley Periodicals, Inc. DOI: 10.1002/jcaf

COSTING METHODOLOGY

From our survey results, it was very apparent that organi-zations use a variety of cost-assignment methods in their CPSs. We asked the participants to classify their main methods of costing. The options included:

equal allocation (resources • cost is apportioned equally to all objects that consume the resources);output-based allocation • (resources cost is allocated based on an output-related driver [allocation basis]); andactivity-based allocation • (resources costs are accu-

mulated into activity pools; these cost pools are allo-cated to objects based on how much of the activity is consumed by the objects).

Organizations can use these methods individu-ally or combine them to suit their needs. Activity-based costing (ABC) has

been widely promoted as a more accurate costing methodology. We found that organizations that received significant benefits from their CPS are much more likely to use ABC, either on its own or in combination with the other methods, than those that do not receive significant benefits (see Exhibit 3).

As indicated in Exhibit 4, 54 percent of the NSB group has either never considered using ABC or has already chosen not to use it. Thus, not only is there a difference between the SB and NSB groups with regard to their current use of ABC in their CPS, but the NSB companies are also more likely to have not considered using this technique in the first place.

go beyond simply providing results—they also use these results to support many types of decisions. Including both opera-tional and financial information in their CPS provides a broader range of decision support and could help to explain their will-ingness to use these results to sup-port decisions and therefore reap greater benefits from the CPS.

For instance, results show that 90 percent of the SB group viewed their CPS as a key ele-ment in the management of their organization, whereas only 44 percent of the NSB group felt this way. And 95 percent of the SB group used information from their CPS to make signifi-cant financial decisions, 86 percent to make signifi-cant operational decisions, and 75 percent to make sig-nificant strategic decisions. Less than 45 percent of the NSB group used their CPS to make any of these types of decisions.

At least 80 percent of SB companies indicated that their CPS:

is helpful for product/service • profitability analysis andhelps us perform budgeting, • planning, and evaluation.

No more than 15 percent of the NSB respondents indicated that they received these benefits.

Between 70 and 75 percent of the SB group indicated that their CPS:

provides good information • for managerial decision making,helps them make product • decisions (e.g., pricing, design, outsourcing),is helpful for customer • profitability analysis,helps them control costs, and•

helps them to make opera-• tional improvements.

Only between 4 and 12 per-cent of the NSB agreed they had received these same benefits.

While 69 percent of the SB group felt that their CPS gave them an accurate assessment of costs in their organization, none of the NSB group felt that this was true for them.

Between 39 and 47 percent of the SB group, compared to no more than 4 percent of the NSB, felt that they had attained these benefits:

CPS provides accurate infor-• mation on the costs of all activities in the organization;

accurately tracing the cost of • overheads down to our final cost objects; andaccurately tracing the cost of • activities down to our final cost objects (e.g., customers, products/services etc.).

It is interesting to note that this final group of benefits is related to tracing overheads and understanding activity costs within the organization. If both operational and financial infor-mation is not included in a CPS, it would be impossible to get this type of benefit. To delve more deeply into this question, we also studied the costing methods of the participants and what kinds of costing decisions they made. Are they purely financial in nature?

While 69 percent of the SB group felt that their CPS gave them an accurate assessment of costs in their organization, none of the NSB group felt that this was true for them.




likely to calculate costs at all applicable levels, including to the activity, product/service, and customer levels. While most organizations indicated the desire to calculate cost at all applicable levels, it is likely that the NSB organizations did not calculate them, because they did not have the functionality (according to Exhibit 5) to be able to do so. This lack of information could very well have caused the NSB organizations to make poor deci-sions and prevented them from achieving significant benefits from their CPS.

PROFITABILITY FUNCTIONALITY

Just as there are differences between SB and NSB companies in the level to which costs are calculated, there are differences in the levels to which profit-ability is calculated. As indicated in Exhibit 7, SB companies are much more likely to calculate profitability for groups and indi-vidual products/services and for groups of customers, and slightly less likely to calculate the profit-ability of individual customers. Again, generally, the CPSs of SB organizations appeared to possess the required functionality and

of resources consumed by differ-ent customers was again a strong point for most SB organizations but eluded most NSB organiza-tions. Significant differences existed with many other func-tions, but the three with the larg-est differences were:

calculating the cost of • customer-facing activities,supporting a variety of cost-• allocation methods, andsupplying cost information at • all necessary levels.

As indicated in Exhibit 6, SB organizations are much more

FUNCTIONALITY

Major differences in CPS functionality exist between the SB and NSB organizations. Exhibit 5 shows that each of the ten areas of functional-ity included in the survey was more frequently available for SB organizations than for those in the NSB group. For example, SB organizations were twice as likely to report being able to accurately identify which customers, prod-ucts, and services were profitable and which were not. Understand-ing the costs of their customer-facing activities and the amount

0%

10%

20%

30%

40%

50%

60%

70%

80%

Only Activity Based Activity Based &

Other

Only Non-Activity-

Based

Pe

rce

nt

SB

NSB

Use of Activity-Based Costing

Exhibit 3

Adoption of Activity-Based Costing

SB NSB Difference

Currently uses activity-based costing 52% 25% 27%

Previously used activity-based costing, but no longer uses it 3% 4% –1%

Is considering implementing an activity-based costing system 15% 17% –2%

Has chosen not to use activity-based costing 11% 25% –14%

Has never considered using activity-based costing 18% 29% –11%

Exhibit 4




appropriate headcount levels, and over 90 percent of SB orga-nizations determine the pricing of products and services.

From a profitability per-spective, the SB organizations reported being able to support all nine surveyed decisions (listed in Exhibit 9) more frequently than the NSB organizations. For 84 percent or more of the SB organi-zations, this meant that they were more likely to use their profit-ability information to support

zations use their CPS to support the following types of costing decisions (see Exhibit 8):

deciding on inventory levels,• making outsourcing decisions,• planning process improve-• ments, andresource utilization and • capacity planning.

Even more impressively, 86 percent of SB organizations use their CPS to help them plan

were able to calculate profitabil-ity at all appropriate levels.

DECISION MAKING WITH CPS INFORMATION

The more timely and accurate cost and profitability information provided by SB companies’ CPSs gave them the ability to enhance their decision making, and they use this ability in numerous ways. Better than three-quarters of the SB organi-

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Calculation of channel, product, and regional

profitability

Calculation of the proportion of resources

consumed by each customer

Supports a variety of cost allocation methods

Calculation of the cost of our customer-facing

activities

Traceability of allocations and how they were

assigned

Ability to handle reciprocal costing

Reporting cost behavior

Cost information at all necessary levels

Accurate identification of profitable and non-

profitable customers

Accurate identification of profitable and non-

profitable products/services

SB NSB

Exhibit 5

Functionality of CPSs for SB and NSB Organizations




have a culture that encour-• ages its employees to not only understand their costs and profits, but also act on the information they receive;use CPS results for opera-• tional, financial, and strate-gic decision support;appropriately apply activity-• based costing for cost confi-dence and decision support;have a high level of func-• tionality in their system, including the ability to:

• determine cost and profit-ability at all appropriate levels for activities, prod-ucts, customers, depart-ments, and so on;

• trace costs from their overheads to their final cost objects;

• understand how custom-ers and products are con-suming resources;

• understand which custom-ers, products, and business partners are profitable and which are not; and

profile of a company that is more likely to experience sig-nificant benefits from its cost and profitability system. These organizations:

have had their CPS for at • least two years;have a purpose-built system • with supported functionality and ongoing improvements;

product/service rationalization and development. And 70 percent or more of SB were more likely to support decisions concerning customer and market, employee compensation, and acquisition.

SUMMARY

Our survey results allowed us to begin to develop a

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Individual customers

Customer groups

Individual product/service

levels

Groups of

products/services

Individual or groups of

activities

SB NSB

Exhibit 6

Level at Which Costs Are Calculated

0% 20% 40% 60% 80% 100%

Individual customers

Groups of customers

Individual product/service levels

Groups of products/services

SB NSB

h

Level to Which Profitability Is Calculated

Exhibit 7




0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Plan appropriate headcount

levels

Resource utilization and

capacity

Pricing of products and

services

Plan process improvements

Outsourcing decisions

Inventory levels

SB NSB

Exhibit 8

Decisions Made With Costing Information

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Employee performance evalutation

Making acquistion decisions

Targeting new markets

Employee compensation

Targeting of new customers

Rationalization of customers

Product line rationalization

New product/service development

Rationalization of products/services

SB NSB

Exhibit 9

Decisions Made With Profitability Information




American Institute of Certified Public Accountants, the Chartered Institute of Management Accountants, the Certified Management Accoun-tants—Canada, the Consortium for Advanced Management—International, the Institute of Management Accoun-tants, and Oracle Corporation. Sup-port was nonfinancial in nature.

yourself, “What action could be undertaken to move closer to this profile and to the achievement of greater benefits from my CPS?”

NOTE

1. The associations include the Association of Chartered Certified Accountants, the

use their cost and profitability • information to support a wide range of decisions including financial, operational, prod-uct/service, and customer.

If this profile does not describe your organization, ask

Raef A. Lawson, PhD, CFA, CMA, CPA, is vice president of research and professor-in-residence for the Institute of Management Accountants out of New Jersey. He has written extensively in the areas of Chinese cost management practices, performance scorecards, activity-based costing, and cost and performance management. Dr. Lawson can be reached at [email protected]. Toby Hatch is a senior strategist for enterprise performance management with Oracle Corporation out of Toronto, Canada, and is involved with research, writing, and speaking about enterprise performance management topics. Previously, she was involved with supporting and implementing business scorecards and activity-based management solutions in companies around the world. She can be reached at [email protected]. Denis Desroches is a principal for the enterprise planning field with Oracle Corporation out of Toronto, Canada. Since 1993, Desroches has supported organizations with the selection, implementation, and knowledge acquisition of scorecard, performance management, and activity-based management solu-tions. He can be reached at [email protected]. William O. Stratton, PhD, CMA, is a professor of accounting at the Udvar-Hazy School of Business at Dixie State College of Utah. He has numerous publications in accounting and international business journals and is coauthor of a leading textbook on management accounting. Dr. Stratton can be reached at [email protected].
