Activity Based Costing versus Throughput Accounting and How to Use SAP BW to implement Throughput Accounting
Activity Based Costing (ABC Costing) can be very beneficial but is very cumbersome to implement. In a nutshell, you have to define Cost Collectors, Assign Cost Objects to each, and then do the math.
The ABC process starts with the allocation of cost from the General Ledger to several cost pools. Activity drivers are selected that are closely associated with the costs in each cost pool. From this, we can derive a cost per unit of activity. Then we can easily roll-up the cost by multiplying the number of units of each activity and multiply that result by the cost per activity driver. This will result in the allocation of all overhead cost to the various cost objects in a consistent, logical manner.
Unfortunately, to implement ABC based costing, using activity based costing in SAP requires a lot of effort and on-going maintenance, and a considerable amount of engineering effort in determining time standards, never mind maintaining them. Most importantly, it provides almost no information as to the constraints in your system and therefore, doesn’t provide you the information you need to implement Throughput Accounting.
However, using SAP BW and standard SAP Production Planning reports, you can begin to both identify constraints in your system and move toward Throughput Accounting. In my experience, you will also need to practice management by walking around (MBWA) to spot the inventory buildups in front of production operations that are the sure signs of a constraint. However, if you have market constraints, you won’t be able to spot those issues by walking around. Here, BW along with market analysis and Executive Dashboards can yield valuable insight into your market constraint. Here's a quick step-by-step on how to implement activity based costing using SAP BW.
To help get you started with on Throughput Accounting journey and with implementing a simple ABC Costing model, we've developed a downloadable Throughput Accounting Calculator.
You can download our Throughput Calculator by clicking on the link.
Please contact us for help with your journey to throughput accounting and greater profitability.
Quantum Costing is a costing methodology that differs from Activity Based Costing (ABC Costing) in several critical aspects. While ABC Costing focuses on allocating costs based on activities and drivers, Quantum Costing takes a different approach by considering the impact of constraints on the overall cost of a product or service. It takes into account the time spent on a constraint and the revenue generated from the products or services that pass through it. This allows for a more accurate understanding of the true cost of a product or service. This also allows you to do detailed profit analytics. When used with throughput accounting, Quantum Costing can provide valuable insights into identifying constraints, maximizing constraint usage, and adjusting the product mix to increase throughput and profitability. As a reminder, here's the general thinking process and implementation process for implementing this approach:
By following these steps, businesses can implement throughput accounting and leverage SAP BW to gain valuable insights into their operations, constraints, and overall profitability.
The concept behind Quantum Costing is that costs are calculated at the most detailed level of company activity, which is the invoice line. Each invoice line represents a specific quantity of a product sold to a customer, with additional dimensions such as vendor, selling location, servicing location, sales representative, customer type, warehouse/direct, and delivery method. This level of granularity allows for a more accurate understanding of the true cost of a product or service.
Would be great to get your comments on my blog and especially to hear about your experiences using SAP BW to implement TOC Throughput Accounting.
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