More Complex, More Robust: Activity-based costing systems are harnessing the internet and adding new functionality, giving companies more horsepower than ever.

• Author: Marshall, Jeffrey
• Position: Activity-based Costing

ABC isn't what it used to be. Activity-based costing and its offshoots -- activity-based management and activity-based budgeting -- are more sophisticated than ever, in part because of Internet-based tools that allow managers to share information across the entire corporation.

Managers can now get a good snapshot of the enterprise's customer profitability, new product or service opportunities and suggestions for relationship-building. "What-if" scenarios allow testing of strategic and operational options before choosing a process or implementing costly changes. With some software, executives can even retrieve reports, scorecards and profitability data from the Internet and save them for off-line review.

In theory, ABC allows organizations to consolidate accounting, activity and output data into a single management tool. "Using this information, managers are able to make strategic activity-based management (ABM) decisions based on a complete picture of how their organization consumes resources and the results produced from the consumption of those resources," observes accounting firm Grant Thornton LLP.

With that, the firm says, companies "are able to better understand the linkages between demand for goods and services, and the factors that impact their capacity to satisfy that demand. This knowledge provides organizations with a significant competitive advantage."

A critical advance is faster decision-making. "These emerging applications improve corporate reaction times as business conditions change, and facilitate the sharing of market data and business intelligence at several levels within the organization and across the value chain," wrote AMR Research in a report last year on enterprise management.

Grant Thornton views the ABC process as comprising three key costing elements. The first, job-order costing, relates costs to specific jobs. Process costing assigns costs to an organization's processing divisions, in which each division is responsible for a specific output, whether it is an interim or end product. And standard costing compares predicted against actual costs to identify areas that vary significantly from the forecasted costs of performing a task. Once identified, those areas can be scrutinized and the work redesigned to bring its cost levels in line with predictions.

One potential trap with an effort like ABC is over-measurement, or getting bogged down in trying to quantify everything. Three or four performance measurements...