Costing models
Important management decisions should be supported by activity-based costing models:
– Should we invest in a new business area? What profitability should be expected?
– What are the actual costs of each activity/service/product/geography/market segment/customer? What profitability does it generate?
– Is the pricing strategy competitive? Which activities should be optimized to improve profitability?
– Is there any product, service or market that should be discontinued?
– Should new services/products be developed and launched? What is the expected profitability?
– What cost drivers can be optimized to generate more profitability?
– What is the comparative performance of different segments?
Best practices proven useful in designing and implementing costing models:
– Keep it simple — the model must be robust and comprehensive, but agile to be easy to maintain
– The methodology should deal separately with volume-sensitive variable costs from fixed costs.
– Adjusted to objectives — detailed as needed and no more than that
– Testing the concept — determining the costs of a specific area before scaling the model to the entire organisation allows essential learning to adjust the model, leading to better results. The construction of a costing model is developed in 6 phases: