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: