What Can Activity Based Costing Do For You?

It can give you a whole new way to look at your business.

Traditional Comparative Income Statement
  20X2   20X1
Sales 8,924,000   7,593,200
Other 8,300   12,700
  8,932,300   7,506,900
Cost of Goods Sold 5,505,000   4,528,900
Gross Profit 3,427,300   3,077,000
Selling & Administrative Expenses:     
Advertising 220,700   200,700
Charge Plans 50,100   37,900
Charitable Contributions 1,600   5,700
Commissions 60,000   -  
Delivery 12,200   10,500
Depreciation 43,100   47,000
Director's Fees 6,000   5,500
Dues & Subscriptions 5,500   5,000
Employment Fees 25,500   -  
Insurance - Comprehensive 27,200   26,500
Insurance - Health 36,500   14,500
Interest 48,300   39,800
Miscellaneous 7,500   4,600
Payroll 1,271,600   1,217,400
Professional Fees 57,500   24,200
Rent 560,200   505,900
Repairs & Maintenance 8,000   6,100
Retirement Plan 162,300   175,000
Security 4,700   3,600
Supplies 31,500   28,800
Taxes - Other 34,400   26,800
Taxes - Payroll 80,000   69,100
Telephone 11,600   11,400
Utilities 90,700   86,100
  2,856,700   2,552,100
Income before Income Taxes 570,600   524,900
Income Tax 199,300   171,900
Net Income 371,300   353,000

How could you use this information to improve your bottom line?

  • Advertising is way too hard. As the saying goes "you know that 50% of your advertising dollars are wasted, you just don't know which 50%."
  • Maybe looking at the biggest numbers is the way to go? However, that means payroll and eliminating people is really hard work with all kinds of unanticipated repercussions.
  • What about rents? There a big number and nobody likes the landlord anyway. Maybe, but most rents are under long-term leases which doesn't lend them to having an immediate impact.
  • Maybe the retirement plan can be restructured? But, that usually means a lot of meetings with experts on complex tax and labor laws. Nothing fast will happen here if anything.
  • Well what about office supplies? We are spending an outrageous amount of money on paperclips. At last something you can have an impact on.

The end result of this approach in my experience is a policy requiring all office supply orders be approved by a manager. This can actually have a short-term positive result. For about a month the manager will diligently check each order and deny a few requests. However, more important things will creep into his or her schedule and those orders will start to pile up in their in-box. Eventually, the manager will rubber stamp them to get them out and the office supplies cost will go back to where they were. Worse, people will adjust to a slower ordering process by building up an even bigger inventory of paperclips.

So, how could we use a little imagination to make our income statement really begin to talk to us? A Better Approach