Improving CashFlow Management through an ActivityBased Costing ABC Implementation

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Improving Cash-Flow Management through an
Activity-Based Costing (ABC) Implementation
Gregory Bedenis, MBA Candidate Youngstown State
University David E. Stout, Ph.D. Youngstown
State University
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XYZ Corporation
Designer and Manufacturer of Value-Based Consumer
Electronics

• Established in 1999
• One manufacturing facility
• Distribution channels
• Domestic internet direct
• Foreign dealer network
• 9 million in annual sales
• 13 employees

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Competitive Environment

• The Competition
• Low-cost, internet-direct distributors
• - Purchase items complete from China
• High-end manufacturers
• - Established brand names
• - Distribute products in specialty stores
• The XYZ Company
• High-value products
• - Low overhead costs
• Superior customer service

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XYZs Historical Performance

• 40 annual sales volume and revenue growth
• Three product families
• Inventory turns of approximately 4
• Low overhead costs
• High dividend payouts
• Low of days payable outstanding

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XYZs Recent Performance

• 20 sales volume and revenue increase
• Six product families
• Decreasing inventory turns ( 2.5)
• Increasing overhead costs
• Decreased dividend payouts
• Increasing days payable outstanding

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Summary Problem Cash Flow
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Performance Drivers

• Increased product-line diversity (to promote
  increased sales revenue)
• Lack of spending controls regarding overhead
  costs
• Poor inventory management
• Inefficient business processes
• Nonexistent product-costing system

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Solution

• Introduce a rudimentary Activity-Based Costing
  (ABC) system to
• Capture underlying economics of the companys
  production function
• Improve product-mix decisions
• Improve product and/or customer costing
• Evaluate product-level and customer-level return
  on investment (ROI)
• S IMPROVED CASH FLOW

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ABC Elements

• Resources Economic elements
• Activities Units of work
• Resource Drivers Used to assign costs from
  resources to activities.
• Cost Objects Final cost-allocation point (e.g.,
  products, services)
• Activity Cost Drivers Used to assign costs of
  activities to cost objects.

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General Representation ABC Model
Resources
Activity Center
Resource Driver
Activities and Activity Cost Pools
Cost Element
Activity Driver
Cost Objects
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ABC Underlying Principles

• DM and DL traced to individual products
• Overhead costs are assigned using a two-step
  process
• Costs are assigned to activities
• Activities are assigned to products
• ABC reflects product/customer diversity and
  complexity
• ABC concepts can be extended to encompass
  allocation of assets, namely inventory

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Cost Objects at XYZ Corporation Product
Families or Distribution Channels

• A Accessories
• T Durable Textured Black Finished products
• W Premium Wood Finished products
• V Economical Vinyl Finished products
• U Uniquely Designed products
• S Purchased Complete products
• D Domestic customers
• F Foreign dealers

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Financial Improvements at XYZ Based on ABC
Implementation

• Use of common components
• Toyota saves an estimated 1,000 per vehicle over
  5 years by using common components
• XYZ estimates a 132,000 reduction in inventory
  by implementing the use of common components in
  the following product lines
• T (Durable Textured Black products)
• V (Economical Vinyl Finished products)
• F (Foreign dealers)

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Use of Common Components at XYZ
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Additional Financial Improvements

• Product-Mix Decisions
• ROI and cash flow can be increased by product-mix
  decisions
• 75,000 inventory reduction by implementing
  the following product-mix changes
• Eliminate off-color finishes in (V) Vinyl and (S)
  Purchased Complete product families
• Eliminate maple wood in (W) Premium Wood Finished
  product family
• Increasing sales in the uniquely designed product
  family (U) should increase ROI and cash flow

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Product-Mix Decisions at XYZ
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Business Process Improvements at XYZ

• Restructuring of the General Ledger
• Restructuring of the Profit and Loss (PL)
  Statement
• Integration of inventory control system with
  financial system
• Integration of the internet shopping cart with
  the financial system
• Implementation of a budgeting process

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Overall Improvements at XYZ

• Inventory reduction 207,000
• ROI increase 27
• Parts proliferation decreased Eliminated 69 of
  the electronic component part numbers
• Integration of important information systems
• Creation of understandable financial statements
• Made company more data-literate

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Overall Financial Improvement at XYZ
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Lessons Learned from ABC Implementation Effort at
XYZ

• Manage the implementation timeline by managing
  the access and flow of information.
• Embrace the concept of good enough when
  determining the required fineness of the cost
  data.
• Focus on getting the project off the ground.
• Significant change doesnt occur without crisis,
  so be ready for the next crisis.

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