Consumption-Based ABCM

Consumption Based ABCM for Planning and Process Improvement


The Cost Decomposition approach focuses on decomposing the general ledger to activities and cost objects with resource and activity drivers. This is the most commonly known approach and has been the foundation for most ABC software and consultants since CAM-I and Kaplan/Cooper first defined the term ABC in the late 80s. However, this approach has serious shortcomings. It is backward looking (i.e. historical based), typically does not consider resource capacties and provides limited "what-if" simulation to support management decision making.

The Consumption-Based approach focuses on the interrelationships between resources, activities and products/services (cost objects) through a model which maps how the organization uses resources in order to provide products and services to its customers. It models the "Cause and Effect" relationships between each of these. As a result, this approach provides a forward looking decision support model, critical for supporting "what-if" decison making, while also providing a historical cost perspective.

The Consumption-Based approach requires a shift in thinking. While the approach has been available in some off-the-shelf ABC software since the late 80's, it has only recently (2002) been recognized by the likes of Kaplan's Time-Based ABC and CAM-I's Closed-Loop. Good to see these groups catching on to this methodology.


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