A new accounting system helps managers identify all activities involved in their production.
"We're basically your typical widget shop," says Hugh Pinkus, vice-president of finance for Transparent Container, a $21-million manufacturer of plastic containers. But two years ago the Berkeley, Ill., company made an atypical decision that "helped us keep boosting our revenues and profit margins during the last recession," says Pinkus. Transparent adopted an accounting method known as activity-based costing (ABC), which helps managers identify all activities involved in their production processes and thus isolate costs.
At Transparent, pricing is crucial, so it is essential to understand which orders make money and which ones don't. Before adopting ABC, "we would price an order by looking at how much raw material and machine time it would consume, and then we'd add a guesstimate for setup costs," says Pinkus. Managers assumed that they intuitively understood their basic costs of production.
An activity-based software program, which led Pinkus through an exhaustive model of possible actions and costs, helped him recognize that "we were failing to consider all kinds of corporate expenses in our pricing model. For example, the more our receiving dock is used on an order, the more expensive that order becomes to fulfill. Those kinds of costs had slipped past our attention."
At many growing companies, managers quickly lose sight of the complex string of production costs and related activities. "In the past, if one job required twice as much machine time as another, we'd probably just price it twice as high -- and we might have lost that job," says Pinkus. "Now we realize that such a job really just consumes more electricity and is not really much more expensive. Another job, requiring more customer service or multiple shipments, might be worth the higher price tag instead."
The only hitch: "You can't adopt ABC without software to help you," says Pinkus. His recommendation is ABC Plus, a PC-based program costing about $4,500. To order the software or Common Cents ($19.95), a book on ABC accounting theory, call ABC Technologies at 800-882-3141.