Driving business innovation while reducing it costs 7 even after using our framework, some opportunities may not be addressable due to various constraints, such as time to completion. Revenue and cost relevance in cost accounting dummies. Conversely, activitybased costing allocates indirect costs to particular production activities related to that cost. Some things lend themselves to driverbased forecasting, things that vary in cost and that. Many analysts, in the absence of relevant and required information about the cost drivers, typically use revenue line item to project the cost line items costs expressed as a %age of sales revenue turnover. Traditional costing methods allocate indirect costs to production activities based on volume of output. The profitability framework starts at profits and breaks it down into the components. That above is my generic framework for cost drivers case. Turn your reverse supply chain into a profit center. Activitybased costing calculation steps and example. A cost benefit analysis also known as a benefit cost analysis is a process by which organizations can analyze decisions, systems or projects, or determine a value for intangibles.
Theoretical framework and an overview of the cost drivers. For most businesses, there are four major profit drivers. Companies use the insights to determine targets and improvement measures. Getting organizational alignment around the entire framework tends to be the. When deciding which driver to use in terms of allocating indirect cost, consider. Another variant of fca can be the multilevel indirect cost allocation approach where the cost allocation mechanism relies on the operational model. Cost of it shared services shedding light into the black box. An activity can have more than one cost driver attached to it. Identification of key cost drivers helps companies to focus on key activities that will constitute almost 90% of the total costs. The model is built by identifying the benefits of an action as well as the associated costs, and subtracting the costs from benefits. In order to treat the reverse supply chain as a profit center in accounting terms, it is necessary to identify the relevant revenue and cost drivers. Include both indirect costs and direct costs to compute the full cost of production. Financial statements typically report revenue and expenses in gross formats. Here well look at the revenue and expense driver tabs and generate the financial statements.
Assess customer, competition, cost and capabilities with. The third driver of declining profitability is rising costs. Five steps to strategic cost reduction sorting the good costs from the bad the key to realising this opportunity is making sure that maximum resources are targeted at the drivers of profitable growth good costs, while freeing up and minimising bad costs. Revenue and cost drivers are what really define the business model. How many driver levels do you typically see for forecasting revenue. A framework of revenue drivers and cost drivers business profitability is a complex topic requiring joint. Cost drivers must be determined by both how activities useconsume. Cost drivers of integrated maintenance in highvalue.
Framework and methodology for pricing of distribution. These cost drivers make up the financial metrics for labor costs. On the revenue side, it is often helpful to segment numbers by product type, geography, etc. While the former 2 provide information of external market conditions, the last 2 provide internal information about the company. Learn to identify the revenue drivers in financial modeling. In the apics dictionary, 14th edition, cost driver is synonymous with driver and is defined as, in activitybased costing, an operation that influences the quantity of work required and cost of an activity. Here in this small business, what drove the cost up as a percentage of revenue were these two cost drivers. Therefore, it is relevant to determine the cost drivers of integrated maintenance in any system, in order to minimize the overall cost. The profitability framework can help executives, consultants and entrepreneurs to.
The first step in activitybased costing involves identifying activities and classifying them according to the cost hierarchy. On the fixed cost side, typical costs include rent, overhead staff and loan interests. Understanding your revenue and cost drivers psychiatry. A framework for key account management and revenue. What are the cost and revenue drivers for the business. For example, a production activity may have the following associated cost drivers. Simplest way to identify revenue drivers is to think what are the variables when mathematically operated. The levels are a unit level, b batch level, c product level, and d facility level. Cost drivers are the structural determinants of the cost of an activity, reflecting any linkages or interrelationships that affect it. Sophisticated drivers to address the complexity of certain services are used for the few and more significant costs, while other, less significant, costs are allocated using drivers or metrics already in use or using a simple driver, whichever is more directionally accurate.
The aim of this article is to present the theoretical framework of the. This is what i mean by cost drivers in the real world of small business. And skillfully using profitability trees is the most efficient, direct way to understanding how a business makes profits and why its not making more. Cost hierarchy is a framework that classifies activities based the ease at which they are traceable to a product. An activity cost driver is a component of a business process.
The revenue and the cost structures would be included in which part of the business model. Bcgs driver based approach for achieving excellence in nonpersonnel costs entails four steps. The methodology allows companies to assess their current costs and underlying drivers, and to compare those costs and drivers with external benchmarks. So what are the good costs and bad costs in this fast. But that taxonomy must also take into account value, revenue, and profit drivers.
The first, and most obvious difference is the format. A framework for comprehensive assessment of the value of diagnostic tests 2 the cost principle. A framework for comprehensive assessment of the value of. Basically all costs arising after the product is on the shelf already. How much do mckinsey, bcg and bain charge clients for a. Use cost drivers to allocate variable and indirect costs to production activities or output. A factor that can causes a change in the cost of an activity. A rigor in revenue build up also ensures a rigor in costs projections. In accounting, the cost driver definition is a factor that incurs cost. For example, revenue drivers for an outpatient clinic include the number of people receiving services, the type of services delivered, and the amount charged for delivering services. According to a recent mckinsey quarterly survey, 79 percent of all companies have cut costs in response to the global economic crisisbut only 53 percent of executives think that doing so has helped their companies weather it. Cost calculation model for logistics service providers the interactions between the units or entities applied for collecting and distributing indirect costs or overheads. Implementing driver based forecasting is something you can set up in a spreadsheet environment for the purposes of scenario analysis with a very small, limiteduse footprint.
Activity cost drivers are used in activitybased costing, and they give a more accurate determination of the true cost. By investigating each branch of the profit equation, revenue and cost, and drilling. To understand cost drivers im going to first explain the relationship of cost drivers to profit. It is common to use value driven maintenance vdm to capture the cost drivers in maintenance. An indirect or variable cost may have several possible cost drivers. Past costs are water under the bridge, and if the costs or revenue remain the same no matter what you decide, they arent relevant. Hospital cost drivers technical report what factors have determined hospital expenditure trends in canada. The cost drivers, revenue drivers, and value chain. The structure is useful to get a better understanding of the client and important during your case interview. Revenue growth framework strategy understand customer needs validate market opportunities understand the competitive industry landscape assess alternative business models developing the proposition develop the concept build the business case understand intangible resources align the organisation and identify resource limits. It also seems that there is a need for a synthesizing, organizing taxonomy of cost drivers that combines and reconciles the differing frameworks. In cost accounting, relevant means that you consider future revenue and expenses. The income statement starts at revenues and takes out different costs and expenses until you reach to the bottom line that is, profits. Consulting case frameworks profit drivers life is a sine wave.
The first level of branches would be revenue minus cost. A framework for key account management and revenue management integration. Exploring supply chain cost drivers apics magazine. Value assessments should consider and report costs incurred and costs avoided over timeframes appropriate for the test or technology including, where available, costs incurred and avoided outside the health care system. This variance is driven by the premium the firm is able to command e. But to get even more value from driver based forecasting you need an integrated platform where you can see the consensus forecast across the company, measure. It is helpful to keep in mind during a case interview, but obviously fresh thinking and perspective is always encouraged when coming up with a framework.
One explanation could be that both revenue managers and kams have little awareness of company profit drivers and limited knowledge of cost behaviorparticularly since these managers performances were predominantly measured by sales volume, or revenue achieved, not. Because indirect costs, such as variable overhead, are not directly traceable to production. A conceptual framework that describes how a company creates, delivers, and extracts value. On the variable cost side, typical costs you will come across are raw materials, delivery, commission fees and direct labour. Executive summary this report presents the results of an analysis done by the canadian institute for health information cihi on hospital cost drivers, concentrating on. Learn vocabulary, terms, and more with flashcards, games, and other study tools. A cost driver is the unit of an activity that causes the change in activitys cost. A pricing methodology based on the forward looking network investment cost is presented and discussed. Therefore, it must be costs that rose significantly, leading to a drop in profitability. Most supply chain and operations management professionals probably have their own definitions and examples. Thus, it is a good idea to group and map initiatives in a grid to develop an implementation timeline. The second level of branches would be the drivers of revenue and the drivers of cost. Revenue and cost drivers are the individual elements that make up those gross numbers. If youve found the biggest driver of the problem, you often times have to switch to a more qualitative framework like the 4 cs to find the underlying root cause.
Consulting case frameworks profit drivers life is a. It now becomes clear that revenue is not the problem because it has grown steadily in recent years. Also, relevant means that a cost or revenue will change, depending on a decision you make. The cost drivers, revenue drivers, and value chain analysis in strategic management accounting article in international journal of knowledge, culture and change management 92. Cost drivers for the clinic include stafflabor costs, administrative costs, and facility costs. A set of key policy questions posed by ofgem in the context of developing a new duos charging methodology for distribution networks with distributed generation is. Profitability trees are a special kind of issue tree, that is created with the sole intent of analyzing the profits of a company and heres why theyre so important. Once you have the drivers of revenue and the drivers of cost, you can develop a hypothesis for each prioritized branch that you think is important to solve the case. Cost reductions often go wrong, we believe, and our experience suggests that they can be done in a better way. The third phase in the activity based costing process is cost allocation, which is based on. Strategic cost management has become an essential area now a day. While formulating the strategy for the accomplishment of organisational overall objectives, different cost drivers should be clearly identified. Most managers usually can identify specific drivers, but they often dont use them as key management tools.