Understanding the ABC model Traditional accounting systems are inaccurate in the way they allocate costs. Frequently flown routes typically incur 50-200% LESS overhead than they are assigned. Small volume services and less frequently flown routes typically incur 200-1000% MORE overhead than they are assigned. This means that routes or services that are considered highly profitable may in fact be profit eaters. Similarly it is believed that high volume customers are profitable customers, a loyal customer is also a profitable customer, and profits will follow a happy customer. Studies on customer profitability have shown that the above is not necessarily true. These, and similar, inaccuracies are becoming more and more critical as demand rises and new entrants are challenging the standard pricing models of charter operators. In order to correctly associate costs with products and services, Activity Based Costing assigns cost to activities based on their use of resources. It then assigns cost to cost objects, such as products or customers, based on their use of activities. This information assists in making decisions about pricing, outsourcing, capital expenditures and operational efficiency. Traditional financial information is reorganized by Activity Based Costing into a form that makes sense. One example is that Activity Based Costing is forward looking whereas traditional accounting will tell you information about past events. Activity Based Costing relies on economic cycles that better match you operational cycles, where traditional accounting relies on the fiscal year. This ability to place costs on activities and their outputs provides a clear metric for improvement, whether for determining improvement priorities in the long-term or for measuring near-term success. Activity Based Costing allows the operator to characterize the value of, or need for, each activity, getting rid of the waste before automating (or re-automating) activities. Is this a new Accounting system? No. You could use your existing accounting system. Accounting systems that support multiple cost classifications might be transformed to accommodate this model. BusinessJet Class will assist you in the implementation of an Activity Based Costing model that is suited to the size of your organization. If you do not have the staff to keep it up to date, we can dispatch our own staff to update the model. This is an essential component for Partner Operators participating in the BusinessJet Class yield management program. Want to learn more? Click here to request additional information.
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