The original ABC architecture is based on a manufacturing model that maps the flow of costs from financial “objects,” such as resources paid to perform work, to the activities they perform to accomplish the work, and then to the output(s) of work delivered to customers. This traditional ABC architecture is visually described in Figure 1 and consists of three “layers”—resources, activities and “cost objects” (products or services).

The methodology used to implement this architecture started with decomposing general ledger items into activities of the organization and then tracing the activities into the products and services ultimately consumed by third parties.

This traditional approach helps organizations assign overhead costs to products and services more accurately than previous costing methodologies. Traditional questions answered using this ABC architecture include customer profitability, “true” net margin of products, and the cost of activities performed in the organization. Most ABC software applications are designed to support this, and only this, architecture.

 Figure 1: The traditional ABC architecture

Organizations have struggled with this traditional model. Although it presents improved information over regular cost accounting, it is limited in its ability to produce accurate costs of business processes.

A clear understanding of the different types of business processes and their cost is fundamental to making effective changes in the organization. Traditional models are unable to forecast the effects of proposed changes to products, to services, or to the processes used to produce the services delivered.

Integrating planning with the budgeting process has been a need that has not been fulfilled by ABC modeling in the past. To be useful and effective for strategic budgeting, the methodology and supporting model must allow users to vary consumption-based processes. They need to easily answer how the required resources would be affected in coming years. Linking budgets, performance reporting, and planning is a necessity that has not been met.

CostPerform was designed to allow the model to forecast changes in the workload and in the productivity of the processes used to handle that workload. Traditional ABC architecture and software do not allow users to vary consumption-based processes, while in CostPerform both push and pull allocation mechanisms can be used within one model making planning and scenario analyses possible and viable.