Imagine rather than just your regular profit and loss statement, you actually have a cost report that showed cost by activity also known as the activity center cost report. The importance of breaking down your financial statement into activities is you can see what it cost you to complete the processes used in serving your customer base. The biggest thing you will gain from this report, is seeing your non value added costs. Activity center cost report shows you how time is spent in each process and the cost associated with it.

Example

Let’s take a look at the business whose main processes used to deliver value can be grouped for efficient costing. Jerry Blue owner of DJM Construction, Inc. has for 2 employees named Nash and John working for him. DJM handles minor construction jobs in homes and offices. Nash and John never know what they are going to do each day. Every day they have to report to the office where they are assigned their job alongside the materials needed for that job. Before Nash and John can be assigned jobs, customers will have to call in their orders. The secretary fills out the work order form. Each day Nash and John have to:

• Report to the office by 8am
• Get their job assignments
• Grab a time sheet and customer completion records to be filled after each job.
• Fill out a material requisition form based on the job assigned for the day. The material requisition form may be filled out by the office assistant, the employee or the manager. In each case, the employee who received the materials will sign off acknowledging they received the materials.
• After gathering the necessary materials, the employees load their truck with the necessary materials for the job
• After each job, the customer is asked to sign a job completion order form or an invoice.
• After each job, the employees fill out the job record form with the number of hours they used on that particular job.
• The time sheet along with the job completion form is turned in to the office assistant. The office assistant uses the time sheet, the material requisition form and the customer completion record to fill out a job cost record sheet and generate invoices if applicable.

Cost break down

DJM activities can be broken into 3 main cost categories namely:

• Clerical time: filling out paper work
• Contractor time: buying supplies, doing on site calls, filling out more paper work
• Management time: authorizing documents

By breaking out the main activities of the business into cost groups as shown above, management is forced to think about how each activity adds value to the customer. Some questions management should think of include:

• Are there any activities that can be batch processed so as to save time?
• Is there a way to automate any activity?
• Is management (the highest paid staff) spending time on those activities that is unique to their skills?
• Is there any technology that can help reduce cost by reducing the time spent on work?

At the end of the day,  a business can only do what the customer will pay for. If your competitor has figured out a way to provide more value at less cost, probability is they will win more customers.  Finding reduction in time consuming activities reduces costs and allows the business to stay competitive. As competition increases, activity center cost report become very essential to the small business owner. Cost control could be a form of core competency for the small business owner.