Abstract
The accounting section of ABCo finalizes an $8,000 invoice for Job 143. Because the job has taken longer than expected, management discounts the bill 5% before sending an invoice for $7,600 to the customer.
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Notes
- 1.
Contribution-Based Activity (CBA) has application for all segments of industry and commerce, including manufacturing, service, professions, wholesale/retail, hospitality, transport, construction, and primary industry.
- 2.
Reference to small and medium enterprises is not intended to exclude large enterprises, which invariably commence as SMEs.
- 3.
I confess to being one of the leading advocates of such an approach at the time!
- 4.
The defensive attitude toward using consultants was largely broken down in the corporates after decades of marketing by the McKinseys of the world, to the point where the first call by CEOs needing to resolve a burdensome problem is now to a consultant.
- 5.
While the focus here is on production-hours, billable units of activity can refer to a production-hour, an invoiced sale, a cash ring-up in retailing, a bed-night in a hotel/motel, a meal in a restaurant (called a cover in the industry), a ton/mile in transport, and so forth. Of the numerous activities occurring in business, the billable unit is fundamental to the activity of the rest.
- 6.
At the time this book went to print, financial statements made no mention of productivity, nor were they legally required to do so; neither was there any seamless connection between billed units of activity and the invoiced sale in any major commercial software. This is driven largely by the regulatory demands of government bureaucracies interested only in the bottom line for tax purposes, which places pressure on the practicing accountant.
- 7.
Chapter 3 has more detail about this business.
- 8.
A methodology now discredited as being too expensively time consuming by its founders, and since replaced with “Time-Based ABC.”
- 9.
Gross profit is the amount left over to cover expenses and profit after deducting the cost of goods or materials purchased. It is referred to as gross profit, gross profit contribution, or contribution throughout the book. It equates to (sales – cost of goods/materials), or (total overheads ÷ expenses + profit).
- 10.
Readers will find several examples of invoice analysis demonstrating a range of contributions per unit and identifying productivity in the ensuing case studies, especially in Chapter 23.
- 11.
That expenses could in any way be “fixed” like the rent is an anathema to certain members of the accounting profession, who have tended to lead the way in the opposite direction.
- 12.
Such as “75% or 6 out of 8 available hours” in manufacturing/service sectors, or “XX number of sales” in retail.
- 13.
In other words, no reference to productivity.
- 14.
For those looking to compare CBA with systems such as Absorption Costing, Marginal Costing, Time-Based, or Activity-Based Costing, the key difference lies in CBA’s focus on tracking the individual unit-contribution in conjunction with the target number of unit-contributions required to cover expenses plus profit. Costing systems focus on the accuracy of the unit cost, and assume management will apply a markup percentage to cover profit.
- 15.
See Chapter 22 for a more complete explanation of action meetings.
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© 2013 Keith N. Cleland
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Cleland, K.N. (2013). Background to Contribution-Based Activity (CBA). In: IMPROVING PROFIT. Apress, Berkeley, CA. https://doi.org/10.1007/978-1-4302-6308-1_1
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