Success Story

SAP Engineering & Construction Activity-Based Costing with R/3 at ABB Industrie AG

With close to 1,600 employees and a sales volume of 600 million Swiss francs, ABB Industrie AG is the second largest subsidiary of ABB Switzerland. Their market operations focus on the development, manufacture, and erection of electrical equipment, innovative drive and automation technology and complete electrotechnical plants for selected branches of industry.

Process optimization as a basis for existence in highly competitive markets

The implementation of an activity-based costing system not only enables the synchronization of process operation and assessment. It also has profound effects on the corporate culture because it inevitably changes the way employees think and act. This is what ABB Industrie AG experienced when they incorporated Activity-Based Costing (CO-ABC) into their R/3 infrastructure.

ABB Industrie AG is a global player in international markets which not only exhibit low growth rates due to strong international competition but are also subject to constant price pressure. To meet challenges like these, ABB has implemented programs like Customer Focus and Total Optimization of Processes (TOP) worldwide. These programs are geared to continuous process orientation and optimization.

Greater transparency of process costs

The conventional, function-related accounting system proved to be inadequate for the process optimization undertaking at hand. It was impossible to determine the process costs both before and after optimization and the requirements for source-related calculation could also not be satisfied.

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In the light of these circumstances, the company decided to implement Activity-Based Costing (ABC). A preliminary study conducted at the end of 1994 found that activity-based costing would make it possible to assess the costs of individual processes and calculate the cost objects based on their source. The outcome of the study prompted the decision to incorporate an activity-based costing system into the accounting processes at ABB Industrie AG. The object of this undertaking was not to use this as a parallel accounting system but to fully integrate it into the companys standard system and use it for all accounting tasks including profitability analysis. And this has been the case at ABB Industrie AG since January 2000.

Stepwise implementation influences further developments

The main project tasks entailed mapping the activity-based costing activities of the two pilot subareas in the R/3 CO-ABC system which has served as a parallel accounting system since the beginning of 1997. Because of its close cooperation with SAP development, ABB Industrie AG was also granted access to an ABC development system: A prototype system was used for product cost planning of production orders. With the availability of release 4.0 at the end of 1997, it also became possible to develop the requirements for allocating process costs to SD orders (sales and distribution processing) and PS orders (project systems). At the same time, the quality of data was improved so that actual cost driver quantities from the Logistics Information System (LIS) and the process structures and planned values were brought to the fore.

of making the associated processes more efficient. And in cases where several cost centers performed the same activities, the organizational structures were adapted individually.

Optimal results through careful survey of process structures

The implementation project at ABB Industrie AG clearly showed that the use of activity-based costing is a very demanding task. This project also initiated the change to a process-oriented corporate culture a change which must be made stepby-step and with extreme care. A careful survey of process structures is therefore of utmost importance: Errors in this phase can have serious consequences and reduce the potential benefits.

Software and hardware

The companys decision to implement all SAP R/3 modules by January of 1997 answered the question of which standard business management system to use. Release 3.0 of the activity-based costing system implemented at the time already made it possible to determine the process costs. What was still lacking was the integration of costing and profitability analysis. This full integration was realized in release 4.0. Against this backdrop, ABB Industrie AG decided to implement activity-based costing in three steps: I Implement the entire ABC system in the electronics and machine production subareas for parallel accounting in the live R/3 System; I Gather experience with a live activity-based costing system in the new R/3 environment; I Determine ABBs specific costing and profitability analysis needs and make these known to SAP development so that a solution can be provided in release 4.0 or 4.5.

Process steps show the optimization potentials

With the functional enhancements of release 4.0 and 4.5, activity-based costing now fulfills the requirements set by ABB Industrie AG for costing and profitability analysis. In the course of the continuous process optimization efforts undertaken in 1998, so-called process steps were evaluated on the basis of the process structures and costs mapped in the CO-ABC system. These graphically formatted steps provide the most important information for each process variant. Each column represents the costs per activity and process variant. Specific areas within a column provide information on which share of the costs a particular activity has in various cost centers. Another column shows the total costs of the process variant. The use of process steps like these make it easier to determine optimization potentials. The costs, in particular of activities that make up a very large portion of the total process, were closely examined to determine ways

R/3 System with the modules I Project System (PS) I Plant Maintenance (PM) I Sales and Distribution (SD) I Service Management (SM) I Materials Management (MM) I Warehouse Management(WM) I Production Planning (PP) I Quality Management (QM) I Asset Management (AM) I Controlling (CO) I Human Resources (HR) I Hardware: HP 9000/879 I Operating system: HP-UX I Database: Oracle I No. of users: about 1060

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