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Typical cost allocation methodologies dont allocate the costs of complexity in the
right way, nor take into account the significant cross-subsidizations that inevitably
and invisibly occur across products, business lines, and market segments,
which mask the true creators of profit and consumers of cost. WP&C has used
Square Root Costing to help a number of organisations identify where their
businesses were saddled with non-value added costs related to complexity. It is
a fast, dynamic alternative to methodologies such as Activity-Based Costing for
organizations looking to quantify the impact of complexity on cost and operations,
and reveals if, and at what volume, certain products in a portfolio could be profitable.
Standard Cost View
Sales price
$/unit
140
NVA cost
140
VA cost
120
12
7.9 BN
10.3 BN
7%
9%
8%
28%
4
0
9.5 BN
32%
29%
64%
62%
61%
2005
2010
2015
120
80
100
80
60
60
100
10
Complexity-Adjust View
$/unit
40
40
20
0
20
0
Volume:
A B C D E F
Volume:
A B C D E F
Profit:
Profit:
8% 11% 7% 7% 6% 6%
COGS
Operating Costs
www.wilsonperumal.com
ifernandez@wilsonperumal.com
Properly allocating costs in this way is not only a key input for price setting, but
will also allow M&S to fully understand both customer and product profitability
before undertaking any portfolio rationalization exercise.