In Douglas Hicks article ‘Measuring Total Cost’, as part of a successful half cost strategy, he maintains that it is difficult in many cases for businesses to reduce cost, as most businesses don’t know what their total costs are in the first place. ‘A key element of the Half Cost Strategy is the ability to measure total cost to capture all the cost savings and encourage behavior to further reduce all costs.’

In most activities that involve change, it is usually best to go after the “low hanging fruit”. I always emphasize the use of the pareto distribution in my cost accounting classes, a simple concept which emphasizes that only about 20%of the causes explain about 80% of the activity, the 20% representing the low-hanging fruit. Hicks explains that by using cost drivers, the low hanging fruit can be more easily identified. He also emphasizes that precision is not as critical as accuracy, a concept I picked up from reading Kaplan and Coopers ‘Cost and Effect’ many years ago. Many companies set there standards with five decimal points of accuracy, a concept that is ludicrous considering a standard is only really a sophisticated estimate.

A company’s managers, supervisors, production leads are for more knowledgeable about the drivers of their costs than any accountant, although an accountant needs to work closely to define and explain the process. By making the connection between costs and their drivers managers more clearly understand the behavior of costs in relation to products, product lines, and customers.

Hicks goes on to further refine the process in the context of ABC and how by focusing on the ‘low hanging fruit’ a simple, cost effective ABC type system can be put in place. Hicks refers to his book ‘Activity Based Costing: Making it Work for Small and Mid-Sized Businesses’. The article has clear, easily understood concepts with good realistic examples, every business should go through this process to better understand their costs.

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