Adding Value through Activity Based Costing/Management

Transcription

1 Adding Value through Activity Based Costing/Management Financial Management Institute April 18, 2012 FINANCE BRANCH Ministry of Transportation

2 Knowledge Objectives for the Day Establish the context importance of understanding the true cost of services Review the language and structure of Activity Based Costing/Management Discover how Activity Based Costing/Management supports multiple management objectives Understand the concept of Full Cost Pricing Explore through examples and a case 2

3 Quote of the Day There is nothing more powerful than an idea whose time has come Victor Hugo (French Novelist) 3

4 Evidence As per survey conducted by Better Management, 9 out of 10 companies of all sizes are using ABC or considering to use it (528 companies surveyed ) 4

5 Context: Balancing Ontario s Budget Ontario Ontario Budget Budget Deficit Deficit Status Status Quo Quo Preferred Preferred Scenario Scenario -$15B -$15B $0 $ Current deficit -$30.2B -$30.2B Balanced Budget Deficit in if Status Quo is maintained 5

6 Context: Balancing Ontario s Budget (cont.) (Actual) (Actual) (Drummond (Drummond Recommendation) Recommendation) Average Annual % Growth Average Annual Growth 8.2% 8.2% 6.9% 6.9% 6.6% 6.0% 6.6% 5.4% 6.0% 5.4% 2.5% 2.5% 1.1% 1.1% 0.5% 0.8% 0.5% 0.8% Health Health Education Education Social Social Services Services Others Others Overall Overall Program Program Growth Growth -2.4% -2.4% To balance budget 6

7 What is Costing? Costing is the process of tracing expenses to products, services or activities to determine their cost Costs are calculated from relevant expenses 7

8 Traditional Costing vs Activity Based Costing Traditional Costing Resources (Expenses from IFIS) Activity Based Costing (ABC) Resources $ used to do work Even spread approach Resource Drivers Stage 1 Products and Services Activities work processes Activity Drivers Cost Objects (Product and Services) For whom work is done Stage 2 8

9 Activity Based Costing The basic premise behind ABC is simple ABC assumes that: clients create need for outputs (services/products), which create the demand for activities, which in turn consume resources 9

10 Traditional vs Activity based view of costs Chart of Accounts View Traditional (IFIS) Actual Plan Favourable/ (Unfavourable) Salaries (25) Materials Supplies Depreciation Rent Utilities Oil and Gas (10) Total Activity Based View Take Orders 70 Make Orders Mix Batter 250 Bake Layers 150 Frost Cakes 90 Store Cakes 40 Deliver Cakes 100 Total 700 ABC/M provides a focus on activities not visible through traditional accounting 10

11 Traditional vs Activity based view of costs (cont.) Chocolate Specialty Cakes Cakes Total Direct Materials Direct Labour Allocated Overhead Total ABC Traditional # of Units produced Cost Per Unit Chocolate Cakes Specialty Cakes Grand Total Total Cost Unit Cost Total Cost Unit Cost Total Cost Unit Cost Take Orders Mix Batter Bake Layers Frost Cake Store Cakes Deliver Cakes Total # of Units Produced Cost per Unit

12 What is a Resource? Salaries and benefits Building occupancy charges Supplies Telephone charges Equipment depreciation 12

13 What is an Activity? Provide IT support & maintenance Process Billing Provide mail services Train employees Maintain Accounts 13

14 What is a Cost Object? Products and Services Drivers Licenses Permits Cameras Personal Savings Accounts Insurance Policies Internal External Clients Channel of Delivery Face to Face E-Channels 14

15 Example: Using a Resource Driver Resource Resource Driver Activities 20% Receive drivers license requests 50% Process drivers license requests Salary and Benefits 30% Maintain drivers license records 15

16 Example: Using an Activity Driver Activity Activity Driver Cost Object 5 transactions Drivers license renewal Process drivers license requests 20 transactions 10 transactions Drivers license renewal with fine Drivers license replacement 16

17 Your Objects of Work? What are examples of your cost objects? Note: objects of work can be another office, external client, a product/service, etc. Drivers Licenses Building Permits Clients served Quarterly Reports 17

18 Your Activities? What are examples of your activities? Develop engineering design Forecast expenses Train employees Maintain company vehicles Maintain oversight of highway maintenance Provide legal advice 18

19 Your Resources? What are some of the resources used by your office/branch? Salaries and benefits Office space Computers Supplies Support received from other offices 19

20 ABC supports Activity Based Management (ABM) ABC View What things cost Resources $ used to do work What things cost Resource Drivers Process View (ABM) Cost Drivers Drivers of work Activities work processes Performance Measurement How well work is done? (Cost, time, quality) Activity Drivers Why things have cost Cost Objects (Product & Services) For whom work is done Better decision making 20

21 Cost Drivers Cost drivers cause work: they are factors that cause the change in the cost of an activity They may cause excess cost, time and poor quality Removing/managing cost drivers is the key to improvement 21

22 Examples of Cost Drivers Cost drivers cause work! Activity Cost Drivers Number of registrants Complexity of forms Register students to program Part time vs. Full time 22

23 What causes work in your Office/Branch? Cost drivers cause work Activity: Cost a program Cost Drivers: (Centralized vs Regional delivery) Complexity of the costing project Scope of the project (No. of issues to look into) Number of briefings required Staff training / capacity 23

24 Activity Based Management Adding Value Activity or Process Step YES Contributes to Client Demands or Government Priorities? YES Public safety Highway maintenance Transit Strategic planning Alternative service delivery Efficiency opportunities Policy changes Necessary to Produce Output? NO NO Contributes to Government Business Demands? YES Government regulations Stakeholder consultations Environmental assessment NO Duplication of work Bureaucracy Outdated processes Reallocate resources/ discontinue 24

25 Cost of a Burger $0.05 $0.10 $0.20 $0.50 $0.10 $0.15 $0.05 $0.02 $

26 Other Costs of a Burger Rent Utilities Signage Advertising Kitchen equipment Furniture Fixtures Kitchen staff Wait staff Insurance Dishes, cutlery, linen, decorations Printing (e.g. menus) Cleaning supplies Licenses 26

27 Types of Costs Ontario Ministry of Finance Costing and Pricing Guidelines classify costs into 5 categories: Direct Program costs Program Support costs Ministry corporate overhead costs Other Ministry costs (such as OSS, MGS, MAG, etc)* Risk Costs (where appropriate) * OSS Ontario Shared Services; MGS Ministry of Government Services; MAG Ministry of Attorney General 27

28 When is ABC Most Useful? Multiple products / services Client diversity Product / service complexity Different products / services placing different demands on resources Difficulty in linking resources to outcomes High overhead costs Better cost information is needed 28

29 Tips / Lessons Learned Activity Based Costing is: 30% understanding and using techniques correctly 70% the ability to convince others to accept beneficial change Ralf Sorenson (Head of SAS Airlines) 29

30 Tips / Lessons Learned (cont.) Need senior management full commitment and buy-in Involve front-line staff (they know the business) Keep it simple Consider all costs Document assumptions and costing methodology Target areas that can benefit the most from ABC/M Cost is a very important dimension of service performance. Also consider quality and efficiency of service 30

31 What can I do with ABC/M Information? Better understanding of costs enhances decision making 31

32 Case: Ministry of Public Works Ministry of Public Works Division A Infrastructure Division (ADM's Office) * provides inspection services and plans approval for buildings, roads and parks Division B Professional Services Branch Service Delivery Branch (Director's Office) Transfer Payments Branch Research and Analysis Office Plans Approval Unit approves all building, road and park plans. Plans Approval Unit provide support to the entire branch Inspections Unit includes 52 full-timeequivalent Inspectors and one manager. Inspectors perform all types of inspections. Unit provides the following services to the public: Information Unit provides support to the entire branch Building Advisors Unit provides supporting research and analysis for Building Inspections and the Plans Approval Unit 1. Building Inspections 2. Road Inspections 3. Park Inspections * ADM Assistant Deputy Minister 32

33 Case: Relevant Costs (cont.) Minister s /Parliamentary Assistant s Salary Division A Building Advisor s Unit * Research and Analysis Office Plans Approval Unit Division B Building Inspections Unit Infrastructure Division ADM s Office Service Delivery Branch Director s Office Professional Services Branch Road Inspections Inspections Unit Information Unit Park Inspections Transfer Payments Branch * Assumption: cost is fully loaded (i.e. includes overheads e.g. governance cost related to manager/director s office) 33

34 Case: Examples of Other Relevant Costs (cont.) Direct Program Costs Costs that are directly attributable to the program/activity Building Inspections Unit (Service Delivery Branch) Pension MGS accrues for all ministries Termination Accruals 1 week of accrued salary for each year per employee Amortization Expense if applicable Bad Debt Expense if applicable Program Support Costs Other offices that support the program/activity Plans approval unit (Service Delivery Branch) Information unit (Service Delivery Branch) Director s office (Service Delivery Branch) Building Advisors Unit (Professional Services Branch) ADM s office (Infrastructure Division) 34

35 Case: Examples of Other Relevant Costs (cont.) Ministry Corporate Overhead Costs Ministry administration costs representing organizational units supporting the entire ministry Deputy Minister s Office Policy Communications Finance and Administration Human Resources Other Ministry Costs* Other ministry services consumed by the program/activity Legal Services Audit Services Information Systems Ontario Shared Services Enforcement and Compliance Risk costs - if applicable (e.g. Financial liabilities like service guarantee, environmental liability etc.) * To avoid double counting watch for costs that have already been charged to the program 35

36 Questions & Comments Jalees Hafeez Senior Financial Coordinator, Procurement & Costing Office, Finance Branch Ministry of Transportation Tel:

37 Appendix 37

38 Other Costing Methods Standard costing where standard cost rates are established based upon historical data (or other reasonable source). This costing methodology is appropriate for repetitive type outputs and relies on ongoing comparisons with actual costs to identify any material variances Process or unit costing where products are created by flowing through a series of steps, accumulating a unit cost as they flow from one step to the next. This methodology is most appropriate for the production of homogenous goods or services, where the same process is used in the production of each output. Job order or project costing where discrete units of work are identified and used to accumulate the appropriate direct costs (via direct assignment) and indirect costs (based on a causal beneficial relationship). This costing methodology is most appropriate for organizations that produce non-repetitive outputs (e.g. engineering and construction, case management. Cost allocation by operational variable the use of an operational variable is the easiest method but is not as accurate as the methods demonstrated so far. The operational variables could include the number of FTEs, total budget dollars, program costs, labour costs or capital costs. 38

39 ABC/M Modeling Approach Data Validation Ensure accuracy of information collected Data Collection define activities, products / services Financial Analysis HR alignment to cost centers Governance cost analysis Corporate expenditure analysis (accommodations, I&IT, PC Fleet, etc) (using special software for ABC SAS) Model Final Costing Report (to be presented jointly with Program Area) Model Building Mgmt. sign-off Validation Unit Cost Total Cost of activities performed and products/services produced 39