Today’s blog post is taken directly from our latest newsletter, normally our newsletters are specifically written for our clients and ACE user audience, but this latest newsletter was a bit more generic and is focused on Environmental / Carbon Accounting. This is a very topical and political subject and there seems to be passionate people on both sides of the “Climate Change” debate. Our objective is to not get into the science or politics, but rather look at pragmatic ways an organisation can better measure and manage its environmental impact, whether that organization wishes to do this on a voluntary basis or is compelled to act via a Government imposed tax or emissions trading scheme.

But first – Some News…

We are excited to announce that BP (London) have recently engaged Pilbara Group to assist them with their ability to estimate their oil / gas platform decommissioning costs using the ACE software suite. The decommissioning of oil and gas platforms is estimated to be a US$44 billion industry over the next 40 years for the UK Continental Shelf alone, so the ability for BP to estimate both the timing and quantum of costs will be an essential component of their forecasting suite of tools. 

This work not only demonstrates the flexibility that ACE has, but also Pilbara Group’s ability to work globally – this engagement involves BP personnel and contractors in UK, US, Africa and West Indies, as well as our teams here in Australia and the USA.

And another new client is Aristocrat – one of the premium suppliers of ground-breaking technologies and services to the international gaming industry!  Aristocrat is another of our ‘global’ clients – we have been assisting them with the development of ABC models both here in Australia and in Las Vegas, USA.

Environmental / Carbon Accounting

The paper that follows this introduction is a summary of an article to be published in the Certified Management Accountants of Canada Magazine – the CMA Magazine.  The full article is an output of the CAM-I Environmental Sustainability Interest Group, chaired by Pilbara Group’s US CEO, Anthony Pember. Members of the Interest Group include Pilbara Group, Boeing, International Federation of Accountants, CMA Canada, SAS, Grant Thornton and the University of Akron.  The full paper is available to CAM-I members and CMA-Canada members.

About CAM-I

The Consortium for Advanced Management – International (CAM-I) is a research organization consisting of sponsoring companies and academia who work in collaboration to study and solve management problems and critical business issues common to the group in the areas of cost, process and performance management.  More information can be found at: http://www.cam-i.org/

The CAM-I Environmental Sustainability Interest Group aims to give value to all member participants by providing practical support on establishing an integrated strategy toward environmental sustainability management.  Through the use of CAM-I’s Body of Knowledge surrounding cost, performance and process management the interest group seeks to facilitate the understanding and measurement of environmental sustainability impacts within organizations.

Applicability to Business Analysts:

This initial CAM-I paper explores the way the Activity-Based Costing methodology can be used to support business / financial analysts within most industries.  There are also a number of other areas within CAM-I that can be used to support the reduction of an organizations environmental impact from a process, costing and performance aspect.

As an example of organizations already adopting environmental modelling, British Telecom (BT) had to undertake an extensive carbon foot-printing exercise as part of the submission to the London Organising Committee of the Olympic Games (LOCOG). 

BT had to develop a methodology to measure the carbon footprint of the project to install a unified communications network for the Olympics, a methodology which they are now applying to all their products and services.  This methodology covers emissions from the use of equipment BT installs and all related support services.  The advantage to BT is that it will make them more competitive, particularly for public sector tenders where there are increasing demands for information on carbon emissions.  This data can also be used by BT clients to assist them with identifying ways they can reduce their own emissions and provide them with benchmarking data.

Further information on BT’s work in this area can be found here: http://www.businessgreen.com/bg/news/1938794/bt-promises-green-olympic-legacy

In another example, Wal-Mart enforces carbon ratings on every one of their product lines and asks their suppliers to become “greener” or face being delisted. Wal-Mart’s supply chain network includes more than 60,000 suppliers in different sectors.

In 2009, Wal-Mart announced a sustainability index that would create a more transparent supply chain. The company asks its suppliers to answer 15 questions on the sustainable practices of their respective companies. This initiative is sending a strong message and reiterates the importance of measuring and reporting greenhouse gas emissions.

Source: https://www.cdproject.net/en-US/WhatWeDo/Pages/Case-Study-Walmart.aspx

And closer to home here in Australia, in 2010 Aldi became the first company to join Planet Ark’s Carbon Reduction Label Program in Australia, with their everyday olive oil range becoming the first products in this country to be certified by the Carbon Trust. 

Further information about this can be found here:  http://aldi.com.au/au/html/service/15854.htm or http://carbonreductionlabel.com.au/

And now for the article….

Managing Environmental Issues and Profitability

The Problem – Every organization’s operations have an environmental impact.  There are numerous pressures – strategic, regulatory, etc. – that call for responsible environmental stewardship from organizations worldwide.  There are real costs associated with addressing these issues.  Accurately quantifying the costs of environmental impacts and remediation efforts has proven to be a daunting challenge.

Why It Matters – Consumers, shareholders and other stakeholders have become increasingly aware of environmental concerns and are pressuring organizations to consider environmental issues and how they relate to an organization’s bottom line.  Understanding the costs of addressing environmental issues can help organizations make informed decisions which can minimize these costs and create a competitive advantage.

What Should You Do About It – Expand the culture of your organization by integrating environmental issues into your overall decision making framework.  Use proven strategic management tools such as activity based costing to better manage the environmental sustainability costs of doing business.

Introduction

An environmentally sustainable organization operates in a way that balances natural resource preservation and usage with its strategic and financial objectives.

Every organization’s operations have an environmental impact.  There are numerous pressures, strategic, regulatory and otherwise that call for limiting these impacts through responsible environmental stewardship.  These pressures require organizations to change their behaviour.  This change in behaviour requires a company to adjust the way it does business, and thus assigns additional costs to addressing the environmental impact.  Building an understanding of these impacts and the actual costs associated with ensuring environmental sustainability can provide an organization with a competitive advantage. 

Accurately quantifying the costs of environmental impacts and remediation efforts is challenging because they do not show up as part of traditional cost accounting models.  The true costs associated with environmental stewardship are lost as “overhead” and ignored in traditional accounting.  Understanding these costs and layering them into an organization’s decision-making processes will allow the organization to effectively and efficiently utilize its resources.  Using activity based costing (ABC) is one way organizations can better understand this competitive advantage. 

How can ABC be applied to environmental sustainability?

An emissions inventory is a form of accounting.  Accurately understanding the amount of emissions and tracking that amount over time is not unlike financial accounting performed by virtually every organization on the planet.  For this reason, tracking and managing environmental emissions such as greenhouse gases (GHGs) can be addressed in much the same way – and employ the same tools and techniques – as financial management. 

As in financial accounting, only having an “inventory” provides little insight into how particular activities are performing.  Performance indicators provide information that allow for effective management.  In order to make management decisions about resources it is necessary to understand what is driving them.  Building models that show how activities drive resources to products and services provide this insight – it shows how, why, and by whom resources are consumed.  ABC models are a proven methodology that can help a company effectively manage is GHG emissions.

ABC was originally used to track overhead costs by assigning those costs to particular activities, it is also widely recommended as a means to track environment-related costs.  ABC is a proven method to uncover “hidden” costs by directly assigning those costs to activities. The “Environmental Management Accounting Procedures and Principles” paper from the United Nations Division for Sustainable Development advocates the allocation of environment-related costs directly to the activity that causes the cost.

‘Whenever possible, environment-driven costs should be allocated directly to the activity that causes the costs and to the respective cost centers and cost drivers.  Consequently, the costs of treating, for example, the toxic waste arising from a product should directly and exclusively be allocated to that product.  Many terms are used to describe this correct allocation procedure, such as environmentally enlightened cost accounting, full cost accounting or ABC.  ABC, “is a product costing system… that allocates costs typically allocated to overhead in proportion to the activities associated with a product or product family”’ ^[1]

Simply put, ABC can help move GHG costs from the catch-all line item of “overhead” and directly assigned to particular activities and cost objects which can be analysed for performance.

Using ABC to address an Organization’s GHG emissions

The true power of the ABC methodology comes by integrating value items that are not part of traditional accounting into an ABC model.  An ABC model can combine cost, revenue, and GHG emissions into the same model.  This allows the correlation of GHG emissions to other business specific cost and performance metrics, providing a more robust assessment of environmental performance to management.

A model that includes cost, revenue, and GHG emissions would provide GHG/cost/revenue metrics that would allow organizations to measure profit and GHG emission impacts for product lines or services.  Such a model gives perspective on how the GHG footprint of particular products, services and activities relate to profit and value for the organization. 

Decision-makers will be able to know which products, services and activities have a high GHG footprint but little “value” versus those with a lower GHG footprint but high “value.”  This will enable managers to evaluate the overall impact GHG emissions have on a company’s bottom line and prioritize best practices that will yield the lowest GHG footprint with the most value.

A model such as this can be extended further to cover a company’s supply and selling chains.

How do we analyse GHG in ACE?

ACE allows unlimited items of Value to be flowed through a model and also allows additional information to be assigned or tagged to entities within the system.  GHG emissions can simply be another “cost” that flows through the model and calculates the Carbon cost on: vehicles, offices, switching equipment etc.  Activities such as field repairs have their own carbon contributions.

The cost drivers for the entities remain, so the standard ABC analysis of cost assignment remains valid.  More field repairs need more vehicle-trip carbon contributions.

This enables a GHG analysis for services, networks and business processes – built on top of the conventional cost analysis and data.

Such analysis enables the potential for evaluation of total cost – including carbon costs.  This could show that cheaper equipment might have a higher cost of carbon compared to more expensive equipment that has lower power consumption and needs fewer field repair trips. 

Moreover, the model can flow GHG Emissions down to individual products and services so that the appropriate Tax or Trade amounts can be applied for on-selling and the end consumer has full disclosure of the environmental impact of the product or service. 

The Benefits of the Approach

An ABC model for GHG emissions provides an organization with the tools to address these decisions.  The benefits of this approach include:

• identifying the GHG footprint of particular products and services;
• providing a detailed understanding of the energy consumption and emissions of particular activities within a company;
• better defining the “boundaries” of emissions for which a company is responsible;
• understanding how energy and GHG intensity effects cost and how those costs are passed from producer to consumer;
• engaging staff in targeted energy reduction steps;
• building a valuable knowledge-base to help measure and justify future corporate environmental and financial decisions;
• setting the example and expectation to  suppliers and contractors to do the same; and
• enhancing public profile and reputation as a good corporate citizen.

Over the past few weeks I have posted a couple of blogs on my top three ‘must haves’ when looking at procuring activity based costing software.  My top three were:

• the ability to report on not only the beginning and end of your model (the inputs and outputs), but all stages in-between;
• the ability to track multiple cost types through the model; and
• the ability to automate as much of the model allocation and maintenance as possible.

The first two points have been covered in the previous blogs so now it’s time to look at model automation and reducing your maintenance burden.

I mentioned a model in my previous blog – a relatively large model containing around 15,000 general ledger accounts, 3,000 personnel, a few hundred assets, about the same number of activities, around 4,000 products and about 500 services.  This model is made up of numerous regions, with both the resources and products spread throughout these locations.  As a result, there are activities that are specific to each region.

Things are going well – the model is built and balanced.  But wait, it’s time for the first update.  It doesn’t matter if your update is monthly, quarterly, or annually, the same issues will arise. 

The first step is to import your new GL resources.  Anything that is already in the model (i.e. same cost centre and account code) will be allocated as per the original model (assuming the driver isn’t changed).  And same with personnel and assets – if they were allocated in the first model, they will remain allocated.  But as you can imagine, in a model with over 15,000 GL accounts and 3,000 personnel, new cost centres are created and people come and go (and move internally!).  And there are also changes to the 4,000 products – some are removed and new ones are created.

Let’s look at the update process that needs to occur:

• new cost centres/ account codes need to be allocated through to activities (or personnel if they are employee related expenses);
• new activities need to be allocated through to products;
• new products need to be added to the current activity allocations; and
• new products need to be allocated to the appropriate services (of which there are around 500).

Assuming that there is a 5% change in your model between periods.  That equates to up to 750 GL accounts, 150 personnel, a few dozen activities, up to 250 products and a few services.  That equals a massive amount of work to do to update and balance your model.

Let’s take one simple example using a University model as an example.  The products are the Units that students take, where they take it, when they take it (which semester) and how they take it.  For example, ‘ABC 101’ at Campus X, Semester 1, and Online.  So the actual product is ‘ABC 101 (Online) – Campus X (Sem 1)’.  This is a different product to ‘ABC 101 (Online) – Campus Y (Sem 1)’ and ‘ABC 101 (On Campus) – Campus X (Sem 2)’ as each of these products incurs different overhead and direct costs.

The activities in the model are pretty standard – there are numerous corporate / overhead activities, direct student-related activities, and of course, the direct teaching and research activities.

If the update process required users to manually update the model, then for each activity, the user would need to review all the products and create the links between that activity and the applicable products. 

For example, the activity ‘Provide Student Career Counselling Services’ at the Melbourne Campus would need to be allocated to all Units taught at Melbourne using the number of students as the cost driver.  And the activity ‘Provide Post Graduate Teaching Services’ at Sydney would need to be allocated to all Units taught at Sydney using the number of post-graduate students as the cost driver. 

As there could be thousands of Units taught at each campus, the effort required to maintain these links is enormous – not only from a time needed (to complete the task) point of view, but also from a business knowledge point of view – the person doing the updating would need to know which Units to link to each activity.

Multiply the effort required by these two examples into that required for dozens of activities in numerous locations and suddenly the amount of time needed to ‘balance’ the model is massive.  It is not uncommon to hear of businesses updating their model quarterly – four weeks to collect the survey data, and six weeks to balance the model, leaving a mere 2 weeks for analysis before the cycle starts again.  The ratio should be reversed – two weeks to update and ten weeks to analyse, investigate and improve.

My solution?  Insist on software that allows you to auto-create allocation paths instead of manually having to find and link objects to create them.

Using the same example described above, all the user is required to do is create one ‘path’, that is, they allocate the activity to the ‘Teaching’ structure and then select the most appropriate driver (in this case it is the number of students on campus (as opposed to those studying online) by Campus (in this case Melbourne), or ‘EFTSL On Campus by Campus’.  The ABC software then does all the allocation work for you:

• by allocating the activity to the structure, all Units held under that structure are automatically selected as potential allocation paths, whether there are 10 Units or 10,000 below the Teaching structure; and
• the software then applies filters based on the selected driver -  only those Units that have ‘On Campus EFTSL’ and that are located in ‘Melbourne’.

As a result, out of the 4,000 Units found under ‘Teaching’, only those with On Campus EFTSL taught from Melbourne are actually selected by the software as allocation paths.  And the best bit?  It takes the user 20 seconds to create the allocation path and select the driver, and the software does all the rest.

But wait…some of you may be asking how did the software select the appropriate Units?  The student enrolment data obtained from the university provided a wealth of information other than just what the Unit names were.  It also provided the number of students taking each Unit, the type of student (Commonwealth funded, domestic fee paying, international etc), the Unit level (undergraduate, postgraduate etc), the location of the Unit (Melbourne, Sydney, Brisbane etc), the fees associated with the Unit (for both funded and fee paying students), plus a range of other information. 

All this meta data is loaded against each Unit when the Unit names are imported into the model, and this data, either in isolation (i.e. Melbourne Units) or combined (Postgraduate EFTSL undertaking Melbourne Units Online) can be automatically targeted and used by drivers with virtually no effort by the user to maintain and manage their model.

And the other bonus?  All this meta data is automatically used in the OLAP cubes and can be used to filter or customise your final reports.

So, to summarise my last three blogs…

• don’t be constrained by three modules;
• don’t be restricted to only one cost type; and
• ensure you select software that automates the majority of your model maintenance.

Trust me, these three things will definitely make your model simpler to maintain and easier to report on – things every cost modeller should be seeking!

A couple of weeks ago I posted a blog on my top three ‘must haves’ when looking at procuring activity based costing software.  My top three were:

• the ability to report on not only the beginning and end of your model (the inputs and outputs), but all stages in-between;
• the ability to track multiple cost types through the model; and
• the ability to automate as much of the model allocation and maintenance as possible.

That blog looked at the first point – unlimited modules and reports.  Today I thought I would tackle the second point – the ability to have multiple costs types in your ABC model.

So what do I mean by multiple cost types?  Imagine a relatively large model containing around 15,000 general ledger accounts, 3,000 personnel, a few hundred assets, about the same number of activities, around 4,000 products and about 500 services.

Now imagine the types of reports that users would like to get out of this model.  Because the model takes advantage of multiple modules (refer to my last blog post!), we can report on each stage of the model separately, so reports can be generated that look at the GL contribution to products, the personnel contribution, the asset contribution, and so on.  But if all those resources had the same cost type (“cost”), then we would still have difficulty reporting on the different contributions, say when looking at the Activity to Product report.  If you had assigned employee expenses from the GL to Personnel, and then Personnel to Activities, and had also assigned depreciation to Assets and then Assets to Activities, the Activity to Products report would show one big bundle of costs and it would be impossible to differentiate where the costs came from (unless you did separate GL to Activity, Personnel to Activity and Asset to Activity reports).

My solution?  Insist on software that enables you to have as many cost types as you need – like having unlimited modules, it will provide you with the utmost flexibility from both a modeling point of view as well as a reporting point of view.  So what cost types would I have?

• Expenses
• Revenues (it is hugely beneficial to be able to report on revenues separately rather than just as a negative expense)
• Personnel (both expenses and head count or full time equivalent (FTE))
• Assets

Other options may include:

• Balance sheet costs
• CAPEX
• Alternative asset costs (such as historical costs versus current costs)

You can even have different periods as unique cost types, for example Expenses (2010), Expenses (2011), Budget (2012), and so on.

What are the benefits?  Your reporting suddenly becomes super easy.  Instead of seeing just one ‘total’ cost, you get to see all the unique cost inputs as well as the total cost.

In addition, you can create drivers that are based on unique cost types.  For example:

• a CAPEX cost driver that allocates out certain costs to assets or activities based on their consumption of CAPEX (but no other cost type);
• a Revenue cost driver that allocates out certain finance activities to products based on their respective use of revenue; or
• a Personnel Cost driver that allocates out nominated GL costs to activities based on the activities’ use of personnel.

The diagram below illustrates how a specific cost and cost type (“cost”) can be tracked through a model.

So it doesn’t matter where the cost ends up, by using separate identifiable cost types, you will always be able to see exactly how that cost type has flowed through the model, and not just where it originated from.

I did some work for a client this month that I think was a little unusual in today’s world of technology, internet and the need to do things ‘now, now, now’.

Like the majority of our clients, this one was looking at developing an activity based costing (ABC) model.  But unlike most of our clients, they wanted to start with training.  Not training on how to use ABC software but basic training on what ABC was, what it could be used for, and most refreshing of all to me, what type of functionality and methodology should they pursue in their software platform to get the results that they were after.

I’ve been designing, implementing and maintaining ABC models for over 15 years and one of the more common trends that I’ve seen is that a lot of organisations tend to procure their software first and then try and ‘mash’ their requirements into the functionality that the software provides.  While a good proportion of organisations ‘list’ their software requirements in a RFP/RFT or similar, most of these requirements are quite generic in nature and unless the author(s) of the RFP/RFT are aware of some of the more sophisticated and complex functionality out there, they may not realise just what an impact a few of these may have on results that can be obtained from their finished model.

So back to the training I did this month.  After a full day of workshopping their requirements and obtaining a better understanding of what they actually wanted, I recommended Microsoft Excel.  Why?  They were small (both in budget and in personnel), this was their first attempt at ABC, and they wanted something simple.  And most importantly of all, they knew that their model would evolve once they started to understand more about the results, and therefore they didn’t want to be locked into software that, although it would satisfy their current requirements, may not satisfy them as their model methodology matured and grew more complex.

As part of the workshop that day, the client and I briefly spoke about my views on the top three ‘must haves’ when looking at procuring activity based costing software.  So here they are, in no particular order (because I think they are equally essential ):

• the ability to report on not only the beginning and end of your model (the inputs and outputs), but all stages in-between;
• the ability to track multiple cost types through the model; and
• the ability to automate as much of the model allocation and maintenance as possible.

Now, I’m not going to go through all of these today, but I thought I would delve into the first one and then follow up on the others over the next few weeks.

So why I have listed reporting, and more specifically, being able to report on all stages of your model as one of my top three ‘must haves’?  Well, I think it’s quite logical – why build a complex model that has numerous allocations in it, each representing phases or stages in your business if you can only report on the beginning and end, and maybe a couple of points in the middle.

Let me give you an example:  most typical ‘top –down’ ABC models (as opposed to standard cost ‘bottom up’ models) will involve an extract of the general ledger for a given period (month, quarter, year etc).

But depending on the size of your organisation, you may wish to then allocate employee related expenditure through to personnel or positions (which in turn get allocated through to activities) and depreciation through to assets.

Because most software restricts you to three modules (Resources, Activities and Cost Objects (Products / Services etc)), you would be required to maintain a number of ‘resource’ structures within your resource module as shown here:

You would then need to allocate salaries and wages to personnel objects and depreciation to asset objects, all within the one module.

Technically this works well – your costs are flowing through the model and will continue on to the next stage of activities.  But there are a number of limitations to this type of solution:

• What happens if you want to allocate facilities maintenance activities to the assets and have that cost ‘follow’ the asset cost through the model?  Very few ABC software products allow you to send costs backwards from the activity module to the resources module and even if it does, there are normally issues with reciprocal allocations being resolved properly.
• What happens if you want to allocate other GL costs to your personnel using their respective salary costs as the driver?  Some software products allow you to ‘phase’ or ‘sequence’ your drivers, but even if they do, you wouldn’t be able to report on salary costs by personnel as nearly all software restricts reporting by module to ‘Start Process’ costs (that is, the starting cost of each object prior to allocations’ or the ‘End Process’ costs (that is, the finishing cost of each object).  In this instance, you would be after the ‘mid point’ cost for personnel, that is, the cost after the first phase of allocations, but prior to the second phase.
• What happens if you want some users to be able to view the General Ledger component but not the Personnel allocations (due to privacy concerns)?  In this case, users would have access to the entire module and would be able to see everything.
• And let’s look at the other end of the model.  What happens if you want to cost both products and customers?  Or services and customers?  The same limitations apply.  Although it is possible to do these in the one module, it really limits the reporting available to you.

My solution?  Insist on software that enables you to have as many modules as you want – it will provide you with the utmost flexibility from both a modeling point of view as well as a reporting point of view.  So, using the example above, this would be how I would set up my model:

Alternatively, I could have the assets module as my third module followed by activities – it all comes down to how you plan to allocate your resources and activities.

From a reporting point of view, this structure not only allows me to report on each module separately, but also the specific allocations from that module to the individual products and customers – nothing is hidden or lost in inter-modular allocations.

So, as I mentioned earlier, don’t be constrained by three modules and don’t let the software dictate how your model works.  Instead, make sure that the software you select can model your business how you want to see it.  For me, unlimited modules are a must!

In the first issue of our Pilbara Group newsletter for 2011 (InterfACE), there is a great article outlining the use of string compare drivers in our ACE solution.

While the newsletter article specifically looks at the use of location tags to automate the allocation of costs to nominated areas or regions in activity based costing (ABC) models, I have found string compare drivers to be the best way to populate and allocate standard salaries to people (resources).  This methodology not only increases the understanding of the model but also greatly reduces the burden of maintenance.

In the public sector, employee salaries are normally paid at the Headquarters’ level, so Departments and Units are not as concerned with actual salaries.  Thus, clients prefer to use a standard salary with benefits by pay band.  This simplifies the model to a comfortable level of detail.

Similar to the example in the newsletter where the teaching activity has been allocated to all products taught at a certain campus by a nominated School, string compare drivers can be used to apply a standard salary (value item) to a person (resource).  For example, the driver:

“Salary” * dbo.strCompare(“Source”.”tagMenu”.”Military Rank” , “Destination”.”tagMenu”.” Military Rank “)

compares the tag “Military Rank” of the source object with the tag “Military Rank” of the destination object, and where there is a match, the destination object inherits the standard salary value item.

What is the value to you as the model maintainer or user?  String compare drivers can save both time and money.  Once the structure is created in the model, the standard salaries only need to be updated annually and/or based on inflation increases.  There is no need to constantly bring in payroll and try to match the actual salaries – a convoluted process.  And as changes occur to the resource module, the model only needs to be recalculated in order to update the standard salary.  Every time the model is calculated, the standard salaries are updated against resources, thus producing a flexible, dynamic model environment.

The screenshot above highlights how the standard salary for the rank of Commander ($156, 301) has been entered in against “O5 – Commander” in just one location in the model (in the Standard Values module).  This standard value has then been allocated out to ‘Deployable Operations’.

ACE automatically finds all resources designated as “O5 – Commander” within ‘Deployable Operations’ (this designation would occur through the use of an “O5 – Commander” tag) and applies the appropriate standard salary to those resources automatically.

As both a cost model developer and maintainer, I can highly recommend taking advantage of this type of functionality.  Not many ABC software products can do it, but it is worth its weight in gold!

Well it’s been a busy time the last few months. We have finally moved to a single brand and have removed all our other websites / brands / logos. We have removed the old acesuite.com / aceondemand.com websites as well as abmtech.com.au – we are officially trading as Pilbara Group internationally, although our Australian company (ABM Technologies) still exists everything will be under the Pilbara Group banner now.

The new website consolidates all parts of our business, the consulting side and the software side.  We still provide consulting services to cover things like Activity-Based Costing, Activity-Based Budgeting and Planning, Environmental / Carbon Accounting, Predictive Modeling and Profitability Analysis. But we also have a focus on providing tailored solutions (software and methodology) to industry verticals which include Higher Education, Telecommunications and the Military.

Our new partnership with Ovum demonstrates our commitment to the Telecommunications industry.  Pilbara Group and Ovum have spent many months developing a joint solution for the Telco industry, using Ovum’s extensive Telco experience and Pilbara Group’s ACE software and extensive technical modeling expertise.  This solution really takes advantage of the advanced functionality in ACE and really targets the core business challenges of the Telco Operator and/or Regulator. More information on this solution can be found on our website  http://www.pilbaragroup.com/Solutions/ByIndustry/Telecommunications.aspx 

We have also updated our blog, the old blog was specifically Higher Education, but the new blog will cover a wide range of industries and topics as they relate to modern cost and performance management. Through our association with CAM-I, we will bring you the latest thinking on Activity-Based Costing / Management, Environmental / Carbon Accounting, Target Costing and Organizational Transparency just to name a few. We will also discuss items of interest to our Higher Education / Telco and Military clients.

As we continue to grow we hope to add more dedicated industry solutions to target those specific problems you deal with on a day-to-day basis and the great thing about the modern internet is that it allows us to provide our expertise anywhere around the planet, using any of our staff or partners equally distributed around the globe. It’s so much more efficient and as we have discovered there are people with superior expertise outside of our local geography who can add great value to any project.

If we don’t currently have a specific solution for your industry, our software can be used by any organization of any size including current clients in the Oil/Gas and Financial Services sectors. The software is very flexible and can be easily configured to meet your unique business requirements.

If you have any questions about cost / performance management or any industry specific questions related to Higher Education, Telecommunications or the Military please feel free to send them our way and pick our brains, we are more than happy to provide our thoughts / opinions.

What does a scoping study involve?

A scoping study would normally involve an on-site visit to meet with model owners, model users, and source data managers to determine:

• What are the goals of the project?
• What will the model be used for? Immediately? Short term? Long term?
• Who will use the model? Will there be specific roles for specific users?
• What is the structure of the organisation?
• What source system data is available?
• Can data be obtained from a central source (BI platform etc) or will it need to be sourced from each individual source system?
• What data fields can be obtained? What format will each data set be in? What is the quality of the data set?
• What does the organisation want to cost? Measure? Track?
• Are there other sources of data outside of source systems such as KPIs or other metrics?
• Does the organisation want to survey staff, or do they want time to be allocated via a series of business rules?
• How often will the model need to be updated?

It is also important to obtain sample data sets from each of the major source systems.

What are the benefits of a scoping study?

Prior to the model being built, the soon-to-be model owners and users will have a vision regarding what the model will look like and how it will be used. It is not uncommon to find out that this vision differs remarkably depending on who you talk to.

So the primary purpose of undertaking a scoping study is two-fold: firstly that there is a clear (and single!) vision regarding the outcomes of the project and what the model will be able to do, and secondly, confirmation that the data that is available is able to support the model requirements based on that vision.

Where the data doesn’t support that vision, the scoping study will provide management with possible alternative solutions, or where feasible, a migration path between what is able to be incorporated into the current version of the model and that in the future – this can occur where there are other longer term projects underway, such as the implementation of a new enterprise finance or HR system etc.

In summary, a scoping study will confirm the outputs of the model prior to the start of the project and minimises any future misunderstandings regarding the model’s scope and boundaries. It also provides management with a more granular specification of the structure and capabilities of the model, and the resulting reporting functionality.

Talking about clients, many of Pilbara Group’s university clients have asked the question on how best to assign personnel time to activities within their cost allocation models. This blog will take a look at some of the options available to Australian universities.

Staff Surveys

Surveying staff is always an option, however while it may result in a detailed division of labour between key activities, it will normally require significant effort to not only collect and enter the data into a cost allocation model, but also to maintain it on an on-going basis, especially when staff move between schools, faculties and/or research projects.

For those universities who like this idea, ensure that you select software that will allow you to set up individual logins for either all staff or nominated key staff that restricts the user to only viewing a subset of the model. This not only removes the burden on model owners to collect and enter the data, but also provides a degree of privacy relating to time allocation splits. For example a Dean of a School could have a login that provides him or her with the ability to view their own School’s allocations, but is restricted from viewing any other School’s splits.

Academic Workload Profiles

Many universities have elected to base activity allocations on the academic workload profiles of their staff.

What is an academic workload profile?
 
Each university will have set a maximum number of annual ‘allocatable’ hours for a typical staff member. For the sake of this article, let’s assume that it is set to 1640 hours (approximately based on a 37.5 hour week less six weeks of holiday and sick leave and 11 days of public holidays). Each academic staff member will have a work function of ‘Teaching Only’, ‘Research Only’, or ‘Teaching and Research’. For those staff belonging to the Teaching and Research category, academic workload profiles are set to describe the split of time between Teaching, Research, Community Service and where applicable, Leadership and/or Administration.

It is important to note that the Teaching component covers a number of activities and not just the time spent performing subject delivery (including off-campus, off-shore, online and face-to-face). It also needs to encompass:

• subject / course development;
• subject / course administration and co-ordination, including arranging practicums and other industry placements;
• preparation of teaching materials;
• supervision of teaching staff;
• supervision of non-undergraduate students;
• supervision of undergraduate students undertaking research projects or fieldwork;
• preparing and marking of exams and other forms of student assessment; and
• student contact / consultation outside of the classroom.

In addition to the time spent conducting research, the Research component also needs to encompass the time spent preparing grant applications and satisfying internal and external research reporting requirements.

There are a number of ways to use academic workload information to determine activity time splits, including:

• If the academic workload profile is held in an electronic format, then it can be directly imported into the cost model, removing the need to survey individuals but still providing the benefit of individual allocations.
• Some universities have profile averages at the School and Award Level, for example:

• For those universities where this level of data is not yet available, using software that allows an iterative approach to refining the data is a good idea. As can been from a screenshot below, this would start with the entry of a university wide allocation – in this case 70% Teaching, 3% Admin, 2% Community Service and 25% Research. Faculties can then refine this split – for example, in the Faculty of Engineering there is a greater focus on research with 24% Teaching, 19% Admin, 4% Community Service and 53% Research.

• If authorized users were to click on the Faculty of Engineering, they would be able to enter School-specific percentages, below that Award Level percentages, and finally if available, individual percentage splits.
• One of the benefits of this approach is that a cost model can be rapidly developed (in around six weeks) and then refined over time. For example during the initial model build, the university-wide split may be used. During the refinement phase, faculties can be invited to add in their specific splits, followed by Schools at yet a later date and so on.

Hours Delivery Method

Another alternative is to use your costing software to calculate the effort spent on teaching and then send the remaining (unused) time to Research and Community Service etc. based on predetermined splits.

While this method still relies on an estimation of the split between Research and other activities, the time spent on teaching delivery is based on a relatively robust formula using timetable data as one of the primary inputs (including hours of lectures, tutorials, labs, practicums etc). The remaining inputs come from a series of business rules regarding preparation times (e.g. a two hour lecture requires two hours of preparation, but only 30 minutes for repeats of the same lecture), unit administration (e.g. 30 hours per undergraduate unit), and student consultation time (e.g. 1.5 hours per student per semester for undergraduates, 15 hours per post-graduate student etc). These business rules can be set at the faculty, school, year (1st year, 2nd year etc) or unit level, allowing universities to refine the calculation of delivery hours to any desired degree.

In theory this is a good alternative to using surveys and academic workload profiles, however it does rely on being able to use quality timetabling data. Without this, the basis for the Hours Delivery calculations is degraded and as such, the reliability of the remaining time available for Research, compromised.

Summary

We know from experience that many universities believe they aren’t in a position to build a robust cost model as they view the challenge of personnel allocations as a brick wall where the effort required to scale it outweighs many of the advantages gained from having a cost model.

• do not require significant effort to collect and/or maintain;
• allow universities to refine and enhance their model at their own pace, rather than waiting until such time as the ‘perfect’ data is available; and
• provide universities with results that they can start using within weeks, not months.

This post is a general introduction to Activity-Based Costing (ABC).  ABC is a powerful methodology and is the fundamental thinking underlying our Cost Wise College modeling. We have taken the basic ABC and enhanced it to provide a more sophisticated and automated model, saving time, money and manhours in building and maintaining the model.

Please enjoy John’s overview.

ACTIVITY-BASED COSTING

The roots of Activity-Based Costing (ABC) go back almost 100 years.  In 1919, the earliest know reference to ABC, Dexter S. Kimball Professor of Industrial Engineering and Dean, College of Engineering, Cornell University published Cost Finding.  Dated in terms of examples (in 1919 the fully burdened direct labor rate was 38 cents an hour), the emphasis was on activity costing and accounting for activity cost, activity output, and activity performance.

In 1971, George J. Staubus, Professor of Business Administration at the University of California Berkeley, published Activity Costing and Input-Output Accounting. Again the focus was on activity costing and accounting.

In 1988, CAM-I published Cost Management for Today’s Advanced Manufacturing: The CAM-I Conceptual Design.

The concepts included the ABC two-stage cost assignment methodology where resources (costs) are first traced/assigned to activities (work) and the resultant activity costs are then traced/assigned to products, services and customers (cost objects).

Known as the CAM-I Cross, the focus of ABC was no longer just activity costing and activity accounting but rather a tool for cost analysis, profitability analysis, and performance measurement.

SAP, SAS, IBM and other Enterprise class software providers recognized the power of ABC and acquired most of the standalone ABC software providers between 2002 and 2006, embedding ABC in their suite of products with a broader emphasis on performance excellence and management.

Today, ABC is more of a best practice for cost assignment, included in projects for product /service profitability analysis, process improvement, shared service charge back, customer profitability or even for vendor analysis.

ABC has been around for 100 years because it is aligned with the basic mission of any commercial organization: convert resources to products and services customers want to buy. Resources fund the activities (work) required to make and provide products and services to customers. Activities are the means of conversion, the so called “value add” by the business.

Improve you analytical capability. Know your ABC’s

John A. Miller

CAM-I (Consortium of Advanced Management – International) is an international not-for-profit collaborative forum of thought leaders who develop practical and effective management tools, techniques and methods to advance the way organizations manage cost, processes and performance. CAM-I has managed over three decades of industry-led collaborative research with some notable members including Boeing, Rockwell Collins, Whirlpool and Navistar Truck Group just to name a few.

We have recently formed the Sustainability Interest Group with the objective of developing practical solutions for organizations to measure and manage sustainability impacts including the relationship between greenhouse gas emissions, cost, profitability and performance. We currently have representatives from the Certified Management Accountants of Canada, International Federation of Accountants, Grant Thornton and Pilbara Group on the team.

CAM-I meets quarterly and the next three meetings for 2010 are:

• June 6-9 – Sheraton Fisherman’s Wharf, San Francisco, CA
• September 12-15 – Snow King Resort, Jackson Hole, WY
• December 5-8 – Royal Sonesta, New Orleans, LA

If you would like to attend one of these meetings please register at the CAM-I website http://www.cam-i.org/ under meetings and events, it’s free registration. Also please feel free to contribute any thoughts to this discussion thread.