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Successfully implementing Managerial Cost Accounting -- in theory and practice

Successfully implementing Managerial Cost Accounting -- in theory and practice. Florida Institute of Technology, College of Business, ABTA Institute 2009 Conference on Improving Government Accountability and Transparency May 18, 2009. Welcome, introductions and expectations. Instructor

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Successfully implementing Managerial Cost Accounting -- in theory and practice

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  1. Successfully implementing Managerial Cost Accounting -- in theory and practice Florida Institute of Technology, College of Business, ABTA Institute 2009 Conference on Improving Government Accountability and Transparency May 18, 2009

  2. Welcome, introductions and expectations • Instructor • Participants • Expectations? • Specific questions? • Logistics/Administration

  3. Learning objectives To familiarize participants with key managerial cost accounting concepts and terms and share a variety of successful approaches to planning and implementing such a system.

  4. Today’s agenda 9:15 – 9:30 Welcome & Introductions 9:30 – 10:30 Key Concepts & Terms 10:30 – 10:45 Break 10:45 – 11:45 Best Practices: Implementation, Use and Integration 11:45 – 12:00 Lessons Learned & Wrap-up

  5. Setting the context for ABTA – Government environment • Disconnect between budget, costs and results • Federal mandates • “Performance budgeting” • Performance Accountability Reports • PART – Performance Assessment Rating Tool • Managerial Cost Accounting Standards (full costing requirement) • State & local efforts • GASB – “Service Accomplishment Reporting” • Performance Management Commission • Severe budget constraints • Tools needed to understand impacts and cost/benefit of budget decisions • “Chief Performance Officer” • Obama Administration will clearly continue focus on improved transparency and visibility into results

  6. Activity Based Total Accountability (ABTA) will support three fundamental functions for government Improved visibility into what government does and how much it costs; common managerial framework; connection of all costs to specific, measureable activities. Accountability Budgeting Policy-making Increased visibility into performance budgets by displaying individual activities and reconciling total costs to budget. Basis for prioritizing spending & aligning with legislative priorities; identifying areas for improvement; foundation for realistic performance target setting; benchmarking.

  7. ABTA Tables provide starting point in meeting objectives • Costs and benefits of providing services. • Work performed in the delivery of services. • Relative efficiency and effectiveness of service delivery and services.

  8. What is managerial cost accounting?? The use of accounting information by managers within organizations, to provide them with the basis to make informed business decisions that will allow them to be better equipped in their management and control functions.

  9. What is managerial cost accounting?? In contrast to financial accounting, managerial accounting information is: • usually used by internal management, instead of publicly reported; • forward-looking, instead of historical; • computed using extensive management information systems, instead of focused on complying with accounting standards;

  10. SSFAS #4 – Managerial Concepts and Standards for the Federal Government • Identifies the purpose of managerial cost accounting and how it should be implemented • Aimed at providing timely and reliable information on the full cost of federal programs, their activities, and outputs.

  11. Five standards set forth fundamental elements of managerial cost accounting • Accumulate & report costs of activities on a regular basis for management information purposes; • Establish responsibility segments to match costs with each segment’s outputs; • Report the full costs of government goods and services in general purpose financial reports; • Recognizing the costs of goods and services provided among federal entities; and, • Use appropriate costing methodologies to accumulate and assign costs to outputs.

  12. Five standards set forth fundamental elements of managerial cost accounting Key TermsSSFAS#4 Standard • Accumulate & report costs of activities on a regular basis for management information purposes; • Establish responsibility segments to match costs with each segment’s outputs; • Report the full costs of government goods and services in general purpose financial reports; • Recognizing the costs of goods and services provided among federal entities; and, • Use appropriate costing methodologies to accumulate and assign costs to outputs. Cost Accumulation, Responsibility Segment Full Cost Cost Assignment

  13. Cost Accumulation Cost Accumulation refers to the collection of cost data in some organized way through an accounting system.

  14. Cost Accumulation - examples • Accumulate by traditional organizational lines: • Departments & Agencies • Divisions • Cost Centers • Program Offices • Accumulate by business process • Core processes • Activities • Accumulate by outputs and/or outcomes • Products/services • Mission goals • Etc..!!

  15. What is a “responsibility segment”? • A responsibility segment is a component of a reporting entity that is responsible for carrying out a mission, conducting a major line of activity, or producing one or a group of related products or services. • Usually possess the following characteristics: • Their managers report to the entity’s top management directly; • Their resources and results of operations can be clearly distinguished from those of other segments of the entity. • Requirement: Establish responsibility segments to match costs with each segment’s outputs;

  16. What are “outputs” in the context of SSFAS #4? • Requirement: Establish responsibility segments to match costs with each segment’s outputs; • Outputs: The “quantity of services provided” • Outcomes: The “results of those services” These can (and should) be integrated to provide a balanced picture of efficiency (outputs) and effectiveness (outcomes)

  17. What is “full cost”? • The full cost of an output produced by a responsibility segment is the sum of: • The costs of resources consumed by the segment that directly or indirectly contribute to the output; and • The costs of identifiable supporting services provided by other responsibility segments within the reporting entity, and by other reporting entities. Requirement: Report the full costs of government goods and services in general purpose financial reports; Requirement: Recognizing the costs of goods and services provided among federal entities; and,

  18. Direct and Indirect Costs Direct Costs: Costs that are related to a cost object that can be traced in an economically feasible way. Examples: direct labor costs, reimbursable costs Indirect Costs: Costs that are related to a cost object but cannot be traced in an economically feasible way. Indirect costs are allocated to the cost object using a cost allocation method. Examples: administrative areas

  19. Direct Costs Output/ Cost Object Indirect Costs Cost Assignment Requirement: Use appropriate costing methodologies to accumulate and assign costs to outputs. Cost Tracing Accumulated Costs Cost Allocation

  20. What are appropriate cost assignment methods? • Cost assignment referred to the methods used to associate costs with outputs. Valid methods for cost assignment include: • Direct costs: direct assignment/tracing • Indirect costs: cost allocation techniques • Cause-and-effect basis; • Reasonable and consistent basis.

  21. Direct tracing • Applies to resources directly used in the production of an output. • Often minimizes distortion from other types of cost assignment methods (e.g., survey processes) • Can be costly • Examples: Direct time coding to activities on a T&A

  22. Cost allocation techniques: assigning indirect costs to cost objects • Cause-and-effect basis • Based on causal linkages between resource costs and outputs • Reasonable and consistent basis • If not economically feasible to use cause-and-effect, can use this basis • Based on relevant common denominator such as: • % or # of FTE, • Square footage of office space, • % of direct costs consumed within a segment.

  23. Traditional cost accounting methods • Project • Process • Standard • Activity-Based Costing.

  24. Project cost accounting • A method that accumulates and assigns costs to discrete projects. Each project has a number or code to accumulate costs. • Resources spent are identified with the project code. • Costs are traced to individual projects to the extent economically feasible. • Costs that cannot be directly traced are assigned to projects either on a cause-and-effect basis or reasonable allocation basis.

  25. Process cost accounting • A method that accumulates costs by individual processing divisions (or organization divisions that perform production processes) • The output of a processing division either becomes the input of the next processing division or becomes a part of the end product.

  26. Standard cost accounting • Carefully predetermined or expected costs that can be applied to activities, services, or products on a per unit basis. • As work is being done, actual costs incurred are compared with standard costs for various tasks or activities to reveal variances.

  27. Tracing Costs to Cost Objects Harley-Davidson used a three-part cost classification in its manufacturing facilities - direct materials, manufacturing overhead, and direct manufacturing labor. Some time ago, a task force analyzed how the product-cost structure compared with the administrative costs required to “collect, inspect, and report” data in its accounting system.... Product Cost Effort in Makeup Collecting Data Direct Materials 54% 25% Manufacturing Overhead 36 13 Direct Manufacturing Labor 10 62 Anything wrong here??

  28. Hit the Target, Not the Bullseye

  29. Traditional Cost Accounting - Relevance Lost? • Indirect costs are typically allocated on an “across-the-board” or arbitrary method • With growth of automation over the last 30 years, Indirect costs are now more significant • Cost distortion - “The Peanut Butter Effect.”

  30. The Peanut Butter Effect... A costing approach that uniformly assigns (“spreads”) the cost of resources to cost objects (such as products, services, or customers) when the individual products, services, or customers use those resources in a non-uniform way.

  31. Example of Peanut Butter Effect Entree Dessert Drinks Total Don Sarah Betty Ed Total Average $ 11 $ 20 $ 15 $ 14 $ 60 $ 0 $ 8 $ 4 $ 4 $ 16 $ 4 $ 14 $ 8 $ 6 $ 32 $ 15 $ 42 $ 27 $ 24 $108 $ 27

  32. The Peanut Butter Effect Example: “General Management & Administration” Costs Service # of FTE % of FTE % of GM&A Cost A 8,263 60% 60% B 3,879 28% 28% C 1,740 12% 12%

  33. Activity-Based Costing provides a new layer of information for management insight OLD WAY Activity-Based Costing Resources Resources • Resources are assigned to work activities and outputs • Provides visibility into the cost of work performed • Provides visibility into the causes of cost • Resources are directly assigned to outputs • Indirect costs are allocated • No visibility into the work performed Business Processes/ Activities NEW WAY Products/Services/ Customers Products/Services

  34. New visibility into the full costs of activities and outputs Two Views of Cost – Fisheries Program Example General Ledger View Activity-Based Costing View • ABC Drivers • % Time • Square Ft. • Direct Tracing Personnel compensation$300,000 Personnel benefits25,000 Travel and transportation of things55,000 Communications, utilities, & misc.20,000 Contracts 90,000 O & M of equipment60,000 Supplies and materials 40,000 Total $590,000 Mark/tag species populations $110,000 Harvest species samples 90,000 Acquire water rights for restoration/ recovery operations 120,000 Maintain inter-agency/nation agreements 80,000 Survey endangered species populations 190,000 Total $590,000 Reports WHAT is spent Expense categories Reports HOW it is spent • Processes

  35. Understand the Drivers of Cost in Your Organization – notional example • Provides insight into what causes an activity to occur Activity View ABC Drivers Outputs Atlantic Sturgeon $25K 55,000 Tags 110,000 Tags 55,000 Tags Mark/Tag Species Populations $110K American Shad $60K Brook Trout $25K

  36. ABM is Management’s Use of the ABC Information to Improve Processes OLD WAY “One Stop” Travel Claims Processing: $320K Travel Claims Process: $750K NEW WAY FTE: 10 ; Total Cycle Time: 24 Hours; “Live” Time: 2 Hrs. FTE: 21; Total Cycle Time: 46 Hrs.; “Live” Time: 4 Hrs.

  37. Break!

  38. Case Studies: Best practices in implementing managerial cost accounting • Planning: Federal Highway Administration • Use: US Marine Corps, Internal Revenue Service • Integration: US Fish & Wildlife Service

  39. Best practice: planning your implementation • Begin with the end in mind! • Vision • Requirements • Change management • CAM-I ABM Design Framework as starting point

  40. Understanding business objectives Identify need for managerial cost accounting information across the organization Assessing readiness for change Identifying implementation approach Example: Potential pilot area(s) Define expected outcomes Identify business functions to be modeled Define level of detail Translates into assessment and planning around the following key components

  41. Three key assessment tools provide the way forward Identified Management Needs Assessment Factors Assessment Tools Situational Assessment Business Purpose Targeted Applications Situational Profile Influencing Factors Change Readiness Assessment Change Readiness Profile Current Environment Implementation Readiness Change Capacity Program Selection Profile Program Selection Assessment Impact Size Complexity

  42. Situational assessment – sample questions Assessment Factors Business Purpose Targeted Applications Influencing Factors

  43. Situational Profile A compelling need exists in my organization to improve the following: The Situational Profile provides respondents with possible needs for managerial cost accounting in their organization. It will assist the organization in aligning cost accounting outcomes with business objectives. In this example, this bar chart shows, in descending order of number of responses, where the respondents believe the greatest need for cost accounting exists.

  44. Change readiness assessment – sample questions Assessment Factors Current Environment Implementation Readiness Change Capacity

  45. Change Readiness Profile Change Readiness Question Average A spider graph, representing the average of each change readiness assessment question, shows where the organization, overall, falls on the readiness spectrum for a cost accounting implementation-- 1 being low risk and 5 being high risk. Each question is averaged and then plotted on this single aggregate graph. This provides a high-level assessment of an organization’s comprehensive risk profile and highlights areas for risk mitigation.

  46. Program Selection profile Assess potential pilot candidates through the use of a program selection profile. • Data Availability: reliable baseline financial and performance information is available • Culture: willingness and readiness to implement organizational change • Program Assessment Rating Tool results: assessment score by OMB PART tool • Impact: it will provide a quick “success story” for the effort • Urgency: Program Office or Program has a pressing need for the information • Size & Scope: FTEs, costs, and/or locations • Program Complexity: complexity of business processes, outputs, and/or customers

  47. Recommend Implementation Strategy • Implementation Strategy • Business Purpose • Influencing Factors • Cost Accounting Approach • Risk Mitigation Plan • Communications Plan • Timeframes Identified Management Needs Situational Profile Change Readiness Profile Program Selection Profile

  48. Case Studies: Best practices in implementing managerial cost accounting • Planning: Federal Highway Administration • Use: US Marine Corps, Internal Revenue Service • Integration: US Fish & Wildlife Service

  49. The ABM Toolkit • Pareto Analysis • Flowcharting • Activity Analysis • Value Analysis • Root Cause Analysis

  50. The ABM Toolkit 1. Pareto Analysis • Separates the MAJOR few from the many • Arranges information according to priority • Determines importance using information, not perception • Does not always give the whole picture Note: Figures for illustrative purposes only

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