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Activity-based Cost Management
Andrea Anderson
SAP America
© Copyright 2000
2 0 0 0 A S U G A n n u a l C o n f e r e n c e & V e n d o r F a i r M a y 7 - 1 0 , 2 0 0 0G e o r g i a W o r l d C o n g r e s s C e n t e r A t l a n t a G e o r g i a
A M E R I C A S ’ S A P U S E R S ’ G R O U P ©Copyright 2000
SAP AG 2000 ASUGABC- Andrea Anderson/ 2
What is Activity Based Costing ?
Introduction
Business Example
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Traditional Costing
Price (cost) / piece
MaterialMaterialExpenseExpense
Direct LaborDirect Labor
Contribution MarginContribution Margin
Product A Product B
StandardMargin: 32 %
StandardMargin: 4 % Overhead Overhead
SurchargesSurcharges
MaterialMaterialExpenseExpense
Direct LaborDirect Labor
Overhead Overhead SurchargesSurcharges
SAP AG 2000 ASUGABC- Andrea Anderson/ 4
Costing using ABC
Price (cost) / Piece
Low Volume Product A High Volume Product B
MaterialMaterial Material
Direct LaborDirect Labor Direct Labor
Claims
ClaimsClaimsOrder Handling
Order Order HandlingHandling
SupportSupport
2.5 %
10 %
Standardmargin: 32 %
Standardmargin: 4 %
ABC Contribution MarginABC Contribution Margin
SAP AG 2000 ASUGABC- Andrea Anderson/ 5
Higher investmentsthrough automation &more indirect activities
Higher investmentsthrough automation &more indirect activities
GLOBAL RESEARCH quicker obsoleteness
of technology
GLOBAL RESEARCH quicker obsoleteness
of technology
CUSTOMERS demand for
better service
CUSTOMERS demand for
better serviceExternalForces
GLOBAL COMPETITION decreasing market prices shorter product life cycles
GLOBAL COMPETITION decreasing market prices shorter product life cycles
SHAREHOLDERS Quick ROI more & more short term oriented
SHAREHOLDERS Quick ROI more & more short term oriented
ProductProfitability ???
ProductProfitability ???
CustomerProfitability ???
CustomerProfitability ???
Process performance???
Process performance???
Overhead Cost Structure???
Overhead Cost Structure???
Less time to recover investments
The Dynamic Market Dilemma
SAP AG 2000 ASUGABC- Andrea Anderson/ 6
Increases
Encourages
Leads to Implies
Product CostDistortion
Cross Subsidizationof Products
Increased ProductVariety and Complexity
Many Low VolumeProduct Lines
Implications of Product Cost Distortion
SAP AG 2000 ASUGABC- Andrea Anderson/ 7
Why Activity-based Costing
Strategic Decision Making
Outsourcing Strategy
Benchmarking
Resource Planning
Reduce Overhead Cost through Process Optimization
Increase Profitability through Identification of non-profitable Products and Customers
SAP AG 2000 ASUGABC- Andrea Anderson/ 8
Why Activity-based Costing
Overhead Cost Transparency
Cost/Revenue Performance Evaluation
Increased Efficiency through Resource Leverage in Overhead Areas
Fair Cost Calculation through Source-appropriate Cost Allocation of Internal Processes
Cost of Complexity
Cost of Product and Process Changes
SAP AG 2000 ASUGABC- Andrea Anderson/ 9
Software enabledSoftware enabled
Management enabledManagement enabled
Key Success Factors for ABC Initiatives
Strategic, action oriented approach to process improvement
Change Management
Established decision making process with quantitative performance measures
No double-maintenance of parallel cost accounting systems
Full scalable tool support
SAP AG 2000 ASUGABC- Andrea Anderson/ 10
CO-OM-CO-OM-ABCABC
CO
-PA
CO
-PA
CO
-PC
CO
-PC
ABCABCProduct Cost ProductsCustomersDistribution Channels...
SAP's Comprehensive Approach to ABC
Process Process
SAP AG 2000 ASUGABC- Andrea Anderson/ 11
Simple Value Flow in CO-ABC
FinancialsFinancials
Cost Center(Resources)
Products,CustomersChannels, etc.
Process
CostDriver
Posting
ResourceDriver
$$
$$
SAP AG 2000 ASUGABC- Andrea Anderson/ 12
ABC Business Scenario
Private University
3 Cost Centers:
Student Services
IT
Print Shop
Two profit segments
Computer Science Curriculum
Accounting Curriculum
CurriculumProfitability
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Accounting4000
Functional Responsibility
AreasProfit SegmentAllocation
usingStatistical Key Figure
2000
Traditional Overhead Costing
StudentServices
IT Department
Printshop
ComputerScience
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Accounting
Cost
CenterProfit Segment
Business
Process
ResourceDriver
CostDriver
ABC Costing
Enrollment
Student Student SupportSupport
OfficeOfficeServicesServices
StudentServices
IT Department
Printshop
ComputerScience
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ComputerScience
Accounting ComputerScience
With ABC
Accounting
With ABCTuition revenue 10 000 20 000 10 000 20 000
Direct salary costs 3 000 3 000 3 000 3 000
Overhead costs 5 696 11 391
Enrollment Activity 1 580 1 128
Student Support 1 139 2 278
Office Services 6 577 4 385
Result per program 1 304 5 608 - 2 296 9 209
# of students 2 000 4 000 2 000 4 000
Result per student 652 1 402 -1 148 2 302
Costing results with and without ABC
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Activity-based Costing in the R/3 System
Master Data
Allocation Methods
Tools for Resource and Cost Assignments
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Controlling Object: Master Data For:
Controlling Objects in R/3 are used by ABC
Cost Center
Internal Order
Business Process
Production Order
Production Cost Collector
Profitability Segment
Sales Order Item
Sales Order Item
. . .
Cost Center Accounting
Overhead Orders
Activity Based Costing
Production cost by lot
Repetitive Manufacturing
Profitability Analysis
Make-to-order manufacturing
Service businesses
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Business Process Definition
Business procedure within an enterprise that uses resources and can involve activities from a number of different cost centers in a controlling area.
When executing a business process, activities can be utilized from several cost centers of a controlling area
BusinessProcess
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Output Measure Master Data
. . .
Output Measure Identifier
No. of Output Measures
Process
Process Driver
ONE!
Activity type
varies
Master Data for the Activity type is maintained separately from the cost center.
Master Data for the Process Driver is maintained within the Process .
Cost centerProcess
Cost center Process+
Driver
ActivityType
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CostAssignment
CostAssignment
Activity-based Management
Products, CustomersChannels..
CostAssignment
Financials
Pu
sh A
pp
roac
h Pu
ll Ap
pro
achFinancials
Pull quantity
Pull quantity
CostAssignment
Products, CustomersChannels..
Cost center
Process
(Resources)
Cost center
(Resources)
Process
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PUSH versus PULL Approach
PUSHPUSH PULLPULL
Implementation
Process Optimization/Flexible Budgeting
Fair Costing
•Simple configuration•Set-up of Process/ Allocation Cycles only
•No Quantity Structure•No backflushing capability•No capacity view •No leveraging of resources
•Costs not assigned according to actual usage of resources•Costs of idle capacity spread across products and customers
•More detailed configuration•Set-up of Process/Structured Processes/Templates
•Quantity Structure•Backflushing capability •Identify idle capacities•Leverage resources during planning
•Prices calculated based on capacity•Costs of idle capacity not spread to products and customers
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Process Structures
Curriculum
Process GroupsProcess Groups Structured ProcessesStructured Processes
Copy Cost Center
Copy Cost CenterIT SupportIT Support
ProcessStudent Support
ProcessOffice Services
ProcessOffice Services
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Tools for Resource Cost Assignment
Cost Object
Process Cost Assignment
Profitability Segment
Resource Cost Assignment
Cost center Assessment
Direct Activity Allocation
Indirect Activity Allocation
Target = Actual Activity Allocation
Distribution
TemplateProcess
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Identifying Templates for Resource Assignment
Resource Cost Assignment
Cost center
Process
TemplateHow much should
be assigned toeach Process?
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Template Concept - Resource Assignment
Quantities consumed:Resources/Driver:
ProcessOffice Services
Print Shop Activity Type: Print Quantity = 300 hours
Cost center
Print Shop Activity Type: Copy Quantity = 500 hours
Cost center
IT Department Activity Type: Maintenance
Quantity = 100 hours
Cost center
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Tools for Process Cost Assignment
Cost Object
Process Cost Assignment
Profitability Segment
Resource Cost Assignment
Cost center
Process
Assessment
Direct Activity Allocation
Indirect Activity Allocation
Target = Actual Activity Allocation
Template
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Identifying the Template for Cost Objects
Cost Object
Process Cost Assignment
Process
TemplateHow much should
be assigned toeach Profit Segment
or Cost Object?
Profit Segment
SAP AG 2000 ASUGABC- Andrea Anderson/ 28
Template Concept - Process Assignment
Profitability Segment:AccountingCurriculumQuantity =
200
Quantity = 500
Quantity = 2000
Processes: Quantities consumed:
ProcessStudent Support
ProcessOffice Services
ProcessEnrollment
Cost Driver:
Number
of Students
Number
of Calls
Number
of Students
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Template Concept - Process Assignment
Cost ObjectCourse ManualQuantity =
200
Quantity = 500
Quantity = 2000
Processes: Quantities consumed:
ProcessAdmininstration
ProcessOffice Services
Process Curriculum Development
Cost Driver:
Number
of Pages
Number
of Calls
Number
BOM items
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Origin of Process Driver Quantities
Template
Routing
Product Costing
Bill of Materials
Material Master Data
wewrerretrtrtrwrtdsfasadfdsafdasfgdfggadgf
LIS
# BOM Items
Lot-size# Purchaseorders
Weight
# Work Centers
CO-PA
# Value fields
How much shouldbe assigned to
each Profit Segmentor Cost Object?
SAP AG 2000 ASUGABC- Andrea Anderson/ 31
Formula-2
......
Process TemplateProcess Template
CurriculumDevelopment
Active
......
QuantityPlan Actual
ActivationPlan ActualObject
Formula-1
......
Active
......
Calculate the number of pages based on Bill of Material item 1 X Numberof Manuals Planned
Formula-1 Formula-2
Dynamics of the Process Template
OfficeServices
Calculate the number of pages based on Bill of Material item 1 X Numberof Yield Confirmed
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3200 Pages
......
Process ConsumptionProcess Consumption
CurriculumDevelopment
Active
......
QuantityPlan Actual
ActivationPlan ActualObject
4000 Pages
......
Active
......
Number of Manuals: 40Sheets of paper: 100
Formula-1 Formula-2
Applying the Process Template
OfficeServices
Number of Manuals: 32Sheets of paper: 100
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Formula-2
......
EnrollmentProcess
Active
......
QuantityPlan Actual
ActivationPlan ActualObject
Formula-1
......
Active
......
Calculate the number students enrolled based on customer numbers in Division 01 last year
Formula-1 Formula-2
Dynamics of the Process Template
Student Services
Calculate the number students enrolled based on customer numbers in Division 01 this year
Process TemplateProcess Template
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225 Students
......
EnrollmentProcess
Active
......
QuantityPlan Actual
ActivationPlan ActualObject
200 Students
......
Active
......
Number of Studentsin 1999 for AccountingCurriculum: 200
Formula-1 Formula-2
Applying the Process Template
Student Services
Number of Studentsin 2000 for AccountingCurriculum: 225
Process ConsumptionProcess Consumption
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Template
Plan Qty. Actual QtyObject Plan Activation
Actual Valuation Event
What process applies?
What process applies?
How much of the process applies?
How much of the process applies?
When does theprocess apply?When does theprocess apply?
Does the process apply?Does the process apply?Does the process apply?Does the process apply?
The Reusability of the Template
ChemistryCurriculumIT
CurriculumAccountingCurriculum
ActualActivation
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For which process and at what costs does a cost center
perform?
ABC Reporting
Which processes are necessary?
What are the costs of a cost object?
What is the profitability ofa certain market segment?
What are the process costs?
Who consumes the process?
SAP AG 2000 ASUGABC- Andrea Anderson/ 37
Simulation of ABC Data
Simulation of ABC Data using R/3 and OROS (ABC Technology)
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Cost effectively experiment with ABC
Quickly build models for strategic cost management
Simplify and accelerate Integrated ABC setup
Conduct what-if analyses for scenario playing
Explore, review, and analyze resource requirements
OROS for Analytic ABC
SAP AG 2000 ASUGABC- Andrea Anderson/ 39
Modeling Measurement
Resource costs & driver data
Master data & cost assignment structures
Integrated ABCAnalytical ABC
PC / PA Reporting
Cost Accounting
Learning
Rapid Prototyping
Job Costing
Refinement
Simulation
Resource costs & Aggregate driver data
The Power of the Integrated R/3-OROS ABC Solution
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