Slides 13 1 determine the purpose and characteristics of rol

Determine the Purpose and Characteristics of Role Based Cost Management and Control © Dale R... Terminal Learning Objective• Task: Determine the Purpose and Characteristics of Role Bas

Determine the Purpose and

Characteristics of Role Based

Cost Management and Control

© Dale R Geiger 2011 1

All the World’s a Stage:

What’s Your Role?

What’s Your Role?

© Dale R Geiger 2011 2

Terminal Learning Objective

• Task: Determine the Purpose and Characteristics of

Role Based Cost Management and Control

• Condition: You are training to become an ACE with

access to ICAM course handouts, readings, and

spreadsheet tools and awareness of Operational

Environment (OE)/Contemporary Operational

Environment (COE) variables and actors

• Standard: with at least 80% accuracy

• Define the characteristics of Role Based Control

• Discuss dimensions of cost reporting

• Apply ABC concepts to Role Based Control situation

© Dale R Geiger 2011 3

Different Types of CMOs

Role Based vs Org Based Control

• Organization based control exploits the

reporting relationship of the org chart

• Sometimes we wish to manage and control

joint efforts where reporting relationships

don’t exist

• Organizations that support but don’t report to the supported core functions

• Organizations that come together for a specific

purpose like ARFORGEN or training

© Dale R Geiger 2011 5

Support Functions Often Do Not

Report to Core Functions

• Consider a common organization where support and core functions report on the same level

• Core functions do the major missions

• Support functions aid the core functions and only

indirectly support the major missions

© Dale R Geiger 2011 6

Headquarters

Core A Core B Support X Support Y Support Z

Budget Often Funds Each Component Separately, Creating “Stovepipes”

• Support functions are often funded independently of their roles and responsibilities to the core orgs

• Over time they can forget their supporting roles

© Dale R Geiger 2011 7

Core A Core B Support X Support Y Support Z

The Problems with Stovepipes

• Support budget is independent of support

provided

• Result: less supportive of core org customers

• Support is “free” to customers

• Result: “free” goods have infinite demand from core organizations

• Bottom line

• More cost than appropriate in support functions

• Support functions disconnected from their support

role

Solution: Role Based Control

• Goal:

• Build cost control process around the support and supported roles

• Solution:

• Create forum of interaction through AAR

structured so that support functions present costs and continuous improvements to core functions

• Requirement:

• Measurement process that assigns virtual support

“costs” to consuming core functions

Role Based Control Goal Results: A

Cost View vs Budget View

Role Based Control

• Facilitates the creation of this virtual

organization

• Key is the after action review

• Support leaders present to core leaders and senior leader

• Support leaders show results and continuous

improvement initiatives just as in the organization based AAR

Role Based Control

• Relatively few people involved in AARs

• New cost based focus on the “enterprise” mission

• Powerful insights and interactions result

• Need to determine the cost of each support

function’s cost for each core function

• This costing process has numerous choices and pitfalls

Role Based Costing Issues

• Most organizations have

• Thousands and thousands of things that could be measured

• and

• thousands of ways to measure them!

• How does one decide which things and ways

to systematize?

• New accountability relationships do NOT

necessarily require new accounting relationships

Individual Study

• Read paper: New Directions for Cost Reporting

What Costs Should be Considered? Defining

the Cost Measurement Process

• General guidance:

• It doesn’t make sense to spend a lot on costing process when the goal is to be more cost effective

• Costing can always be done more frequently

• Costing can always be done in greater detail

• Some cost views are more useful than others

• Costing can always include more components

Frequency

Scope

Flavor

Fullness

Scope Issues

• There is a point where the cost of greater detail exceeds the value of greater detail

• The goal is to reasonably approximate the cost

of things that matter

• Choices:

• Number of activities considered in the support orgs

• Organization level of the core functions considered

to be cost objects

• Complexity of allocation process

• Controllable versus non-controllable

• Total versus incremental

• Fixed/Variable vs Direct/Indirect

Fullness Issues

• Cost considerations must be bounded to

exclude elements that don’t support goal

• Example, every cost in the Army should include

an allocation from the Commander in Chief if truly “full”

• Choices:

• Allocations from Brigade, Division, Corps, etc

• Allocations from personnel, resource mgmt,

chaplain, etc

Learning Check

• What are the four dimensions of cost to

consider when defining the cost control

process?

• What two considerations govern the decision

of what to include in cost measurement?

© Dale R Geiger 2011 22

Role Based Control Needs a Consumption Based Allocation

• Traditional accounting

• Provides the elemental data on input or source

cost

• Consumption based allocation

• Pools cost data into activities

• Develops drivers based on consumption of the

activity

raw accounting data cost pool activity

Managerial Costing Terms

raw accounting data

managerial costing translation

managerially useful information

=

cost pool

method of distribution

Allocation Costing Terms

Activity Aggregation is Necessary in

Allocation Processes

• Too many things happen in a complex

organization for every activity to be

considered in allocation

• Some level of aggregation in

pooling is a practical necessity

• Deciding the activities is an important design consideration

Activity

How Many Activities Are Needed?

• Cost tradeoff story again

• Cost of the system increases with

number of activities

• Cost of bad information decreases

with number of activities

• Willie Sutton Law again

• Many pools aren’t material

• Homogeneity issues again

What is an Activity?

• Is the Army one activity?

• Or is preparing vegetables 96 activities?

Army Installation Mgmt Command Southeast Region

Fort Huachuca Garrison Installation Services Dir Logistics Branch

Thunderbird Dining Hall Preparing Vegetables

• Degree of relevant sameness

• You can’t add apples and oranges

.Unless you want to know total of fruits

• Homogeneity determines activity cost pool’s fitness for use

• Good homogeneity allows aggregation of activities

• Poor homogeneity requires disaggregation

• The average is non-representative

• Aggregated data could be misleading if

significantly non-homogeneous

• How does the number of activities affect the cost of the cost control process?

• What condition must be met in order to

aggregate activities?

© Dale R Geiger 2011 31

Learning Check

A Practical Example

• A presentation by an overhead leader in NRaD

to installation leaders

In “management” this translates to $1.5M

Intro: A good statement of philosophy

Should each of these

be an activity?

What about these activities?

These are all important, aren’t they?

Here are some more things they do… Should we hire another accountant?

First Step:

Aggregate actions actions into major activities major activities

Second Step:

Determine cost

of the activities

Third Step:

Determine the bases of allocation

Step Four: Calculate

• Task: Calculate the “old” Safety Office

overhead allocation based on labor hours

given the following usage for the following

Step Four: Calculate

• Task: Calculate the “new” Safety Office

overhead allocation using the three activity

cost pools and the driver information below:

Sixth Step: Actions

• Site renegotiated intra service agreements with tenants and stopped subsidization

• Senior leader reorganized,

redirected Code 50

• Core function leaders learned the

high costs of hazardous materials

Questions for Thought

• How much longer would this exercise have

taken you if there had been 48 activities

instead of three?

• How much more value would have been

generated by the extra time spent?

© Dale R Geiger 2011 48