Cost management training section3

Army’s overall objectives Change enablers o support Cost Management The process of Cost Management and how it differs from Budget Management Section 2: Cost Model Components Defining the

Section 1: Cost Management Overview

What are costs and why is managing costs important?

Army’s overall objectives

Change enablers o support Cost Management

The process of Cost Management and how it differs from Budget Management

Section 2: Cost Model Components

Defining the various cost objects (which replace APCs/JONOs) within a Cost Model, e.g organizations,

products, services, jobs, etc.

Understanding decision points of where to capture information

Section 3: Cost Flow Methods

The difference between cost capturing, allocations, and assignment

Section 4: Cost Model Build

Reflecting organizational structures

Replacing APC/Jonos

CM 101 Training

Cost Flow Overview

Capturing costs is utilized in order to reflect:

• Budget Execution

• The full costs of organizations

• The full costs of products/services

• The full costs of customers

• How organizations can influence the costs by their behavior (output consumption)

Cost Flow Overview

Full Cost

Organizations

Full Cost Product/Services

Full Cost Customers

- Ready Unit

- Capability

Mission Commander

- Division / BCT

- MOS

- FMS

- Tenants

in the Cost Model

Model

Cost Flow Methods

Full Cost

Organizations

Full Cost Product/Services

Full Cost Customers

- Ready Unit

- Capability

Mission Commander

- Division / BCT

- MOS

- FMS

- Tenants

There are three types of Cost Flows:

• Direct Charge – the primary or initial posting

• Assignments – secondary or follow-on movement based on quantity consumption (has Rate x Qty consumed)

• Allocations – secondary or follow-on movements that are value based ($ or # converted to a % split)

Assignment vs Allocation

Assignment:

The establishment of relationship between a sending cost object and a receiving

cost object based on a quantity (with a rate for valuation) being consumed by

the receiver

Requires:

• Activity Type or Business Process quantity as sender

• A rate associated to valuate the quantity flow

• Mechanism for capturing or imputing the sender quantity

Allocation:

The establishment of a relationship between a sending cost object to one or more receiving cost object(s) based on % (even if a quantity is utilized to generate a %, e.g # FTEs)

10 @

8 EE’s

Order 1

160 Hrs

50 %

Assignment vs Allocation

Assignment:

Pros:

• Direct relationship

• Real-time information for analysis

• Reduces systemic burden during period close

• Dynamic (can change as the environment changes)

• Capacity Mgmt (resource utilization)

• Typically less accurate

• High demand on system resources during period-end close

• Static assumption set often infrequently updated

• As the Army’s Management Accounting framework matures over time, utilization between cost allocation versus assignment methods will shift

• Value-based: Cost allocations utilizing tracing factors that result in the allocation of dollars between cost objects, e.g % split or quantitative

information such as # FTEs The result is the cost flow of dollars only Supports current costing with limited management control and projection capabilities

• Quantity-based: Cost assignments utilizing the quantity of goods and services provided between cost objects, e.g # Hrs, SQFT, CPUMINS, etc The

result is the flow of quantities between cost objects with a corresponding monetary valuation Therefore both quantities and dollars flow Supports current costing with management control and projection capabilities

Capturing Costs

Today:

 Not All Cost Allocated

 Focused on Direct Obligation by Appropriation

 Assigned / Mapped to High Level Programs (e.g MDEP)

 Allocation Done Differently by Organization

Tomorrow:

 Standardized Process

 Will Use Acceptable Cost Assignment/ Allocation Practices

 Will Provide Capability for Multiple Cost Assignments/Allocations

 Allocations Only where Direct Assignments not Used

• Assignments utilize a generic basis providing both a rate &

quantity consumed (e.g SQFT)

• Allocating utilizes a value basis (either amount or value) to

calculate a percentage split

Lesson 2 Capture Output Costs

Objective(s):

To understand which outputs are captured, how the outputs are classified (quantitative or qualitative) and how these outputs are captured

Capture Output Costs

Overview

In addition to capturing cost, non-financial quantity information is necessary to

support Cost Management

Non-financial quantity information can be:

Quantitative, e.g # of helpdesk tickets, # students

Qualitative, e.g average # days to close helpdesk ticket, % Completion Rate

Capture Output Costs

Decisions

Does the output quantity support the cost by BCT/ARFORGEN? HQ Need? or Field

product/services?

(e.g ammo used for training, # soldiers)

Is the output quantity currently used by scheduling/operational managers on a timely

basis?

Can an output change the behavior of an organization/individual to be more efficient and

effective (e.g # cancelled course registrations in ATAARS) Are output quantities used for justifications and/or requests for funding?

If it supports cost management – efficiently & effectively - then considered

Capturing Output Costs Posting Data

Output Costs are captured as SKF’s, Activity Types, or Business Processes

Entry Methods:

Interface: Direct communication from legacy system to ERP

Load Spreadsheets: Taking an output of an existing legacy system (command and control), formatting appropriately, and processing in ERP

Direct Entry: Currently captures manually or taking a low volume output from existing system and posting

an aggregate of the values in ERP

ACT TYPE

ACT

SKF #

Capturing Output Costs

Analysis

Understanding the dollar amount of unit provided, based on number delivered Cost/Per

Understanding the relationship between Resource Capacity to Output generation (e.g 3 Hrs: 1

Capturing Output Costs Analysis

– Supports Comparative Analysis between sites, tasks, types of work, groups of resources to identify best practice vs inefficiencies

– Allows for realization of trade-offs between delivery and resource consumption

2ABM0014: LEGAL (ILO)

Capture Output Costs Analysis

Training Event (UIC)

10 rounds

at $50

Qty is valuated with rate

2ABM0065: AMMO SUPPLY

Ammo 9400.AMMO $500 10 EA

AMMO FIRED

WARS

AMOUNT AND QUANTITY ARE THE OUTPUTS OF THIS

Lesson 2 Wrap Up

• Output measures can be used to justify resources, to capture total costs, to influence behavioral changes, to retain operation tasks completed daily.

• The output measures facilitate both qualitative and quantitative measures This can also

be viewed as efficiency and effectiveness:

– How efficiently are resources utilized (e.g how much is expended to close a ticket in 4 hrs, 8, hrs, 2 days?)

– How effectively is the product/service provided to the customer? (e.g how long does it take for me

to close a ticket)

Lesson 3: Summary/Key Take-Away’s

Objective(s):

What is Cost?

“Cost is a monetary measure of the sacrifice associated with:

• expending resource functionality to achieve a specific objective, or

• utilizing resource output required to achieve a specific objective, or

• the provision of resource functionality or resource output while not using it.

Consumed

Effectively & Efficiently Produce Outputs Ensure Strategic Objectives are Effectively

dg et

C on str uc t

• ARFORGEN Synch Board

Need to Understand What the Resources Buy – The Army Product

Available / Deploy Train / Ready

• Civ P erso

nnel Svcs

• Mil E duca

tion / Trai ning

• Mil P erson

nel S vcs

• Prof. Deve

lopm ent E duc.

ing, & Con tract ing

Nat ional Reso urce Svcs

• Healt h Svc

s

• Insta llatio

n / Fa cility Mgt

Readiness

Human Capital

Cost Management Focus

COST MANAGEMENT FOCUS

Products Services:

Courses Services Support Programs Tests

Work Performed by Organizations (Cost Centers) to Produce Products and Services for Customers

Managing Business Operations Efficiently & Effectively Through the Accurate Measurement & Thorough Understanding of the "Full Cost" of an Organization's Business Processes, Products & Services in Order to Provide the Best Value to

Customers .

Cost Planning

Cost Analysis

Cost Accounting

Cost Management Process

Cost Management

• ERP Applications e.g (GFEBS, LMP, GCSS)

• Business Warehouses

• Process Improvement (Lean 6-Sigma)

• Integrated Business Design

Policy

How To’s

Army Cost Culture Change

“Making a Square a Circle”

• Budget-focused

• Spend rate driven – inputs

• Performance objective -99.9%

obligated

• Free goods has infinite demands

•Cost and performance focused

•Results driven - output & outcome

•Performance objective – resource consumption optimization (efficiency & effectiveness)

•Use what is necessary to obtain the objective

• Develop/Recruit Analysts

• Enhance Training

• Performance Focus (NSPS)

Enhanced Ability to Capture Cost

ERP (SAP)

Cost Collectors

• Support to Olympics

Army Cost Design

Full Cost

Organizations

Full Cost Product/Services

Full Cost Customers

- Ready Unit

- Capability

Mission Commander

maturation over years

Costing Conceptual Design

Where the information is entered, stored, used, and

Cost Planning

Cost Controlling

Cost Analysis

Cost Accounting

Cost Management Process

How the information is entered, stored, used, and

presented What/Why information is entered, stored, used, and

presented

Many Types Costs

• Direct costs— A cost such as labor, materials/supplies that can be directly traced to producing a specific

output of an organization, product/service.

• Indirect costs – A cost that cannot be directly traced to a specific organization, product/service output

• Funded Costs The value of goods or services received because of an obligation of funds (obligation

authority), by the organization performing the work

• Unfunded costs A cost that are financed by another organization's or activity's appropriations

• Variable Costs A cost that changes with change in output

• Fixed Cost A cost that remains the same regardless of the change in output.

• Recurring Cost A cost that is incur repeatedly for each organization and/or product/service produced

• Non-Recurring Cost A cost that is unusual and unlikely to occur again

• Avoidable Costs A cost incurred on an object that will no longer be incurred due to a decision to change

the output

• Unavoidable Cost A cost incurred on an object that will be incurred regardless of the decision to change.

• Common Understanding of Types of Cost is Necessary for Informed Decision Making

• Each Decision Should be Focused on Only Relevant Cost that Impact the Decision

Cost Objects

• Cost Center - A cost center is a responsibility center that incurs costs and has a manager who is accountable for those costs.

• Activity Type - An Activity Type is a cost object that represents a group of resources within a Cost Center These resource groups have capacity and a unit of measure such as: labor hours, machine hours, square footage, etc Activity Types are consumed and utilized to the produce the products and services of the organization.

• Cost Element - A Cost Element is the lowest level component for classifying costs and revenues (as negative costs) of a resource and indicates the category/type associated with a posting (e.g allocation type, revenue, expense)

• WBS Element - WBS elements are activities in the Project used for planning and updating cost data Some examples of WBS Elements are: Tasks, Partial tasks that are further subdivided, and work packages.

• Order - Orders are cost objects used to plan, collect, monitor, and settle the costs of specific jobs and tasks Orders are used to monitor the costs

of short term projects and event/job costing.

• Business Process - A business process is a cost object used to capture costs of cross-functional (cost center) activities

Other:

• Statistical Key Figure - A Statistical Key Figure is a piece of information about the cost object it is assigned to, e.g # FTE for a cost center, # telephones, etc.

Cost Management Enables Optimization

Providers/Inputs Outputs/Consumers

HQDA

Military Pay Contracts (CLS)

Army Service Component Commands

Direct Reporting Unit

Direct