Activity Based Costing - TRPC

1 ActivityActivityBasedBasedCostingCosting in the Telecom Industryin the Telecom Industry28 February 200228 February 2002 Presented by:Presented by: 2000 All rights reserved. ABC Technologies, Inc. Slide 2 Activity Based Costing in the Telecom IndustryActivity Based Costing in the Telecom IndustryIntroduction -- What ABC is notIntroduction -- What ABC is not What is Activity Based Costing :What is Activity Based Costing :!As defined by Kaplan & Cooper in 1991!Difference between ABC and Traditional Accounting!The CAM-I Standard and business modelingAABC in the Regulatory Environment:BC in the Regulatory Environment:!FDC, LRAIC versus ABCABC in Government:ABC in Government:!

2 Cost Recovery, Cost Management, Process Improvementand Outcome/Output AnalysisABC in the Telecom Industry:ABC in the Telecom Industry:!Predictive Resource Planning, Profitability Analysis, Costing and Cost ManagementWho are using ABCWho are using ABC 2000 All rights reserved. ABC Technologies, Inc. Slide 3 Financial Accounting versus ABCF inancial Accounting versus ABC There are many ways to arrive at cost as well as revenue as the Enronscandal has so vividly an accountant, cost can be anyoutflow of value .. for an economist, a cost only arises from a a real cause. John UreABC practitionersand economists thinkalike.

3 2000 All rights reserved. ABC Technologies, Inc. Slide 4 Expenditure is not the same as costExpenditure is not the same as cost Costs and expenses equal in total. Butthey are not the same thing. Expenditures are incurred when moneyis exchanged between parties. Costs arealways calculated, restated and thenassigned to products and services. ABC resolves the arbitrary CostAbsorption in traditional accounting 2000 All rights reserved. ABC Technologies, Inc. Slide 5 ABC is not ..ABC is not .. the same as financial accounting A heretic in the world of accounting Well understood by accountant In conflict with FDC, LRAIC andother Costing Philosophy as definedby economistsIS NOT 2000 All rights reserved.

4 ABC Technologies, Inc. Slide 6 Activity Based Costing in the Telecom IndustryActivity Based Costing in the Telecom IndustryIntroduction -- What ABC is notIntroduction -- What ABC is not What is Activity Based Costing :What is Activity Based Costing :!As defined by Kaplan & Cooper in 1991!Difference between ABC and Traditional Accounting!The CAM-I Standard and business modelingAABC in the Regulatory Environment:BC in the Regulatory Environment:!FDC, LRAIC versus ABCABC in Government:ABC in Government:!Cost Recovery, Cost Management, Process Improvementand Outcome/Output AnalysisABC in the Telecom Industry:ABC in the Telecom Industry:!

5 Predictive Resource Planning, Profitability Analysis, Costing and Cost ManagementWho are using ABCWho are using ABC 2000 All rights reserved. ABC Technologies, Inc. Slide 7 ABC by Kaplan and CooperDefined by Kaplan and Cooperin 1991, ABCin 1991, ABC shows what activities are shows what activities areused to produce what products and to produce what products and services. Full blown ABC business models now use Full blown ABC business models now useActivity- Based Cost as a unit of measurementActivity- Based Cost as a unit of measurementto describe the organisation activities, theto describe the organisation activities, theresources consumed by those activities andresources consumed by those activities andthe products and services generated by thosethe products and services generated by is not just a way to describe cost.

6 It isABC is not just a way to describe cost. It isalso an unimpeachable operationalalso an unimpeachable operationalmanagement methodology that enables fact-management methodology that enables fact- Based and quantity Based managementbased and quantity Based 2000 All rights reserved. ABC Technologies, Inc. Slide 8!! ResourcesResources are consumed by Activitiesare consumed by Activities!! Activities Activities are consumed by Products/Servicesare consumed by Products/ServicesActivitiesProducts&Serv icesResourcesWhat is ABC 2000 All rights reserved. ABC Technologies, Inc. Slide 9 Industry Definition: The CAM-I StandardPerformanceMeasuresResourceDrive rsActivityDriversCOSTOBJECTSA ctivityACTIVITIESR esourceRESOURCESA ssignmentAdapted from The CAM-IGlossary of Activity -BasedManagement, edited by NormRaffish and Peter Turney,(Arlington: CAM-I, 1991.)

7 Cost Assignment ViewProcessViewCost DriversResource Cost AssignmentActivity CostAssignment 2000 All rights reserved. ABC Technologies, Inc. Slide 10 The Need for ABCThe Need for ABCThe demand foroverhead activities arenot much linked tosales or productionvolume. They resultfrom: The diversity andcomplexity ofproducts, servicesand customers Quality levels Rates of neededchangeA key to understanding ABC is to understand how costbehavior truly varies in relation to other factorsCost ComponentsStages in Business EvolutionIntegratedOld-fashionedHierarch icalChanges in Cost Structure100%OverheadDirect (recurring) LaborMaterial1950s1990sDirect0% 2000 All rights reserved.

8 ABC Technologies, Inc. Slide 11 ActivityActivity Work performed within an organization. What we doWhat we doAdapted from The CAM-I Glossary of Activity - Based Management, Edited by Norm Raffishand Peter Turney, (Arlington: CAM-I,1991.) 2000 All rights reserved. ABC Technologies, Inc. Slide 12 Activity ExamplesActivity ExamplesUnloading trucksProcessing phone centre ordersTraining employeesMaintaining company vehiclesForecasting sales 2000 All rights reserved. ABC Technologies, Inc. Slide 13 Key/scan claimsAnalyze claimsSuspend claimsReceive provider inquiriesResolve member problemsProcess batchesDetermine eligibilityMake copiesWrite correspondenceAttend trainingTotalClaims Processing DepartmentThe Language of ABCThe Language of ABCS tating activities with an action verb-object-noun grammar convention creates an atmosphere for change byproviding a new way of looking at something people are already familiar with, rather than something expenseSuppliesUse andoccupancyTotal$621,400161,20058,00043 ,90030,000$914,500$600,000150,00060,0004 0,00030,000$880,000$(21,400)(11,200)2,00 0(3,900)

9 $(34,500)PlanActualFavorable/(unfavorabl e)Chart-of-Accounts ViewChart-of-Accounts ViewFrom: General LedgerActivity- Based ViewActivity- Based ViewTo: ABC Data Base$ 31,500121,00032,500101,50083,40045,00011 9,000145,50077,100158,000$914,500 Claims Processing DeptWhen managers get this kind of report, they areeither happy or sad, but they are rarely any smarter! 2000 All rights reserved. ABC Technologies, Inc. Slide 14 ABC DoesnABC Doesn t Replace the Accounting Systemt Replace the Accounting SystemAn ABC/ABM system does not replace the accounting system. It restates the samedata and adds operating relationships to more effectively support decision ((expense expense accountaccountbalances)balances)A blizzard oftransactionsAnAccumulatorOpticalLens(R eassigns Costs)Decision makersAABBCC//AABBMMMs.

10 StrategyMr. OperationsDataDataData+Data+InformationI nformation 2000 All rights reserved. ABC Technologies, Inc. Slide 15 Three Views of CostThree Views of CostFinancialViewOperational ViewStrategicViewYesterdayYesterdayToday TodayTomorrowTomorrow? 2000 All rights reserved. ABC Technologies, Inc. Slide 16 Activity Based Costing in the Telecom IndustryActivity Based Costing in the Telecom IndustryIntroduction -- What ABC is notIntroduction -- What ABC is not What is Activity Based Costing :What is Activity Based Costing :!As defined by Kaplan & Cooper in 1991!Difference between ABC and Traditional Accounting!