Determine the Purpose and Characteristics of Role Based

Determine the Purpose and Characteristics of Role Based Cost Management and Control Dale R. Geiger 2011 1 All the Worlds a Stage: Whats 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 dont exist Organizations that support but dont 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 Headquarters Core A Core B Support X Support Y

Support Z Core functions do the major missions Support functions aid the core functions and only indirectly support the major missions Dale R. Geiger 2011 6 Budget Often Funds Each Component Separately, Creating Stovepipes Support functions are often funded independently of their roles and responsibilities to the core orgs

Core A Core B Support X Support Y Support Z Over time they can forget their supporting roles Dale R. Geiger 2011

7 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: Solution Create forum of interaction through AAR structured so that support functions present costs and continuous improvements to core functions

Requirement: Requirement Measurement process that assigns virtual support costs to consuming core functions Role Based Control Goal Results: A Virtual Organization Headquarters Core A Core B AAR

X Y Z X Y Z Where support functions are now part of each core team Cost View vs. Budget View

Headquarters Headquarters Core A Core B Core A Core B Support X

Support Y Support Z AAR X Y Z

X Y Z Dale R. Geiger 2011 11 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 Major Strengths Relatively few people involved in AARs New cost based focus on the enterprise mission Powerful insights and interactions result Major Challenges Need to determine the cost of each support functions 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 Learning Check

How does role-based control differ from organization-based control? What are the benefits of implementing rolebased control? Dale R. Geiger 2011 15 Individual Study Read paper: New Directions for Cost Reporting What Costs Should be Considered? Defining the Cost Measurement Process General guidance: It doesnt make sense to spend a lot on costing

process when the goal is to be more cost effective Frequency Scope Flavor Fullness 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 Issues The cost of the control process is the sum of the measurement cost and the process cost More frequent meetings increase both Choices: Event Driven Daily Weekly

Monthly Quarterly 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 Flavor Issues

Different cost views exist to fill different intelligence needs What cost view provides best intelligence in support of Commanders Intent? Choices: Controllable versus non-controllable Total versus incremental Fixed/Variable vs. Direct/Indirect Fullness Issues Cost considerations must be bounded to exclude elements that dont 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 cost pool managerial costing translation method of distribution

= managerially useful information Allocation Costing Terms cost pool activity method of distribution allocation based on

cost driver = Activity Aggregation is Necessary in Allocation Processes Too many things happen in a complex organization for every activity to be considered in allocation Activity Some level of aggregation in pooling is a practical necessity Deciding the activities is an important design consideration

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 arent material Homogeneity issues again 50% 45%

40% 35% 30% 25% 20% 15% 10% 5% 0% 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 Homogeneity Degree of relevant sameness You cant add apples and oranges . . .Unless you want to know total of fruits Homogeneity determines activity cost pools fitness for use Good homogeneity allows aggregation of activities

Poor homogeneity requires disaggregation Summary: Homogeneity If homogeneous: Then the average can be used for management purposes The cost of the measurement process can be minimized by reducing pools If non-homogeneous: The average is non-representative Aggregated data could be misleading if significantly non-homogeneous Learning Check

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 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, arent they? Here are some more things they do Should we hire another accountant? First Step: Aggregate actions into 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 consumers: 30 40

50 70 80 Tenants Total 410 950

583 715 709 0 3367 Codes 30, 40, 50, 70, and 80 are core research functions Step Four: Calculate Task: Calculate the new Safety Office

overhead allocation using the three activity cost pools and the driver information below: 30 40 50 70 80 Tenants Total

Square feet 100 489 474 495 568 705

2831 Hazmat units 0 11 2128 317 350 328

3134 Composite units 50 467 950 417 617

317 2818 Step 5: Evaluate Compare the ABC allocation with the labor hours allocation: Change Dale R. Geiger 2011 43 Step 5: Evaluate Compare the ABC allocation with the labor

hours allocation: Change 151 263 (333) 104 Dale R. Geiger 2011 64

(249) 0 44 Step 5: Evaluate Compare the ABC allocation with the labor hours allocation: Code 50 was being grossly undercharged Change 151

263 (333) 104 Dale R. Geiger 2011 64 (249) 0 45

Step 5: Evaluate Compare the ABC allocation with the labor hours allocation: Tenants were getting free goods Change 151 263 (333)

104 Dale R. Geiger 2011 64 (249) 0 46 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

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