Identify Pitfalls in a Role Based Control Case Study Scenario Navy Research and Development Case © Dale R Geiger 2011 Ever Wonder Why Overhead is Often Called “Burden”? Terminal Learning Objective • Task: Identify Pitfalls in a Role Based Control Case Study Scenario • 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 • Discuss role based control issues related to support functions • Describe various allocation solutions for support functions • Calculate step-down allocation © Dale R Geiger 2011 SPAWAR Systems Center-Pacific • Very high tech R&D funded by project basis • Funding process required total cost by project for proper reimbursement • Organized into research divisions with numerous centralized support functions • Safety (as shown in last segment) • Facilities (the focus of this case) and • Many others Proposed Change in Distribution of Facilities Cost • Situation: meeting at Navy R&D lab • Reviewing a distribution of San Diego facilities cost to operating divisions • Existing method allocated based on labor • Proposed method allocated based on square feet occupied Division Labor Basis ($M) Footage Basis ($M) Change ($M) 30 2.3 2.3 40 5.1 4.0 1.1 50 2.4 4.6 (2.2) 70 3.8 4.1 (.3) 80 3.7 4.6 (.9) Total 17.3 17.3 - Chaos Resulted • Division 30 wasn’t represented as they were located in Pennsylvania • Division 40 didn’t say a word • Divisions 50, 60, and 70 strongly objected to the methodology, purpose, and change • The meeting deteriorated until the commander exercised his leadership role Division Labor Basis ($M) Footage Basis ($M) Change ($M) 30 2.3 2.3 40 5.1 4.0 1.1 50 2.4 4.6 (2.2) 70 3.8 4.1 (.3) 80 3.7 4.6 (.9) Total 17.3 17.3 - Leadership Driven Management • The Commander stated: • “Look, we’ve got to get our overhead down” • (Management need awareness) • “There are two ways to this One is to use the Soviet Method and I’ll make all the decisions” • (Centralized management paradigm) Leadership Driven Management • “The alternative is to use free market economics” • (Decentralized management paradigm) • “Activity based costing will tell you what things really cost” • (Actionable cost measurement capability) • “I’ll look to you to make the right decisions Which you want?” NRaD Facilities Allocation Revisited • Simple, direct allocation of facilities to line divisions on the basis of occupied space made sense to the CO • Division 40 was growing rapidly (and was short space) while Division 50 was declining (and had a lot of space) Division Labor Basis ($M) Footage Basis ($M) Change ($M) 30 2.3 2.3 40 5.1 4.0 1.1 50 2.4 4.6 (2.2) 70 3.8 4.1 (.3) 80 3.7 4.6 (.9) Total 17.3 17.3 - NRaD Facilities Allocation Revisited • HOWEVER, the Commanding Officer had a major concern about the cost model: • Motivated line departments to reduce but • Did not put similar pressure on overhead • The unintended consequence would be: • Line functions vacating space • Overhead functions moving in • Advanced allocation issues had to be considered Step Down Allocation Payroll Cost Incurred Receiving 700 Payroll Cost (add) 30 Final Cost Total 1000 14 Receiving Cost (add) Allocated (subtract) 40 -700 -1014 0 © Dale R Geiger 2011 1700 177 509 700 414 600 1014 -1714 591 1109 1700 43 Discussion on Step-Down • Theoretically we would repeat the steps for each activity in the hierarchy • What are the implications? • What solutions might you suggest? © Dale R Geiger 2011 44 Suggested Step Down Hierarchy Most Important Support Activity X Support Y © Dale R Geiger 2011 Support Z 45 Suggested Step Down Hierarchy Most Important Support Activity X Support Y © Dale R Geiger 2011 Support Z 46 Suggested Step Down Hierarchy Most Important Support Activity X Support Y © Dale R Geiger 2011 Support Z 47 Demonstration Problem (part 2) • Ignore the allocations from and between payroll and receiving • Apply direct simple allocation • Report Code 30 and Code 40 allocations cost Compare the results from the three methods â Dale R Geiger 2011 48 Direct, Simple Allocation Payroll Cost Incurred 700 Receiving 30 1000 40 Total 1700 Payroll Cost (add) Receiving Cost (add) Allocated (subtract) Final Cost © Dale R Geiger 2011 49 Direct, Simple Allocation Payroll Cost Incurred 700 Receiving 30 40 Total 1000 Payroll Cost (add) 1700 180 520 700 Receiving Cost (add) Allocated (subtract) -700 Final Cost © Dale R Geiger 2011 50 Direct, Simple Allocation Payroll Cost Incurred 700 Receiving 30 40 Total 1000 1700 Payroll Cost (add) 180 520 700 Receiving Cost (add) 408 592 1000 Allocated (subtract) -700 -1000 -1700 Final Cost © Dale R Geiger 2011 51 Direct, Simple Allocation Payroll Cost Incurred Receiving 700 30 40 Total 1000 1700 Payroll Cost (add) 180 520 700 Receiving Cost (add) 408 592 1000 Allocated (subtract) Final Cost -700 -1000 0 © Dale R Geiger 2011 -1700 588 1112 1700 52 Compare the Three Methods Payroll Receiving 30 40 Total Reciprocal 0 589 1111 1700 Step-Down 0 591 1109 1700 Simple 0 588 1112 1700 What have you learned? © Dale R Geiger 2011 53 Learning Check • What is the first step in the step-down allocation process? • What is the main advantage of the step-down method © Dale R Geiger 2011 54 Recommendations – Pitfall Avoidance • Keep it simple • Allocate most support functions directly to cost objects • Take exception rarely and thoughtfully • Facilities • Automated data processing • Handle exceptions with step down method instead of reciprocal Step Down Method Recommended to NraD Commanding Officer • Facility overhead first allocated to all line and overhead functions • Overhead functions included this cost in their budgets and subsequent direct, simple allocations • Small impact on cost distribution • Significant impact on behavior NRaD Facilities Conclusion: Results • Leaders of core functions chose role based control process over “Soviet” Method • Both core and support functions quickly identified space no longer needed • 35,000 square feet freed in first year with cost savings and cost avoidance evaluated at $2.3 million per year • Monthly AAR still conducted 15 years later • Why you think this process has continued? ... rapidly (and was short space) while Division 50 was declining (and had a lot of space) Division Labor Basis ($M) Footage Basis ($M) Change ($M) 30 2. 3 2. 3 40 5.1 4.0 1.1 50 2. 4 4.6 (2. 2) 70 3.8... Footage Basis ($M) Change ($M) 30 2. 3 2. 3 40 5.1 4.0 1.1 50 2. 4 4.6 (2. 2) 70 3.8 4.1 (.3) 80 3.7 4.6 (.9) Total 17.3 17.3 - Leadership Driven Management • The Commander stated: • “Look, we’ve got... Reciprocal Allocation Example: Two Activities and Two Cost Objects • Payroll costs $700 and supports itself (1%), Receiving (2% ), Code 30 (25 %) and Code 40 ( 72% ) • Payroll reciprocal cost (PRC): PRC