Cost management training section3

CM 101 Training 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 Lesson 1: Cost Assignments Overview Objective(s): Understand the different cost flow methods, the information needed, the Army objective of which method to use S3L1_p 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) S3L1_p Cost Flow Overview Full Cost Full Cost Full Cost Organizations Product/Services Customers • Services: IMCOM: SSP 29A, 31B Garrison TRADOC: Ranger School Mission technique - Division / BCT classes, combative - MOS training - FMS FORSCOM: - Ready Unit Mission st Brigade Combat Team - Capability Commander S3L1_p in the Cost Model - Tenants Courses: Section focused on the shapes depicted • Section focuses on the arrows in the Cost Model 4 Cost Flow Methods Full Cost Full Cost Full Cost Organizations Product/Services Customers There are three types of Cost Flows: • Direct Charge – the primary or initial posting • Assignments – secondary or follow-on Services: IMCOM: SSP 29A, 31B Garrison - Tenants movement based on quantity consumption Courses: TRADOC: Ranger School Mission technique - Division / BCT classes, combative - MOS training - FMS (has Rate x Qty consumed) • Allocations – secondary or follow-on movements that are value based ($ or # FORSCOM: - Ready Unit Mission st Brigade Combat Team - Capability Commander S3L1_p converted to a % split) 5 Assignment vs Allocation Assignment: Allocation: The establishment of relationship between a sending cost object and a receiving The establishment of a relationship between a sending cost object to one or cost object based on a quantity (with a rate for valuation) being consumed by more receiving cost object(s) based on % (even if a quantity is utilized to the receiver generate a %, e.g # FTEs) Requires: Requires: • • • • Activity Type or Business Process quantity as sender Mechanism for capturing a quantitative or monetary value on the receiver(s) which is then utilized to determine the % split of the sender costs A rate associated to valuate the quantity flow Mechanism for capturing or imputing the sender quantity • Acceptance of batch processing 10 $220 -$200 S3L1_p @ $ CC 160 Hrs EE’s Hr Order $1 10 @ 50 CC Order % Order 10 Order 50% 160 Hrs Assignment vs Allocation Assignment: Allocation: Pros: Pros: • • • • • • Direct relationship Provides mechanism for cost association when tracking of quantity is not possible or cost prohibitive Real-time information for analysis Reduces systemic burden during period close Dynamic (can change as the environment changes) Capacity Mgmt (resource utilization) Cons: • Must have the ability to track quantity from send to receiver or impute Cons: • • • • S3L1_p Full-absorption approach Typically less accurate High demand on system resources during period-end close Static assumption set often infrequently updated Allocation to Assignment Maturation Process 100% 80% Value-Based 60% 40% Quantity-Based 20% 0% Year Year Year Year Year Year N • 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 S3L1_p Capturing Costs Today: Tomorrow:  Not All Cost Allocated  Focused on Direct Obligation by Appropriation  Assigned / Mapped to High Level Programs (e.g MDEP)  Allocation Done Differently by Organization  Standardized Process  Will Use Acceptable Cost Assignment/ Allocation Practices  Will Provide Capability for Multiple Cost Assignments/Allocations  Allocations Only where Direct Assignments not Used • • • • Inconsistent Army Reporting Not Full Cost Financial Focus to Meet Budget Execution Reports Not linked to Output S3L1_p • • • • Required for Full Cost Accuracy More Accurately Defines Overhead & Indirect Cost Maintains Budget Execution Capability Linked to Output Lesson 1: Wrap-Up • There are forms of cost flows: direct charge, assignments, and allocations • The primary or initial posting is directly charged to the Cost Object • Further associations of the costs to consuming organizations, products/services, uses assignments/allocations • 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 S3L1_p 10 Capture Output Costs Analysis 2ABM0065: AMMO SUPPLY 2ABM0014: LEGAL (ILO) Name Name Cost Element Cost Element Amount Amount Quantity Quantity Perm Ammo 6100.11B1 9400.AMMO $5,000 100 10 hrsEA AMMO FIRED Training Event (UIC) 10 rounds WARS at $50 Name Cost Element Ammo 9400.AMMO Amount $500 Qty is valuated with rate AMOUNT AND QUANTITY ARE THE OUTPUTS OF THIS PROCESS S3L5_p 17 Quantity 10 EA Lesson 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: S3L5_p – How efficiently are resources utilized (e.g how much is expended to close a ticket in hrs, 8, hrs, days?) – How effectively is the product/service provided to the customer? (e.g how long does it take for me to close a ticket) 18 Lesson 3: Summary/Key Take-Away’s Objective(s): • S4L3_p1 Highlight the most important concepts addressed throughout the training What is Cost? Resources Resources Consumed “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 * www.rcainstitute.com - RCA Taxonomy S4L3_p2 Need to Understand What the Resources Buy – The Army Product Ensure Strategic Objectives are Effectively X Effectively & Efficiently Produce Outputs Resourced X X Heavy Stryker • • CG TRADOC CG AMC • • • CG FORSCOM • • CG IMCOM ARFORGEN Synch Board Human Capital Materiel Services & Readiness Infrastructure • • • S4L3_p3 • • ARFORGEN Pr og m /B ud g et C on st ru ct Light Products/Services Organizations (Cost Centers) Resources (Labor, Equipment, Assets) Army Cost Management Framework X X X ARFORGEN Heavy Stryker Light Available / Deploy Train / Ready Reset g ratin Ope es For c Activities pot M Program / Budget Construct • • • • • • • Research Procure Sustain Engin Acquire & Train Manage (Pay) Develop & Educate Human Capital Force Development Installation Command Programs Centrally Managed Services & Infrastructure Programs S4L3_p4 Note: Program / Budget and Cost Management constructs shown represent subset of overall framework eer ining / Tra tion a c u d vcs Civ E n el S rson e P ining Civ / Tra ation c u d Mi l E Svcs nnel erso duc P il nt E M pme lo e v De Prof vcs ily S Fa m & y it mun rity & Com Secu nta l e m on vcs Envir ce S sour e R l na Natio cs h Sv Mgt ility Healt / F ac n io t lla Insta CE u e to Uniq • • • • • • • Facility Eqt • De ance dn • Or & R&D E, n, T & T • S& ms Acquisitio g tin ste • Sy ing, & Contrac Dispose & Distribute • • • • • • Materiel Distribute ain il of M epair t/R • • m on Com s to CE Cost Management Construct Readiness Com ce Operation Planning & Control Operations & • • igen Financial Management / Budget Train Units Intell Communications, Computing, & Info Systems • • d& ma n Cost Management Focus COST MANAGEMENT FOCUS Conversion Inputs “Work” Resources: Labor Material Equipment Supplies Contracts S4L3_p5 Work Performed by Organizations (Cost Centers) to Produce Products and Services for Customers Outputs Products Services: Courses Services Support Programs Tests Research Projects Training Events Assets 23 Cost Management 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 Accounting Cost Cost Planning Management Process Cost Controlling S4L3_p6 Cost Analysis Army Cost Culture Change “Making a Square a Circle” “A Culture of Influence” “A Culture of Entitlement” • • • Budget-focused • • • Spend rate driven – inputs • Results driven - output & outcome Enhance Training • Performance objective – resource Performance Focus (NSPS) Performance objective -99.9% consumption optimization (efficiency & How obligated • • Cost and performance focused Develop/Recruit Analysts Free goods has infinite demands Policy • • Process Improvement (Lean 6-Sigma) Integrated Business Design • • • S4L3_p7 To’s ERP Applications e.g (GFEBS, LMP, GCSS) Business Warehouses Executive Scorecards Enablers of Change effectiveness) • Use what is necessary to obtain the objective Enhanced Ability to Capture Cost Cost Objects ERP (SAP) Organizational Real Property / Entities Equipment Cost Centers Cost Collectors • Installation • Brigade Army Examples • School • Directorate Program / Project Task / Activity Project / WBS Business Process Assets / Real Estate Objects Initiative Internal Order • BRAC • Building • Training Range • Weapon System • Acquisition • Services • Instructional Course • RDTE Project • Repair Process • MILCON Project • Test Run • System Test • Training Event • Mandatory Training • Support to • Lab Olympics Cost assigned Directly or Indirectly Customer / Product S4L3_p8 Special Event or • • • Brigade Tenant Command • • • Weapon System PEO / PM Course Army Cost Design Full Cost Full Cost Full Cost Organizations Product/Services Customers IMCOM: Garrison Services: SSP 29A, 31B - Tenants A monetary valuation of the economic goods and services of the Courses: TRADOC: Ranger School FORSCOM: st Brigade Combat Team Mission technique - Division / BCT organization – full classes, combative - MOS burden cost flows training - FMS - Ready Unit Mission - Capability Commander maturation over years S4L3_p9 27 Costing Conceptual Design What/Why information is entered, stored, used, and presented Cost Accounting How the information is entered, stored, used, and Cost Cost Cost Planning Management Analysis presented Process Cost Controlling Where the information is entered, stored, used, and End User Presentation Layer presented S4L3_p10 Public Sector Budget Accounting 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 • Common Understanding of Types of Cost is Necessary for authority), by the organization performing the work Informed Decision Making • 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 • Each Decision Should be Focused on Only Relevant • 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 S4L3_p11 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 S4L3_p13 Cost Management Enables Optimization Outputs/Consumers Providers/Inputs relating Cost Weapon Sys $ of Brigade (VAMOSC) HQDA Military Pay Direct Contracts (CLS) assign $ $ $ $ $ Army Service Component Commands Direct Reporting Unit Unit Training Direct • Ground OPTEMPO Army Commands Installation assign • SSP1 (Labor Tracking) School Training assign •Initial Entry Direct Equip the Force •Acquisition GFEBS enables Army to “slice and dice” data for decision-making S4L3_p14 $ $ $ $ ... in Order to Provide the Best Value to Customers Cost Accounting Cost Cost Planning Management Process Cost Controlling S4L3_p6 Cost Analysis Army Cost Culture Change “Making a Square a Circle”... S3L1_p in the Cost Model - Tenants Courses: Section focused on the shapes depicted • Section focuses on the arrows in the Cost Model 4 Cost Flow Methods Full Cost Full Cost Full Cost Organizations... • Unavoidable Cost A cost incurred on an object that will be incurred regardless of the decision to change S4L3_p11 Cost that Impact the Decision Cost Objects • Cost Center - A cost center is