Costing by type of activity

The calculation of the cost of activities (RSVD) provides an analytical model that describes how specific products or customers use different volumes of services supplied from indirect or additional sources. At the first stage of the RSVD model, the costs of acquired resources are linked to the actions and processes performed:
Costs, quality and time spent, as a rule, characterize the results of any process. Because quality and time are easy to measure, evaluating them is usually easy. However, the costs are a kind of analytical "construction", not always tangible - it cannot be measured by a stopwatch or calibrated with a laser tool. Only the RSVD model can accurately track all the organization’s expenses: for procurement, production, distribution, or delivery. Thus, a correctly designed model of the RSVD is the main element in assessing the costs of the internal component of a balanced scorecard.
However, determining the costs of the operational process is only the first step, after which managers and employees should begin to act in the direction of improving it. Activity-based management covers those functions that increase efficiency, reduce costs and improve asset utilization. The RSVD seeks to either increase capacity or reduce costs in such a way that the production of products or services requires less physical, human and working capital resources. The financial benefits of activity-based management are measured by cost reduction, revenue growth (due to more optimal use of resources), and the ability to evade costs, as increasing the productivity of existing resources eliminates the need for additional investment in capital and people. The management based on the types of activities entails the improvement of production and represents a process consisting of five stages:

Often, managers simply do not know about the opportunities available to reduce costs and improve process efficiency. For decades, the attention of engineers has been focused on improving advanced production technologies and service operations within existing divisions, without paying attention to auxiliary activities, or interfunctional activities, or business processes. Previously, when the costs of all this were relatively small compared to the costs of production, and the business processes themselves were simple and clear, priorities were set correctly. However, in a modern organization, an increasing part of expenses falls on indirect and auxiliary types of business activity, and the same business process is influenced by many different departments and functions.
As a rule, the information obtained as a result of the analysis of costs by type of activity shows how high the costs of inefficient types of work are, the detection of marriage and measures to eliminate it. Those managers who are still skeptical and suspicious of the potential benefits of improvement processes, such as integrated quality management and six sigma programs, can motivate this information to change. Data obtained as a result of RSVD analysis can serve as a basis for determining both internal and external standards (benchmarking).
In conclusion, it should be said that the first advantages of the analysis of activities arise as a result of the classification of costs due to the possibility of reducing costs. Improvements can be achieved either by developing completely new processes, or by improving the quality and productivity of existing ones. Classification of expenses by type of activity allows managers to understand what operating costs arise during inefficient and low-quality processes. The information used in this way, obtained on the basis of the analysis of the RSVD, stimulates promising ideas for the development and implementation of programs for continuous improvement of activities.

For example, two software products are being introduced at an enterprise. The first is for managing production in the workshop, the second is for automating sales in the sales department. Both products are served by one of four full-time programmers, with a salary of 40,000 rubles / month.

Required: to calculate the costs of informatization of production business processes and sales processes (despite the fact that three other programmers are busy with other processes).

In this case, the management of the enterprise considers the time driver to be a cost driver . By the end of the month, the report showed that the programmer spent 25% of his time working with the first product, 75% with the second. However, the work of a programmer required not only his work. Depreciation of a computer programmer is 2,000 rubles / month. Depreciation of the premises in which the IT department is located is 12,000 rubles / month. Management considers the area of ​​the premises to be the driver of depreciation, conditionally assuming that each programmer occupies an equal area.

Then we first summarize the costs for one month of the programmer’s work:

40 000 rub. + 2 000 rub. + 12 000 rub. : 4 = 45,000 rub.

Now distribute this amount.

  Costs of production informatization: 45,000 rubles.  * 0.25 = 11,250 rubles.

  Costs of sales informatization: 45 000 rubles.  * 0.75 = 33,750 rubles.

Many organizations already have their own ideology of improvement programs and do not need additional information regarding current costs for inefficient and low-quality processes identified during the RSVD analysis. However, without such data, one can concentrate on aspects that currently do not have the potential for the highest financial return. The most scarce resource of any organization is time. That is why managers should direct all the efforts of their employees to improve those processes where the possibility of significant cost reduction is greatest. The RSVD model determines where such opportunities exist, it helps to identify those processes that should be improved in the first place.

Often, incorrect reengineering gives excellent results at first, helps to "pluck low-hanging apples," but then the effectiveness of this approach dropped significantly, and often led to significant losses for companies. Activity-based management process:

• It requires an analysis of the functions of the enterprise to determine large volumes of inefficient costs. Then the managers and employees of the company propose projects, reengineering can be very effective.
• Based on the information from the RSVD analysis, priorities are established. Both managers and ordinary employees are very limited in time. That is why among the many initiatives they should choose only those projects whose implementation will bring maximum results in the shortest possible time.
• Even if the best and most effective process improvement projects often require solid investments, returning them will not take long.

Suppose that based on the initial information of the RSVD analysis, some steps have been developed and taken in accordance with the management method based on the types of activities: redesigning or reengineering. However, many companies still do not fully understand all the benefits and advantages that they will receive as a result of this activity. Enterprises improve or change processes, producing the same volumes of products at lower cost, but it never occurred to them to redistribute or eliminate those resources that are no longer needed. Thus, the total cost of the company remains unchanged.
The RSVD model provides information on those resources - general ledger expense code, assets, as well as full-time employees (FTE) - that are necessary for a particular operation. Periodically updating and replenishing the basic model of the RSVD, a company can reassess and reallocate resources (expenses, assets, FTE) aimed at a particular type of activity or business process. Periodic recourse to the cost model by type of activity allows you to get tangible feedback on what benefits and advantages the organization has from initial operational improvements and what should be done to consolidate success.

Managers can determine the factors for achieving results that explain the need for a given amount of resources, and, consequently, the costs of performing the corresponding operations. For example, the quality of this raw material, determined during the incoming inspection, can serve as a factor in achieving results in the processing of raw materials. Another factor for achieving results is the skills of process operators. These factors may be local performance indicators that company employees can improve on a daily basis. They are not strategic indicators, but define, motivate and evaluate daily activities and steps to improve and improve processes.

The practice of mass use of the RSVD has shown that it is very difficult to use the RSVD in its well-known form, which is why it is difficult. The activity model, broken down to fairly small jobs, requires considerable effort to constantly maintain it in a current (fresh) state. The benefits of these efforts are often inferior to costs. That is, the RSVD from the ideology of accounting, continuous, moved into the category of one of the types (methods) of the analysis of activities performed periodically, from case to case.

• Activity Based Costing Theory
• Activity Based Costing - cost accounting
• "Process Oriented Management"
• “The key to implementing corporate strategy. Part 1 "A. Mironenko, expert in the field of CPM (inaccessible link from 05-24-2013 [2328 days] - history , copy )
• “The key to implementing corporate strategy. Part 2 "A. Mironenko
• “Managing Program Performance in the Public Sector,” Gary Kokins
• “MES systems: operational functional-cost analysis of production”

Organization Performance Management