Week 7_ SeeGod Meregini_ Correctly evaluating expenses in my department

One of my roles in my organization is to monitor costs. I was asked recently to evaluate some expenses in my department for a reporting period. I had to represent the calculated costs showing how these expenses flowed.

The problem is how to present this cost data information to my supervisors such that visibility is enhanced to provoke positive actions.

In order to properly represent the cost elements in the expense, I decided to use several alternatives in solving this problem.

The feasible alternatives chosen were:

·         Traditional Cost Systems - “Code of accounts” also called General Ledger (TCS).

·         Activity-Based Cost Management system (ABC/M)

·         Work Breakdown Structure system (WBS)

The table below shows some cost elements classification using the alternatives above.

Chart of Accounts (TCS)				ABC/M		WBS
Cost Code	Cost Category	Actual Cost		Activity	Actual Cost
1000	Expenses			Attend training (for contractors)	$30,000	NA	NA
1100	Salaries	$200,000		Conduct Company FEED engineering deliverables reviews	$350,000	NA	NA
2000	Indirect			Conduct Company DED engineering deliverables reviews	$150,000	NA	NA
2100	Logistics	$200,000		Develop Contractor FEED deliverables	$415,000	NA	NA
3000	Engineering			Develop Contractor DED deliverables	$320,000	NA	NA
3100	FEED	$800,000		Analyse deliverable quality using external assurance SME	$100,000	NA	NA
3200	DED	$500,000		Attend training (for Company)	$40,000	NA	NA
				Make Travel Trips (for external facilitators)	$30,000
				Make copies of final FEED deliverables	$35,000
				Make copies of final DED deliverables	$30,000
				Analyse and Resolve Contractor Claims	$200,000
Total		$1,700,000		Total	$1,700,000

While classifying and summarising the cost elements, the outcomes using these alternatives were:

·         TCS: It provided a cost accounting system whereby all recorded cost elements are classified into various categories of cost using a chart of accounts. It “bucketized” the various cost centers to show how the cost was spent around separate departments. It only described what was spent and lacked the visibility of the costs that belong to the end-to-end business processes.

·         ABC/M: This system provided enhanced visibility by bringing focus to how work really serves customers and which activities may be considered wasteful. This would easily make my supervisors see where costs are big or small and also which costs can be managed in the near term.

·         WBS: This system would have classified costs with a similar output like the ABC/M. However, there was no standard framework for planning and controlling the resources needed to perform these specific technical objectives. There were only different plans and processes for individual work groups. This made it difficult for me to use this system.

The selection criteria used was, the chosen alternative must:

·         be structurally sufficient such that it provokes intelligent actions and supports better decisions other than the old form of control – budget variances.

·         drive desirable process behaviour

In analysing the alternatives, some key points to note are given below:

TCS: The TCS (general ledger) is organised around separate departments as seen in the table for example salaries. This does not tell where the works for the salaries are spent for. Furthermore, the TCS is transaction-centric, reports expenses as lump-sum amounts and its structure of cost center mapping drives vertical behaviour only which is clearly not a desired behaviour. My supervisors would have difficulty controlling and influencing the work that is being performed. Another deficiency is the fact that this cost reporting system makes it difficult in tagging the costs as an overlay (i.e. attributes) by differentiating one cost from another. Clearly this alternative did not meet the selection criteria and hence not chosen.

ABC/M: This type of system accurately represents the cost of outputs. This is possible because ABC/M demonstrates that all costs actually originate with the customer or beneficiary of work and it is these outputs or people that place demands on work and the costs then measures the effect by reflecting backwards. This can be seen from the table with the example “Analyse and resolve contractor claims”. The driver here being, “claims” generation from the contractor and mitigation by the company shows how the work was created and costs measured. The ABC/M being “work centric “ would greatly stimulate a spark for discussion and discovery and effortlessly guide my supervisors to make better decisions based on what affects the level of workloads. Because the ABC/M represents calculated costs of how expenses flow through work activities into outputs of work, it creates an opportunity for my supervisors to further analyse the impact of these costs. This can be done by using a range of tags (attributes) that can be scored for the individual activities that contribute to a process output. These scored costs using attributes can invoke actions beyond just gazing and analysing by showing high-value and low-value activities in order to give an idea about critical, necessary and postponable activities including activities that “meets” or “exceeds” customer expectations just to name a few scoring choices. Performance and Importance attributes are examples of scoring tags that can be used by my supervisors.

WBS: Due to lack of a standard framework for planning and controlling the various departmental resources and different plans and processes for individual work groups, the WBS system could not be used in analysing the costs.

With the above analysis and selection criteria, it can be seen that ABC/M is the best alternative and was chosen.

For performance monitoring, I would use positive cost effective changes in process behaviour from team members to assess the efficiency of the ABC/M system. This would be achieved by analysing how well the cost of outputs measure against the planned budget using earned value.

For post evaluation of results, I would analyse how effective performance and importance attributes are developed and maintained. Another evaluation would be, how well the department meets the organization’s cost objectives based on the organizations metrics at the end of each reporting period.

References

Giammalvo, P. D. (2010). AACE Certification Prep Course [PowerPoint slides], Day 2. Lagos: Nigeria.

Sullivan, W. G., Wicks, E.M., & Koelling, C.P. (2009). Engineering Economy and Design Process. In M.J. Horton (Ed.), Engineering Economy (14^th ed.) (chapter 1.3) (pp. 27). New Jersey, NJ: Pearson Education, Inc.

AACE International Education Board. (2010).Activity-Based Cost Management. In S.J.Amos (Ed), Skills & Knowledge of Cost Engineering (5^th ed) (chapter 8) (pp.8.1-8.10). Morgantown, West Virginia: AACE International.

AACE International Education Board. (2010).Cost Elements. In S.J.Amos (Ed), Skills & Knowledge of Cost Engineering (5^th ed) (chapter 1) (pp.1.1-1.8). Morgantown, West Virginia: AACE International.

AACE International Education Board. (2006). Asset Cost Accounting. In J.K.Hollmann (Ed), Total cost management framework – A process for applying the Skills & knowledge of cost engineering (1^st ed) (chapter 5.1) (pp.75). Morgantown, West Virginia: AACE International.