Activity-based

Cost Management
Andrea Anderson
SAP America

2000 ASUG Annual Conference & Vendor Fa i r May 7-10, 2000

Georgia Worl d Congress Center Atlanta Georgia

A M E R I C A S S A P U S E R S G R O U P Copyright 20002000
Copyright
What is Activity Based Costing ?

Introduction
Business Example

SAP AG 2000 ASUGABC- Andrea Anderson/ 2

Traditional Costing

Contribution
Contribution
Margin
Margin
Price (cost) / piece

Standard
Margin: 32 %
Standard
Overhead Overhead
Surcharges Margin: 4 %
Surcharges

Direct Labor Direct Labor

Material Material
Expense Expense

Product A Product B
SAP AG 2000 ASUGABC- Andrea Anderson/ 3
 Costing using ABC

ABC
ABCContribution
Contribution
Margin
Margin
Price (cost) / Piece
2.5 %

Support 10 %
Standard
Order
margin: 32 %
Handling
Standard
Claims margin: 4 %
Order Handling
Claims
Direct Labor Direct Labor

Material Material

Low Volume Product A High Volume Product B

SAP AG 2000 ASUGABC- Andrea Anderson/ 4

The Dynamic Market Dilemma

GLOBAL RESEARCH GLOBAL COMPETITION

quicker obsoleteness decreasing market prices
of technology shorter product life cycles

CUSTOMERS Externa SHAREHOLDERS

demand for l Quick ROI
better service Forces more & more short
term oriented

Higher investments Less time to recover

through automation & investments
more indirect activities

Customer
Profitability ???
Product
Profitability ??? Process Overhead Cost
performance??? Structure???

SAP AG 2000 ASUGABC- Andrea Anderson/ 5

Implications of Product Cost Distortion

Increases
Increased Product
Product Cost
Variety and Complexity
Distortion

Leads to Implies

Many Low Volume Cross Subsidization

Product Lines of Products
Encourages

SAP AG 2000 ASUGABC- Andrea Anderson/ 6

Why Activity-based Costing

Strategic Decision Making

Outsourcing Strategy
Benchmarking
Resource Planning
Reduce Overhead Cost through Process
Optimization
Increase Profitability through
Identification of non-profitable Products
and Customers

SAP AG 2000 ASUGABC- Andrea Anderson/ 7

Why Activity-based Costing

Overhead Cost Transparency

Cost/Revenue Performance Evaluation
Increased Efficiency through Resource Leverage in
Overhead Areas
Fair Cost Calculation through Source-appropriate Cost
Allocation of Internal Processes
Cost of Complexity
Cost of Product and Process Changes

SAP AG 2000 ASUGABC- Andrea Anderson/ 8

Key Success Factors for ABC Initiatives

Management enabled

Strategic, action oriented approach to

process improvement
Change Management

Established decision making process

with quantitative performance measures

No double-maintenance of parallel cost

accounting systems
Full scalable tool support
Software enabled

SAP AG 2000 ASUGABC- Andrea Anderson/ 9

SAP's Comprehensive Approach to ABC

Process Process

CO-OM-
ABC

Product Cost ABC Products

CO

A
Customers

-P
Distribution Channels
-PC

CO ...

SAP AG 2000 ASUGABC- Andrea Anderson/ 10

Simple Value Flow in CO-ABC

Financials
Posting

Cost Center
(Resources)
Resource
Driver
$$

Process
Cost
Driver
$$
Products,
Customers
Channels, etc.

SAP AG 2000 ASUGABC- Andrea Anderson/ 11

ABC Business Scenario

Private University
3 Cost Centers:
Student Services
IT
Print Shop
Curriculum
Two profit segments Profitability

Computer Science Curriculum

Accounting Curriculum

SAP AG 2000 ASUGABC- Andrea Anderson/ 12

Traditional Overhead Costing

Student
Services

Computer
IT Department 2000 Science

4000 Accounting
Printshop

Functional
Responsibility Allocation Statistical Key Figure Profit Segment
Areas using

SAP AG 2000 ASUGABC- Andrea Anderson/ 13

ABC Costing

Student
Services
Enrollment

Computer
IT Department Science
Student
Support

Office Accounting
Printshop
Services

Cost Resource Business Cost

Profit Segment
Center Driver Process Driver

SAP AG 2000 ASUGABC- Andrea Anderson/ 14

Costing results with and without ABC

Computer Accounting Computer Accounting

Science Science
With ABC With ABC
Tuition revenue 10 000 20 000 10 000 20 000
Direct salary costs 3 000 3 000 3 000 3 000
Overhead costs 5 696 11 391
Enrollment Activity 1 580 1 128
Student Support 1 139 2 278
Office Services 6 577 4 385
Result per program 1 304 5 608 - 2 296 9 209
# of students 2 000 4 000 2 000 4 000
Result per student 652 1 402 -1 148 2 302

SAP AG 2000 ASUGABC- Andrea Anderson/ 15

Activity-based Costing in the R/3 System

Master Data
Allocation Methods
Tools for Resource and Cost Assignments

SAP AG 2000 ASUGABC- Andrea Anderson/ 16

Controlling Objects in R/3 are used by ABC

Controlling Object: Master Data For:

Cost Center Cost Center Accounting
Internal Order Overhead Orders
Business Process Activity Based Costing
Production Order Production cost by lot
Production Cost Collector Repetitive Manufacturing
Profitability Segment Profitability Analysis
Sales Order Item Make-to-order manufacturing
Sales Order Item Service businesses
...

SAP AG 2000 ASUGABC- Andrea Anderson/ 17

Business Process Definition

Business
Process

Business procedure within an enterprise that uses

resources and can involve activities from a number
of different cost centers in a controlling area.
When executing a business process, activities can
be utilized from several cost centers of a
controlling area

SAP AG 2000 ASUGABC- Andrea Anderson/ 18

Output Measure Master Data

Cost center
Process
Process

Activity type Output Measure Identifier Process Driver

varies No. of Output Measures ONE!

Master Data for the Activity type Master Data for the Process
is maintained separately from Driver is maintained within
the cost center. the Process .

Cost center Activity Process

Type
...
+
Driver
SAP AG 2000 ASUGABC- Andrea Anderson/ 19
Activity-based Management

Financials Financials
Cost Cost
Assignment Assignment
Cost center
Cost center
Push Approach

Pull Approach
(Resources) (Resources)
Cost
Assignment
Pull quantity
Process
Process
Cost
Assignment Pull quantity

Products, Customers Products, Customers

Channels.. Channels..

SAP AG 2000 ASUGABC- Andrea Anderson/ 20

PUSH versus PULL Approach

PUSH PULL
More detailed configuration
Implementation Simple configuration
Set-up of Process/ Set-up of Process/Structured
Allocation Cycles only Processes/Templates

No Quantity Structure Quantity Structure

Process
No backflushing capability Backflushing capability
Optimization/
No capacity view Identify idle capacities
Flexible
No leveraging of resources Leverage resources during
Budgeting
planning

Fair Costing Costs not assigned according Prices calculated based

to actual usage of resources on capacity
Costs of idle capacity Costs of idle capacity not
spread across products and spread to products and
customers customers

SAP AG 2000 ASUGABC- Andrea Anderson/ 21

Process Structures

Process Groups Structured Processes

Curriculum

Process
Student Support
Copy Cost
IT Support
Center
Process
Office Services

Process
Office Services

SAP AG 2000 ASUGABC- Andrea Anderson/ 22

 Tools for Resource Cost Assignment

Cost center
Assessment
Direct Activity Allocation
Indirect Activity Allocation
Resource Cost
Assignment Target = Actual Activity Allocation
Distribution
Process Template

Process Cost
Assignment

Profitability Cost
Segment Object

SAP AG 2000 ASUGABC- Andrea Anderson/ 23

Identifying Templates for Resource Assignment

Cost center

Template
How much should
be assigned to
each Process?
Resource Cost
Assignment

Process

SAP AG 2000 ASUGABC- Andrea Anderson/ 24

Template Concept - Resource Assignment

Process
Office Services
Quantities
Resources/Driver: consumed:
Cost center
Print Shop
Activity Type: Print Quantity = 300 hours

Cost center
Print Shop
Activity Type: Copy Quantity = 500 hours

Cost center
IT Department
Activity Type: Quantity = 100 hours
Maintenance

SAP AG 2000 ASUGABC- Andrea Anderson/ 25

 Tools for Process Cost Assignment

Cost center

Resource Cost
Assignment

Process

Process Cost Assessment

Assignment
Direct Activity Allocation
Indirect Activity Allocation
Profitability Cost
Object Target = Actual Activity Allocation
Segment
Template

SAP AG 2000 ASUGABC- Andrea Anderson/ 26

Identifying the Template for Cost Objects

Process

Template
How much should
be assigned to
each Profit Segment
Process Cost
Assignment or Cost Object?

Profit Segment
Cost Object

SAP AG 2000 ASUGABC- Andrea Anderson/ 27

Template Concept - Process Assignment

Quantities Profitability
Processes: Cost Driver:
consumed: Segment:
Accounting
Process Number Quantity = Curriculum
Student Support 200
of Students

Number Quantity =
Process 500
Office Services of Calls

Number Quantity =
Process 2000
Enrollment of Students

SAP AG 2000 ASUGABC- Andrea Anderson/ 28

Template Concept - Process Assignment

Quantities Cost
Processes: Cost Driver:
consumed: Object
Course
Process Number Quantity = Manual
Admininstration 200
of Pages

Number Quantity =
Process 500
Office Services of Calls

Number Quantity =
Process Curriculum
2000
Development BOM items

SAP AG 2000 ASUGABC- Andrea Anderson/ 29

Origin of Process Driver Quantities

Routing
Bill of Materials
# Work Centers
# BOM Items

# Value fields Template

How much should
CO-PA be assigned to Material Master Data
each Profit Segment
or Cost Object? Weight

wewrerretrtrtrwrt
dsfasad
fdsafdas
LIS Product Costing
fgd
fggadgf

# Purchase
orders Lot-size

SAP AG 2000 ASUGABC- Andrea Anderson/ 30

Dynamics of the Process Template

Process Template
Quantity Activation
Object Plan Actual Plan Actual

Curriculum Formula-1 Formula-2 Active Active

Development
...... ...... ...... ......
Office
Services

Formula-1 Formula-2
Calculate the number of Calculate the number of
pages based on Bill of pages based on Bill of
Material item 1 X Number Material item 1 X Number
of Manuals Planned of Yield Confirmed
SAP AG 2000 ASUGABC- Andrea Anderson/ 31
Applying the Process Template

Process Consumption
Quantity Activation
Object Plan Actual Plan Actual

Curriculum 4000 Pages 3200 Pages Active Active

Development
...... ...... ...... ......
Office
Services

Formula-1 Formula-2
Number of Manuals: 40 Number of Manuals: 32
Sheets of paper: 100 Sheets of paper: 100

SAP AG 2000 ASUGABC- Andrea Anderson/ 32

Dynamics of the Process Template

Process Template
Quantity Activation
Object Plan Actual Plan Actual

Enrollment Formula-1 Formula-2 Active Active

Process
...... ...... ...... ......
Student
Services

Formula-1 Formula-2
Calculate the number Calculate the number
students enrolled based on students enrolled based on
customer numbers in customer numbers in
Division 01 last year Division 01 this year
SAP AG 2000 ASUGABC- Andrea Anderson/ 33
Applying the Process Template

Process Consumption
Quantity Activation
Object Plan Actual Plan Actual

Enrollment 200 Students 225 Students Active Active

Process
...... ...... ...... ......
Student
Services

Formula-1 Formula-2
Number of Students Number of Students
in 1999 for Accounting in 2000 for Accounting
Curriculum: 200 Curriculum: 225

SAP AG 2000 ASUGABC- Andrea Anderson/ 34

The Reusability of the Template

Chemistry
IT Curriculum Accounting
Curriculum Curriculum

Template

Object Plan Qty. Actual Qty Plan Actual Actual Valuation

Activation Activation Event

What Does the process apply?

process
applies?
When does the
How much of the process
process apply?
applies?

SAP AG 2000 ASUGABC- Andrea Anderson/ 35

ABC Reporting

For which process Which processes are

and at what costs necessary?
does a cost center
perform? What are the costs of a
cost object?
What is the profitability of
a certain market segment?

What are the

process costs?
Who consumes
the process?

SAP AG 2000 ASUGABC- Andrea Anderson/ 36

Simulation of ABC Data

Simulation of ABC Data using R/3 and OROS (ABC

Technology)

SAP AG 2000 ASUGABC- Andrea Anderson/ 37

OROS for Analytic ABC

Cost effectively experiment with ABC

Quickly build models for strategic cost management

Simplify and accelerate Integrated ABC setup

Conduct what-if analyses for scenario playing

Explore, review, and analyze resource requirements

SAP AG 2000 ASUGABC- Andrea Anderson/ 38

The Power of the Integrated R/3-OROS ABC
Solution

Analytical ABC Integrated ABC

Refinement

Master data & cost assignment structures

Job Costing
Learning PC / PA Reporting

Modeling Measurement
Rapid Prototyping Cost Accounting

Resource costs & driver data

Simulation

Resource costs &

SAP AG 2000 ASUGABC- Andrea Anderson/ 39 Aggregate driver data
 Thank you for attending!
Please remember to complete and return
your evaluation form following this session.

SAP AG 1999 filename (author) / 40