activity-based cost manaagement in sap r3

Activity-based Cost Management

Andrea Anderson

SAP America

© Copyright 2000

2 0 0 0 A S U G A n n u a l C o n f e r e n c e & V e n d o r F a i r M a y 7 - 1 0 , 2 0 0 0G e o r g i a W o r l d C o n g r e s s C e n t e r A t l a n t a G e o r g i a

A M E R I C A S ’ S A P U S E R S ’ G R O U P ©Copyright 2000

SAP AG 2000 ASUGABC- Andrea Anderson/ 2

What is Activity Based Costing ?

Introduction

Business Example


Traditional Costing

Price (cost) / piece

MaterialMaterialExpenseExpense

Direct LaborDirect Labor

Contribution MarginContribution Margin

Product A Product B

StandardMargin: 32 %

StandardMargin: 4 % Overhead Overhead

SurchargesSurcharges

MaterialMaterialExpenseExpense

Direct LaborDirect Labor

Overhead Overhead SurchargesSurcharges


Costing using ABC

Price (cost) / Piece

Low Volume Product A High Volume Product B

MaterialMaterial Material

Direct LaborDirect Labor Direct Labor

Claims

ClaimsClaimsOrder Handling

Order Order HandlingHandling

SupportSupport

2.5 %

10 %

Standardmargin: 32 %

Standardmargin: 4 %

ABC Contribution MarginABC Contribution Margin


Higher investmentsthrough automation &more indirect activities

Higher investmentsthrough automation &more indirect activities

GLOBAL RESEARCH quicker obsoleteness

of technology

GLOBAL RESEARCH quicker obsoleteness

of technology

CUSTOMERS demand for

better service

CUSTOMERS demand for

better serviceExternalForces

GLOBAL COMPETITION decreasing market prices shorter product life cycles

GLOBAL COMPETITION decreasing market prices shorter product life cycles

SHAREHOLDERS Quick ROI more & more short term oriented

SHAREHOLDERS Quick ROI more & more short term oriented

ProductProfitability ???

ProductProfitability ???

CustomerProfitability ???

CustomerProfitability ???

Process performance???

Process performance???

Overhead Cost Structure???

Overhead Cost Structure???

Less time to recover investments

The Dynamic Market Dilemma


Increases

Encourages

Leads to Implies

Product CostDistortion

Cross Subsidizationof Products

Increased ProductVariety and Complexity

Many Low VolumeProduct Lines

Implications of Product Cost Distortion


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


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


Software enabledSoftware enabled

Management enabledManagement enabled

Key Success Factors for ABC Initiatives

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


CO-OM-CO-OM-ABCABC

CO

-PA

CO

-PA

CO

-PC

CO

-PC

ABCABCProduct Cost ProductsCustomersDistribution Channels...

SAP's Comprehensive Approach to ABC

Process Process


Simple Value Flow in CO-ABC

FinancialsFinancials

Cost Center(Resources)

Products,CustomersChannels, etc.

Process

CostDriver

Posting

ResourceDriver

$$

$$


ABC Business Scenario

Private University

3 Cost Centers:

Student Services

IT

Print Shop

Two profit segments

Computer Science Curriculum

Accounting Curriculum

CurriculumProfitability


Accounting4000

Functional Responsibility

AreasProfit SegmentAllocation

usingStatistical Key Figure

2000

Traditional Overhead Costing

StudentServices

IT Department

Printshop

ComputerScience


Accounting

Cost

CenterProfit Segment

Business

Process

ResourceDriver

CostDriver

ABC Costing

Enrollment

Student Student SupportSupport

OfficeOfficeServicesServices

StudentServices

IT Department

Printshop

ComputerScience


ComputerScience

Accounting ComputerScience

With ABC

Accounting

With ABCTuition 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

Costing results with and without ABC


Activity-based Costing in the R/3 System

Master Data

Allocation Methods

Tools for Resource and Cost Assignments


Controlling Object: Master Data For:

Controlling Objects in R/3 are used by ABC

Cost Center

Internal Order

Business Process

Production Order

Production Cost Collector

Profitability Segment

Sales Order Item

Sales Order Item

. . .

Cost Center Accounting

Overhead Orders

Activity Based Costing

Production cost by lot

Repetitive Manufacturing

Profitability Analysis

Make-to-order manufacturing

Service businesses


Business Process Definition

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

BusinessProcess


Output Measure Master Data

. . .

Output Measure Identifier

No. of Output Measures

Process

Process Driver

ONE!

Activity type

varies

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

Master Data for the Process Driver is maintained within the Process .

Cost centerProcess

Cost center Process+

Driver

ActivityType


CostAssignment

CostAssignment

Activity-based Management

Products, CustomersChannels..

CostAssignment

Financials

Pu

sh A

pp

roac

h Pu

ll Ap

pro

achFinancials

Pull quantity

Pull quantity

CostAssignment

Products, CustomersChannels..

Cost center

Process

(Resources)

Cost center

(Resources)

Process


PUSH versus PULL Approach

PUSHPUSH PULLPULL

Implementation

Process Optimization/Flexible Budgeting

Fair Costing

•Simple configuration•Set-up of Process/ Allocation Cycles only

•No Quantity Structure•No backflushing capability•No capacity view •No leveraging of resources

•Costs not assigned according to actual usage of resources•Costs of idle capacity spread across products and customers

•More detailed configuration•Set-up of Process/Structured Processes/Templates

•Quantity Structure•Backflushing capability •Identify idle capacities•Leverage resources during planning

•Prices calculated based on capacity•Costs of idle capacity not spread to products and customers


Process Structures

Curriculum

Process GroupsProcess Groups Structured ProcessesStructured Processes

Copy Cost Center

Copy Cost CenterIT SupportIT Support

ProcessStudent Support

ProcessOffice Services



Tools for Resource Cost Assignment

Cost Object

Process Cost Assignment


Resource Cost Assignment

Cost center Assessment

Direct Activity Allocation

Indirect Activity Allocation

Target = Actual Activity Allocation

Distribution

TemplateProcess


Identifying Templates for Resource Assignment


Cost center

Process

TemplateHow much should

be assigned toeach Process?


Template Concept - Resource Assignment

Quantities consumed:Resources/Driver:


Print Shop Activity Type: Print Quantity = 300 hours

Cost center

Print Shop Activity Type: Copy Quantity = 500 hours

Cost center

IT Department Activity Type: Maintenance

Quantity = 100 hours

Cost center


Tools for Process Cost Assignment

Cost Object




Cost center

Process

Assessment

Direct Activity Allocation

Indirect Activity Allocation

Target = Actual Activity Allocation

Template


Identifying the Template for Cost Objects

Cost Object


Process

TemplateHow much should

be assigned toeach Profit Segment

or Cost Object?

Profit Segment


Template Concept - Process Assignment

Profitability Segment:AccountingCurriculumQuantity =

200

Quantity = 500

Quantity = 2000

Processes: Quantities consumed:

ProcessStudent Support


ProcessEnrollment

Cost Driver:

Number

of Students

Number

of Calls

Number

of Students


Template Concept - Process Assignment

Cost ObjectCourse ManualQuantity =

200

Quantity = 500

Quantity = 2000

Processes: Quantities consumed:

ProcessAdmininstration


Process Curriculum Development

Cost Driver:

Number

of Pages

Number

of Calls

Number

BOM items


Origin of Process Driver Quantities

Template

Routing

Product Costing

Bill of Materials

Material Master Data

wewrerretrtrtrwrtdsfasadfdsafdasfgdfggadgf

LIS

# BOM Items

Lot-size# Purchaseorders

Weight

# Work Centers

CO-PA

# Value fields

How much shouldbe assigned to

each Profit Segmentor Cost Object?


Formula-2

......

Process TemplateProcess Template

CurriculumDevelopment

Active

......

QuantityPlan Actual

ActivationPlan ActualObject

Formula-1

......

Active

......

Calculate the number of pages based on Bill of Material item 1 X Numberof Manuals Planned

Formula-1 Formula-2

Dynamics of the Process Template

OfficeServices

Calculate the number of pages based on Bill of Material item 1 X Numberof Yield Confirmed


3200 Pages

......

Process ConsumptionProcess Consumption

CurriculumDevelopment

Active

......

QuantityPlan Actual


4000 Pages

......

Active

......

Number of Manuals: 40Sheets of paper: 100

Formula-1 Formula-2

Applying the Process Template

OfficeServices

Number of Manuals: 32Sheets of paper: 100


Formula-2

......

EnrollmentProcess

Active

......

QuantityPlan Actual


Formula-1

......

Active

......

Calculate the number students enrolled based on customer numbers in Division 01 last year

Formula-1 Formula-2

Dynamics of the Process Template

Student Services

Calculate the number students enrolled based on customer numbers in Division 01 this year

Process TemplateProcess Template


225 Students

......

EnrollmentProcess

Active

......

QuantityPlan Actual


200 Students

......

Active

......

Number of Studentsin 1999 for AccountingCurriculum: 200

Formula-1 Formula-2

Applying the Process Template

Student Services

Number of Studentsin 2000 for AccountingCurriculum: 225

Process ConsumptionProcess Consumption


Template

Plan Qty. Actual QtyObject Plan Activation

Actual Valuation Event

What process applies?

What process applies?

How much of the process applies?

How much of the process applies?

When does theprocess apply?When does theprocess apply?

Does the process apply?Does the process apply?Does the process apply?Does the process apply?

The Reusability of the Template

ChemistryCurriculumIT

CurriculumAccountingCurriculum

ActualActivation


For which process and at what costs does a cost center

perform?

ABC Reporting

Which processes are necessary?

What are the costs of a cost object?

What is the profitability ofa certain market segment?

What are the process costs?

Who consumes the process?


Simulation of ABC Data

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


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

OROS for Analytic ABC


Modeling Measurement

Resource costs & driver data

Master data & cost assignment structures

Integrated ABCAnalytical ABC

PC / PA Reporting

Cost Accounting

Learning

Rapid Prototyping

Job Costing

Refinement

Simulation

Resource costs & Aggregate driver data

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

SAP AG 1999 filename (author) / 40

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