oman telecommunications company (s.a.o.c) activity based costing model
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Oman Telecommunications Company (S.A.O.C)Oman Telecommunications Company (S.A.O.C)
Activity Based Costing ModelActivity Based Costing Model
ByKhurshid Mohammad Ashraf
Manager Costing
ForFor
Arab Regional Workshop on Calculation of Costs, Tariffs and Rates Arab Regional Workshop on Calculation of Costs, Tariffs and Rates for Telephone Services “COSITU”for Telephone Services “COSITU”
Cairo (Egypt) 9-13 March 2003Cairo (Egypt) 9-13 March 2003
Knowing what your real product costs are, is The Key to surviving in today's competitive environment….
Activity Based Costing
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Meeting this daunting challenge often requires:Determine the true and actual cost of servicesImplementing process improvementsEvaluating different optionsAligning activities to the organization’s mission and its strategic plan
Meaning…Operational managers will have to change their ways of thinking about the true costs and value of the services they provide.
Activity Based Costing
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These restrictions will create a lot more reasons to understand cost. Efficiency and performance will increasingly be part of the language of organization.
Activity Based Costing/Management (ABC/M) offer potential solutions to this problem. Providing meaningful, fact based information to organization officials, managers, and employee teams, can be a cost-effective means of bringing about beneficial change and improved performance in very competitive environments.
Activity Based Costing
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Traditional Cost Accounting vs. Activity Based CostingTraditional cost accounting systems have evolved primarily to serve the function of inventory valuation for external audiences such as creditors and investors. However, these traditional systems have failed to address:
1. There inability to report individual product costs to a reasonable level of accuracy.
2. There inability to provide useful feedback to management for the purpose of operational control.
Activity Based Costing
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Traditional Product Costing
Costs
Consumed by:
Products
Allocation:Costs are allocated to products based on assumed linkages or convenient alternatives such as direct labor hours
1. Focus on the product in the costing process.
2. Costs are traced to the product with assumption to consuming of the resources in proportion to the volume produced.
3. These volume drivers, fails to account for product diversity in the form of size or complexity.
4. There is not a direct relationship between production volume and cost consumption.
Activity Based Costing
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Activity Based Costing
Costs
Consumed by:
Consumed by:
Products
Activities
Resource Drivers:Costs are assigned to activities based on effort expended
Activity Drivers:Activity costs are assigned to products on unique consumption patterns
1. ABC focuses on activities in the costing process.
2. Costs are traced from activities to products, based on the product’s demand for these activities during the production process.
3. ABC theory contends that, virtually all of a company’s activities exists to support production and delivery of services, they should all be included as product costs.
Activity Based Costing
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ABC is extremely valuable to an organization, because it provides information on the range, cost and consumption of operating activities. Specific benefits of and strategic use for this information are:
1. More accurate product costs enable better strategic decisions regarding:
A. Product pricingB. Product mix.C. Make vs. BuyD. Investments in R&D, Process automation,
etc..
Activity Based Costing
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2. Increased visibility of the activities performed enables a company to:
A. Focus more on the management of activities, such as improving the efficiency of high cost activities.
B. Identify and reduce non-value added activities.
Activity Based Costing
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State Ownership/Full Regulation
Negotiate cost recovery
Social policy pricing
Design subsidies and achieve universal service
Structure social subsidies and maintain regulatory liaison
Functional efficiency
Manage demand (product extensions leveraged from network as designed)
Rate period performance
The relevant aspects to be considered during the transition of a telecommunications company from a scenario of full regulation to one of full competition, considering an interim stage of regulated competition, are highlighted below.
Managed Competition
Manage cost recovery
Cost based pricing
Manage subsidies and Universal Service Obligation
Increased subsidies awareness and maintain supportive regulatory liaison
Functional cooperation
Meet demand (new products leveraged from customer need e.g. interconnection)
Balanced short/long term view
Full Competition
Manage margins
Market price based pricing
Manage comprehensive business portfolio
Competitive awareness and maintain proactive regulatory liaison
Process effectiveness /efficiency
Stimulate demand (new products with emphasis on cycle time to market)
Shareholder value
Activity Based Costing
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The need for ABC in OmanTel
Cost Model will establish the vital linkage
between the physical work of OmanTel and
historical financial performance of the
company. It will give insight to the causes of
cost and link those cost to the physical work.
Activity Based Costing
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o Cost Based Pricingo Enhance Performance/efficiency
through various activitieso Solid understanding of cost causation.o Cost Model will provide credible data
by which OmanTel can interact with Regulatory Body
The need for ABC in OmanTel..…Activity Based Costing
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Primary Benefit of ABC Results:The most tangible and immediate benefits of ABC will be the provision of accurate cost information relating to the following:
•Cost of Network Blocks
- Used capacity
- Spare capacity
Activity Based Costing
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•Cost of International Routes
- by Carrier
Primary Benefit of ABC Results:
•Cost of Services
- Basic services
- Final services
•Cost of Activities
Activity Based Costing
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Primary Benefit of ABC Results will leads to:Deeper understanding of network components costs will help in
Costing of calls using such network components
Calculation of returns on network investments by region
Activity Based Costing
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Cost of sharing network components by services - Fixed line, GSM, etc.
Primary Benefit of ABC Results will leads to:
In a telecom company, same resources are used to provide multiple services. ABC will identify and cost the extent of resources used by each service.
Activity Based Costing
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Primary Benefit of ABC Results will leads to:Information will be available by Used and Spare Capacities within network blocks. This will facilitate:
Network capacity planning.
Optimization of network capacities
Network planning and roll-out of services
Activity Based Costing
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Cost of International Routes by:
Primary Benefit of ABC Results will leads to:
CarriersProfitability analysis of international
calls by routes and by carriersInformed decisions on call routings to
minimize costCost of sharing international routes by
different services - Fixed line, GSM, etc.
Activity Based Costing
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Cost of Services
Primary Benefit of ABC Results will leads to:
1. Service profitability analysis for better decision making.
2. Accurate information of call termination costs will facilitate inter-connection costing and pricing in the future competitive environment
3. Will provide verifiable data to the regulatory environment
Activity Based Costing
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Cost of Services
Primary Benefit of ABC Results will leads to:
4. Profitability analysis of business units by service line.
5. Cost plus Tariff Setting6. Better understanding of the economics of
cross subsidization – which services are profitable and are subsidizing other services…
Activity Based Costing
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Cost of Activities
Primary Benefit of ABC Results will leads to:
Will enable in-depth understanding of cost causation - Why, Where and When costs occur.
Managing performance and efficiency of departments can be based on
cost of activities within the departments
Activity Based Costing
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ActivitiesActivities
Client FacingActivities byBusiness Unit /Global
Network Activitiesby Business Unit /Network Block
Support Activitiesby Business Units/Global
Client FacingClient FacingActivitiesActivities by byBusiness Unit /Business Unit /GlobalGlobal
Network ActivitiesNetwork Activitiesby Business Unit /by Business Unit /Network BlockNetwork Block
Support ActivitiesSupport Activitiesby Business Units/by Business Units/GlobalGlobal
GeneralCarrier’sProducts & ServicesCustomer GroupsRegionsOther Cost Objects
Network Blocks
Hardware & Software
GeneralCarrier’sProducts & ServicesRegionsOther Cost Objects
Network Blocks
Hardware & Software
Hardware GroupsHardware GroupsHardware Groups
Software GroupsSoftware GroupsSoftware Groups
Cost ObjectsCost Objects
4th Level
Products / Services by Regionand Customer Group
Other Cost Objects
44thth Level Level
Products / Services by Region
Other Cost Objects
3rd Level
Basic Services b y Region
Customer Groups
Regions
33rdrd Level Level
Basic Services b y Region
Regions
Common Costs and RevenuesCommon Costs and Revenues
1st Level
Network Blocks by Region
11stst Level Level
Network Blocks by Region
2nd Level
International Routes by Carrier
22ndnd Level Level
International Routes by Carrier
ResourcesResourcesEquipment
GroupsSwitching
BTS’sFiber Optic Cable
Cross-connectsEtc.
DepartmentsDirectorate HEMDirectorate HEPCorp. PlanningFinancial Serv.Customer Serv.Support Serv.Mobile C.U.Fixed C.U.
InternationalAdministration
Etc.
Hardware &SoftwareGroups
TIMSTABSPayroll
Etc.
EquipmentEquipmentGroupsGroupsSwitching
Transmission EqmtFiber Optic Cable
Cross-connectsEtc.
DepartmentsDepartmentsOmanTel
OrganizationalCost Centers
Hardware &Hardware &SoftwareSoftwareGroupsGroups
Billing SystemsPayroll System
Etc.
Resource Pools- Personnel- Fleet- Buildings- Communications- Hardware/ Software
Other Costs- Depreciation- Cost of Capital- Maintenance- External Supplies- Etc.
Resource PoolsResource Pools- Personnel- Fleet- Buildings- Communications- Hardware/ Software
Other Costs- Depreciation- Cost of Capital- Maintenance- External Supplies- Etc.
RevenuesRevenuesRevenues
ABC Design at OmanTelActivity Based Costing
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Activity Based Costing
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PSTN-PSTN Basic Product & Services Network Block wise Costing
Network Block Description
PSTN-PSTN Band 1 (Free
Services) PSTN-PSTN Band 2 PSTN-PSTN Band 3Unit_Cost Unit_Cost Unit_Cost
Activities -0.00009329 -0.00084128 -0.00160002Primary Switches -0.00002939 -0.00002939 -0.00005847Fiber Optic Cable (FOC) -0.00051996 -0.00051996 -0.00142183Coaxial Cable -0.00050637 -0.00030637 -0.00021248Distribution Frame - DDF (Digital) -0.00006998 -0.00005998 -0.00012806Distribution Frame - ODF (Optical) -0.00000366 -0.00000166 -0.00000782Transmultiplex -0.00000011 -0.00000003 -0.00000004PDH Hierarchy (Multiplex) -0.00032304 -0.00052304 -0.00058311SDH Ports -0.00004338 -0.00005338 -0.00011030Analog Multiplexing -0.00000001 0.00000000 0.00000000Coaxial Terminal -0.00000203 -0.00000403 -0.00000261Microwave Radio Equipment -0.00031269 -0.00061269 -0.00092948Exchange Test Equipment -0.00006508 -0.00007508 -0.00006125Masirah Earth Station 11 (Domestic + TVRO) -0.00000024 -0.00000044 -0.00000161Mobile Earth Station -0.00004212 -0.00003211 -0.00005725Shaa Earth Station 12 (Domestic + TV-TXRX) -0.00000021 -0.00000071 -0.00000146Al-Amerat Antenna 4 - Arabsat-2A (Domsat) -0.00000888 -0.00000988 -0.00003689Local Exchanges (EWSD + AXE) -0.00251734 -0.00251734 -0.00207936Total Cost -0.00453777 -0.00558737 -0.00729204
Main Issues to Deal with before and after ABCMain Issues to Deal with before and after ABC• Development of Organization Culture• Time Report System• WIP/Capitalization• Fixed Asset Register Auditing/De-merger• Fast Closing of Monthly & Year End Accounts• Update of Tariff Manual with Switch plus Fixing Revenue
Leakage • Update of Telecom Network Details
– Switch– Transmission– Trunks– Local Loops
Activity Based Costing
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• Complete Understanding of Interconnect Costing Requirements
• Facilitating Regulatory Body and Understanding Regulations.
Activity Based Costing
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Main Issues to Deal with before and after ABCMain Issues to Deal with before and after ABC
ABC will lead toABC will lead to• ABC is the foundation for moving into Activity Based
Management (ABM).• ABC will help a long way for implementation of
Activity Based Budgeting/Planning (ABB).• ABC will create a data repository containing information
from all financial and operational system, and can be used to generate various types of management information.
• ABC will be first step towards the implementation of Strategic Enterprise Management tools such as Balanced Scorecard, Performance Management, Etc..
Activity Based Costing
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Thank You For Your AttentionThank You For Your Attention
Activity Based Costing
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ABC/M Resources on WebABC/M Resources on Webwww.abctech.comwww.bettermanagement.com
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