oman telecommunications company (s.a.o.c) activity based costing model

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

OmanTel / Cairo (Egypt) 9-13 March 2003Cairo (Egypt) 9-13 March 2003 2/27

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.



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.



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.



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.




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.



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..



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.



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



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.



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


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



•Cost of International Routes

- by Carrier

Primary Benefit of ABC Results:

•Cost of Services

- Basic services

- Final services

•Cost of Activities



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



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.



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



Cost of International Routes by:


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.



Cost of Services


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



Cost of Services


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…



Cost of Activities


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



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




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



• Complete Understanding of Interconnect Costing Requirements

• Facilitating Regulatory Body and Understanding Regulations.



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..



Thank You For Your AttentionThank You For Your Attention



ABC/M Resources on WebABC/M Resources on Webwww.abctech.comwww.bettermanagement.com

http://www.abctech.com/

http://www.bettermanagement.com/

oman telecommunications company (s.a.o.c) activity based costing model

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