Activity Based Costing in the Telecom Industry
Activity Based Costing
Introduction -- What ABC is not• not• What is Activity Based Costing: ! As defined by Kaplan & Cooper in 1991 ! Difference between ABC and Traditional Accounting ! The CAM-I Standard and business modeling
in the Telecom Industry 28 February 2002 Presented by:
ABC in the Regulatory Environment: ! FDC, LRAIC versus ABC ABC in Government: ! Cost Recovery, Cost Management, Process Improvement and Outcome/Output Analysis ABC in the Telecom Industry: ! Predictive Resource Planning, Profitability Analysis, Costing and Cost Management Who are using ABC ©2000 All rights reserved. ABC Technologies, Inc.
Financial Accounting versus ABC
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Expenditure is not the same as cost
“There are many ways to arrive at “cost” as well as revenue as the Enron scandal has so vividly illustrated.
•Costs and expenses equal in total. But they are not the same thing. •Expenditures are incurred when money is exchanged between parties. Costs are always calculated, restated and then assigned to products and services.
For an accountant, “cost” can be any outflow of value … for an economist, a “cost” only arises from a a real cause.” John Ure
•ABC resolves the arbitrary “Cost Absorption” in traditional accounting ABC practitioners and economists think alike …
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ABC is not ...
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Activity Based Costing in the Telecom Industry Introduction -- What ABC is not• not• What is Activity Based Costing: ! As defined by Kaplan & Cooper in 1991 ! Difference between ABC and Traditional Accounting ! The CAM-I Standard and business modeling
• the same as financial accounting • A heretic in the world of accounting
ABC in the Regulatory Environment: ! FDC, LRAIC versus ABC
• Well understood by accountant
ABC in Government: ! Cost Recovery, Cost Management, Process Improvement and Outcome/Output Analysis
• In conflict with FDC, LRAIC and other “Costing Philosophy” as defined by economists
ABC in the Telecom Industry: ! Predictive Resource Planning, Profitability Analysis, Costing and Cost Management
IS NOT
Who are using ABC ©2000 All rights reserved. ABC Technologies, Inc.
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What is ABC
ABC is...
Defined by Kaplan and Cooper in 1991, ABC shows what activities are used to produce what products and services.
!
Resources are consumed by Activities
!
Activities are consumed by Products/Services
Full blown ABC business models now use Activity-based Cost as a unit of measurement to describe the organisation activities, the resources consumed by those activities and the products and services generated by those activities.
Resources
ABC is not just a way to describe cost. It is also an unimpeachable operational management methodology that enables factbased and quantity based management decision.
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Products & Services
Activities
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The Need for ABC
Industry Definition: The CAM-I Standard Cost Assignment View
A key to understanding ABC is to understand how cost behavior truly varies in relation to other factors
RESOURCES
Changes in Cost Structure 100% Resource Resource Cost Assignment
Process View
Cost Drivers
ACTIVITIES
Activity Activity Cost Assignment Assignment Adapted from The CAM-I Glossary of Activity-Based Management, edited by Norm Raffish and Peter B.B. Turney, (Arlington: CAM-I, 1991.)
Resource Drivers
Overhead Cost Components
Performance Measures
Direct
Material
Direct (recurring) Labor Activity Drivers
1950s
1990s
0% COST OBJECTS
Old-fashioned
The demand for overhead activities are not much linked to sales or production volume. They result from: • The diversity and complexity of products, services and customers • Quality levels • Rates of needed change
Integrated
Hierarchical
Stages in Business Evolution ©2000 All rights reserved. ABC Technologies, Inc.
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Activity
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Activity Examples Unloading trucks
“Work performed within an organization.”
Processing phone centre orders
Training employees
Maintaining company vehicles
What What we we do do Adapted from The CAM-I Glossary of ActivityBased Management, Edited by Norm Raffish and Peter B.B. Turney, (Arlington: CAM-I, 1991.)
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Forecasting sales
The Language of ABC
ABC Doesn’ Doesn’t Replace the Accounting System
Stating activities with an action verb-object-noun grammar convention creates an atmosphere for change by providing a new way of looking at something people are already familiar with, rather than something foreign.
An ABC/ABM system does not replace the accounting system. It restates the same data and adds operating relationships to more effectively support decision making.
To: ABC Data Base
From: General Ledger
Data
Activity-Based View
Chart-of-Accounts View
Data+
Information
Claims Processing Dept Claims Processing Department Actual Salaries Equipment
Plan
Favorable/ (unfavorable)
$621,400
$600,000
$(21,400)
161,200
150,000
(11,200)
Travel expense
58,000
60,000
2,000
Supplies
43,900
40,000
(3,900)
Use and occupancy Total
Key/scan claims
$ 31,500
Analyze claims
121,000
Suspend claims
32,500
30,000
––
$914,500
$880,000
$(34,500)
(expense
101,500
Resolve member problems
83,400
account
Process batches
45,000
balances)
119,000
Make copies
145,500
Write correspondence
30,000
A blizzard of transactions
Receive provider inquiries
Determine eligibility
Attend training Total
A B C / A B M
General Ledger
Ms. Strategy Mr. Operations
77,100
An Accumulator
158,000 $914,500
Optical Lens (Reassigns Costs)
Decision makers
When managers get this kind of report, they are either happy or sad, but they are rarely any smarter! ©2000 All rights reserved. ABC Technologies, Inc.
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Three Views of Cost
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Activity Based Costing in the Telecom Industry Introduction -- What ABC is not• not• What is Activity Based Costing: ! As defined by Kaplan & Cooper in 1991 ! Difference between ABC and Traditional Accounting ! The CAM-I Standard and business modeling
Operational View
Financial View
Today Yesterday
Tomorrow
ABC in the Regulatory Environment: ! FDC, LRAIC versus ABC
Strategic View
ABC in Government: ! Cost Recovery, Cost Management, Process Improvement and Outcome/Output Analysis
?
ABC in the Telecom Industry: ! Predictive Resource Planning, Profitability Analysis, Costing and Cost Management Who are using ABC ©2000 All rights reserved. ABC Technologies, Inc.
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LRAIC as stated by Telecom Agency of Germany
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OFTA versus Irish Telecoms
The Telecom Authority considered that … LRAIC would be the appropriate cost standard for it would send the right “build or buy” signals to interconnecting carriers.
• LRAIC is the long run cost of providing either an increment or decrement of output, which should be measured on a forwardlooking basis.
In July 1997:
• Setting interconnection charges using LRAIC permits recovery of fixed costs, while retaining some of the desirable properties of marginal cost pricing.
In April 1999:
ABC principles are relevant to the determination of interconnection charges, for which purposes the costing systems of operators will need to be sufficiently detailed to permit the allocation of costs to network components.
LRAIC Model Reference Paper, Telestyrelsen ©2000 All rights reserved. ABC Technologies, Inc.
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Irish Telecoms Stated in April 1999 …
Irish Telecoms Stated in April 1999 …
ACCESS: • An open, fair and transparent licensing regime PRICE: • Regulatory Costing and Accounting • Interconnection Rates • Long Run Incremental Costs(LRIC) • Internet Interconnect • Accounting Separations • Costing Methodologies • Consumer Prices • Price Cap • Rate Regulation for TV Delivery QUALITY: • Quality of service offered by operator to operator and by operator to consumer is of major importance
•The Telecoms Regulator today issued proposals for the costing methodologies to be used in the separated accounts of operators designated as having significant market power (SMP). The move should facilitate and sustain the further development of a competitive telecoms environment ... •The proposals consider the implications of following the principles of cost causation e.g. Activity Based Costing, in the allocation of costs, revenues and capital employed for the purposes of preparing separated accounts. ©2000 All rights reserved. ABC Technologies, Inc.
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Irish Telecoms Stated in April 1999 …
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Irish Telecoms Stated in April 1999 … PRINCIPLES OF COST ALLOCATION:
PRINCIPLES OF COST ALLOCATION:
•The 8/4/98 Recommendation recommends that the allocation of costs, capital employed and revenue is done in accordance with the principle of cost causation (such as activity-based costing (“ABC”)), i.e. costs and revenues should be allocated to those services or products that cause those costs or revenues to arise.
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Irish Telecoms Stated in April 1999 …
i) Transparency: the operator should publish updated versions of its cost allocation methodology when changes are made to it. ii) Consistency: the same bases of allocation should preferably be used from year to year. Where there are changes made the operator should restate the previous year separate accounts on the new bases. iii) Materiality: the use of specific allocation bases may not be necessary if the effect on the allocation is not material to the outcome. Of course, it may not be possible to measure the effect without adopting an alternative basis and, in cases of doubt, the most appropriate activity related cost apportionment basis should be used. ©2000 All rights reserved. ABC Technologies, Inc.
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Irish Telecoms Stated in April 1999 …
PRICE:
INTERCONNECTION RATE:
• Access is effectively denied if the price is
• The ability of new entrants to interconnect to the network of an incumbent operator is fundamental to the development and sustainability of competition in a telecommunications industry.
prohibitive. • In a monopoly market and in markets in transition from monopoly to competition, specific regulatory measures are necessary to ensure that users and new entrants have appropriately priced access to services from the former monopolist.
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Many Costing Philosophies …
Activity Based Costing in the Telecom Industry
FDC and LRAIC are costing “philosophies” philosophies” which say what costs should or should not be included
Introduction -- What ABC is not• not• What is Activity Based Costing: ! As defined by Kaplan & Cooper in 1991 ! Difference between ABC and Traditional Accounting ! The CAM-I Standard and business modeling
Measurement (quantitative technique) is the key LRIC
FDC
TELRIC-BS
LRAIC
FLEC/LRAIC
ABC in the Regulatory Environment: ! FDC, LRAIC versus ABC
Measurement Measurement
Measurement
ABC in Government: ! Cost Recovery, Cost Management, Process Improvement and Outcome/Output Analysis
Measurement Measurement
•• ABC ABC is is aa measurement measurement •• ABC ABC demonstrates demonstrates the the “Cost and Effect” Effect” (Causation) (Causation) “Cost and
ABC in the Telecom Industry: ! Predictive Resource Planning, Profitability Analysis, Costing and Cost Management Who are using ABC
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Does our Government understands its cost structure?
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Activity Based Cost Recovery (Therapeutic Goods Agency)TGA, Commonwealth Department of Health and Aged Care of Australia Regulator of therapeutic goods, drugs and medical devices !
Costs as input to pricing
!
Identify cross subsidisation
!
Defensible basis for prices
!
Similar applications in Hong Kong: Kong: Water Water Supplies De Department, partment, Hong Kong Kong Post, OFTA etc.
Translate Costs to Prices
“ We will first consider [how to cut]
• Costs translate to revenue required per sector • Estimate no. units for fee events • What - if analysis by sector • Develop pricing model • Negotiate with industry associations
expenditure. The Government is determined to solve the issue in the medium and long term” Antony Leung, Financial Secretary, S.C.M.P. Thursday December 6, 2001
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4 Weeks
RECEIVE INSPECT STORE ISSUE MACHINE INSPECT STORE ISSUE ASSEMBLE INSPECT STORE TEST STORE PACK STORE SHIP
Output/Outcome Decision Framework
Raw Material RECEIVE MACHINE ASSEMBLE TEST PACK SHIP Minimize Cost Drivers for Non-Value Added Activities
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2. ABC/M In Government
Process Improvement and Cost Management Example Raw Material
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Government’ Mission Government’ ssMission 4 Days
Government’ Strategy Government’ ssStrategy
PolicyObjectives Objectives Policy
Finished Product
GovernmentServices Services Government
(Outcomes)
(Outputs)
ActivityArrangement Arrangement Activity
Finished Product ©2000 All rights reserved. ABC Technologies, Inc.
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2. ABC/M in Government
OUTCOMES
OUTPUTS
IN PUTS
Activities
Managing for Outcomes
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Activity Based Costing in the Telecom Industry
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Key challenges for the Telecom industry …
Introduction -- What ABC is not• not•
Economic and Structural Change:
What is Activity Based Costing: ! As defined by Kaplan & Cooper in 1991 ! Difference between ABC and Traditional Accounting ! The CAM-I Standard and business modeling
“… these “secular” trends have seen the traditional cash cows of the industry, IDD and mobile voice service drying up.” John Ure,TRP
ABC in the Regulatory Environment: ! FDC, LRAIC versus ABC
“… the (Hong Kong) telecom market is saturated. Profits of most operators are falling. Most companies are losing money. I hope government policy would also consider and encourage investments as it opens up the telecom market.” Linus Cheung, PCCW
ABC in Government: ! Cost Recovery, Cost Management, Process Improvement and Outcome/Output Analysis ABC in the Telecom Industry: ! Predictive Resource Planning, Profitability Analysis, Costing and Cost Management Who are using ABC ©2000 All rights reserved. ABC Technologies, Inc.
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ABC in Telstra - Why?
ABC in Telecom Business Planning
The existing Cost Management System was inappropriate •Profit Margins were not transparent •Lack of belief in the cost system(s) •Provided little insight into the key activity costs for each major product segment •Information not used by line managers •Large number of special costing studies •Reports not used by management •Insufficient to support strategy setting
Business planning for policy makers and Telecommunications operators in the new technical and legal environment
It was not supporting the product management process ©2000 All rights reserved. ABC Technologies, Inc.
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Sample Activity Based Budgeting Model
Profitability Profile Using ABC Profitability profiles are like electrocardiograms of a company’s health. After sales are attached to the ABC costs, this graph reveals that $8 million was made on the most profitable 75% of products --- and then $6 million was conceded back! $8
Resources
Cumulative Profit (Millions)
Capacity Available Required
Activities
Cost Objects Estimated Required Output
Work Effort
Expenses from GL
Output
Customer type
- Activation - Compensation Expenses
$6
- Non-Labor Expenses
Net Revenues Minus $4 ABC Costs
- IT Charge Back
- Existing Acct Activities
- Activation Call
- Upselling
- Business Call
- Trouble Resolution
- Consumer Call
Consumer Business
- Trouble Ticket - Store Data Records
Unrealized profit revealed by ABC
$2 $1.8 profit
Determine Resources Required
Apply Rates
Estimate Demand
$0
Specific Products, Services, and/or Customers (ranked most profitable to least profitable) ©2000 All rights reserved. ABC Technologies, Inc.
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Process Improvement Theory
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Using OROS Software With Sprint Process Improvements Strategic Goals
Knowledge Management
LOB KPI CBI
Strategic Goals
Managed Process (results)
Balanced Scorecard
Detail based on managed output ($ or headcount; i.e manageable resources)
Strategic ABM
Reporting
Balanced Scorecard
ABC TOC CQI ABM/P
Operational ABM
Planning
Functional
Process 'As Is'
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Traditional Budget
Process Changes
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Process Improvement - Scenario Analysis
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Resource Planning
!How many employees should I hire? !What staff levels (Employees with OT vs. Contractors)
!There are cuts going on all over the company. How do I reduce my budget without sacrificing customer service?
do I need?
!What should be my mix between Contractors and
!With the business environment dramatically
Salaried employees?
changing, we need to be able to manage growth of some products and maturation of other products effectively.
!Do I need to build a new facility to handle my expected volume?
!Should I buy a new server to support data storage? !Should I train employees to handle multiple tasks?
!How efficient do I have to become to support my expected volume with my current budgeted resources?
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(able to handle 2-3 types of calls)
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Management = Management of Activities
Activity Based Costing in the Telecom Industry
Activities
What is Activity Based Costing: ! As defined by Kaplan & Cooper in 1991 ! Difference between ABC and Traditional Accounting ! The CAM-I Standard and business modeling
Product or Service
Customer Needs
Introduction -- What ABC is not• not•
ABC in the Regulatory Environment: ! FDC, LRAIC versus ABC ABC in Government: ! Cost Recovery, Cost Management, Process Improvement and Outcome/Output Analysis ABC in the Telecom Industry: ! Predictive Resource Planning, Profitability Analysis, Costing and Cost Management Who are using ABC
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Who are using ABC – Regulatory Environment
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Who are using ABC – Telecom Operators Clients in the Asia/Pacific: Telstra Singapore Telecom Telekom Malaysia Globe Telecom (Malaysia)
Telkom Indonesia Telstra Celcom Malaysia LG Telecom (Korea)
Clients in Europe: ICP Instituto das Comunicacoes NTL Communications TMN Telecomunicacoes Movieis Clients in US and Canada: AT&T Northern Telephone Limited Telecom Australia Bell South/Atlanta Sprint
Irish Telecom Authority
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GTE Pacific Bell Bell Canada Global One
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Contact
[email protected] for CD-ROM
THANK YOU! For more information, please contact: Alan Lung, Director & General Manager ABC Technologies(HK)Ltd Tel: +852 2503-1383 Fax: +852 2503-3645 E-mail:
[email protected] http://www.abctech.com http://www.bettermanagement.com
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