Intermediate Cost Analysis and Management Identify Key Elements of Information from Output Based Case Study Data Bureau of Engraving and Printing Intermediate Cost Analysis and Management 14.2

This is Not How the Bureau of Engraving and Printing Makes It

Terminal Learning Objective Action: Identify Key Elements of Information from Output Based Case Study Data Condition: You are training to become an ACE with access to ICAM course handouts, readings, spreadsheet tools, and awareness of Operational Environment (OE) variables and actors Standard: With at least 80% accuracy: Describe case background Discuss the process of cost management and control at Bureau of Engraving and Printing (BEP)

The Bureau of Engraving and Printing: Is a branch of the United States Treasury Responsible for printing all U.S. currency Operates two facilities: Washington, DC (above left) Fort Worth, TX (above right) Funded entirely by sales to the Federal Reserve

Bureau of Engraving and Printing (BEP) BEP formerly printed 100% of all U.S. stamps It enjoyed a monopoly selling to the U.S. Post Office BEP had a good cost system but did not employ an output based cost management and control process It knew its average costs precisely as $2.15/K stamps It priced all stamps at the same $2.15/K Life was good – until the Post Office decided to seek bids from private sector printers For commemoratives For bulk stamps like the flag stamps

Post Office Asked for Bids for Commemorative and Flag Stamps Low Volume High Complexity Cost $4.00/K High Volume Low Complexity Cost $1.12/K What do you think happened when BEP bid both jobs at the $2.15 per thousand price that their cost system reported? Which bid did they win? Which did they lose? How do you think they performed with the business they won?

Problems of Bidding on Average Unit Cost New commemorative job bid If BEP bids $2.15 average and Competitors bid something closer to true cost BEP will win work and lose money New flag stamp job bid BEP will lose bid

Three Effects of the Stamp Debacle The Bureau developed much more sophisticated costing capable of supporting multiple products The Bureau implemented an effective output based cost management and control process The Bureau learned and continues to believe that its continued existence is not guaranteed Its culture assumes that continuous improvement is critical Senior leaders believe that cost management is essential to long term viability It acts like it is in a Cost War

LSA #1 Check on Learning Q1. What is the danger of using an average product cost to set prices? A1. Q2. How did losing the stamp bid impact the Bureau? A2. Q1. What is the danger of using an average product cost to set prices? A1. Cost will be correct on average but incorrect in each individual case. That means that prices based on cost will be too high for some items (causing the organization to lose business on its most profitable products) and too low on others (cause the organization to “win” bids for items that aren’t really profitable.) Q2. How did losing the stamp bid impact the Bureau? A2. The cost system was upgraded to accommodate multiple products. An output based cost management and control process was implemented. The culture of the organization changed to one of cost management and continuous improvement.

LSA #1 Summary We discussed how the Bureau of Engraving and Printing (BEP) uses the method of Average Unit Cost to bid for stamp jobs. Due to inaccurate cost information, they would win bids for jobs where they would lose money and lose bids where they could profit.

Leadership Director (the Senior Leader) holds a monthly cost meeting All key leaders attend prepared to discuss performance Cost versus standard Quality

BEP Strategic Plan This Strategic Plan furthers our commitment to maintaining state-of-the-art production capability, product quality and security, and employee safety and environmental stewardship as we continue to cost effectively meet the needs of our customers and the American public.

Analytic Cost Experts Office of the CFO Office of Compliance Office of Acquisition Office of Financial Management Cost Accounting Branch General Ledger Accounting Branch Payroll Branch Budget Branch Financial Systems Branch ACEs Managerial External Reporting and Administrative

Chief Financial Officer Mission The mission of the CFO Directorate is to maintain the integrity of the Bureau's revolving fund, provide the financial resources necessary to meet customer requirements, and oversee management control functions and the mutilated currency redemption program.

Process Two key after action reviews monthly Pre-cost meetings Working sessions for each manufacturing site More detail oriented Director’s cost meeting First thing set on the annual calendar Attended by all key executives More summary and key issue oriented

Cost Measurement Extensive actual cost reporting Variance reporting Detailed costs by product type (output) Monthly frequency Variance reporting Monthly and YTD versus standards Standards updated several times per year per leadership direction Consider the intelligence content of the following reports

BEP 2008 AAR Sales down $61.4M, but COGS down only $18.3M 2007 ($M) Revenue from Sales 516.6 578.1 Cost of Goods Sold 443.3 461.6 Gross Margin 73.3 116.5 Operating Costs -General and Administrative 60.3 56.2 -Research and Development 12.4 14.0 Total 72.7 70.2 Excess of Revenues over Expenses 0.6 46.3 Sales down $61.4M, but COGS down only $18.3M This drops Gross Margin Percent from 20.2% to 14.2%!! Can you reconcile??

What is Leadership Interested In?

What is Leadership Interested In?

What is Leadership Interested In?

Graphs Help Leaders Learn Production and Quality Report July 2009 Graphs Help Leaders Learn

Production and Quality Report July 2009 Describe Performance COST PERFORMANCE: Cost per Cost 1000 notes Impact WCF Current Month Cost (Above) or Below Standard ($0.4464) ($134,272) YTD Total Cost (Above) or Below Standard $0.7151 $2,425,728 ECF Current Month Cost (Above) or Below Standard ($1.3342) ($204,928) YTD Cost (Above) or Below Standard $0.1272 $288,480 Total Current Month Cost (Above) or Below Standard ($0.7465) ($339,200) YTD Cost (Above) or Below Standard $0.4795 $2,714,208

What does this report suggest? Production and Quality Report July 2009 What does this report suggest? BREAKDOWN OF YTD COST : Cost Impact WCF Material Cost (Above) or Below Standard $201,732 Labor Cost (Above) or Below Standard $853,196 Overhead Cost (Above) or Below Standard $64,470 Volume Impact (Above) or Below Standard $1,306,330 Total MFG Cost (Above) or Below Standard $2,425,728 ECF Material Cost (Above) or Below Standard $246,509 Labor Cost (Above) or Below Standard $464,780 Overhead Cost (Above) or Below Standard ($257,846) Volume Impact (Above) or Below Standard ($164,963) Total MFG Cost (Above) or Below Standard $288,480

Requirements Inventory Leadership: Director actively involved, runs AAR ACE: CFO and staff have mandate Process: Two institutionalized, formal AAR meetings Measurement: Detailed, frequent, costing with outputs as cost objects and comparisons to standard costs

Output Based Control Important to organizations providing a limited number of products of services Supports a full spectrum of costing views and analyses Much more complex than organization or role based control Probably has more limited applicability in government But extremely powerful where applicable, especially when user fees are based on cost

LSA #2 Check on Learning Q1. How did cost measurement and reporting differ from the pre-cost meeting to the Director’s cost meeting? A1. Q2. What role did leadership play in the process? A2. Q1. How did cost measurement and reporting differ from the pre-cost meeting to the Director’s cost meeting? A1. The report for the pre-cost meeting was much more detailed. It showed how each production element contributed to total cost. The reports for the Director’s cost meeting was much higher level (reported performance at a facility level and then total organization performance). Q2. What role did leadership play in the process? A2. Leadership signaled the importance of the process by scheduling the meeting as a priority, and also provided commander’s intent-type guidance in the organization’s strategic plan. It is also possible to see leadership’s influence on the reporting process by looking at what elements are prominently featured in the report formats.

LSA #2 Summary During this discussion, we discussed the process of cost management and control at Bureau of Engraving and Printing. After a monthly cost meeting was implemented, the cost culture had been started. Managers were now responsible for variances being reported.

TLO Summary Action: Identify Key Elements of Information from Output Based Case Study Data Condition: You are training to become an ACE with access to ICAM course handouts, readings, spreadsheet tools, and awareness of Operational Environment (OE) variables and actors Standard: With at least 80% accuracy: Describe case background Discuss the process of cost management and control at Bureau of Engraving and Printing (BEP)