Intermediate Cost Analysis and Management Identify Similarities Between Battlefield Management and Cost Management Intermediate Cost Analysis and Management Show Slide #1: Identify Similarities Between Battlefield Management and Cost Management Title: Identify Similarities Between Battlefield Management and Cost Management References: Handouts, Excel Spreadsheets Facilitator Material and Student Material: Dry erase markers, white boards, access to Excel spreadsheets, case-studies Facilitator Material: Each primary facilitator should possess a lesson plan, slide deck, course handouts, practical exercises, access to Excel spreadsheets, case-studies All required references and technical manuals will be provided by the local Command. Student Material: Students should possess course handouts, practical exercises, access to Excel spreadsheets, case-studies and standard classroom supplies. The 21st Century Soldier Competencies are essential to ensure Soldiers and leaders are fully prepared to prevail in complex, uncertain environments. This lesson reinforces the following 21st Century Soldier Competencies:   Communication and Engagement (Oral, written, and negotiation) Critical thinking, intergovernmental, and multinational competence Tactical and Technical Competence Throughout the lesson discussion seek opportunities to link the competencies with the lesson content through the student’s experiences. 9.1

Program of Instruction Overview Week One Week Two Week Three Understanding Cost Learning the Process Applying the Process Accounting Basics Cost Relationships Cost Tradeoffs Cost Projection Cost Explanation Cost Benefit Analysis CBA Examples Cost Management After Action Review Cost Management Cases Cost Control Theory Org Based Control Role Based Control Output Based Control Change Management Show Slide #2: (Instructor- This needs to be a Motivator Slide)

Terminal Learning Objective Action: Identify Similarities Between Battlefield Management and Cost Management 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: Identify symptoms of the Cost War Demonstrate understanding and awareness of the purpose and motivations for managerial costing Describe the similarities between cost management and battlefield management Describe Commander’s Intent and economy of forces sector Show Slide #3: TLO Action: Identify similarities between battlefield management and cost management Condition: You are a cost advisor technician with access to all regulations/course handouts, and awareness of Operational Environment (OE)/Contemporary Operational Environment (COE) variables and actors Standard: with at least 80% accuracy: Identify symptoms of the Cost War Demonstrate understanding and awareness of the purpose and motivations for managerial costing Describe the similarities between cost management and battlefield management Describe Commander’s Intent and economy of forces sector Safety Requirements: In a training environment, leaders must perform a risk assessment in accordance with DA PAM 385-30, Risk Management. Leaders will complete a DD Form 2977 DELIBERATE RISK ASSESSMENT WORKSHEET during the planning and completion of each task and sub-task by assessing mission, enemy, terrain and weather, troops and support available-time available and civil considerations (METT-TC). Local policies and procedures must be followed during times of increased heat category in order to avoid heat related injury. Consider the work/rest cycles and water replacement guidelines IAW TRADOC Regulation 350-29. Environmental Considerations: Environmental protection is not just the law but the right thing to do. It is a continual process and starts with deliberate planning. Always be alert to ways to protect our environment during training and missions. In doing so, you will contribute to the sustainment of our training resources while protecting people and the environment from harmful effects. Refer to FM 3-34.5 Environmental Considerations and GTA 05-08-002 ENVIRONMENTAL-RELATED RISK ASSESSMENT. INSTRUCTIONAL LEAD-IN.

Why are We Interested in Cost Management? How many brigade combat teams can you afford if: Each costs $2B and you have $30B? Each costs $3B and you have $30B? Each costs $5B and you have $30B? Show Slide #4: Introduction Facilitator Note: How Many Brigade Combat Teams Can you Afford if: Each Costs $2B and you Have $30B? Each Costs $3B and you Have $30B? Each Costs $5B and you Have $30B? Notice that the amount we “have” is not changing. In fact, it is likely to become less. The best way for a strong Army is not to keep trying to get more money, since that is not likely to happen in the near future, but to try to reduce the cost of each operating unit. Unit Cost Total Cost Units $2B $30B 15 BCTs $3B 10 BCTs $5B 6 BCTs Which provides the stronger Army?

Cost Management and Control: National Security Implications What if the cost of a BCT could be reduced by one-third while maintaining the same effectiveness? Simplify the math by considering Army Budget to be 30 and initial BCT cost to be 3 ARMY Budget 30 initial BCT cost 3 ARMY Budget 30 2/3 initial BCT cost 2 = = 10 BCTs = = 15 BCTs x x x x x x x x x x x x x x x x x x x x x x x x x Show Slide #5: Introduction (Cont.) Facilitator Note: What if the cost of a Brigade Combat Team could be reduced by a third while maintaining the same effectiveness? Notice we are not talking about indiscriminate cost reductions, but carefully managing cost to maintain effectiveness Simplify the math by considering Army Budget to be 30 and initial BCT cost to be 3. If the cost is 3, our budget of 30 permits us to have 30/3 = 10 BCTs If we reduce the cost by one-third, giving us a cost of 2 per BCT, our budget of 30 permits us to have 30/2 = 15 BCTs Notice that a one-third cost reduction yields a 50% increase in BCTs. This gives us an idea of just how powerful cost management can be. A one-third cost reduction yields a 50% increase in BCTs “My guess is that a third of the defense budget goes into the friction of following bad regulations – doing work that doesn’t need to be done.” Bob Stone former DASD Installations, Reinventing Government

Risk to Mission = Cost War The Cost War is the struggle: To accomplish and enhance your organization’s mission With fewer financial resources than you would wish While meeting specifications for quality, customer service, and ethics Show Slide #6: Describe Cost War doctrine Learning Step/Activity #1 Identify symptoms of the Cost War Method of Instruction: DSL (large or small group discussion) Facilitator to Student Ratio: Time of Instruction: 2.0 (Total) Media: Power Point Presentation, Printed Reference Materials Facilitator’s Note: The risk to mission posed by the continuous reduction of resources is the Cost War The Cost War is the struggle: To accomplish and enhance your organization’s mission. Not only do we want to accomplish the mission, but we want to do it better. With fewer financial resources than you would wish. This may even mean fewer resources than you have had in the past. While meeting specifications for quality, customer service, and ethics. And…we do not want to compromise. Obviously this is not easy. As General WT Sherman said, “War is Hell.” However, having the right tools and training make it possible to not just survive but win the Cost War.

Are You in a Cost War? Do you need more resources? Have your budgets been cut? More than once? Almost always? Is your list of unfunded requirements increasing? Do you have limits on hiring? Are you getting unfunded mandates? Show Slide #7: Describe Cost War doctrine (Cont.) Facilitator Note: Do you need more resources? Have your budgets been cut? More than once? Almost always? Is your list of unfunded requirements increasing? Do you have limits on hiring? Are you getting unfunded mandates? These are all essentially rhetorical questions. And all are signs that needs are greater than resources. And the risk to the mission is real unless something is done.

Assess Before Continuing STOP: You need not proceed if your organization is not in a Cost War GO: Proceed only if your organization is engaged in a Cost War Show Slide #8: Describe Cost War doctrine (Cont.) Facilitator Note: Assess Before Continuing STOP: You Need Not Proceed if Your Organization is Not in a Cost War GO: Proceed Only If Your Organization is Engaged in a Cost War It is not expected that any students will excuse themselves!

What are You Going to Do About It? Alternative 1: Try to get more budget Better define and document “needs” Highlight deficiencies and problems Contrast funding levels to others’ React to cuts with downsizing, reduced service levels, personnel cuts Show Slide #9: Describe Cost War doctrine (Cont.) Facilitator Note: So, you are still here, meaning that you acknowledge your organization is in a Cost War. What are you going to do about it? There are two common ways of dealing with this situation. The first is Alternative 1: Try to get more budget. Better define and document “needs” - Even an astute five-year old knows that “needs” carry more weight with Mom and Dad than “wants”. If the need can be defined and documented, it is more likely to be funded. Highlight deficiencies and problems – this follows the “squeaky wheel” school of thought. More visibility to the problem makes it more likely to be funded. Contrast funding levels to others’ – “It’s not fair! They have more than we have” React to cuts with downsizing, reduced service levels, personnel cuts - this is a knee-jerk reaction (not response, but reaction) is the other common way of dealing with the Cost War. It assumes that output of services is a direct function on input of resources. It is essentially conceding defeat, since the mission effectiveness is reduced. All of these responses represent the old way of doing things. The old way of doing things

Traditional View of Budget $ Budget Mission Appropriated Accomplished Show Slide #10: Describe Cost War doctrine (Cont.) Facilitator Note: This diagram clearly defines the assumed relationship between budget dollars appropriated and the level of mission accomplished. Notice that the two boxes are the same size.

Traditional View of Budget Budget Appropriated $ Mission Accomplished Show Slide #11: Describe Cost War doctrine (Cont.) Facilitator Note: We assume that if the box on the left, representing budget, is reduced in size, there must be a corresponding reduction in the box on the right, representing mission accomplished.

What are You Going to Do About It? Alternative 2: Manage cost better Seek, but don’t count on, budget increases Develop a cost management paradigm Measure costs as needed Motivate a culture of continuous improvement in productivity Reprogram/redirect savings to self fund needs What This Course is All About Show Slide #12: Describe Cost War doctrine (Cont.) Facilitator Note: There is another alternative! Alternative 2: Manage cost better. That is what this course is all about. Seek, but don’t count on, budget increases. It’s ok to ask for more resources, but it shouldn’t be the primary focus. We shouldn’t spend more efforts on justifying “needs” than on managing what we have well. Develop a cost management paradigm. Cost management won’t just happen on its own. It requires a systematic approach, which we will explain here. Measure costs as needed – Good cost measurement and analysis has been the focus of this course. By now you should know that poor cost measurement can be worse than none at all. Motivate a culture of continuous improvement in productivity – Expect it. It should be a way of life, just as continuous improvement in battlefield skills and readiness are a way of life. Reprogram/redirect savings to self fund needs. This is a key point, and a huge motivator for continuous improvement. If the saver can keep the savings – or even part of the savings, the motivation increases.

Payoff: Better Execution, Not Cost Savings $ $ Budget Manage Better Mission Appropriated ment Execution $ $ Show Slide #13: Describe Cost War doctrine (Cont.) Facilitator Note: This diagram represents the idea that, if organizations manage the budget dollars they receive and reprogramming the savings, they can achieve better mission execution Redirected Efficiencies

Top 10 Reasons Government Orgs Manage Cost Enhance Mission Execution Show Slide #14: Describe Cost War doctrine (Cont.) Facilitator Note: Top 10 Reasons Government Orgs Manage Cost: Enhance Mission Execution! There really is no other reason. The goal is not to give money back to taxpayers. Once appropriated by Congress, by law the money will be spent. The question is, what will we get for it? Most government employees are there because they believe in the mission. Given the opportunity and the tools they want to do a good job. They willingly accept less pay for the opportunity to make a difference. This is the essence of the public servant.

Productivity: Getting More Mission for Less Cost Private sector productivity is the cornerstone of recent economic success National statistics show sustained 3-4% annual rate of productivity improvement What did you pay for your first calculator? iPod? Cell phone? Computer? Show Slide #15: Describe Cost War doctrine (Cont.) Facilitator Note: Private sector productivity is the cornerstone of recent economic success. National statistics show sustained 3-4% annual rate of productivity improvement What did you pay for your first calculator? iPod? Cell phone? Computer? The drop in the price of these items is an example of how continuous productivity improvement works. Not only has the cost of these items dropped, but functionality has increased tremendously. The first pocket calculator produced by Texas Instruments in the 1970s had only four basic functions: Add, subtract, multiply and divide (the first big improvement was the square root and percent key) and the cost was about $100.

Conclusion: The Cost War Period of plenty (The Cold War) is over Period of limited resources (The Cost War) has begun Losing the Cost War will result in excessive loss of mission capability or missed opportunities for enhancement Winning the Cost War Requires a strong cost management process and a culture of continuous improvement Show Slide #16: Describe Cost War doctrine (Cont.) Facilitator Note: Period of plenty (The Cold War) is over. Period of limited resources (The Cost War) has begun As our nation moves out of the Cold War mentality, we need to recognize that a new type of war has begun: The Cost War. The resources that were relatively plentiful during the Cold War are no longer so readily available. Losing the Cost War will result in excessive loss of mission capability or missed opportunities for enhancement This poses a threat to combat capability that is just as real as the threat posed in a “real” war. The weapons and strategies used in the Cold War will not meet the threats posed by the Cost War. Managing cost will be important, and ignoring cost management will result in lost combat capability. Winning the Cost War Requires a strong cost management process and a culture of continuous improvement. We’ll talk about how to implement that.

LSA #1 Check on Learning Q1. You know you’re in a Cost War if…..? A1. Budget cuts more than one period in a row. Needs that are greater than available resources. Unfunded requirements increasing, to name a few. Q2. What are the two alternatives for dealing with reduced resources? A2. (1) Seek more resources; cut outputs. (2) Develop a cost management paradigm. Show Slide #17: LSA #1 Check on Learning Facilitator Note: Ask the following Questions; Q. You know you’re in a Cost War if…..? . Budget cuts more than one period in a row. Needs that are greater than available resources. Unfunded requirements increasing, to name a few. Q. What are the two alternatives for dealing with reduced resources? A. 1) Seek more resources; cut outputs. 2) Develop a cost management paradigm.

LSA #1 Summary During this lesson, we discussed the differences between Battlefield Management and Cost Management by giving two alternatives explaining the quality of the service versus the money output. Show Slide #18: LSA #1 Summary Facilitator Note: Restate the summary; During this lesson, we discussed the differences between Battlefield Management and Cost Management by giving two alternatives explaining the quality of the service versus the money output.

Assess Before Continuing STOP: Do not proceed if you would emphasize resource acquisition or if you don’t want this mission GO: Proceed only if you wish to more efficiently use the resources you have and you want this job Show Slide #19: Describe the similarities between cost management and battlefield management 2. Learning Step/Activity #2 Describe the similarities between cost management and battlefield management Method of Instruction: DSL (large or small group discussion) Facilitator to Student Ratio: Time of Instruction: 2.0 (Total) Media: Power Point Presentation, Printed Reference Materials Facilitator’s Note: Assess Before Continuing, STOP: Do not proceed if you would emphasize resource acquisition or if you don’t want this mission. If your reaction to the Cost War looks more like Alternative 1, trying to seek more resources, then this is not for you. GO: Proceed only if you wish to more efficiently use the resources you have and you want this job. If you want to learn how to implement Alternative 2, Cost management, then let’s continue. Once again, it is not expected that any students will excuse themselves!

Can Government Manage? Many believe “Government Management” is an oxymoron Do you? Academics typically cite: Lack of profit motive History of government spending Show Slide #20: Describe the similarities between cost management and battlefield management (Cont.) Facilitator Note: Many believe “Government Management” is an oxymoron. Like “death benefit” or “amicable divorce.” (We are pointedly avoiding the use of “military intelligence” as an oxymoron.) Most people believe that the government is inherently incapable of management. Do you? Academics, who are known for holding this point of view, typically cite: Lack of profit motive. In their minds the goal of maximizing profit is the only thing that motivates management. Since government does not operate to make a profit, it is inherently unable to manage. History of government spending. This tends to argue against government’s ability to manage cost. We have already discussed in this course how the very mechanism of appropriated funding creates the incentive to spend 99.9% of the budget. However, there is more than one way to interpret the historical data.

How Important is Profit Motive? Most managers in corporations are not profit managers Cost center managers outnumber profit center managers 40 or 50 to 1 Owner control is typically weak unless an individual owns a large share block Probably not much different than power of voters in political elections Show Slide #21: Describe the similarities between cost management and battlefield management (Cont.) Facilitator Note: Most managers in corporations are not profit managers. If a profit motive is necessary for good management, how can it be that many managers in private industry do not manage for profit. Cost center managers outnumber profit center managers 40 or 50 to 1. That means that most private sector managers, by far, manage COST not PROFIT. Their operating segments do not generate revenues, and their performance measurement does not include profit. Owner control is typically weak unless an individual owns a large share block. The ability of an individual shareholder to impact the management of the company is very small, unless he or she owns a large block of shares. The ability of the average shareholder to impact the management of the company through the voting process is probably not much different than the power of an individual voter in a political election. These facts argue AGAINST profit-making as the only motivator of management.

Can Government Manage? History of last 60 years of Government spending Cited as evidence by skeptics of Government’s inability to manage Used here as rationale that Government has not needed to manage Show Slide #22: Describe the similarities between cost management and battlefield management (Cont.) Facilitator Note: So, if the profit motive isn’t necessary, what about the track record. CAN government manage? History of last 60 years of Government spending seems to say no. However, facts without context can be misleading. Cited as evidence by skeptics of Government’s inability to manage. This is one interpretation of the facts. Used here as rationale that Government has not needed to manage. The government’s spending history over the last 60 years may actually be caused by the fact that there was no NEED to manage, not that it is UNABLE to manage. Resources were plentiful, the economy was good. Even private industry does not manage well when resources are plentiful. So the profit alone does not motivate management. Case in point: the US auto industry in the 50s and 60s. There were very few competitors, gasoline was cheap, and the economy was good. Resources were plentiful, and the US car manufacturers became bloated and inefficient. They did not manage well because they didn’t have to manage well. When the economic environment changed in the 70s and 80s, and imports became a real threat, they had to adjust. Some companies managed better than others. Some survived, some didn’t. Some government organizations will respond better to the Cost War than others. How will yours respond?

Government Management Improvement Strategies Centralized Decentralized A-76 Business Process Reengineering Discontinuous Continuous Budget Mgmt PART Cost Management & Control Processes Show Slide #23: Describe the similarities between cost management and battlefield management (Cont.) Facilitator Note: Government does implement improvement strategies, such as the A76 program and Business process reengineering. These, however, are discontinuous and don’t bring sustained management improvement. Only Cost Management and Control processes that are decentralized and continuous offer the potential to have sustained effect. PART = Presidential Agenda Reporting Tool (under Bush 2)

Requirements for Cost Management and Control Cost Data: Providing the raw materials needed for decision making and process Process: Institutionalizing a method of stimulating continuous improvement Cost Staff: Translating data into information Leadership: Driving management, setting and achieving intent Show Slide #24: Describe the similarities between cost management and battlefield management (Cont.) Facilitator Note: There are four things necessary for cost management and control. They are: Cost Data: Providing the raw materials needed for decision making and process. The cost data must be available, and it must be credible and relevant. Process: Institutionalizing a method of stimulating continuous improvement. As we said before, cost management doesn’t just happen. A process is needed. Cost Staff: Translating data into information. There must be people trained to translate the data into useful information. That is why you are here in this course. Leadership: Driving management, setting and achieving intent. Last, and definitely not least, there must be leaders who know how to communicate goals and motivate the troops to achieve the mission.

Cost Management & Control Processes Must Require frequent management attention Stimulate learning: frequent feedback Generate goals that challenge Encourage performance to meet goals Eliminate entitlements Create continuous improvement culture Emphasize constant reduction of needs Show Slide #25: Describe the similarities between cost management and battlefield management (Cont.) Facilitator Note: Require frequent management attention. If the process is something that managers can ignore, it likely won’t change the way they manage. Stimulate learning: frequent feedback. The process must generate the kind of information that helps managers understand the results of their decisions and what they need to do to improve. Generate goals that challenge Encourage performance to meet goals. These two are pretty self explanatory. The cost management cycle should not only help managers to strive to meet goals, but it should help them to set goals that are not too easy but also not out of reach. Eliminate entitlements. The process should get away from the mindset that the budget is “my money to spend”. Focus should be more on outputs or outcomes. Create continuous improvement culture. Continuous improvement should be expected, and it should be measured in a meaningful way. Emphasize constant reduction of needs

Battlefield Management Provides a useful template for cost management Good military commanders are inherently cost conscious in achieving missions Minimize cost in casualty losses Minimize cost in resources and capabilities Good financial managers must also be cost conscious in achieving their missions Show Slide #26: Describe the similarities between cost management and battlefield management (Cont.) Facilitator Note: We will use battlefield management as an analogy. It provides a useful template for cost management, and it gets away from the idea that profit is the only motivator. Good military commanders are inherently cost conscious in achieving missions, they just don’t measure cost in dollars and cents. Minimize cost in casualty losses. Weighing the potential cost of casualties against the benefit of victory is inherent to military leadership. No good military commander takes lightly the cost of lives and wounded warriors. Minimize cost in resources and capabilities. Very few military commanders have unlimited resources available in the form of equipment and other capabilities. Those that don’t must choose how to use what they have to best accomplish the mission. Good financial managers must also be cost conscious in achieving their missions

Battlefield Management Unique to government management arena No profit motive exists We’re pretty good at it Command, control, and communication paradigm provides a useful template for cost based management Show Slide #27: Describe the similarities between cost management and battlefield management (Cont.) Facilitator Note: Battlefield management is unique to the government management arena. No profit motive exists We’re pretty good at it The command, control, and communication paradigm provides a useful template for cost based management

Command, Control, and Communication of Cost Warrior Pull becomes Cost Warrior Pull Battlefield Intelligence becomes Managerial Costing Cost Command and Control Process Show Slide #28: Describe the similarities between cost management and battlefield management (Cont.) Facilitator Note: These four components can be easily translated to become relevant to the Cost War: Cost Warrior Pull suggests that the cost warrior, or decision maker, defines the information needed to perform the mission Managerial Costing represents gathering the information needed to fight the battle. Such information must be timely and relevant to the situation Cost Forecasting allows cost warriors to ask “What if” or to simulate the changes in performance given different situations or variables After Action Cost Review evaluates performance after execution, comparing actual results to the plan Together these four components represent an Interactive Cost Based Management System. It is considered interactive because management reviews the results of its actions and then applies the lessons learned to future situations and decisions. After Action Review becomes Cost After Action Review Modeling and Simulation becomes Cost Planning

The Role of Cost Planning Cost Command And Control Cost Planning : Cost Projection What - Iffing Ad Hoc Analysis Provides proactive alternative to annual budget crisis Stimulates learning/training in financial consequences of alternative actions cheaply Provides a basis to evaluate mission success Clarifies short term assignments Show Slide #29: Describe the similarities between cost management and battlefield management (Cont.) Facilitator Note: The process starts with Cost Planning. Cost planning includes Cost projection, What-if scenarios, and other Ad Hoc analyses. Provides proactive alternative to annual budget crisis. Would you rather spend your resources trying to justify needs and obtain more budget, and then react with cuts to the mission when the budget is less than desired? Or would you rather plan? Stimulates learning/training in financial consequences of alternative actions cheaply. What if scenarios encourage thinking about how to handle different levels of demand and different level of resources. Provides a basis to evaluate mission success. The plan is the standard by which the actual performance is measured. Clarifies short term assignments. The plan helps to generate action items. What should I be doing NOW to achieve the goal?

The Role of the Cost After Action Review Cost Command And Control Cost After Action Review È Performance Measurement Fixed Accountability Continuous Improvement Document and explain performance Evaluate performance and create accountability Stimulate learning for: Better reconnaissance Better planning Better execution Show Slide #30: Describe the similarities between cost management and battlefield management (Cont.) Facilitator Note: The Cost After Action Review (AAR) is really the key to the success of the process. Document and explain performance using the variance and reconciliation tools we have already learned. Evaluate performance and create accountability. Create an expectation of performance, and follow through by comparing the actual performance to the expectation. Stimulate learning for: Better reconnaissance – we can learn how to better measure costs. Better planning - we can learn how to better forecast cost and set effective goals Better execution – most importantly, we can learn better ways to accomplish the mission

The Role of Cost Warrior Pull Process Cost Warrior Pull « Command Specification Command Review Command Goal Setting Cost Command And Control Specify managerial costing requirement Perform intelligence prep of the battlefield Determine essential elements of info Lead the cost management process Set the agenda Negotiate and approve plans Critically review execution Signal the importance of cost management Show Slide #31: Describe the similarities between cost management and battlefield management (Cont.) Facilitator Note: “Cost Warrior Pull” requires a Cost Warrior to: Specify managerial costing requirement – the Cost Warrior defines what information is needed for the decisions he or she needs to make. Perform intelligence preparation of the battlefield. What does the Cost Warrior need to know to make and execute the plan? Determine essential elements of info – these key pieces of information needed are the essential elements of information. Lead the cost management process - this is the Cost Warrior’s job: Set the agenda – how and when will the review take place? What pieces of information will be reviewed? Negotiate and approve plans – listen to the managers who present their information, and help to set effective goals. Critically review execution – ask the hard questions. Make sure that the reported information makes sense. Signal the importance of cost management – Be actively involved, lead by example.

The Role of Managerial Costing $ Relevant Costs Customized Views True Resource Use Cost Command And Control Develop needed intelligence for the cost manager fighting the cost war Needed: credible measurement of true costs of resource consumption Provide information to the cost management process Needed for decision making, planning processes, and after action reviews Show Slide #32: Describe the similarities between cost management and battlefield management (Cont.) Facilitator Note: Managerial Costing is the key to developing the needed intelligence for the Cost war battlefield. It can help to: Develop needed intelligence for the cost manager fighting the cost war. Needed: credible measurement of true costs of resource consumption. Understanding the true cost of resource consumption will help to eliminate free goods, and decrease unneeded consumption. Provide information to the cost management process Needed for decision making, planning processes, and after action reviews. Understanding true cost also gives management the information needed for planning and decision making. (Managers can make rational decisions based on true cost) Managerial costing also provides the information needed for after action review, or performance evaluation.

LSA #2 Check on Learning Q1. Why is “lack of profit motive” not an excuse for not managing cost in government? A1. The so-called profit motive does not always work in the private sector! Most private sector managers do not manage profit, they manage cost. Q2. What is the role of the Cost Warrior? A2. The Cost Warrior’s role is to specify the need for cost information and to lead the cost management process. Show Slide #33: LSA #2 Check on Learning Facilitator Note: Ask the following Questions; Q. Why is “lack of profit motive” not an excuse for not managing cost in government? The so-called profit motive does not always work in the private sector! Most private sector managers do not manage profit, they manage cost. Q. What is the role of the Cost Warrior? A. The Cost Warrior’s role is to specify the need for cost information and to lead the cost management process.

LSA #2 Summary During this lesson, we discussed the similarities between cost management and battlefield management , control processes, and the various roles of cost planning, AAR’s, the cost warrior pull, and managerial costing. Show Slide #34: LSA #2 Check on Learning Facilitator Note: Restate the summary; During this lesson, we discussed the similarities between cost management and battlefield management , control processes, and the various roles of cost planning, AAR’s, the cost warrior pull, and managerial costing.

Costing Systems Differ Principles of Cost Analysis and Management Managerial Costing $ Relevant Costs Customized Views True Resource Use Cost Command And Control Financial & Regulatory Managerial Goals: Consistency Comparability Equity Users: Shareholders Congress Regulators Tax Authorities Methodology: Laws Rules GAAP Goals: Fit Functionality Relevance Users: Managers Methodology: Situation Dependent Externally Specified Require-ments Internally Specified Require-ments Show Slide #35: Demonstrate understanding and awareness of the purpose and motivations for Managerial Costing 2. Learning Step/Activity #2 Demonstrate understanding and awareness of the purpose and motivations for Managerial Costing Method of Instruction: DSL (large or small group discussion) Facilitator to Student Ratio: Time of Instruction: 2.0 (Total) Media: Power Point Presentation, Printed Reference Materials Facilitator’s Note (THIS IS A KEY SLIDE AND AN IMPORTANT CONCEPT IN DIFFERENTIATING MANAGERIAL COSTING.) Most accounting systems focus on meeting external reporting requirements. External reporting is a fact of life and a cost of operation. However, goals for the measurement process in external reporting are seldom the same as management information goals. While external reporting requires consistency and comparability, management needs information that is relevant to its decision making needs An individual would not generally use the information in his IRS form 1040 (an external reporting requirement) to manage his household budget (an internal reporting application). He will need to take his financial information (probably his checkbook) and determine what information is important for his own decision making. (How much did I spend on groceries last month?) The comparability and consistency goalset of external reporting requires a rigid accounting methodology that is auditable. Managerial information systems do not need audits for the same reason that your checkbook does not get audited. If you cheat on your checkbook, it’s your own problem. If you cheat on your managerial costing system, you are only cheating yourself out of the ability to make good managerial decisions.

Managerial Cost Accounting Principles of Cost Analysis and Management Managerial Cost Accounting Managerial Costing $ Relevant Costs Customized Views True Resource Use Cost Command And Control Seeks to understand true economic cost Based on cause-effect relationships Reflecting drivers of resource consumption With reasonable, but not precise, accuracy Enables cost based management for continuous improvement Enables better decision making Enables rational consumption behavior Show Slide #36: Demonstrate understanding and awareness of the purpose and motivations for Managerial Costing (Cont.) Facilitator Note: Managerial cost accounting works best as a self-made tool: it is designed by the managers who will use it. It has two goals: Seeks To Understand True Economic Cost. Based on Cause-Effect Relationships Reflecting Drivers of Resource Consumption With Reasonable, But Not Precise, Accuracy Managerial costing will look at the cause-effect relationships: What drives resource consumption. It will give a true picture of cost with reasonable accuracy, while avoiding overly detailed precision. The second goal of managerial costing is to promote better resource management. Understanding true cost allows better resource management. When managers understand what things truly cost, and recognize that their decisions have an impact on costs incurred by the organization, this stimulates desired behaviors. It also gives managers the tools to control costs and be accountable for their decisions. Enables Cost Based Management for Continuous Improvement Enables Better Decision Making Enables Rational Consumption Behavior

Why Do Managerial Costing? Principles of Cost Analysis and Management Why Do Managerial Costing? Managerial Costing $ Relevant Costs Customized Views True Resource Use Cost Command And Control Enhance decision making Provide reconnaissance necessary for Cost Based Management process Influence resource consumption behavior Show Slide #37: Demonstrate understanding and awareness of the purpose and motivations for Managerial Costing (Cont.) Facilitator Note: The purpose for undertaking the task of managerial accounting is to: Enhance Decision Making. We have already shown how cost information impacts the decision process. We have also already discussed how most managers focus on the budgetary information, which can motivate some undesired behaviors in resource consumption. Provide Reconnaissance Necessary for Cost Based Management Process. Think of managerial cost information as the scouting report for managerial decision making. You would not expect an officer to lead soldiers into battle without good information about the enemy and the battlefield. Neither should a manager attempt to manage without good cost information. Influence Resource Consumption Behavior. Knowing the true cost of resources consumed helps managers to make rational decisions about spending. Purchasing the cheapest item (rule-based management approach) is not always the wisest decision. It is also not always wise to purchase the item with the most features and capability, if they are not needed. (The “free goods” approach).

1. Cost Measurement’s Role in Decision Making Principles of Cost Analysis and Management 1. Cost Measurement’s Role in Decision Making Managerial Costing $ Relevant Costs Customized Views True Resource Use Cost Command And Control Which Metal is Best for Transmission? Show Slide #38: Demonstrate understanding and awareness of the purpose and motivations for Managerial Costing (Cont.) Facilitator Note: In absence of cost information, which metal would you choose for your transmission wires? This is the “free goods” approach mentioned on the previous slide. When cost is unknown, it becomes unimportant to the decision. Instead, the decision maker will choose the best available. That is the rational decision in absence of cost information. Which metal would you choose, knowing that while A is a good conductor, B is better and C is better still? The rational decision is to choose C. How would your decision change knowing that Metal C is gold, which is a better conductor than Metal B (silver) which is a better conductor than Metal A, copper? In fact, it is more cost-effective to use a thicker copper wire to achieve the conductivity needed than to use either silver or gold. There are some specialized applications where gold’s superior conductivity is cost effective, but for everyday transmission wires, copper is the better choice.

2. Cost Managed Orgs Need Cost Measurement Principles of Cost Analysis and Management 2. Cost Managed Orgs Need Cost Measurement Managerial Costing $ Relevant Costs Customized Views True Resource Use Cost Command And Control Cost managers must have cost measurement to fight Cost War Cost measurement Informs Cost Warriors of financial implications of management decisions Provides a basis of accountability Is prerequisite to cost reduction Show Slide #39: Demonstrate understanding and awareness of the purpose and motivations for Managerial Costing (Cont.) Facilitator Note: Cost Managers Must Have Cost Measurement to Fight Cost War. Cost measurement is an important strategy for fighting the cost war. Cost Measurement Informs Cost Warriors of Financial Implications of Management Decisions. The cost warrior must have an understanding of cost in order to make financially sound decisions. Provides a Basis of Accountability Is Prerequisite to Cost Reduction. In addition, management cannot reduce cost without first knowing what things cost. Good cost measurement will eliminate free goods, which will reduce their demand. It will also help managers make best use of limited resources by giving them a criteria (cost) for decision making.

3. Cost Measurement’s Influence on Consumption Principles of Cost Analysis and Management 3. Cost Measurement’s Influence on Consumption Managerial Costing $ Relevant Costs Customized Views True Resource Use Cost Command And Control The Demand Curve - Economics 101 Cost Quantity Demanded Show Slide #40: Demonstrate understanding and awareness of the purpose and motivations for Managerial Costing (Cont.) Facilitator Note: The demand curve illustrates that as cost decreases, quantity demanded increases. When cost is high, demand is low. When cost is low, demand is high. Taken to its logical extreme, we can say that the demand for free goods is infinite.

Not Knowing Cost Makes Everything Appear Free Principles of Cost Analysis and Management Not Knowing Cost Makes Everything Appear Free Managerial Costing $ Relevant Costs Customized Views True Resource Use Cost Command And Control Cost influences consumption Quantity demanded rises as cost falls Free goods have infinite demand Things that aren’t free, but appear free, get over-consumed Attempts to prevent overconsumption lead to rules, regulations, restrictions Show Slide #41: Demonstrate understanding and awareness of the purpose and motivations for Managerial Costing (Cont.) Facilitator Note: The “free goods” approach. Cost Influences Consumption Quantity Demanded Rises as Cost Falls Free Goods Have Infinite Demand Things that Aren’t Free, But Appear Free, Get Over-consumed. Example: Military labor is only tracked at the highest levels of the budget. It appears to be free, although it is not. It is often overconsumed, or at least not consumed to its maximum potential. Attempts to Prevent Overconsumption Lead to Rules, Regulations, Restrictions. This is the “rule-based” approach, where limits are placed on consumption or using the least expensive item is mandated. Ironically, rules, regulations and restrictions can sometimes lead to an entitlement mentality. Example: a regulation may state that the maximum size office space for a particular rank is 12x12. This may translate into individuals assuming they are entitled to a 12x12 office even if no office space is needed (while deployed, for example.)

Principles of Cost Analysis and Management LSA #3 Check on Learning Q1. How does demand for a good change as cost decreases? A1. As cost decreases, demand increases Q2. What is the logical result of not knowing what something costs? A2. Not knowing what something costs makes it seem free. The logical result is overconsumption Show Slide #42: LSA #3 Check on Learning Facilitator Note: Ask the following Questions; Q. How does demand for a good change as cost decreases? As cost decreases, demand increases Q. What is the logical result of not knowing what something costs? A. Not knowing what something costs makes it seem free. The logical result is overconsumption

Principles of Cost Analysis and Management LSA #3 Summary During this lesson, we discussed the understanding and awareness, the purpose and motivations for Managerial Costing and Accounting. Show Slide #43: LSA #3 Summary Facilitator Note: Restate the Summary; During this lesson, we discussed the understanding and awareness, the purpose and motivations for Managerial Costing and Accounting

“Commanders must develop and communicate a clear vision or intent” Commander’s Intent Process Cost Warrior Pull « Command Specification Command Review Command Goal Setting Cost Command And Control “Commanders must develop and communicate a clear vision or intent” --United States Army Field Manual FM 25-101 Battle Focused Training (emphasis added) Show Slide #44: Describe Commander’s Intent and economy of forces sector 2. Learning Step/Activity #2 Describe Commander’s Intent and economy of forces sector Method of Instruction: DSL (large or small group discussion) Facilitator to Student Ratio: Time of Instruction: 2.0 (Total) Media: Power Point Presentation, Printed Reference Materials Facilitator’s Note: The Field Manual states: “Commanders must develop and communicate a clear vision or intent.” Just as this is necessary for battlefield management, it is also necessary for cost management.

Why is Commander’s Intent Important? Process Cost Warrior Pull « Command Specification Command Review Command Goal Setting Cost Command And Control We are in a dynamic environment Changing conditions under fog of war Unanticipated enemy actions/reactions Unforeseen opportunities and threats We wish to capitalize on the skills of subordinates who are best positioned to make decisions Show Slide #45: Describe Commander’s Intent and economy of forces sector (Cont.) Facilitator Note: Why is Commander’s Intent important? Dynamic environment; Changing conditions under fog of war. If the conditions change, the original tactical plan may no longer make sense. Knowing the intent makes it possible to adjust decisions to the changing conditions while still keeping the ultimate goal in mind. Unanticipated enemy actions/reactions. Unforeseen opportunities and threats. Again, as these arise it is possible to respond with the commander’s intent in mind. Capitalize on the skills of subordinates who are best positioned to make best decisions. The officer on the ground is frequently in a better position to make decisions since he knows his people and has first-hand knowledge of the situation before him.

Commander’s Intent Process Cost Warrior Pull « Command Specification Command Review Command Goal Setting Cost Command And Control Show Slide #46: Describe Commander’s Intent and economy of forces sector (Cont.) Facilitator Note: This diagram from the Field Manual shows how the Commander’s Intent must flow through the chain of command. Missions should be defined with the Commander’s intent in mind. Tasks should be defined to align with the mission. METL: Mission essential task list. --United States Army Field Manual FM 25-101 Battle Focused Training

Why is Commander’s Intent Important? Process Cost Warrior Pull « Command Specification Command Review Command Goal Setting Cost Command And Control Commander physically cannot make all decisions Commander is not best qualified to make all decisions Command must insure control while reaping all possible advantages of decentralization Show Slide #47: Describe Commander’s Intent and economy of forces sector (Cont.) Facilitator Note: Commander physically cannot make all decisions. There are too many. Some things must be delegated. Commander is not best qualified to make all decisions. One person cannot have all of the information needed to make all of the decisions. It would be foolish and arrogant to assume one could. Command must insure control while reaping all possible advantages of decentralization. While the commander can’t make all of the decisions, he ultimately bears the responsibility for the decisions made by his subordinates. Knowing that subordinates are all on the same page allows for decisions to be delegated, while still directing the overall goals of the mission.

A Military Analogy Consider the economy of force sector Process Cost Warrior Pull « Command Specification Command Review Command Goal Setting Cost Command And Control Consider the economy of force sector Some sectors in the front line are deliberately allocated fewer forces This permits concentration of force for The main attack The secondary attack The Cost War now places many government organizations in the fiscal economy of force sector Show Slide #48: Describe Commander’s Intent and economy of forces sector (Cont.) Facilitator Note: Consider the economy of force sector Some sectors in the front line are deliberately allocated fewer forces. There are not unlimited resources on the battlefield. In some areas the resources are spread thinly to permit concentration of force in other areas. Forces may be concentrated for: The main attack The secondary attack The “Cost War” now places many government organizations in the fiscal economy of force sector. That means that resources may be deliberately spread thinly in your area to permit concentration in another area.

One Way to Think About Your Options Process Cost Warrior Pull « Command Specification Command Review Command Goal Setting Cost Command And Control Grant Me . . . The Serenity to Accept the Things I Cannot Change; The Courage to Change the Things I Can; And the Wisdom to Know the Difference Resource Level Resource Management Your Decision Show Slide #49: Describe Commander’s Intent and economy of forces sector (Cont.) Facilitator Note: One Way to Think About Your Options is the Serenity Prayer: Grant Me . . . The Serenity to Accept the Things I Cannot Change…this is your level of resources. You can plead, you can complain, but you likely will not gain significantly more budget resources. The Courage to Change the Things I Can…You can’t change the level of resources, but you can learn to manage what you have better. And the Wisdom to Know the Difference…You can choose your battles. There may be times when it is worth the effort to try to obtain more resources. There may be times when you must manage what you have. You make the choice.

How Would You Spend Your Time as Commander in the Economy of Force Sector? Process Cost Warrior Pull « Command Specification Command Review Command Goal Setting Cost Command And Control You must allocate your limited time and energy between: Going to higher HQ to plead for more resources to increase your effectiveness Staying at your sector maximizing the effectiveness of the resources you have Would you: Spend 80% of your time at HQ? Divide your efforts equally between the two actions? Spend 80% of your time in your area of operation making the best of what you’ve got? Show Slide #50: Describe Commander’s Intent and economy of forces sector (Cont.) Facilitator Note: Your time and energy (and other resources) are limited You must allocate them between: Going to higher HQ to plead for more resources to increase your effectiveness. This is Alternative 1 that we discussed earlier. Staying at your sector maximizing the effectiveness of the resources you have. This is Alternative 2. What will you do?

Group Activity Commander’s Intent Break into groups Process Cost Warrior Pull « Command Specification Command Review Command Goal Setting Cost Command And Control Break into groups Address the previous slide’s question Write a one page PowerPoint slide with your Commander’s Intent Present your statement to the class in 20 minutes Show Slide #51: Define Commander’s Intent / Conclusion 4. Learning Step/Activity #4 Define Commander’s Intent Method of Instruction: DSL (large or small group discussion) Facilitator to Student Ratio: Time of Instruction: 2.0 (Total) Media: Power Point Presentation, Printed Reference Materials Facilitator’s Note: Break into groups Address the previous slide’s question (What if you’re in the economy of force sector?) Write a one page PowerPoint slide with your Commander’s Intent It should clearly communicate your intent in dealing with the limited resources in your sector. Management is making the best of a bad situation. Dealing with what resources you have and making the best of it is clearly your job. Of course, you may want to ask for additional resources, everybody else is too. They probably won’t be available and any you get are just going to make it harder for someone else. Winning the Cost War is about doing the same thing when the fiscal resources available are less than ideal. We want you to be able to do the best you can with what you got. Present your statement to the class in 20 minutes

Commander’s Intent: Leadership Foundation Process Cost Warrior Pull « Command Specification Command Review Command Goal Setting Cost Command And Control Development of clear vision and intent is key to: Leading the continuous improvement process Developing and institutionalizing the cost based performance management process and needed cost measurement capabilities Show Slide #52: Define Commander’s Intent / Conclusion Facilitator Note: Development of clear vision and intent is key to: Leading the continuous improvement process Developing and institutionalizing the cost based performance management process and needed cost measurement capabilities How did your classmates do in developing and communicating their vision and intent to you? How would it help you in dealing with an unforeseen situation?

The Leader’s Evolution of Cost Thinking Process Cost Warrior Pull « Command Specification Command Review Command Goal Setting Cost Command And Control Recognition that continuously reduced resources have become a way of life Awareness that sound management of resources has become more important Search for a workable management paradigm becomes critically important Development of actionable measurement capability becomes indispensable Show Slide #53: Define Commander’s Intent / Conclusion Facilitator Note: Recognition that continuously reduced resources have become a way of life; Awareness that sound management of resources has become more important Search for a workable management paradigm becomes critically important Development of actionable measurement capability becomes indispensable Military commanders have always been concerned with cost (at least the good ones were). However, they looked at cost in terms of men and equipment. Today’s commander must also consider dollars and cents. Resources simply are not as plentiful as they were in the past. Reduced resources mean that management of resources is more important. Managers must adopt a cost management paradigm. The capability to measure cost is a prerequisite to cost management.

The Leader’s Objective in Cost Management Process Cost Warrior Pull « Command Specification Command Review Command Goal Setting Cost Command And Control Change culture to one which: Aggressively seek better ways to operate De-emphasize defense of past practice (assumed best practice at that time) Require and expect development of continuous improvement initiatives Today, tomorrow, next week, next month, next year, forever Show Slide #54: Define Commander’s Intent / Conclusion Activity Facilitator Note: Leadership is key. Ultimately the continuous improvement process requires a culture change. Change culture to one which: Aggressively seeks better ways to operate – You won’t find better ways if you don’t look for them. De-emphasizes defense of past practice (assumed best practice at that time) – we don’t criticize the past or blame, nor should we cling to or defend the past. We did the best we knew how then. Now we know better, so we should change. Requires and expects development of continuous improvement initiatives - it should become part of the job description. 3M corporation makes innovation part of the job description. Without that institutionalized expectation of innovation we would not have Post-it notes! Who knows what better ways of doing things might be developed when there is an institutionalized expectation of continuous improvement. Today, tomorrow, next week, next month, next year, forever

LSA #4 Check on Learning Q1. Why is Commander’s Intent important? A1. To clearly communicate the goal, so that subordinates can make decentralized decisions that align with the overall goal. Q2. What does it mean to be in the fiscal economy of forces sector? A2. Resources are deliberately spread thinly to permit concentration of resources elsewhere. Show Slide #55: LSA #4 Check on Learning Facilitator Note: Ask the following Questions. Facilitate the answers given. Q. Why is Commander’s Intent important? To clearly communicate the goal, so that subordinates can make decentralized decisions that align with the overall goal. Q. What does it mean to be in the fiscal economy of forces sector? A. Resources are deliberately spread thinly to permit concentration of resources elsewhere.

LSA #4 Summary During this lesson, we discussed the definition and the purpose of the Commander’s Intent and then separated into groups to answer an issued question. Show Slide #56: LSA #4 Summary Facilitator Note: Restate the Summary; During this lesson, we discussed the definition and the purpose of the Commander’s Intent and then separated into groups to answer an issued question.

TLO Summary Identify symptoms of the Cost War Action: Identify Similarities Between Battlefield Management and Cost Management 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: Identify symptoms of the Cost War Demonstrate understanding and awareness of the purpose and motivations for managerial costing Describe the similarities between cost management and battlefield management Describe Commander’s Intent and economy of forces sector Show Slide #57: TLO Summary Action: Identify similarities between battlefield management and cost management Condition: You are a cost advisor technician with access to all regulations/course handouts, and awareness of Operational Environment (OE)/Contemporary Operational Environment (COE) variables and actors Standard: with at least 80% accuracy: Identify symptoms of the Cost War Demonstrate understanding and awareness of the purpose and motivations for managerial costing Describe the similarities between cost management and battlefield management Describe Commander’s Intent and economy of forces sector “Or”   Facilitator's at this time, have one learner from each group to explain the most important take away to them from this lesson. Facilitate a discussion on each answer.