Principles of Cost Analysis and Management Course Introduction Principles of Cost Analysis and Management

Even Super Powers Can Lose a Cost War Aral Sea, Kazakhstan Soviet military installation Paldiski, Estonia Kamchatka Peninsula , Russia

Terminal Learning Objective Action: Introduce Principles of Cost Analysis and Management Condition: You are cost advisor technician with access PCAM course handouts, readings, and spreadsheet tools and awareness of Operational Environment (OE)/Contemporary Operational Environment (COE) variables and actors. Standard: With at least 80% accuracy (70% for international learners): Discuss purpose for increasing cost effectiveness; terminology, and best practices in response to threat Understand the Purpose of this Course Understand the asymmetrical threat of lack of resources.

Cost Maturation Process Single Use Estimated Future Cost Cost Benefit Analysis Cost Informed Decisions Persistent Use Expected and Actual Cost Continuous Improvement Cost-Managed Organizations Universal Use Planned & Actual Cost Role Based, Org Based, Output Based Control Cost-Managed Enterprise Cost War Cost War High Cost War Full Insurgency Intensity Conflict Spectrum Operations Starting here (Some work is being done now) TARGET

LSA #1 Check on Learning Q1. What are the three stages of the Cost Maturation Process? A1. Q2. Where is the Army now in the process? A2. Q1. What are the three stages of the Cost Maturation Process? A1. Single Use, Persistent Use, Cost Managed Organization Q2. Where is the Army now in the process? A2. Single Use – Cost benefit analysis

LSA #1 Summary In this LSA, we discussed the Cost Maturation Process and gave some examples of how even a Super Power can fall victim to poor cost management.

Transforming the Army: Four Requirements for Success Leadership Team with the Assistant to the Commander – Enterprise (ACE) to create “informed” leaders Exploit existing strong leadership capabilities ACE Build strong staff, strong organization Select, develop ACEs Design and deliver advanced training Process Modify “winning the cost war” template as needed Cost Info Use new tools as they come online Need Status Action

ACE Development: PCAM & ICAM Principles of Cost Analysis and Management Targeted at entry level CP11 Personnel, Sergeants, Lieutenants, Junior Captains Course Length: Three Weeks Intermediate Cost Analysis and Management Targeted at mid career CP11 Personnel, Staff Sergeants and above, Senior Captains, Majors and above

Stackable Credentials Based on the Financial Management Career Field All CEs will require basic, advanced, and master skills with a concentration in: Readiness – Capacity management and force cost analysis Materiel – Logistics and working capital funds cost analysis Human Capital – Manpower cost analysis Services & Infrastructure – Services and capital asset costing FAs and CPs that are common to all CEs should train to become a master in any CE * NOTE: Stackable credentials are based on Financial Management (BC36/CP11) career field demands for cost management, which is the Army maximum; other career fields will use a subset of these requirements.

PCAM Develop basic cost management skills First step in becoming an ACE

Purpose of Course Develop Skills in Cost Accounting Includes Conference, Demonstration and Practical Exercises Emphasizes hands-on experience Introduces Excel templates to facilitate learning Introduce and Apply Skills in Cost Management Case studies give students the opportunity to apply their skills to a real-world scenario

Cost Accounting: External Reporting Overview of Course Week 1: Basic Accounting Principles: External Reporting Accounting Basic Training Basic Financial Statements, Cash-based Accounting Military Fund Accounting Budgetary Accounting, Obligations & Expenditures Financial Accounting Accrual Accounting Basics – Revolving Funds Cost Accounting: External Reporting Accounting for Manufacturing, Job Order Costing Test Days 1-4 Managerial Cost Intro Cost Terminology, Relevant Cost Decisions

Key Issues for Week 1 Internal vs. External Reporting Different ways of measuring costs for external reporting Measuring and reporting the cost of a job Defense contractor costing How to use and interpret different types of information prepared for external users

Expectations There are lots of different methods to account for costs The goal of this course is to create awareness of the different methods Students are not expected to become experts but should understand where each method is used and why

Activity Based Costing Overview of Course Week 2: Cost Relationships and Cost Tradeoffs Cost Relationships I Fixed, Variable, Linear and Non-linear relationships Cost Relationships II Net Present Value and Expected Value Activity Based Costing Allocation Mechanics, Cost Driver Selection, Pitfalls Cost Tradeoffs I Breakeven Analysis, Sensitivity, Indifference Points I Test Days 5-9 Cost Tradeoffs II Batch Quantity Tradeoffs, Indifference Points II

Key Issues for Week 2 Identify and express cost relationships Evaluate investment courses of action using net present value and expected value Identify behavioral issues with cost measurement Explain the concept of cost tradeoff and identify points of indifference

Cost Planning and Estimation Overview of Course Week 3: Cost Planning & Explanation, CBA Cost Planning and Estimation Flexible Forecasting, Trend Projection, Learning Curve Cost Benefit Analysis Eight Steps to Cost Benefit Analysis Cost Explanation Variance Analysis and Reconciliation Winning the Cost War After Action Review Prepare After Action Review Briefing from Case Study Final Exam Comprehensive Final Exam, Closing Activities

Key Issues for Week 3 Tools for cost planning and projection Cost Benefit Analysis Cost explanation and After Action Review

LSA #2 Check on Learning Q1. What is an ACE? A1. Q1. What is an ACE? A1. Assistant to Commander of the Enterprise. This is a key position in a Cost Managed Organization.

LSA #2 Summary During this instruction, we discussed the entire 3-week course overview, and the expectations and issues with each. Also, the requirements for success along with the four levels of Cost Management training.

Remember Valley Forge Read the article by Ms. Matiella

LSA #3 Check on Learning Q1. Why does the Army need to become more cost effective? A1. Q2. What is the difference between Cost Benefit Analysis and a Cost-Managed Organization? A2. Q1. Why does the Army need to become more cost effective? A1. The three alternatives are listed in the article. Get more cash (not likely), cut services (not attractive) or increase cost effectiveness. Q2. What is the difference between Cost Benefit Analysis and a Cost-Managed Organization? A2. Among other points students should gather that Cost Benefit Analysis is done on a project by project basis, essentially a one-time effort. A Cost Managed Organization has an ongoing, systematic process for planning, measuring, and evaluating performance.

LSA #3 Check on Learning (Cont.) Q3. How do fiscal constraints pose an “asymmetric threat”? A3. Q4. How should we respond? A4. Q3. How do fiscal constraints pose an “asymmetric threat”? A3. Fiscal constraints pose an emerging asymmetric threat that we have labeled as the “Cost War.” The Cost War is the struggle to meet the mission in an environment of constrained budgets. Even a superpower can lose a Cost War and history has some very prominent examples. Q4. How should we respond? A4. This should stimulate varied responses from students. To quote the article: Winning the Cost War requires a dedicated, proactive, results oriented effort that should appeal to the aggressive nature of the American Soldier. The Army’s posture is not to wait for the inevitable budget cuts and merely react to the situation. We seek to shape the issue through the third option: increasing cost effectiveness through the development of a cost conscious culture.

LSA #3 Summary During this instruction, we read the Article “Remember Valley Forge” by Ms. Matiella and briefly discussed it’s outcome.

Payoff: Better Execution, Not Necessarily Less Spending $ $ Budget Management Better Mission Appropriated Execution $ $ Reprogrammed Efficiencies

TLO Summary Action: Introduce Principles of Cost Analysis and Management Condition: You are cost advisor technician with access PCAM course handouts, readings, and spreadsheet tools and awareness of Operational Environment (OE)/Contemporary Operational Environment (COE) variables and actors. Standard: With at least 80% accuracy: Discuss purpose for increasing cost effectiveness; terminology, and best practices response to threat Understand the Purpose of this Course Understand the asymmetrical threat of lack of resources.