Introduction to Cost management DASA-CE Training Introduction to Cost management

Cost Management – Overview Cost Management = Managing Business Operations Efficiently & Effectively Through the Accurate Measurement & Thorough Understanding of the "Full Cost" of an Organization's Business Processes, Products & Services in Order to Provide the Best Value to Customers Cost Management Process consists of Cost Planning, Cost Accounting, Cost Analysis, and Cost Controlling Cost Management involves Operational Managers and Resource Managers In this section, we will present an overview of cost management. Cost Management means Managing Business Operations Efficiently & Effectively Through the Accurate Measurement & Thorough Understanding of the "Full Cost" of an Organization's Business Processes, Products & Services in Order to Provide the Best Value to Customers. Cost Management Process consists of Cost Planning, Cost Accounting, Cost Analysis, and Cost Controlling Cost Management involves Operational Managers and Resource Managers

Cost Management is a New Process Cost Accounting / Management is new to most of the Army as a formalized process Provides Financial and Managerial Information Cuts across financial and operational organizations Is driven by information needs of the Operational Army not solely the financial community Cost Management is a New Process Cost Accounting / Management is New to Most of the Army as a formalized process It provides Financial and Managerial Information, Cuts Across financial and operational organizations, and is Driven by Information Needs of the Operational Army not solely the Financial Community

Cost Management Managing Business Operations Efficiently & Effectively Through the Accurate Measurement & Thorough Understanding of the "Full Cost" of an Organization's Business Processes, Products & Services in Order to Provide the Best Value to Customers. Efficiently means doing things "right” - e.g. in the best and most economical way, wasting no resources Effectively means doing the "right" things - e.g. setting targets to achieve an overall goal (the effect) and attaining the goal Cost management means Managing Business Operations Efficiently & Effectively Through the Accurate Measurement & Thorough Understanding of the "Full Cost" of an Organization's Business Processes, Products & Services in Order to Provide the Best Value to Customers. Efficiently means doing things "right“, e.g. in the best and most economical way, wasting no resources Effectively means doing the "right" things, e.g. setting targets to achieve an overall goal (the effect) and attaining the goal Full Costs are the inclusion of all and only those costs related to generating the output Best Value is a qualitative measurement to be taken into consideration Full Costs is the inclusion of all and only those costs related to generating the output Best Value is a qualitative measurement to be taken into consideration

Cost Management Cost Management Process Cost Accounting Cost Planning Managing Business Operations Efficiently & Effectively Through the Accurate Measurement & Thorough Understanding of the "Full Cost" of an Organization's Business Processes, Products & Services in Order to Provide the Best Value to Customers. Cost Accounting Cost Management Process Cost Planning Cost Analysis The cost management process consists of four components: Cost accounting, cost analysis, cost controlling, and cost planning. Cost Controlling

Cost Planning Cost Planning is the use of a Cost Model for “should-cost” forecasting to make informed decisions Often performed for: Budget Requirement Requests Cost Estimations Output Quantities Capacity Management Risk Analysis Various Time Frames: Out year / Current year, Quarterly, Monthly Standard Rates Defining Targets to Measure Efficiency and Effectiveness Cost Accounting Cost Planning Cost Analysis Cost Management Process Cost Planning is the use of a Cost Model for “should-cost” forecasting to make informed decisions. It is often performed for: Budget Requirements Requests Costs Estimations Output Quantities Capacity Management Risk Analysis Various Time Frames: Out year / Current year, Quarterly, Monthly Standard Rates Defining Targets to Measure Efficiency and Effectiveness Planning is performed both in terms of dollars, but since we are talking about efficiency and effectiveness, quantity as well. Cost Controlling

Cost = Converting and Measurement of Work Cost Center Asset / Equipment Project / Program Internal Order WBS / Work Order Organization - Labor, Materials, Supplies Resources/Inputs Plant, Property & Equipment Building Project, Weapon System Outputs Services, Events (SSP, Course) Job (Set of Tasks) – Maint & Repair 7

Cost Accounting Cost Accounting translates the operational value chain into financial values Cost Planning Controlling Analysis Accounting Management Process Cost Accounting is the dollar value of the cost measurements resulting from business operations Cost Measurement has meaning only when considering its purpose Defining Cost Measurement should be carefully considered and evaluated Alternative cost methods should be evaluated under operating environment Cost Accounting translates the operational value chain into financial values. Cost Accounting is the dollar valuation of the cost measurements resulting from business operations Cost Measurement has meaning only when considering its purpose Defining Cost Measurement should be carefully considered and evaluated Alternative cost methods should be evaluated under operating environment * Source: The Federal Accounting Standards Advisory Board (FASAB) No. 4. Managerial Cost Accounting Standards

Cost Analysis Cost Analysis is the integration of functional outcome data with cost data to produce valid and verifiable information to conduct various forms of analysis Cost Planning Controlling Analysis Accounting Management Process Sample types of analysis include: Organizational performance Analysis of alternatives Variance analysis Economic analysis Cost / Risk assessments Trends Cost Analysis is the integration of functional outcome data with cost data to produce valid and verifiable information to conduct various forms of analysis Sample types of analysis include: Organizational performance Analysis of alternatives Variance analysis Economic analysis Cost / Risk assessments Trending

Types of Cost Analysis Forecasting: using prior period information to predict future dollars and quantities Variance Analysis: comparison analysis of standard vs. actuals, plan vs. actuals, or multiple periods (e.g. Jan vs. Feb) Trend Analysis: Analysis of cost/qty over multiple consecutive time frames (e.g. Month to Month, Year to Year, etc.) Economic Analysis: Analysis of economic benefits of multiple options over different periods of time Some types of cost analysis are: forecasting, variance analysis, trend analysis, and economic analysis. Forecasting is using prior period information to predict future dollars and quantities Variance Analysis is comparison analysis of standard vs. Actuals, Plan vs. Actuals, or multiple periods (e.g. Jan vs. Feb) Trend Analysis is Analysis of cost or quanitity over multiple consecutive time frames (e.g. Monthly to Month, Year to Year, etc.) Economic Analysis is Analysis of economic benefits of multiple options over different spans of time

Types of Cost Analysis Cost/Benefit Analysis: Analysis of decision to examine costs vs. return Life Cycle Cost Estimate: Estimate of program or project cost over the full life cycle from concept development to disposal Cost/Risk Analysis: Assesses cost in reference to probability/risk of potential outcome Cost Benefit Analysis, Life cycle cost estimates, and cost/risk analysis are other examples of cost analysis. Cost/Benefit Analysis is the Analysis of Decision to examine costs versus return A Life Cycle Cost Estimate is an Estimate of program or project cost over the full life cycle from concept development to disposal Cost/Risk Analysis:is Analysis assessing cost in reference to probability/risk of potential outcome

Analysis Supported by Enterprise Resource Planning (ERP) Reporting The various types of analysis are supported by ERP reporting by providing: Real-time, accurate data Drill-down capabilities to generating document (e.g. transparency and audit/integrity) Standard definitions, business rules, and methods (commonality in what the data means) Multiple cost assignments and views The various types of analysis are supported by ERP reporting by providing: Real-time, accurate data Drill-down capabilities to generating document (e.g. transparency and audit/integrity) Standard definitions, business rules, and methods (commonality in what the data means) Multiple cost assignments and views

Cost Controlling Cost Controlling is taking “Best Value” and/or “Best Practice” actions to realign the organization to achieve the defined objectives Actions taken based on information provided from Cost Analysis results Redeployment of resources between outputs Change outputs (e.g. do more or less) Update/revision of plan information - e.g. updated Std. Rate Execution of trade-off decisions - e.g. OT vs. external support Cost Planning Controlling Analysis Accounting Management Process Cost Controlling is to take “Best Value” and/or “Best Practice” actions to realign the organization to achieve the defined objectives It is actions taken based on information provided from Cost Analysis results. For instance: Redeployment of resources between outputs Change outputs (e.g. do more or less) Update/revision of plan information, e.g. updated Std. Rate Execution of trade-off decisions, e.g. OT versus external support

Cost Controlling It’s where the benefits of Cost Management are realized The step where leaders and decision-makers use the results of their cost analysis as decision support, and implement the changes and enhancements that ultimately move us to a more efficient Army 14

Cost Management Involves.. Capturing and Valuating Data Accurate, timely and relevant data Connecting operational output/performance data to financial data Allocate Overhead Cost Planning Controlling Analysis Accounting Management Process Cost Planning Set Cost Targets and Efficiency Goals Compute Standard Rates Cost Analysis Variances Depreciation Trends and forecasting Product, service or activity cost by element (labor, contract, etc.) Understanding full costs of organizations, operations, products and services Cost management involves: Cost accounting, in which we capture and valuate data that is accurate, timely, and relevant; connect operational output/performance data to financial data; and allocate overhead. Cost analysis, which includes analysis of variance, depreciation, trends and forecasting, product, service, or activity cost by element, and full costs of organizations, operations, products and services. Cost controlling, which consists of actions such as changing targets, changing resources, or changing quality. And Cost planning, which sets cost targets and efficiency goals and computes standard rates. Cost Controlling Move to action based on analysis Change targets Change resources Change quality

Cost Management Process (Who Is Involved?) RM Cost Planning Controlling Analysis Accounting Management Process OM Resource managers typically focus on accumulating the costs and reporting, and are most involved in the cost accounting and cost analysis domains. Operational managers are focused on efficiency, and are most involved in the cost planning and cost controlling domains. Resource Managers (RM) - Operational Managers (OM)

Cost Culture Culture is the shared “Taken-For-Granted” assumptions, beliefs, values, expectations and rules that members of a work unit team or a corporate organization hold Change management is required to move towards a Cost Culture Change management impacts the areas of people & other resources, processes, policies and procedures, and technology Cultural shift to a Cost Culture is a maturation process moving from “What We Spent,” to “What It Actually Costs,” to “What It Should Cost” In this section, we will present an overview of Cost Culture. Culture is the Shared “Taken-For-Granted” Assumptions, Beliefs, Values, Expectations & Rules that Members of a Work Unit Team or a Corporate Organization Hold Change management is required to move towards a Cost Culture Change management impacts the areas of People & Other Resources, Processes, Policies & Procedures, and Technology Cultural shift to a Cost Culture is a maturation process moving from “What We Spent”, to “What It Actually Costs”, to “What It Should Costs”

What is a Cost Culture? Comprises the attitudes, experiences, beliefs and values of an organization A shared behavior by people & groups in an organization A Cost Culture is the cultural shift from “Accomplish the Mission at Any Cost” to “Accomplish the Mission While Considering Cost” What is a Cost Culture? It Comprises the Attitudes, Experiences, Beliefs & Values of an Organization It is a Shared Behavior by People & Groups in an Organization Most Experts Agree that it is the Shared “Taken-For-Granted” Assumptions, Beliefs, Values, Expectations & Rules that Members of a Work Unit Team or a Corporate Organization Hold A Cost Culture is the Cultural Shift from “Accomplish the Mission at Any Cost” to “Accomplish the Mission Considering Cost” Culture is the combined way an organization operates. Moving to a culture of cost is a big change It is important to note that a transition to cost culture does not imply that cost trumps everything, simply that it is considered and known

Why Focus on Cost Culture? Deploying Systems, Improving Cost Models, Issuing Policies, Training Staff, Recruiting Experts will not enhance the Army’s ability to manage costs unless Army Soldiers / Civilians understand and value the need to manage costs Why Focus on Cost Culture? Deploying Systems, Improving Cost Models, Issuing Policies, Training Staff, Recruiting Experts will not Enhance the Army’s ability to manage costs unless Army Soldiers / Civilians Understand & Value the Need to Manage Costs Knowing Our Costs & Managing Them To Increase Our Mission Capability Must Become Ingrained in Our Culture Leaders Must Demand Cost Information & Use It In Decision-making — Otherwise It Provides No Utility To The Army We Need A Lifestyle Change, Not A Diet! Knowing our costs and managing them to increase our mission capability must become ingrained in our culture Leaders must demand cost information and use it in decision-making, otherwise it provides no utility to the Army We Need A Lifestyle Change, Not A Diet!

Moving to a Cost Culture “A Culture of Entitlement” “A Culture of Influence” Budget-focused Spend rate driven –inputs Performance objective -99.9% obligated Free goods have infinite demands Cost and performance focused Results driven - output & outcome Performance objective – resource consumption optimization (efficiency & effectiveness) Use what is necessary to obtain the objective Moving to a Cost Culture means transitioning from a culture that: is Budget-focused, is spend rate or inputs driven, where the performance objective is to obligate 99.9% of available resources, and where free goods have an infinite demand, to a culture that is cost and performance focused, is results driven, where the performance objective is resource consumption optimization, and where only the resources necessary to obtain the objective are used. From Budget to Cost

Cost Enablers Enterprise Resource Planning (ERP) is an enabler to Cost Management “Culture” by providing the necessary technology The Cost Management Process is an enabler to Cost Management by incorporating cost impact into routine decision-making In this section, we will present an overview of Cost enablers. Enterprise Resource Planning, or ERP, is an enabler to Cost Management “Culture” by providing the necessary technology. The Army Cost Model is being designed into GFEBS which utilizes the SAP ERP application The ERP application is operational focused generating financial information as an outcome of an operational transaction The ERP application has a transactional component and an analytical component The transactional component has real-time integration for the various value streams/function modules