Cost Systems Design

Cost Systems Design

Also by Pierre Mevellec Les Systèmes de coûts, objectifs, paramètres de conception et analyse comparée, Dunod et l’Orde des Experts Comptables, Paris 2005 Le calcul de coût dans les organisations, Repères, La découverte, Paris 1995 Eléments fondamentaux de Comptabilité, co-authored by Guy Rochery, Vuibert Paris 1990 Gestion financière dans les organisations coopératives, co-authored by Michel Belley, Gaëtan Morin éditeur, Chicoutimi, 1985 Introduction au calcul de coûts, E-Thèque, 2002, http://www.numilog.com/ fiche_livre.asp?PID=2661

Cost Systems Design Pierre Mevellec

© Pierre Mevellec 2009 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6-10 Kirby Street, London EC1N 8TS. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author has asserted his right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2009 by PALGRAVE MACMILLAN Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS. Palgrave Macmillan in the US is a division of St Martin's Press LLC, 175 Fifth Avenue, New York, NY 10010. Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries. ISBN-13: 978–0–230–22442–1 hardback ISBN-10: 0–230–22442–3 hardback This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Mevellec, Pierre, 1944– Cost systems design / Pierre Mevellec. p. cm. Includes bibliographical references and index. ISBN 978–0–230–22442–1 1. Cost accounting. 2. Activity-based costing. I. Title. HF5686.C8M434 2009 658.15⬘52—dc22 10 9 8 7 6 5 4 3 2 1 18 17 16 15 14 13 12 11 10 09 Printed and bound in Great Britain by CPI Antony Rowe, Chippenham and Eastbourne

2008035150

Contents List of Figures

viii

List of Tables

ix

Acknowledgements

x

Introduction

1

Part I Theoretical Approach 1 The Rationale behind Costing Systems 1.1 Managing resources 1.2 Interacting with the environment 1.3 Orienting behaviour 2

The General Parameters of Modelling 2.1 Choice of language 2.2 The perimeter 2.3 The status 2.4 Units of analysis

5 5 7 8 11 11 13 16 17

3 The Creation of Architecture 3.1 Modalities of the constitution of the unit of analysis 3.2 Hierarchization and allocation 3.3 Bases for cost allocation

21 21 30 31

4 A Panorama of Existing Systems 4.1 Broad categories of systems 4.2 Analysis of the two black boxes 4.3 Conventional systems 4.4 Non-conventional systems

33 33 37 37 42

5 Analysis of Relevance 5.1 Internal relevance 5.2 External relevance 5.3 Relevance from the viewpoint of behaviour orientation

46 46 54 57

6 From Enterprise Model to Cost Calculation 6.1 The tradition of unit costs 6.2 Unit cost in non-volumetric context

60 60 63

v

vi

Contents

6.3 Predominance of a single cost object 6.4 Multiplication of cost objects

64 65

7 Widening of Perimeters in New Models 7.1 Total cost over the life cycle 7.2 Non-transactional costs 7.3 Composite costs

67 68 72 73

8

75 75 79 80 81

Articulation with Other Tools of Control and Management 8.1 Key indicators as support for cost-value dialogue 8.2 Presentation of key indicators 8.3 Costing models and quality management 8.4 Costing model and stakeholders

9 Evolution of Costing Systems 9.1 The slowing down of evolution 9.2 Promising trends in evolution 10

Costs and their Utilization 10.1 Price and unit cost 10.2 Information concerning costs and cost management

Conclusion

95 95 96 98 101 102

Presentation of the Cost Systems Families

11 Cost Systems: Synthetic Presentation and Quantified Illustrations 11.1 Cost architecture 11.2 Common characteristics 12

87 87 90 93

Appendix A.1 Subsidization A.2 Basic data A.3 Effect of diversified activities in a cost centre A.4 Effect of relative costs of activities A.5 The effect of batch size

Part II

83 83 84

Conventional Systems 12.1 Direct value added (DVA) 12.2 Theory of Constraints (TOC) 12.3 Variable cost 12.4 Direct cost 12.5 Basic full cost

111 112 112 121 121 128 133 139 146

Contents vii

12.6 12.7 12.8 12.9 12.10 13

All direct Hierarchized responsibility centres Value added units method (VAU) Homogeneous cost pools method Hierarchized homogeneous cost pools method

Non-conventional Models 13.1 ABC Model 000 13.2 ABC Model 001 13.3 ABC Model 010 – functional 13.4 ABC Model 011 (hierarchized and value creation oriented) 13.5 ABC Model 100 13.6 ABC Model 101 13.7 ABC Model 110 (functional) 13.8 ABC Model 111 13.9 MBM (Management by Means) 13.10 Tables of synthesis

152 158 166 179 187 195 196 208 221 233 244 254 264 276 285 300

Bibliography

307

Index

309

Figures 1.1 Managing costs 2.1 Functioning of organizations without cost systems 2.2 Tree diagram of costing systems based on general parameters 3.1 Example of transfunctional activities 3.2 Macro-activity proposed by Peter Turney, (common cents, 1991) 3.3 Transfunctional process (Mevellec, OCE case) 4.1 Four categories of systems 4.2 Conventional systems 4.3 Non-conventional systems 5.1 Functioning of a VAU system starting from year 2 5.2 Analysis network in a full costs system 6.1 Mechanism of unit cost calculation 6.2 Autoclosure in the costing systems 7.1 Curves of expenses incurred and disbursed over the life cycle of a product 7.2 Example of spatial analysis framework in automotive industry 8.1 Structure of the ‘Tableau de bord’ 8.2 The balanced scorecard 8.3 Example of a process linked to the stakeholder ‘financial market’ 9.1 Evolution cycle of costing systems 10.1 Mechanics of selling price fixing 11.1 The basic structure 11.2 Manufacturing process

viii

7 12 19 29 29 30 34 38 43 50 51 61 63 69 71 79 81 82 86 88 113 113

Tables 3.1 Abstract of 92 tasks at the headquarters of a food industry firm 6.1 Generic matrix of unit cost calculation of an object 8.1 Deployment of the KPI at the process level 8.2 Deployment of the KPI at the activity level 11.1 Cost and income statement before inventory 11.2 Bill of materials 11.3 Bill of operations 11.4 Production and sales volume 11.5 Materials used 11.6 Cost of operations 11.7 Products by order 11.8 Products by customer 11.9 Orders by customer

ix

25 62 77 78 114 115 115 115 117 118 119 120 120

Acknowledgements I am greatly indebted to several people who helped transform my research work, conducted mostly in French into this book in English. I would like, in particular, to thank Pr. Surinder Jathaul from Chandigarh University, Tom Becker from Nantes. I am also indebted to my foreign colleagues who have encouraged this project, especially Pr. John Innes from Dundee, Pr. Dinesh Gupta from Chandigarh, Pr. Matti Sievanen from Tampere. I am also gratefull to my doctoral students and local colleagues Noel Barbu, Thierry Bertrand, Marie Catalo, Jean-Marc Lauzanas, Pascal Perrot, who contributed through their questions and discussions to the development of this work.

x

Introduction

Formalization of the notion of cost seems to be linked to the advent of mass production, which makes use of shared resources. The notion of cost gave way to that of a costing method meant for the dissemination of a practice. More recently, we have moved from the notion of method to that of costing systems. Here it is not a question of defining a method of calculating, but of organizing data in view of the multiple analyses in the domain of costs and in the relational domain of analysis of profitability. The spectacular progression of computer science, both in terms of capacity of processing and in potential of modelling, makes the task of the designer of costing systems at once easier and more complex. Everything, or almost everything, is possible in the domain of collection and processing of data, but the output still has to be intelligible, flexible for users and unambiguous. One may dream of a vast warehouse of data where everyone, as needs dictate, finds the requisite data. But to obtain a minimum of coherence in such a world, users would have to share the same model of organization and its environment, and a like capacity for handling techno-economic data which is the raw material of all calculations of cost. In order to cater to this hypothetical community of purpose, the data must be collected, stored, arranged, designated and organized in a manner that facilitates its coherent use. This mission, which was altogether exceptional earlier, with systems lasting several decades without major restructuring, becomes critical in organizations that are constantly being reorganized. Today organizations change much faster than the formal systems representing them. While a robotic painter is capable of reprogramming itself, depending upon the configuration of the part to be painted, our robotic accountants are far from having acquired this agility. Just as a simple automaton is programmed for a set of predetermined tasks, 1

2

Cost Systems Design

the current accounting systems get stuck by routines that express simultaneously cost concepts and the state of the organization. We must, as in mechanics, switch from simple automaton to flexible automaton, that is to say, be capable of expressing the same cost concepts in an organization with a changing structure and with changing objectives. A step in this direction can be taken by stressing not the production of a costing system but rather its structure and the parameters that will enable it to restore an intelligible representation of the organization. This representation or model, being no longer constrained by such and such specific form or costing method, permits at once both a real multiplicity of approaches starting from a common base and an autonomy of concepts in relation to organizational dynamics. This disposition to separate the modelling of the organization from the tools which stem from it is partially illusory to the extent to which representation and action utilizing representation belong to the same recursive loop. From our representation of the world flow our actions, and our action calls for a new representation of this world upon which we have just acted. What is true in a general way is equally so in the matter of costs. It would be interesting to dwell upon the objectives to be met by instituting costing systems. Answers found in the past to this question converge around three ideas. First, costs are useful for resources management; second, costs are useful for an interaction with the environment; third, these two objectives underlie the role of costs in the orientation of behaviour of major players in the organization. In the first part, I will present a standardized analysis of costing systems. This is constructed in two phases by associating general parameters with the parameters of the system itself. Relying on these modalities of construction, I will present a panorama of existing systems in order to probe them on the basis of twin references of the manager, the strategy and its theory of value. I will continue the exploration of costing methods by examining more specialized models, and will end by an excursion into the domain of information systems without which nothing stated here would have any existence. The second part enables the reader to go from theory to practice. All systems identified in the first part are implemented using a single case, providing thus a concrete translation of the remarkable assemblages that all costing systems are.

Part I Theoretical Approach

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1 The Rationale behind Costing Systems

Between the two extremes of works devoted to the technique of calculation exclusively, and works that focus on the use of costs for decision-making, the present work is structured around the why and the wherefore of the costing system. Several authors have studied the reason why, and have given a more or less lengthy set of answers. Others have tried to find in history an answer to the why, coupling it with the question of the when. The problem of the when and its inevitable quarrels about anteriority are of little interest to me. If one takes an interest in a firm, the when is to be found in its own life, not over a period of history, even if one takes into consideration corporate factors characterizing the environment of the time. If one asks oneself this question at the level of the population of businesses, does one look for the first or for a significant adoption threshold? I will therefore take up the reason why in a timeless manner, the objective being at once to convey information concerning the reason for adoption of a costing system by an organization, and to make clear the reason for change in common practices of organizations. To my way of thinking, these interconnected reasons tie up with three major objectives that relate to resources management, interaction with the environment and orientation of the behaviour of the major players. These points will be taken up one after the other.

1.1

Managing resources

One calculates costs to manage them. This formulation constitutes probably the most common justification of costing. The implicit hypothesis promoted here is that knowing the costs is sufficient for generating actions that will control them. The obvious question is: what costs are we 5

6

Cost Systems Design

talking about? Generally, reference is made to three of them: resources, responsibility centres and the products. The cost of resources is accessible from two angles: acquisition cost per unit and the total cost. The first-mentioned term rarely supposes a calculation of cost strictly speaking, acquisition cost being reduced to purchase price. In that case, the costing system is operative only for keeping track of an evolution over a period of time. In certain cases, resources merit a more elaborate processing because acquisition cost is not to be confused with the cost of execution. The cost of execution supposes mobilization of additional resources for another provision, which diminishes their yield directly (fall in productivity) or indirectly by modifying certain attributes of production (quality, time limit). Estimation in this case becomes problematic and the costing system responds rarely in a satisfactory manner. Socio-economical analysis, also known under the name of the method of hidden costs (Savall and Zardet, 1995 [1987]), attempts to formalize and generalize this approach in the wake of important convention, particularly with respect to the estimation of lost revenues. These conventions leave estimation of hidden costs out of the contractual costing systems. This difficulty must not lead one to ignore this problem at the time of analysis of resources. It is possible to have recourse to specific, isolated studies by including estimations, admittedly inferior in comparison with analysis of hidden costs, but superior compared with the simple information provided by the account of the concerned resources, in addition to the accountable ascertainment. Beyond simple analysis into price volume, each resource can be related to another scale: the total cost, cost of a function, sales figures, etc. (CEGOS Studies). One question, which arises, is that of interpretation of the results of the comparison. Apart from simple temporal evolution, the search for external references provides food for thought, which may turn out to be useful. Nevertheless, one must be wary about the real contribution of these sectorial comparisons, to the extent to which definitions of resources, as well as the aggregates they are related to, vary considerably from one business to another, if not from one establishment to another within the same group. The difficulties pointed out at the level of resources exist at the level of responsibility centres, whatever be its nature. Its frontiers rarely transgress the concerned parameters with the decisions taken there. Its structuring differs from one business to another, and its importance in the organization may be mirrored in a strategic choice, which makes it tricky for any management that keeps pace with an external norm. What about the cost of output, generally the product or service? The latter requiring multiple resources in a more or less complex process

The Rationale behind Costing Systems

Resources

Perimeter for action

Objects

Figure 1.1

7

Action on acquisition costs Action on usage of resources

Action on the perceived value

Managing costs

of production, one is led to an analysis of accumulated resources and/ or responsibility centre throughout the cycle of production. Moreover, one must recall that cost analysis at the product stage intervenes after implementation of the resources and that corrective action during the cycle is ruled out. For the subsequent cycle, we are brought back to action on the other two levels of analysis explained earlier. Here we come to the conclusion that the only useful cost calculations relate to intermediary zones, large enough for notions of efficiency and effectiveness to have a sense, and limited enough for information on action to be easily accessible or interpretable (see Figure 1.1).

1.2

Interacting with the environment

Without doubt, the reason most often put forward in small organizations is that one calculates costs in order to fix the sale price. The connection between cost and price is old and deep-rooted among accountants, probably even more so among other categories of professionals working within organizations, and more particularly among marketing people. It is a matter of negotiating meaningfully with clients on a basis accepted by economic theory and certain laws: if I sell at a price lower than the cost, I am rushing headlong into bankruptcy and I am to be blamed for restraining competition. It is interesting to note that irrespective of the ideological family to which one may belong, the cost of products is of the utmost importance. For partisans of corporatism, the recourse to a uniform cost price (even if false) is a guarantee of replacement of devastating competition by a healthy emulation. For the dyed-in-thewool liberals, cost no longer determines the price but provides the basis for negotiations and the floor price below which it is dangerous

8

Cost Systems Design

to agree to descend. We will enlarge upon the correspondence that can be established between modes of regulation of exchanges and the structuring of the costing systems. In (theoretically) planned systems, price is equal to theoretical opportunity cost obtained by resolution of a linear program modelling the production program. However, this preoccupation with cost in view of a business relationship with the client is just one of the aspects of interaction with the environment. Practically all parties to a negotiation are equally attentive to presentation of costs, be it in a continuous manner or an occasional one. In the first instance, one can cite the financial market, which awaits an estimation of certain assets to base its own estimation of the position of the organization in question. The absence of a tried methodology of estimation of intangible assets is one of the causes of the speculative bubble that seized the sector of new technologies at the end of the 1990s. With the continued growth in volume of services and the intangibles in developed economies, this question is not likely to disappear from the preoccupations of managers. The development of new modes of relations with suppliers, particularly in the form of partnerships, gives rise to new needs of information, not on purchases but on the supply chain starting from expression to satisfaction of needs. In long-term partnerships, modulation of prices is based on the estimation of costs aimed at guaranteeing a win–win relationship. The personnel, through work councils, particularly in a crisis or during reorganization, will also demand to know certain costs, especially if these are taken into account by the management for taking decisions on reappraisal of volume of employment (cost of subcontracting, relocation, temporary work, etc.). Public authorities, increasingly incisive in areas like the environment or social issues, also demand information in which the notion of cost is often of prime importance for converting their aid into cash. In general, all parties to a negotiation want to know costs in some form or the other; the problem is that their requests are as varied in forms and objectives as the parties themselves. This race of parties for information on costs is seemingly a determining factor in the setting up and evolution of costs.

1.3

Orienting behaviour

Cost calculations cannot be separated from the mechanism of control and the steering required for the functioning of any organization. One

The Rationale behind Costing Systems

9

of the best-known forms of control is provided by standard costs. Once a cost is set up as a norm, it imposes itself on the players involved who needs must, at the risk of disciplinary action, adapt their attitudes to observe the said norm. However, beyond this form directly inspired by Taylorism, the posting up of costs, whatever these may be, plays an important role in the attitudes of those who, indifferently, send or receive information. Just consider for a moment the central role played by hourly rates in the running of manufacturing workshops. What the senders must do is to influence the methodology of calculation for a better presentation of their performance; for the receivers, it is a question of the instrument of justification for decisions having serious consequences like outsourcing or even the shutting down of sites. The influence on behaviour can also be more subtle, less visible. The use of such and such convention of calculation can modify the meaning of the information presented, when done without notice to concerned players, who, on another job, on an another site, will nonetheless change their behaviour. Just think of value analysis carried out in the R&D centre and evaluated by an hourly rate of manufacturing. Such a practice can only contribute to research for innovations or simplifications, highly promising in direct laboursaving, since it is in respect of the latter that they are graded. A question that certainly arises is that of anticipation of attitudes. Facing higher costs, will the concerned players spontaneously try to reduce them, stabilize them or act as if it was not in their area of responsibility? Examples from the world of health show that a reaction cannot be taken for granted. The posting up of prices of generic medicines has up till now not been a factor in the spread of generic medicines and yet they are much less expensive. The effectiveness of steering by costs depends on the possibility of anticipating attitudes of key actors towards the showing of costs.

Japanese companies seem to use accounting systems more to motivate employees to act in accordance with long-term manufacturing strategies than to provide senior management with precise data on costs, variance and profits. Accounting plays more of an ‘influencing’ role than an ‘informing’ role. For example, high-level Japanese managers seem to worry less about whether an overhead allocation system reflects the precise demands each product makes on corporate resources than about how the system affects the cost-reduction priorities of the middle managers and the shop-floor workers. Hiromoto Toshiro, Harvard Business Review, July–August, 1988

10 Cost Systems Design

From these few elements concerning the rationale behind costing, one will have understood that expectations are manifold. Objectives deviate infinitely between the nature of resources and the extended business unit. Parties to negotiation in the life of an organization become more numerous each day and the bringing into play of impact on attitudes so as not to be disputable is tricky. It flows from this that one cannot conceive of tackling costing on the technical side alone. It concerns the whole life of the organization and, as such, the setting up or restructuring of a costing system merits the status of a strategic project. Mobilization of an organization around this project may not ensure success, but it constitutes a necessary condition for it.

2 The General Parameters of Modelling

I position myself here in the perspective of the creation of a new costing system. Whether it is the creation out of nothing or a change of a system, there is little difference. The points to be considered are the same but, undoubtedly, one has to communicate even more in the case of a change of system in order to ensure that the strategic aspect of the project is clearly understood by all and that it calls for their active participation. The construction of a costing system can be done in three phases: definition of general principles; creation of an internal architecture; and the fixing of calculation procedures, which will make it possible to describe the system. All too often the first point is overlooked or taken for granted. I, however, consider that this point is of paramount importance and that it warrants as much attention as the other points, if only because it is from this level that the meaning begins to take shape. It is based firstly on the language in use and concerns a specified perimeter. The status of a costing system in an organization and its relationships with the other existing modelling are two other dimensions that make up the hardcore of all costing systems.

2.1

Choice of language

Falling under the general procedure of evaluation, costing systems naturally use monetary language. This obvious fact needs to be examined. Can one imagine costing systems that use physical language, if not exclusively, at least predominantly? Leaving aside a barter economy where exchanges are done based on direct physical equivalents, there is any number of situations where the physical unit is the actual basis for economic evaluations. One may use the vocabulary of economics and refer to costs, but it is the physical unit alone which forms the subject of 11

12

Cost Systems Design

a modelling. In a controlled economy, at least partially, the selling price of the factors of production, particularly that of labour, is fixed, and cost boils down to an evaluation of quantities of the necessary factors. Negotiations with customers are done on the sole basis of physical units. Although this kind of economic regulation has been abandoned in industrialized countries, there are sectors where this practice subsists. The health sector is one good example. In addition, the arts and craft sector still provides multiple examples. A craftsman evaluates quantities of material and labour, and then posts the price without relating it to any accounting system. If one grants that a cost is a consumption of resources, one may say that, for a craftsman, cost is expressed only in physical units and value in monetary terms (Figure 2.1). Very recently, environmental preoccupations have brought into fashion the physical evaluations of costs with the monetary aggregation of multiple impacts being presently out of reach of economic calculation. Life-cycle analyses amalgamate internalized costs (evaluated in monetary forms) and externalized costs (evaluated in physical units). Generally speaking, for pricing its factors of production, each time an organization doesn’t use an internal cost but external information, one may consider that there is no costing system in the usual sense of the word, but a system of physical measures priced ultimately by information totally disconnected from the accounting system of the organization in question. I will not go into this type of system in greater depth. Let me emphasize that in such situations there is confusion between evaluations of cost and value, both being based on the same set of indicators stemming from the environment.

Total cost

Operational management

Qu an titi es

Institutions

Rule of price setting

Operational profit

Price

Figure 2.1 Functioning of organizations without cost systems

Sales revenue

The General Parameters of Modelling

13

In the following, my concern will be with systems which use monetary language as a medium for the collection, processing and production of information. This does not mean to say that physical information is absent. Quite the contrary: such information is always translated into monetary language, which is indispensable for aggregation and communication of costs within the organization. The limits of monetary language have been widely studied in financial accounting, and I will not go into them. But unlike financial accounting, which is exclusively monetary in its expression, management accounting and costing systems, which concern us here, are constantly dealing with both the physical and the monetary. For this reason, costing systems are fed at the same time with financial accounting, which provides them with the bases for evaluation, and by other systems enriched with their physical data, such as production management, sales management, research and development, analysis of industrial value, etc. Assistance from costing systems in decision-making is expressed as much in the physical register as in the financial one, the physical supposedly anticipating the financial. Taken on the whole, a costing system can be seen as a system connecting financial accounting with physical management systems for producing signals which are partly recuperated in monetary form (for dialogue with negotiating parties) or which trigger actions within physical management systems (for improvement in utilization of resources) that influence the behaviour of people in charge of the organization.

2.2

The perimeter

With this new parameter of design, we really get into the heart of the matter. If there exists a fundamental parameter, it is surely that of the perimeter. Within what boundaries does one position a costing system? The answer to this question until recently was quite obvious: the boundary of a costing system corresponded to the legal boundary of the given entity. Complexification of organizations, their relationships, extension of cost calculation to new objects and new organizations make the answer more problematic nowadays. To realize this, let us examine a few situations. Within an industrial group, where each establishment is legally autonomous and technically specialized, while outsourcing very many activities or subcomponents, what is (or are) the pertinent perimeter(s) of costing? When the R&D team starts developing a new product or functionality of an existing product which will not be produced in-house,

14

Cost Systems Design

and whose estimated life cycle is eight years, with ultimately an obligation to recycle old products, how does one determine the perimeter of analysis? When a municipality sets up a day nursery with the dual objective of redistribution of resources and facilitation for housewives to return to work, what is the perimeter of cost analysis and benefits? In a partnership of global sourcing (at world level for a line of product), on what costing system can the decision-makers rely for organizing allocation of profits from a relationship supposedly of the win–win type? Without going into such sensitive situations, the question of perimeter must be thrashed out in every organization intending to construct for itself a costing system. Is it to cover the entire organization or to confine itself to managing a fraction of it, and in that case, which fraction? In the chosen perimeter, is the system complete or partial, that is to say, will all resources entering this perimeter be attributed to one or more cost objects? But a full cost in a legal entity is rarely, if ever, the full cost of an offer of product or service. The entity undertakes design and manufacture but lets another subsidiary manage the distribution, which in turn transfers the products to other geographically specialized subsidiaries. The centralized analysis of profitability of products, which seems to be a banal management analysis, becomes in this context a challenge. For its resolution, it supposes a perfectly clear definition of perimeters of different costing systems constructed in entities and their extensions. Like the consolidation techniques developed in financial accounting for meeting the needs of the financial market for information, the increasing complexities of organizations nowadays call for an equivalent to satisfy the needs for internal information. But situations are so varied that it is illusory to define the right perimeter. It seems therefore reasonable to accept that the notion of ‘perimeter’, like the notion of ‘system’, ranges from the smallest to the largest depending on the position held by the designer. If he is at the head office of an original equipment manufacturer that covers all functions from R & D to distribution, his perimeter is constituted by all the legal entities of the group. If it is in an industrial subsidiary responsible for production of mechanisms for Europe, his perimeter will be the subsidiary in question. It is for him to decide in line with the directives of the group if the internal transactions are valued or not. If they are, they come within his perimeter; if not, they are not grasped by monetary language, and for this reason are excluded from the perimeter. If the designer occupies a centralized position and wants to bill his services to subsidiaries based on quantifiable services, his perimeter will be constituted by the sole

The General Parameters of Modelling

15

function whose costs he wants to break down. In all these cases, we are faced with systems covering the totality of the concerned perimeter. In other words, once the perimeter is defined, every system is complete. But the observer, the user happening to be outside the perimeter, may perceive them as partial. Perimeter and position with respect to the observer are essential for the comprehension and interpretation of signals sent by costing systems. In the literature, existence of a gap between an organization and its costing system perimeter results in calling the latter a partial system. This term is based on an implicit hypothesis that the perimeter of costing systems ought to coincide with that of the organization, which will then be comprehensive or complete. Now, as we have seen earlier, it is just not so if one goes from the organization to the product. Resources consumed within the organization but not integrated with the system are generally analysed in other systems of reference like those of budgets and projects. There again the observable practices are multiple. Certain costing systems integrate only material cost, while others integrate material and direct labour cost, while still others integrate productions cost, not forgetting those who keep out committed costs or general administration costs. It is not for us to comment on these choices but only to forge criteria as clear as possible for the classification of systems into complete systems and partial systems. The partial or global character is determined with respect to the objects to be evaluated, not with respect to the perimeter itself. As long as the product was almost the only object of analysis, it was easy to distinguish between partial and full costing systems. However, an increasing diversification of costing objects (customer, geographical sector, life cycle, strategic domain, etc.) makes this remark on perimeter more and more problematic and crucial. This is so because the same system can be partial or global depending upon the use to which it is put. Ideally, a parameter is defined by its contents. Allowing for exceptions, any enumeration is liable to be tedious, difficult to keep up-to-date and marred with mistakes. It is decidedly more convenient to refer to a potential reference perimeter, the legal requirements which constitute the source of accounting data, specifying if there is coincidence between perimeters of the organization and that of the costing system. This description of the perimeter of a costing system with respect to the organization which constitutes it, says nothing about the kind of costs that will be calculated. These could be full or partial, all depending on the objects to be evaluated. To go back to the foregoing examples, a partial system, covering just one function, will be able to produce

16

Cost Systems Design

full costs for provision of services of this function, whereas a complete system of the entity handling the manufacturing of all its various products will only furnish a partial cost of the same object. Finally, let us recall that a system capable of producing a full cost is generally capable of producing a partial cost of the same object. This results from the consideration that the notion of ‘perimeter’, which is seldom specified, is essential to the comprehension of the signals given out by costing systems, and that it is necessary to take the precaution of making it clear by referring to the position occupied by the analyst in the organization, and to objects of cost he serves to evaluate.

2.3 The status Another important parameter is that of the status of the system. Will the system under consideration be the only reference for cost calculation in the concerned perimeter, or will it compete with other systems? If the costing system is autonomous with respect to financial accounting, it is unlikely that the organization will mobilize resources to implement several costing systems in order to attain various objectives. It will try, rather, to construct a complete system that offers possibilities of partial processing. Inversely, in the Anglo-Saxon world, integration of costing with financial accounting leaves little room for innovation and one frequently observes the existence of systems parallel to the system dictated by accounting norms. Such a situation is also seen in large groups. Reporting constraints associated with the obligation of observing an internal standardization relying on a basis more financial than operational leads certain local managers to construct a parallel system, which gives them relevant information for local management. If there is just one system, then we are talking of a legal system, without this term having any legal connotation whatever with respect to the accounting and fiscal legislation. Otherwise, we are talking of parallel systems. Choice between single and several systems is fraught with consequences in matters of behaviour. If the people in charge have at their disposition two references, the odds are that their behaviour will follow the system, which is advantageous to them, though not necessarily so for the organization. Likewise, there is little chance of the two systems sending systematically signals on the same lines with respect to every issue. Thus, there is a great risk of fostering opportunistic behaviours, which will refer now to one system, now to another, according to the circumstances. Existence of a single system does not preclude multiplicity of points of view, at least if the single system is

The General Parameters of Modelling

17

complete. It is then possible to downgrade it for transformation into a partial system with respect to the same object. I will conclude by saying that if there are several systems, there is no reason why their perimeters should be identical (cost of production function in the financial system and full cost in the parallel system). One might advocate that the multiplicity of views enriches our knowledge of reality, and that the result is favourable. One may equally say that having two views which are not coextensive, does not produce an image in relief, but a blurred one, which diminishes our knowledge of reality upon which we mean to act.

2.4

Units of analysis

When the proponent of a costing system project has chosen its language, fixed its perimeter and spelled out its status, he still has to determine the elements with which he will construct the system. These units are denoted in the present text by the term building block or unit of analysis. One could just as well have used the expression basic brick. My preference for the notion of unit is due to its pre-eminently flexible character as compared with a building block! The choice facing a costing system designer, merely a modeller of the organization, is simple: either he relies upon existing models and adopts their elements of analysis, or else he constructs his own model by defining new elements of analysis. Let us examine the options. Recourse to existing models leads to an inventory of these models. To put it simply, every organization, commercial or otherwise, has one of these two models: products or services and management structure. These are the two bases, which one uses normally if one does not mean to start defining a new business model. Certain companies have other models, such as a process model derived from quality management or a supply model stemming from flow management. Choosing a product or service model is to see the organization as a function of production in which a workforce combines materials or components. Depending on the sectors of activity, priority is given to raw material, direct labour or a combination of both. In actual practice, the choice of a solution may emerge from fundamentally different preoccupations. The central position accorded to analysis of material in the food processing industry has little to do with an identical choice made by partisans of the theory of constraints. In the first case, one may put forward the hypothesis that this is a historic reason. Traditionally, the value of food products (agricultural produce untransformed) depended

18 Cost Systems Design

on the volume of material incorporated. As a result, focus was on this data. In the case of the theory of constraints, the choice ensued from the fact that all other resources are considered frozen in the short term and therefore not pertinent in decision-making. In ordinary industrial enterprises, emphasis was placed, if anywhere, on direct labour. The model of reference was the traditional economic model, which makes work the basis for value produced by the enterprise. Material and labour can be utilized in conjunction with each other. One obtains thus a composite analysis of the bill of materials and a bill of operations, the basis for modern production management. Whatever the choice may be, the main thing is to see that the product constitutes the basis of resources consumption modelling. The other assumed possibility of a basis for a model is offered by the organization flowchart. This provides a model of the organization, from the angle of responsibilities, which can easily be adapted to serve as a receptacle for analysis of resources consumption. It is possible to respect the flowchart and move down to the lowest level or, on the contrary, depending upon functions or sites, to settle at higher levels of responsibility. Very recently, new models were drawn up aiming at control of quality or time schedules. There is no reason why these new transversal readings of the organization should not be used for constructing costing systems. The whole idea of taking up an existing model is to gain simplification and understanding, by avoiding incursion of any additional element of complexity in an already complex organization where each person in charge has to refer to several models. Conversely, the designer of a reference model for cost calculation may think that his model has the status of being a superstructure, since everything ultimately has to be evaluated in monetary terms in our free market economies. Consequently, it is not advisable to refer to an already existing model whose representativeness is only partial, since other models which rival and/or are complementary exist already. The question which then arises is that of definition of a new basis for the representation of the organization that will be acceptable to all without calling into question the pre-existing models. What is the lowest common denominator between the different existing models? The only way to answer this question is to go into what is actually done in the organization at the lowest level, which can be an event, task or activity. One still has to move from this ideal analysis to a feasible model in the economical and informational sense. At present, the choice falls upon the notion of activity. This is used in all approaches in the organization, but unfortunately with palpably different contents. Consequently,

Figure 2.2

No

Yes

1

Existing

2

Defined

Whole organization

Legal

Yes

1

Existing

2

Defined

A fraction of the organization

Stand alone

A physical basis without connection to the accounting system Value system

No

Tree diagram of costing systems based on general parameters

Unit of analysis status

Scope

Legal/stand alone

Monetary

Formal

Valuation systems

1

Existing

2

Defined

Whole organization

1

Existing

2

Defined

A fraction of the organization

20

Cost Systems Design

a designer who wants to take the route of a new modelling will have to determine his own unit of analysis. At the end of this first stage, broad outlines of a costing system are already drawn, but the most important part is yet to come. Now it is a matter of filling this framework so that it constitutes a true representation of the functioning of the organization and serves as a base for development of various tools of guidance that it needs and, in the first place, its costing system (Figure 2.2). I will enlarge upon this tree diagram in Chapter 4. We may note here that barring the first two branches, which are of no interest to us, all systems are differentiated by the choice of unit of analysis: either this unit pre- or co-exists in the model of the organization used as a basis for the costing system, or it is constituted especially for this objective.

3 The Creation of Architecture

The five parameters we have just used for characterizing costing systems tell us nothing about their internal structure. These fairly general parameters position costing systems in an organization and allow a preliminary approach to their respective places within management systems. They say nothing about the internal structuration of the cost systems, structuration which is essential for analysing both their relevance and internal coherence. In reality it is at the level of fine-tuning that the reliability of data, its traceability and potential impact on behaviours can be appraised. In this chapter, I will review five new criteria, which, if applied to our two families of systems resulting from the foregoing phase of analysis, offer us a new road map of costing systems.

3.1 Modalities of the constitution of the unit of analysis Every cost system relies on the structuration of data in units of analysis. Whether one relies on an existing model or one develops a new one for the organization, due thought on modalities of modelling constitution is of the utmost importance. This is manifest when one constructs a newmodel of the organization with a view to setting up a costing system; but it is also the case when one relies on existing models, because it is rarely possible to use them without any adaptation. As usual in management, pure models do not exist. The following presentation, that makes sharp distinctions between different options, is given for the sole purpose of exposition without seeking to standardize. Modelling on the basis of products or services Product has been, and often still is, the prime response to any question on a definition of organization. Organization is invisible behind the 21

22

Cost Systems Design

product. Moreover, since the product continues often to be the sole object of cost, one would not be surprised to note that many a costing system is structurally based on technical models that serve to describe their products. The most successful model of products is constituted by a bill of materials and/or a bill of operations. This representation of product gives us, on the one hand, the material characteristics (nature, quantity, articulation) and, on the other hand, the characteristics of the manufacturing process (work stations utilized, man and machine hours). Moving from a model for each product to an aggregate model capable of giving an account of the organization presupposes a few simplifications. It is through his choice in allowing this move that the costing-system designer expresses himself. The simplest solution lies in considering all products or services in their entirety. The unit of analysis then becomes the sum total of material and/or labour or machine hours contained in a product or service. The analysis thus stems from inputs. Depending on options accepted at the perimeter level, each input is processed at its acquisition cost or charged with overhead rates representing the expenses of the organization. It is this value which makes it possible to subsequently obtain the cost of the product. Between the comprehensive processing of two or three inputs and the generally available solution in all firms endowed with computer-aided manufacturing based on a detailed definition of nomenclature and operation sheet, one can imagine a whole series of intermediate solutions. Simplified nomenclatures are frequently used. This simplification may be carried out in two ways. For each product one may settle at a level that is somewhere between l and m, the maximum number of levels. To put it plainly, it amounts to settling at a level of subcomponents considered sufficient for conveying complexity of the product. The same attitude is possible in the domain of operation. The second way to simplify does not bear on an individual product or service, but on a family. Here the idea is to work by equivalent units. Instead of processing 25 window sizes, just one will be used, being deemed representative, while all others will be expressed in a simple manner (by a coefficient of equivalence) based on the representative product. Modelling on the basis of the organization In the foregoing option, the organization is not analysed and its total operative costs are simply added to inputs in an undifferentiated manner. In the present option the organization is analysed independently of the product. The question that arises is the same as the one evoked by

The Creation of Architecture

23

products: down to which level of detail must one go in an analysis to construct a costing system? There again one may consider two extreme solutions. The first one consists in considering the overall organization as being a single unit of analysis. One reverts to a solution that is hardly differentiated from the solution of the preceding option. The second solution envisages, on the contrary, a structuration of accounting information based on the most detailed organization chart. Each unit at the lowest level of responsibility is set up as a unit of analysis for resources. Between these two extreme positions, organizations tap a whole range of possibilities. It is possible to settle on a function, a department or module just as it is possible to go right down to a workstation to find a solution similar to one of the possibilities explored in the foregoing option (the bill of operations). The technical proximity between two options of modelling that has just been emphasized explains that in practice costing systems very often have recourse to these two options simultaneously. Modelling on a new base The desire to disregard the constraints of the organization is not a new thing. In its strict definition, the homogeneous section suggested by Lieutenant Colonel Emile Rimailho is constituted by a series of tasks invariably carried out in sequence, leading to a physical or immaterial production. In this definition, no reference is made to a workshop or a responsibility centre. Where production is analysed minutely, the result is a multitude of homogeneous sections in the workshop or department. Likewise, Clinton H. Scovell’s suggestion of constructing a costing system based on automated and not manual work amounts to shying away from strict reference to hierarchical and functional organizations. These two suggestions in their purest form have found little application. The homogeneous section soon became the ‘homogenous’ workshop, whether it was because of the material or the operations. More recently, these new ideas of the early twentieth century have aroused a renewed interest. Considering that economics is only the expression of human activity, it was suggested that one should return to a structuration of costing systems on the basis of what is actually done in an organization rather than on its input and structure. Such an approach poses formidable problems to the modeller in the course of data collection, processing and updating. These problems are crucial to the extent that the modeller, liberating himself from constraints of organizational structure, finds himself without any safeguard or abseiling rope. Everything depends as much on his

24 Cost Systems Design

art as on his science. He is not setting off in search of the unknown altogether, as he has at his disposition a methodology of analysis and a few tools. Interviews, task analysis, search for causality, dictionaries of activities in each industrial branch, etc. are all so many aids which, precious as they may be, nevertheless make the modeller fully responsible for his choices. The starting point generally suggested is to hold meetings with the line management so as to render visible all tasks and operations that constitute the daily fare of the organization. However, at this very first stage arises the question of choice of people polled and their number. Does one poll the entire hierarchy and beyond? Does one stick to top management? In the light of responses received to these questions, the vision of the functioning of the organization is evidently different. Interrogation of all and sundry does not preclude subjectivity in the exercise. One must realize this and try to limit the risks involved. One of the salutary practices in these matters is to get feedback from persons interviewed regarding the synthesis of the modeller in order to verify the concordance of interpretation (see Table 3.1). The fundamental idea is that construction of a managing system on a basis not recognized by those who are represented there has little chance of producing the desired results. Once this exigency is satisfied, this idea must be confronted with another one just as important: is it reasonable to construct a system of information at this level of details and does the necessary data exist? Can it be updated with required reliability within the time limit? If these two conditions are met, the modeller has his new unit of analysis and can carry on with his work of modelling. The modeller can reduce the risks of drift by temporizing with the hierarchical structure. Instead of trying to construct a general model by ignoring the existing organization, he carries out an analysis of the functioning of the organization by department. Modification in the modelling process does not in any way dispense with the necessity of obtaining an answer to the two questions posed above: do the line managers recognize themselves in the representation that one wishes to utilize? Is this representation viable on the economic and data processing plane? However, risks encountered within the departments are independent of one another instead of being generalized at the organization level. As we will see further on, these two modalities of work, which appear relatively very similar, actually lead to very divergent models. Here the choice must be reasoned out and not be a result of mere chance, convenience or economy. Such a choice deserves to be made

The Creation of Architecture

25

Table 3.1 Abstract of 92 tasks at the headquarters of a food industry firm (the result of interviewing 11 people in the human resources department) Implementing an in-house and off-the-job training plan Search for training centres Registration management, recording and reservation of accommodation Administrative and accounting follow-up of training schemes Drawing up annual reports on training and producing statistics Managing in-house training Follow-up and registration of occupational injuries, sickness, maternity and paternity Drawing up of different claims and attestations of occupational injuries and sickness Management of new work contracts Posting personal records in groups Verification and filing of all documents relating to salary or status of salaried staff Payment by cheque to trainees and salaried personnel Management of termination of contracts Remittance of salaries of persons in traineeship with the works council to accounts department Remittance of salaries of representatives of the Chamber of Agriculture to accounts department Reception of trainees and new salaried staff Receipt of candidatures Management of wages claims Dispatch of pay slips for each department Drawing up different statements (taxes, MSA, bank) Data entry in Excel managing director’s allowances Making out labour turnover statements, to send to Occupational Safety and Health Administration Making out annual statement on the handicapped from CAT certificates, then make a synthesis Follow-up of contract work and temping Recruitment of seasonal workers Management of settlement of short-term employment contracts in OPCA2 Draw up statistics Assistance and training of users on X software Management of holidays and ART on X software Management of interfaces of X and Y software Parametering of tool X from statutory point of view Print out of records in Y and BO (remuneration, staff) Providing computer maintenance Management of training courses Make out statement and deposit of apprenticeship tax Data entry in Excel X of holidays and working hours Secretarial work of department manager Secretarial work of administrative management department Convening of labour and management and sending a copy to line managers

26 Cost Systems Design

by taking into consideration two parameters, homogeneity and transfunctionality. Homogeneity Whatever the nature of the units of analysis, one of the fundamental characteristics is homogeneity. If one wants to establish laws of cost behaviour, one must be able to explain, right from the lowest level, the consumption of resources. But this concern for associating cost information with capacity to influence costs based on a relationship of causality is not always there. In numerous cases, the two problems are disassociated. Information on costs comes under the costing system; influence on cost is organized within the framework of the budget system or that of action plans. Disassociation is complete, for certain resources, in systems that do not cover the entire organization. As for the part covered by the model, the smaller the number of unit of analysis, the greater is the risk of heterogeneity. This risk must be offset against the problem stated above, that of the complexity of the system under construction. It is often found that simplification overrides homogeneity. One retains, as cost centre, a perimeter of responsibility, even if heterogeneous, in preference to a multiplication of units of analysis. The concern for simplification is expressed as much in number of units of analysis as in their relationships. Limitation in level of reallocation also leads to the creation of units of analysis aggregating costs in different behaviours. This is technically expressed in two options. The first one consists in creating homogeneous units of analysis in liaison with envisaged cost objects and then in allocating to them, conventionally, all other costs. The basis for allocation, identified during analysis of homogeneity, becomes thereby distorted. The second option consists in inversely creating over the entire perimeter homogeneous units of analysis and then, according to needs, utilizing arbitrary allocation bases to be able to allocate all units to cost objects. The problem of homogeneity cannot be separated altogether from the notion of management horizon. Usually, homogeneity is understood to be of short term. This perception is inherited from models that made the volume of products the sole variable explicative of the evolution of the consumption of resources. The moment one accepts a multiplicity of causes, and therefore a diversity of laws of behaviour of costs, it is necessary to specify the horizon on which this variability is operational and utilizable for influencing the concerned costs. This problem which must be taken up at the level of units of analysis crops up at the level of possible regrouping of the latter in models that integrate several levels of allocation.

The Creation of Architecture

27

Transfunctionality Although it existed in numerous costing systems, this characteristic has only recently been analysed through its links with the change in performance management perspective. The transfunctional coordination and cooperation are now considered as fundamental to addressing customers’ expectations, whether it be in matters of total quality, justin-time manufacturing or meeting environmental challenges. The explicit presence of transfunctionality in costing models dates back to the 1960s with the advent of the notion of cost drivers. It was then a question of finding new approaches to manage indirect product costs based on the existence of transfunctional factors of causality linked to the increase in complexity of organizations. From this oneoff utilization evolved explicit integration with costing systems, and, depending on the costing systems, it is possible to distinguish four scenarios. The first scenario avoids transfunctionality altogether in the constitution of the unit of analysis. This is most often the case. An example of this would be modelling that strictly respects operation nomenclatures and/or the hierarchical–functional structure. The second scenario is characterized by an ignorance of transfunctionality. Units of analysis of large size, heterogeneous in their composition, may span large perimeters within which several functions coexist. The simplest example is represented by costing systems whose units of analysis correspond to industrial and/or commercial establishments in which several functions coexist (production, supply chain, finance, administration, etc.); but this is not an isolated case: transfunctionality is also seen in small units of analysis in which the modeller has wished to converge all consumption within the perimeter without distinction of origin. The third scenario is characterized by the introduction of transfunctionality at the level of the unit of analysis. Here it is a question of a deliberate approach associated more often than not with the concern of respect for homogeneity. The unit of analysis in such a case is constituted irrespective of any hierarchical and functional constraints. It is the result of the aggregation of similar tasks and operations, or else structurally and stably linked to the production of a clearly identified output. Transfunctionality for this reason can be considered functional or transfunctional. It is functional in the sense that all collective tasks contribute to the implementation of one function. It is equally transfunctional to the extent this function is the result of tasks taken up by departments belonging structurally to different functions.

28

Cost Systems Design

In the first option, all tasks involved in carrying out the same function, regardless of the place of implementation, are bracketed together in a single unit of analysis. There is reconstitution in the costing system of a function (human resource management) or subfunction (payroll management) split in multiple departments of a firm. Specialization of resources constitutes the guiding criteria of this approach. In the second option, the point of view taken is not the functional aspect (know-how) but the output. The placing of orders requires execution of a large number of tasks within different departments (identifying a requirement in the store, confirmation by users, data capture in the purchasing department, approval of financial management, for example). These approaches are more common because the analysis of the functioning of organizations is acute. The detailed analysis of the organization leads to research for complementarity of tasks executed in different departments for constructing significant units of analysis in terms of consumption of resources. The fourth scenario corresponds to the implementation of transfunctionality at the level of aggregation of the unit of analysis. What is mobilized here is the notion of process. But there again the two visions evoked in the foregoing point (referring to specialization of mobilized resources or outputs obtained) are present. In the concern for respecting the structure of the organization, all units of analysis are inferior or equal to a department. Subsequently, these units of analysis are grouped together on a functional basis. All activities of quality control, whether they are carried out in the course of purchasing, production or supply chain management, are grouped together to give a representation of the function ‘quality’ within the organization. This practice of transfunctionality, purely functional, runs counter to the recent evolution of business structures. It is accepted and widely observed that the support functions ought to be decentralized and positioned as close as possible to the operations they support. In numerous cases, this results in the enrichment of the tasks of the line managers, who conduct maintenance operations at the first level, or quality inspections. One can also say that this use of transfunctionality in the modelling of resource consumption makes it possible to retain a decentralized vision of the function (for each cost unit) while reconstituting the overall vision of the function (at the process level) (Figures 3.1–3.3). Where output is taken into account for the structuring process, transfunctionality takes quite a different form. This process is the assembling of elements of cost that contribute to delivery not of an output but a package of value attributes (functionality, quality, time required, for

The Creation of Architecture

29

Resources Materials and direct costs

Indirect cost

R C1

RC2

A

A

A

A

A

A

A

A

A

A

1

2

3

1

5

3

4

5

2

4

Cost of activity 1

Cost of activity 2

Product 1 Figure 3.1

RC4

RC3

Cost of activity 3

Cost of activity 4

Cost of activity 5

Product 3

Product 2

Example of transfunctional activities

Source: Michel Lebas, ‘Comptabilité analytique basée sur les activités, analyse et gestion des activités’, Revue Française de Comptabilité, Septembre 1991.

Packaging Tape inspection

Visual inspection

Incoming inspection

Final inspection

Outgoing inspection

Safety class

Quality assurance department

Department

Production Sales return

Raw materials returns

Department

Quality activity center Tape inspection

Figure 3.2

Visual inspection

Final inspection

Sales return

Raw Incoming materials inspection returns

Outgoing inspection

Safety class

Macro-activity proposed by Peter Turney, (common cents, 1991)

Source: Turney (1991).

30 Cost Systems Design

Process

Vendors management

Reception controls

Warehousing

Accounting

Part numbers management Figure 3.3

Transfunctional process (Mevellec, OCE case)

example) for constituting a family of objects. In order to obtain such a result, it is generally necessary to have cooperation among operational units, support units and units responsible for the resolution of the inevitable problems. The process is a mini-value chain that integrates all activities necessary for the delivery of a bundle of attributes. It is at this level that there is confusion over the meaning to be given to activities with and without value. In this process we find, for example, the activity of storage, control and invoicing, in addition to preparation for shipping, palletization and actual shipping. From the customer’s point of view, it is obvious that a certain number of these activities are of little value, but, from the point of view of the company, these activities are presently necessary for producing value as expected by the customer. It is desirable to make them superfluous, but very risky to cut them out prematurely.

3.2

Hierarchization and allocation

The concern about homogeneity, and just as often the complexity of organizations, leads frequently to a large number of units of analysis. This phenomenon, combined with the concern for organizing allocations to products on a basis of causality, results rapidly in the development of hierarchical costing systems. The bases for hierarchization are twofold: they call on simultaneously the principle of causality and the relation with the object. Three scenarios can be distinguished. The first one introduces hierarchization but no allocation; the second associates prioritization and object; and the third ignores the objects. In the first scenario, objects are organized in order of priority and so are units of analysis. The principle is to find objects that have a direct relationship with units of analysis. We will have for example the following hierarchy of objects: unit of product, product, product family, the brand, business unit, customer, distribution channel and the

The Creation of Architecture

31

business. This hierarchy in objects, from the simple to the complex, can be reduced to two levels – the unit of product and the business – and which permits organization into a hierarchy of unit of analysis based on a relationship of causality. All elements of cost will be characterized as direct, but in relation to objects organized into the hierarchy. In the second scenario, things are inverted. Objects are predetermined, often limited to products and product family or brand. The units of analysis in direct relationship with these objects serve as receptacles to all other units of analysis through allocations that are more or less complex. This is done based (in theory) on the relationship of causality. Allocation is done by unit of analysis based on the consumption of services relating to another unit of analysis or an object. There is neither aggregation nor transfunctionality. Allocations progressively allow us to concentrate all resources consumed within the concerned perimeter on objects and unit of analysis where services are used for preparation of objects whose cost is being calculated. In the third scenario, objects are disregarded. The model is constructed purely on the basis of unit of analysis. But the very fact that objects whose costs are to be calculated are ignored allows us to keep a flat structure, that is to say, one does not proceed to any merging or allocation. If one proceeds to regroup, however, it is for a reason other than a mere calculation of costs of objects. The idea is to construct useful alternatives for assessment and management of resources. The choice of these alternative objects, although based on the principle of causality, is arbitrary and depends on the objectives to be attained. As stated above, the two major modes of regrouping are based, on the one hand, on a functional approach and, on the other hand, upon a transfunctional vision. In the first scenario, one assesses the force of different functions, particularly of support functions. The particular concern is with the movement of resources from an internal point of view. In the second scenario, the concern is inversely focused on the external. One tries to construct a representation of the consumption of resources based on value creation processes.

3.3

Bases for cost allocation

The architecture ends with the identification of the bases for allocation. These transform the model (complete or partial) representing the organization as a tool of economic calculation. Only the unit of analysis having these bases for allocation are integrated into the cost of objects. Rejection of certain units of analysis from the calculation of the cost of objects makes it possible to define the perimeter of attributable costs.

32 Cost Systems Design

A perimeter of comprehensive analysis does not, by this very fact, lead necessarily to full costing systems. One can distinguish three major categories of bases for allocation: those linked to inputs, those attached to outputs, and bases that are purely conventional. Recourse to the last-mentioned, which ought to be exceptional, is in reality quite frequent as a cost-cutting measure (one uses information already known to the system), as a matter of tradition (absence of system maintenance), or else for institutional reasons (conformity with practices in an economic sector). They introduce a rupture into the logic of the construction of a costing system due to their arbitrary nature. The bases for allocation hinging on inputs are generally the fruit of statistical analysis. The variable that explains the widest variation in consumption of resources in a network of unit of analysis is by definition the most important input. Since input is known, it can provide a basis for an allocation that is easy to use, perfectly known and very likely common to other firms of the economic sector. Currently, the two widespread examples are direct labour hours and consumption of material. Using an output as an allocation base is rather tricky, one of the reasons given is the difficulty in making a model work with belated information on output and its uncertainty (sales figures). However, there is another category of output, corresponding to outputs of unit of analysis at the lowest level of architecture. In such a case, outputs are combined in order to built an offer for a customer. Distinguishing between input and output is not always a simple matter because at times, the customer (contractor) buys direct labour hours. One terms ‘output’ any element that is of value, at least for one stakeholder. This rule, which makes value intervene in the identification of bases for allocation, makes it possible to characterize relevant systems. It is those having bases for allocation which are effectively recognized to be of value by stakeholders, generally the ultimate customer. This underlines the fact that any description of relevance on a purely technical basis is impossible. For a textile subcontractor, the direct labour hours are outputs, whereas for a fashion designer, the labour hours are inputs consumed in the course of various processes that deliver outputs of value (models, restocking, etc.) This difficulty must not deter us from qualifying the nature of the basis for allocation applied by the system. Is it oriented exclusively towards information on costs (focused on inputs), or is it providing information on value (focused on outputs)? Any diagnosis of relevance depends on this description.

4 A Panorama of Existing Systems

The analysis of design parameters that we have just carried out allows us to go beyond the usual presentations that are focused on three leading models: full costing, direct costing and activity based costing. The ambition here is to discover potential costing-system architectures and, after an analysis using experience gained in this field, identify those that are currently used, and under what label. For this purpose, I will call upon cladistics, a technique of logical classification propounded long ago by Plato. In cladistics, one gradually constructs a solution tree, through progressive additions of criteria, which, each time, open up two further possibilities. Having used 10 parameters, we could potentially end up with 210, that is 1024, different costing systems. Mercifully, not all of them are possible. Our arborescence therefore will be far more restricted. To simplify matters, let us go back to the two phases in the presentation of parameters. First, we return briefly to the tree deduced from the general parameters. Subsequently, we analyse the differentiation in costing systems obtained by a combination of our last five parameters.

4.1

Broad categories of systems

Our combination of five parameters, that might have led to 32 taxa (terminal branches), results in identification of only ten noteworthy endings. The first two are generally excluded from presentation of costing systems, while the eight others, divided into two broad families, constitute the basis of formal monetary systems and are the subject of technical expositions in all good manuals (Figure 4.1). Without enlarging upon this, I wish to include the first two in this commentary.

33

Figure 4.1

Stand alone

2

Defined

1

Existing

2

Defined

1

Existing

2

Defined

1

Existing

2

Defined

Whole organization A fraction of the organization

A physical basis without connection to the accounting system

1

Legal

Yes

Whole organization A fraction of the organization

Existing

No

Yes

Value system

No

Four categories of systems

Unit of analysis status

Scope

Legal/stand alone

Monetary

Formal

Valuation systems

Panorama of Existing Systems 35

Non-monetary systems Paradoxically, the first system marked out is not a costing system, but a value system. This branch catches our attention because it provides an entry to the study of an appreciable phenomenon: the performance of organizations that have no formal system of economic calculation. These are organizations which, instead of looking for assistance from their costing system to negotiate the value of their services, rely on other signals. History, analysis of environment, power struggles, their monopolistic situation and a thorough knowledge of the attributes of value constitute in all likelihood possible and partial explanations of behaviours of these organizations. Unfortunately, in the absence of any available research, we cannot say much about such organizations, although the population in question is far from negligible, whether in quantity or quality. The second system marked off is a hybrid one. It is based on internal physical data as well as on external economic and monetary information. For this reason, one talks of costing systems, but they are disconnected from the financial accounting of the organization. Basically, they amount to systems of valorization rather than costing systems. A combination of internal physical data (manufacturing time, length of stay, materials consumed) forms the basis for the fixing of prices. Cost management will be done either through physical variables or in some other framework, say the budget system. This situation relates to organizations functioning in state-controlled or cartelized economies. This disconnection of the resource management system from negotiation with the environment for services makes it tricky to run these organizations. The major risk is of promoting a system which concentrates on means management to the detriment of a search for overall efficiency addressing the expectations of the environment. Monetary systems There are eight monetary systems, but this number in my opinion can be brought down to two, because the first two distinctive criteria have little impact on the actual architecture. Whether a system is legal or parallel, it can be identical; likewise, whether it impacts on the entire organization or only on a part, it has little influence on the architecture. Obviously this does not imply that these two parameters are shorn of interest, quite the contrary, but their influence is exerted, not during construction but during the use of outputs of the system. The force of signals emitted by a legal system will be different from that coming

36 Cost Systems Design

from signals given out by a parallel system. One can likewise imagine that the perimeter capacity determines the possible uses of the information provided. If the perimeter is confined to one function of the organization, it is probably a system geared to a precise goal, whereas a system covering the entire organization will have an all-purpose function. A real differentiation stems from the choice made in constructing units of analysis: does one use existing units (centres), or does one designate new ones? In the first case the costing system takes up either one representation or a combination of several existing representations. This means that its autonomy is tenuous and that of the other representations will dictate the evolution. As each representation is specialized, one imagines also that this choice is likely to lead to contradictions between the economic calculation system and other principles of action underlying representations that have not been taken into account. As far as we know, representations used in designing costing systems are few. Indisputably, the representation that is most commonly used is the one that restricts organizations to products or services generated. A bill of materials and bill of operations will then be the only references which will allow the transformation of financial accounting data into costs. The other representation frequently used is that presenting the organization in the form of a hierarchical and functional arborescence: the organization chart. Technical representations may also serve this purpose, particularly in processing industries (chemistry, food-processing). Nothing precludes a combination of two or three of these representations in constructing a costing system, but it is frequently seen that, even if several sources are used, one of them is always predominant. A system based on the product and the organization, but using in all units of analysis hours indicated by a bill of operations as a basis for allocation, can be considered as fundamentally structured by the ‘product’ model. The other branch consists in basing development of a costing system on the designation of new units of analysis. We have then an autonomous economic representation, which, instead of depending on other systems, will have the possibility of interacting with them. A hopefully advantageous dynamic will be instituted between the pre-existing representations and the new one, with federative ambitions, to the extent that it uses the sole language recognized by the environment and all the stakeholders – the monetary language. Such a move that buttresses the power of the financial and accounting function is not easy to make and, understandably, is rarely made.

Panorama of Existing Systems 37

4.2

Analysis of the two black boxes

Whether a unit of analysis is taken from another modelling procedure, or is characterized to meet the needs of economic calculation, the latter remains at this stage a black box which we must now analyse so as to end in a classification of costing systems. For this purpose, we will again use the parameters specified in the preceding chapter but which have not been utilized as yet: the mode of constitution of the unit of analysis, its homogeneity, its transfunctional character, the existence of a hierarchical allocation system and the cost or value allocation base orientation. Before proceeding to describe the taxa obtained, one must figure out the influence or not of the order of the introduction of parameters. As a matter of fact this question hardly arises except for the two parameters: homogeneity and transfunctionality. Before applying them, the unit of analysis must be characterized; the hierarchical allocation can be considered only after the units of analysis have been properly identified. Likewise the qualification of a base for assignment can only be made at the end. When only two criteria can be permuted, their order has no influence on the final tree. The four possibilities, a result of their combination, are independent of the order, which therefore has no influence on the formation of the taxa of the subsequent levels. One will recall that the eight taxa boil down to two broad categories and we will examine these successively. The first category, based on pre-existent units of analysis, groups together most of the cost systems developed before the 1980s. These systems are called here conventional systems. The second category, which is based on specific units of analysis, groups together systems developed mainly in the wake of the movement of analysis of activities after 1980; they are called here non-conventional systems.

4.3

Conventional systems

A combination of five parameters leads potentially to 32 taxa, but it seems that certain branches cannot exist, so our tree has only nine terminal branches (Figure 4.2). These must be considered as system families rather than as individualized systems insofar as making use of each parameter is not exempt from local variants. In the previous chapter we compared the different dimensions of each parameter and concluded by recalling that pure systems do not exist or rarely so. An illustration is provided by the first parameter.

Figure 4.2

VAD, Constraint theory

Conventional systems

Cost/value orientation

Multilevel

Variable costing Simple full cost

Components Direct labour

Transversality at unit of analysis level

Homogeneity

Unit of analysis origin

All direct

Cost

No

Product

No No

Value added units

Cost

Departmental costing

Cost

Yes

Organization

Yes

1

No

Cost

No

Yes

Multilevel process costing

Cost

Yes

Process costing Multilevel homogeneous cost pools

Cost

Yes

No

Yes

Homogeneous cost pools

Cost

No

Panorama of Existing Systems 39

There are systems based solely on product analysis, but a vast majority combine product analysis with organization analysis. But leaving aside this case, hybrid parameters have not been explicitly integrated with the cladogram insofar as terminal branches represent system families in which these hybrid forms co-exist with purer forms. The first branch provides the simplest of all systems. Only the material and component dimension is taken into account in the economic calculation. This vision is recommended by theoreticians coming from operations management and preoccupied with optimization of the use of production capacity. This is considered as fixed on a short-term basis and for this reason non-relevant to economic calculation. An overview is to be found in the work of Goldratt and Fox, entitled Theory of Constraints. In France, similar recommendations, although built on an another base, are made by the firm Brodier under the name of ‘Direct Value-Added Method’. The idea here is to define the value added by the firm, the value that determines the real perimeter of management within which arbitrages are reached between stakeholders and particularly between the personnel and contributors of capital. The second branch groups together systems built around direct labour (exclusively in the case of services) and material and components. In this branch we find all systems referred to, incorrectly, as ‘variable costs’, but which are in fact costs proportional to volumes manufactured. A trait common to these two branches is that set units of analysis do not require any cost-allocation base. Bills of operations and materials, irrespective of the detail level, allow tracing costs to cost objects in the analysed perimeter. One can add that in certain industrial sectors products are grouped by families. In each family of product, one qualified by its bills of operations and materials is set as a standard. The cost of other products is arrived at through a factor of equivalence. The traceability that characterizes variable cost systems becomes thereby elusive, and that is the price that has to be paid for simplicity. If one adds other specific cost drivers to products like dedicated equipment or specialized personnel, one obtains direct costing systems. Between the second and third branches are simplified full-costing systems, that is to say, systems integrating the organization without analysing it. Insofar as there is no unit of analysis other than the organization itself, I favour placing them under branch 2. Starting from the third branch, we enter a world of more complex systems that links analysis of the organization providing products or services with their own analysis. The third branch groups together systems relatively heterogeneous in their structuring though governed

40 Cost Systems Design

by simplicity to the detriment of any other characteristic, such as assignment to cost objects, or costs analysed beyond those of material and direct labour. The heterogeneity of the systems is manifested across the number of units of analysis. The simplest case consists in considering the organization in its totality and apportioning expenses in the analysed perimeter to objects by using as base some data or other taken from the first two branches. We thus obtain full costing systems in which all indirect costs are averaged and apportioned to cost objects by a single factor. The other variants of this family of systems break up the organization into several units of analysis and assign them directly to cost objects by using cost-allocation bases which are for the most part arbitrary. One variant that has enjoyed a certain popularity in the early 1990s was marketed under the banner of ‘All Direct’. As the name indicates, the method consisted in directly apportioning all units of analysis to products, with an attempt to reproduce the basic form of Activity Based Costing (ABC), i.e. resources, cost centres and cost objects, without adhering to its hypothesis (see below for a study of non-conventional systems). The fourth branch is distinguished from the previous ones by the introduction of hierarchical allocation procedures and the disappearance, for this reason, of the direct linking of all units of analysis to cost objects. This is probably the most common system family. Whether it is the method of responsibility centres, as in the French style, or the American ‘departmentalization costing’, these systems are characterized by nonhomogeneity of units of analysis and by the distinction of principal and service units of analysis leading to the existence of at least one level of reallocation, with the service units merging into principal units and the latter into cost objects. The variants, in large numbers, are determined by the number of units of analysis, their nature, mode of allocation, the number of levels and by the choice of cost-allocation bases. The fifth branch corresponds to an original approach that introduces transfunctionality into the structuring of its units of analysis while avoiding reallocation. Transfunctionality is implicit, and results from the apportioning of all costs nature-wise to a unit of analysis constituted by a workstation. The procedure of cost-allocation to cost objects uses equivalent production determined at each workstation. The two bestknown variants in France are the George Perrin Method (focused on the product) and the Method of Value-Added Units (focused on orders). In addition one can doubtlessly list in this branch the costing system developed in the hospital sector, leading to the evaluation of medical treatment in ISA (Synthetic Activity Rating) points. It must be noted

Panorama of Existing Systems 41

that in this evaluation, the cost of the service of reference is reactualized each year, whereas the reactualization is only periodical in the other two methods. The sixth branch is somewhat hypothetical. It is indeed difficult to imagine an organization perfectly structured in homogeneous services. This structure, following organizational precepts of Taylorism, provides an interesting base for resource consumption analysis. Absence of reallocation indicates that all cost elements are directly traced to cost objects. Two scenarios can therefore be envisaged. Where only one type of cost object exists – product, for example – arbitrary cost-allocation bases must be used for a certain number of units of analysis rendering a trickier interpretation of information produced. In the second scenario, we have a prioritized series of cost objects, product, product family, channels of distribution, etc. Each one can then have directly allocated cost element(s), which are linked by the strict law of causality and thus keep up the quality of the information produced. The price for this is the multiplicity of analysis levels required for the comprehension of the functioning of the organization. The seventh branch corresponds to a system of homogeneous sections in the usual sense of the word. There is no transfunctionality but the reallocation between secondary and principal units of analysis make it possible to recognize in the latter all costs analysed within the perimeter. Each one of these units of analysis is directly linked to cost objects through allocation bases. When the latter recognize origin in an almost exclusive manner in the analysis of materials and components, we are facing full costing systems determined entirely by inputs. One may consider that these are ‘push’ costing systems. The eight and ninth scenarios appear to me hypothetical. As far as we know, no conventional system uses a transfunctional approach in calculation of costs in an explicit manner. One could imagine organizations that are technically organized in a transfunctional manner, such as the process industry and organizations managed by projects. We think that in these organizations the process or projects are cost objects and not specific models supporting the calculation of costs. In these organizations, as in the others, one defines units of analysis and sets up conventions that have nothing specific about their nature compared to those which allow the aforementioned systems to function. The trait common to branches 2 and 7 is the orientation of the last level of architecture towards cost information alone. These costs are aggregated to objects on the basis of the analysis of physical composition and production process, with the latter including perhaps consumption

42

Cost Systems Design

of services that do not intervene directly in the production process while making that possible. With reference to production management, one may here talk about ‘push’ costing systems, whether full or partial. The exception constituted by branches 1 and 2 is to be underlined because there is no cost calculation as such and the variable, which is sought, is the margin assimilated with value. But unlike the systems that will be studied below, value is the result of interaction with the market that sets the price. The gap between the market price, over which the organization has no influence, and the cost gives the value added. It must not be concluded from all this that these systems are not relevant. This point is examined in Chapter 5.

4.4 Non-conventional systems Our tree has only 8 identified branches out of the 32 in theory. Just as in conventional systems, each terminal branch must be seen as a system family and not as individualized system (Figure 4.3). Although the branch analysing materials, components and direct labour do not figure here, it is not being ignored. Admittedly it does not link up with any specific family, but it does provide a necessary base for taking into account the physical part of costs in an industry, and if need be the direct labour part of costs in cost objects, in an industry as well as in services. It must also be underlined that the notion of direct labour such as it is construed ought to be abandoned because it is based on the idea that production results from the addition of factors of production and not from their combination. In my opinion, only costs related to materials and components are to be added to costs processed through the analysis of the organization, the latter aggregating the costs of the personnel. The point common to non-conventional systems is constituted by a search for a new representation of the functioning of the organization, a representation that is not constrained by other representations like the functional and hierarchical organization chart, technical organization or representations of quality certification. Aiming at information about costs and action on these costs, it is logical to rely upon the construction of homogeneous units of analysis, a requisite for the implementation of a cause-and-effect relationship, which in turn is required for action. We have nevertheless left one branch for incorporating systems that would be constructed on the basis of non-homogeneous units of analysis. In our opinion, these cases would merit a prognosis aimed at reorienting them towards either

Figure 4.3

?

3

6

7

8

Cost Value

Value added process cost system 2 Functional process cost system 2 Two stage ABC4 Two stage ABC3

5

Cost value

No Yes

Value added process cost system 1

4

Cost Value

Functional process cost system 1 Homogeneous cost pools system

Two stages ABC2

2

No Yes

Two stages ABC1

1

Cost

Non-conventional systems

Cost/value orientation

Multilevel

No Yes

Transversality at unit of analysis level

Organization Yes

2

Homogeneity

Unit of analysis origin

44 Cost Systems Design

conventional systems (branch 3) or to reformatting the units of analysis while obtaining homogeneity. The eight operational branches are differentiated on the basis of three parameters: transfunctionality, the existence of several levels of allocation and cost or cost/value orientation. The first, second, fifth and sixth branches are the best known, which I have called canonical form ABC (Activity Based Costing). Unlike the literature which considers a single model, I distinguish four variants by combining two parameters, the mode of the constitution of activities and the cost/value orientation of the activity drivers. Branches 1 and 2 are based on the internal unit of analysis within a subdivision of the organization, such as represented by the functional and hierarchical organization chart. No transfunctionality is brought in at this stage. This practice avoids any conflict of responsibility between a new interpretation of the functioning of the organization and the old one (which subsists). This model modifies only the representation of the movement of resources. Inversely, in the fifth and sixth branches, the construction of a unit of analysis is done without any preoccupation with existing representations of responsibility. The transfunctional character of a new unit of analysis is the root cause of a great many problems in maintenance, especially in the use of information taken from the new system, the conflict of responsibility, the high cost of management, the reliability of information, etc. The second parameter that contributes to differentiation of these four branches is strictly cost- or cost and value- orientation as reflected in cost assignment. If they are related to inputs, the cost orientation is implicitly preponderant. It is equally true that in the list of bases one finds measures against failure or quality control, or more generally measures relating to activities deemed without value. Their presence is a sign that the modellers’ preoccupation is precision in cost analysis, not comprehension of the value creation process. The fact that in these four families there is no reallocation makes information on value creation problematic: this creation then takes place within the identified unit of analysis but no less than in their interrelations, which are not taken into account. The only way to implement this preoccupation is to assemble operations in a process that translates this interfunctional cooperation, leading to production of an attribute or set of attributes having a potential value for a category of customers. Branches 2 and 6 try to express this option. Branch 2 is somewhat theoretical, because it supposes that one can identify within departments or sections homogeneous units

Panorama of Existing Systems 45

directly delivering these value attributes. It boils down to imagining a management geared to operational processes and not to functions: these situations exist, but are rare at the moment. The third branch constitutes an interesting point because here is a family common to conventional and non-conventional models. You find here a model of homogeneous sections in its purest form. The unit of analysis is homogeneous, not transversal, and there is reallocation. This is an expression of the existence of units of analysis without a direct contact with cost objects. The ultimate unit of analysis is very often a function or a reconstituted service, with transfunctionality taken into account from this point of view in the course of mergers or reallocation. The fourth branch is distinguished from the previous by its cost/ value-orientation. Here groupings of homogeneous units of analysis are done not on a basis of any functional orientation but on the basis of comprehension of different value creating processes within the organization. The processes link up operational units of analysis, support units and units correcting problems of operational units. Clearly all cost assignments are value bearing for one category of potential customers. The last two branches (7 and 8) are somewhat hybrid. Transfunctionality is present right at the inception of the unit of analysis, and can be reinforced by the existence of reallocation between units. As earlier, these reallocations lead on to two theoretical families, one with a functional character oriented towards a better-cost analysis, the other facilitating the comprehension of value formation within the organization. Deciphering the groupings of transfunctional units of analysis is not a simple affair. If the unit of analysis is restricted, one reconstitutes a scattered service, and it is possible to obtain eventually the functional processes as before. The difference in comparison with branch 3 will be seen essentially at the management of units of analysis but hardly so at the stage of cost evaluation. The eighth branch is distinguished from the third by the nature of the accepted cost assignment. Experience shows that very often models 7 and 8 are combined in organizations. Model 7 concerns upstream processes; model 8, downstream processes in which personalization of services makes it easy to identify value-bearing allocation bases.

5 Analysis of Relevance

The construction of a costing system based on an existing representation or on the basis of a new one does not pose any technical problems, but even then one has to make sure that the tool developed is relevant. This relevance must be assessed according to targets one has set for oneself. These are, it may be recalled, three in number: management of internal resources, dialogue with the environment and orientation of behaviours. On the internal level, the representation of internal movement of resources must facilitate their management, that is to say, their control. On the external level, the tool must facilitate dialogue with the environment by enabling the coupling of cost and value. These two objectives are not easy to achieve separately, nor are they easy to join together, and very often call for additional tools like performance indicators and budgets. Reaching these objectives supposes in fact reaching a third objective because no information, as relevant as it may be, is transformed into action without input from people who make up the organization. The order of presentation chosen here in no way implies the supremacy of internal objectives over the external ones; from our viewpoint, the three objectives pursued by developing a costing system form a part of the same reality and deserve the same attention. All three of these contribute to the implementation of the organizational strategy.

5.1 Internal relevance Internal relevance is expressed in the capacity of a costing system to help control resource consumption. It relies on three complementary principles: causality, traceability and responsibility. Causality expresses the capacity of the system to link a cause to a consequence, that is to say, 46

Analysis of Relevance

47

its utility in a proactive manner. Traceability expresses the capacity of a system to keep track of resources of the organization from their entry to exit, in spite of their progressive transformation. Responsibility is a necessary attribute for implementation of causality and the verification of its results through traceability. Let us examine one by one these three attributes before discussing their relationships in different families of costing systems. Causality Causality has long been discussed in every reputed manual under the banner of ‘cost behaviour’. We know variable costs and fixed costs. Champions of activity-based modelling have reduced these two categories to just one: variable costs. As a matter of fact, they simply dig up the true definition of fixed costs that are fixed only in relation to a given period; should this period be stretched they become, in turn, variable in relation to a volumetric cause. To this law of proportionality one must add another variant of causality: a binary variant. In this case, costs are traced to an object without the amount being changed following the variation in volume of this object. One may also note that under the influence of quality control, questions are increasingly being asked not only about the immediate causes of resource consumption but also concerning the underlying causes, because these causes usually constitute levers of action at once more powerful and more difficult to activate. This blend of horizons and relationships spells a lot of ambiguity in terminology. Consequently, it is always desirable to specify laws of causality integrated into the organizational model, which serve as a basis for cost calculation. Achieving such a result supposes the construction of a representation of resource consumption on the basis of units of analysis using the causality viewpoint. Usually it is easy in the case of physical products. Consumption of materials or components is proportional to the volume of products manufactured. The unit of analysis constituted by the bill of material for each product ensures the observance of the principle of causality in this category of costs. For organic products like milk products or animal products, things become rather more complex, to the extent to which causality exists not at the level of the individual product but at the line of products derived from a single material that constitutes a joint cost. In a specialized and standardized department, necessary human resources are likewise proportioned by volume of service provided. The third case is constituted by industrial labour, the direct labour remunerated for piecework, or a sales force on a commission basis.

48

Cost Systems Design

Apart from these well-known situations, laws of causality are trickier to tie down. The moment you leave the bill of materials and bill of operations of a product, there arises a conflict between the concern for comprehension of the most accurate possible behaviour of costs and the complexity of their follow-up. In all known systems, simplicity has always prevailed over a quest for accuracy because the cost involved increases rapidly in an exponential manner. Designers of costing systems set out to identify roughly valid relationships of causality, often described as semi-variables, laying a bet that responsibility makes up for approximation in a cause-and-effect relationship. The adage ‘globally correct but specifically incorrect’ takes on its full meaning. Two system families have made the search for homogeneity of cost behaviour the basis of their constructs. They are conventional systems known as the ‘cost centres method’ and non-conventional methods known under the name of ‘activity-based costing’. But this common principle can hide divergent construction practices of units of analysis. This is the case of ABC3 and ABC4 families, which introduce transfunctionality at this level and challenge the articulation of responsibility with homogeneity expressed within the same subdivision of the hierarchical–functional structure in the other three cases, ABC1, ABC2 and the Cost Centres Method. Beyond this divergence, it must also be noted that the cause to be discovered is not the same. In the case of cost centres, product remains the only cost object and production departments are defined in relation to it. The outcome is that causality is searched for in relation to a product component: its weight, surface, number of sub-assemblies or human component, and its specialized operation time. In service departments, cause is not always identified (use of percentages); when it is, cause measures their production of service. In ABC models, the cost object is not prespecified; for this reason the causes of resource consumption are more diversified and the search for causality is more elaborate. Not everyone shares this vision. The literature suggests a typology of cost drivers, distinguishing three types. These are volumetric or unitary drivers, batch drivers and drivers related to support activities. If this typology has the merit of drawing attention to the existence of non-volumetric causalities, it suffers from the disadvantage of focusing attention on product instead of opening up to other cost objects. In multilevel systems of the ‘homogeneous cost centre’ type, the principle of causality weakens as one draws nearer the product on account of successive reallocations in service departments. In multilevel ABC systems, the so-called value-added process, another type of causality law is looked for at the process level. It is no longer short- but

Analysis of Relevance

49

medium- and long-term causality that one looks for by appealing to the underlying cause, expressed usually in the form of value-bearing output. These systems are therefore full of promise because, structurally, they provide an analysis of the causes of short-term resource consumption within units of analysis and an analysis of the causes of long-term resource consumption at the last level of the cost system architecture. Apart from these systems and systems of variable costs, no other system makes the principle of causality its main principle. Their capacity to help in controlling resource consumption is diminished if one moves away from material, component and perhaps direct labour costs. Traceability Traceability is a characteristic of costing systems that provides a follow-up of resources from their entry into the organization to their exit. It is easily obtained by the majority of contemporary information systems provided it was set up as a parameter of the accounting information system and the costing system. It must cover the entire perimeter of the system. All costs are traced to cost objects, and it is possible at every level of architecture to break up the local cost into basic components, whether they are external resources or organizational units. When the cost perimeter covers the entire organization, one speaks of a full costs system. Otherwise, one speaks of a partial costing system, although traceability spans the entire perimeter. Full costs Sfci = FC = resources consumed within the organization, where Sfci is the full cost of the object i. If Pi is the selling price of the object, one obtains: SPi – Sfci = income of the organization.

Partial cost Spci = PC = resources allocated to objects, where pci is the partial cost of the object i. If Pi is the selling price of the object, one obtains: SPi – Spci = contribution margin for covering resources not allocated to objects by the system but consumed within the organization.

The epithet ‘partial’ was forged with reference to the full cost owing to confusion between an enterprise and the product. In partial costing systems, traceability remains total but the organizational resources taken into account are fairly limited (materials, direct labour or any other partition).

50 Cost Systems Design Resources used Unit cost of VAU Production volume Sales volume

Nomenclature Nomenclature

VAU Index

VAU produced

Total VAU

VAU produced

Product cost

Cost of sales Income Figure 5.1

Contribution margin

Functioning of a VAU system starting from year 2

The present power of information technology makes it possible to follow both individualized resources and units of analysis considered as resources for the next level of architecture. The only system not maintaining traceability is the system of value-added units (VAU) inasmuch as the total cost (from the P&L statement) is compared with the total of the VAU to give the unit cost of the VAU that is then used in the valuation of products and orders (Figure 5.1, and see point 8 in Chapter 12). In every system,for examplein a full cost system as shown in the Figure 5.2 the presence of work-in-progress or finished products leads to a break in traceability inasmuch as the issue of stocks is done at the average weighted unit cost. It can be maintained if one uses the valuation method: first in, first out, but the interpretation will not be simple. In unsophisticated systems, reallocations are also likely to pose certain problems of follow-up (globalization of costs on reallocation from service departments), but these are situations for which software solutions exist. Traceability is fundamental to resources management because its association with causality allows the validation of laws of behaviour by verifying with hindsight that the effect on resource consumption is just what was expected. Traceability is equally important for external purposes. It allows the breakdown of the cost of a product or any other object into its elementary components (resources and units of analysis) helping the negotiations with partners.

Analysis of Relevance

51

Financial cost Non incorporated costs

Additional costs Cost incurred during the period Direct cost

Indirect costs Purchasing cost of the period

Production Inventory

Cost of material used

Purchasing overhead

Production cost of the period cost of product available for sale

Production overhead

Distribution cost of the period

Distribution overhead

Inventory Distribution

Cost of goods sold Sales Operating profit

Figure 5.2

Analysis network in a full costs system

Responsibility A link between causality, traceability and responsibility is the basis of any action on the consumption of resources. However, this link is established in different ways depending on the system families. The first important parameter here is that of the perimeter. A partial costing system, whatever its nature, must rely on another system for action, short of relinquishing its control on any part of the organization excluded from the perimeter covered by the costing system. The second major parameter is the one that concerns the origin of the unit of analysis. If this is defined on a basis specific to a costing system, it is likely that linking with the system of responsibility will be more difficult than if the system is based on a representation of the organization which itself gives a greater importance to the concept of responsibility. Beyond these two major sources of divergence, each family of costing systems develops through its specific adjustments to the original relationships with the organization of responsibility. Without attempting to review all cases, we may dwell upon a few situations. Among conventional systems, let us examine successively families of ‘variable costs’, ‘responsibility centres’ and ‘cost centres with reallocations’.

52 Cost Systems Design

Variable cost system family. Focused on technical definitions of products or services, these systems are altogether disconnected from the organization of responsibility. Even if analyses and controls (variances in prices and quantities) are carried out using the costing systems, it is the budget system which is the focal point for cost control. This system mirrors the entire organization and is constructed on the principle of responsibility. The shortcomings of this double system are due to lack of communication between traceability, causality and responsibility. Liaison between the costing system and budgets is operative only at a general level through the analysis of the breakeven point. Responsibility centres family. The situation here is exactly the inverse with respect to the preceding one. It is the organization of responsibility that serves as support to the costing system. Depending on the degree of decentralization, the size of units of analysis will be more or less large, and more or less heterogeneous. If traceability adapts itself readily to this situation, the same is not true of causality. The heterogeneous character of responsibility centres inevitably leads to favouring the technique of cost apportionment to the detriment of the search for the cause. Paradoxically, responsibility, as in the preceding system, has a tendency to express itself in the budget framework in a manner relatively disassociated from cost analysis, although the system itself is constructed on the principle of responsibility. Family of cost centres with reallocations. These systems represent a compromise between the two preceding systems. The fact of relying upon hierarchical and functional structure ensures a close link between the costing system and the responsibility system. By choosing to define the unit of analysis on a homogeneous basis, one accords an important place to the notion of causality. All the ingredients for an efficient management of resources are thus cumulated. Its implementation for all that does not become less difficult. First of all, several cost centres are often internal to the same responsibility centre. The risk of overall management, to the detriment of local causalities, is not negligible. Then, the distinction between service centres and production centres that necessitates reallocations leads all too often to favouring the apportionment technique (percentages, monetary bases) over economic analysis. Lastly, the focusing of the calculation of unit cost of allocation bases, often transformed into as many performance indicators (hourly rates), leads to manipulations that confuse information relayed by the respective cost system, making it, in extreme cases, unfit in use for cost management.

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53

Let us now examine the case of two families belonging to non-conventional systems: ‘ABC3 systems’ (taxa 5) and the ‘valueadded process costing system’ (taxa 4). Systems of type ABC3. Here the problem arises from the transfunctional mode of construction of the unit of analysis. By setting up a new representation of the organization with elementary tasks and operations, without enforcing the constraints of the functional structure, these systems are taking a great risk in respect to the principle of responsibility. This risk is primarily expressed in two forms that, usually, lead to inaction. The unit of analysis, being a result of the aggregation of a very large number of elementary transactions executed in multiple responsibility centres, is shorn of responsibility and therefore of the capacity for action on concerned resources. If processing in an information system for purposes of calculation does not technically pose any problem, management is problematic. One can appoint an activity manager for coordinating and steering all the tasks with a risk of conflict with managers of departments from which these tasks are assigned. Otherwise one can put one of the departmental managers in charge of an activity, with the same risks. Or again, no manager is appointed and nothing happens at the level of management. The risk of inertia likewise increases when each department is broken up into a large number of activities, each time on the basis of trivial tasks in terms of means at its disposal. Whatever the choice of the management, the activity is most likely to stay out of the system of responsibility and, by virtue of this fact, out of management that remains a prerogative of services and functions, thus leading to a contradiction between the system of responsibility and the cost system. Value-added process costing system. The problem moves from activity level to process level. Contrary to the situation just discussed, there is no conflict of authority here between running an activity and managing a department, since all activities are specified in one department. On the other hand, during transition to process grouping there are real difficulties. Ideally, one imagines a complexification of the chain of responsibility on adding to vertical responsibilities a horizontal responsibility. In practice success in this case is rare. Process is rarely set up to the responsibility perimeter, and organizations prefer to keep for it an ambiguous status, that of centre of coordination and cooperation. Usually appointment of a process manager goes hand in hand with the setting up of management tools, particularly performance indicators. But there is no automation, and performance indicators can, at least for a certain length of time, adapt to the absence of a manager.

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Behind these difficulties in making activity and/or processes a central point for management loom the failures of what was going to be the real novelty of the movement launched by the CAM-I in 1987: activity management or ABM (Activity Based Management).

5.2 External relevance External relevance is judged with regard to capacity of the system to facilitate dialogue between the organization and its environment. Two levels of responses are possible and which are not mutually exclusive. Relevance can be judged by the quality of valuations obtained and the quality that improves the dialogue with the partners. Relevance is also assessed at a general level with regard to the capacity of the systems to organize cost-value dialogue. Quality of estimations Costing systems generally provide three types of estimation: overall costs of units of analysis and their potential groupings; the unitary cost of production of the service of these units (allocation bases or drivers); and the various combinations of these unitary costs. Except for calling into question the quality of traceability of costs from financial accounting to management accounting, there is no earthly reason to think that one system is potentially superior to another in this respect. Nevertheless there are multiple conventions and these are available to all systems. The fact of spreading the cost of units of analysis over other units of analysis by a technique of reciprocal services is used as much in conventional systems as in non-conventional ones. It is through the choice of convention that one can have, in an individual case, full costs of units of analysis and not merely their direct consumption costs. The same holds true in the use of notions of non-incorporable costs or additional costs. This use is not specific to any particular system. The unit cost of production of service in units of analysis is more problematic. The issue here is the quality of cause-effect relationship that has led to the choice of the unit of measure. As we noted above, very often it is the facility in calculation and force of habit in a given sector that substitutes itself for a true analysis of costs within a unit of analysis. But this practice which appears apprehensible at first sight is not necessarily so, as will be seen shortly. Conventional systems are more subject to these upward pressures than non-conventional systems, but they are far from having a monopoly.

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Combination of unit costs It is by combining unit costs of units of analysis that one proceeds in the estimation of many and varied objects. Traditionally, the most common combination is the one that makes it possible to obtain the unit cost of products and services. Obviously, other utilizations are possible but these are limited by the diversity and nature of unit costs provided by the system. If all costs come under product, the only possible estimations relate to products and their sub-assemblies. Beyond that, one uses information from product level to construct other costs such as the customer’s cost or the area cost. These common practices give incorrect information, as they convey the same information aggregated in a different manner without induction of any fresh data. These systems are therefore relatively poor in production of information. The same holds well if the single object is an order or a line of orders (UVA, MBM [Management By Means]). Inversely, if unit costs bear on product and other dimensions of the life of the organization, it will be possible to multiply objects depending upon their causal relationships with these dimensions. In particular, it will be possible to obtain specific information on cost objects at a level higher than the product (customer, family, strategic unit, to name just a few). Cost-value dialogue Although rarely explicit, cost-value dialogue has always been present in costing systems insofar as their first use cited by the vast majority of practitioners is price fixing and contribution forecasting. One of the basic equations in matters of economic calculation is written P – C = M, where P is the selling price, C is the unit cost of goods or services provided and M is the contribution margin. In economics, as in mathematics, validity of this equation rests on an implicit hypothesis of a common base used for estimation of P and C: failing on that condition brings a difference that has neither mathematical meaning nor any economic validity. Relying upon this observation, is it possible to assert that a given system is preferable to another? The answer must be nuanced because a common base for determining value in the environment does not exist. For this reason, there cannot be a technical supremacy of one system over another. What is possible, however, is to draw attention to coherence existing between certain systems and certain theories of economic value. One can distinguish three theories of value based on the work of economists. Intrinsic value, exchange value and utility value constitute

56 Cost Systems Design

with their variants the bases of economic reasoning and provide decisive factors of relevance of estimations conveyed by costing systems. Intrinsic value is based on the idea that inputs determine the value of goods and services. Expressed in accounting terms, this means that systems must be structured around inputs, materials and labour. Depending on the degree of transformation, the second factor has the advantage over the first one. However, irrespective of the situation, this theory goes back to a precise analysis of the production function in which inputs are incorporated. Socially, it seems that this theory was widely prevalent until the end of the reconstruction of Western economies after the Second World War. In this context, cost gives value subject to the condition of being able to impute to an input considered as a value driver the aggregate costs of the business concerned. This is what lends relevance to industrial costing systems structured around the notion of direct labour. This consensus on the source of value was still existent in the vocabulary in use at the end of the twentieth century under the term ‘unproductive personnel’, an expression used to denote the entire personnel listed apart from direct labour. The same phenomenon is seen in the food industry where common units of measure express the volume of raw materials incorporated in the finished product, but also in service industries where the time of performance of service is the only recognized basis of discussion. Exchange value is based on a different paradigm, with value being determined not in-house but outside the organization at the time of exchange on the market. It is binding on the organization. Computation of full cost involving multiple allocations then becomes meaningless. The only relevant costs are those that can, at once, be allocated to products and services and evaluated by the market. This results in excluding from the perimeter of cost computation all common or joint costs and retaining only incorporable costs on a unitary basis, material and direct labour or costs specific to such and such an object. This theoretical reference gives its relevance to partial costing systems, be they variable or direct. Although prevalent in economic theory, the third theory of value, the utility value, has found concretization in the field of accounting only recently. Two major differences must be underlined, compared to other theories. Value is no longer monolithic, borne by a single object in a transaction. It is the result of the aggregation of functionalities perceived by customers with each one bearing a useful dimension. For all that, it is difficult to claim that the total value is the sum of unitary values of these functionalities. The result is a second element,

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the fundamental uncertainty that characterizes this value; it is neither dictated by an internal cost nor deduced from the functioning of the market, but it is co-constructed in the exchange itself. In other words, it can be said that nowadays a transaction does not bear on a product or service but a set of value-bearing attributes (of functionalities). That allows the personalization of transactions through variation in sets, generating as many specific and uncertain values both for the producer and the customer. Constructing the relevance of a costing system in this environment boils down to searching for means to provide valuation of functionalities or sets of attributes as well as their innumerable potential assembling. This is done by certain non-conventional systems constructed on the approach of activities and processes, which figure in the cladogram within the last ‘cost/value orientation’ parameter. These systems are, as yet, relatively rare, insofar as the selling point of this system family has always been an argument linked more or less to improvement in the accuracy of costs. But, one must not forget that in a society there co-exist several approaches to value at a given time. A specialized enterprise that subcontracts in a non-automated sector sells production capacity in the form of direct labour hours and/or machine hours. The outcome is that a conventional system structured by the analysis of direct labour or that of machine hours remains relevant. Inversely, in an enterprise that admits few indirect costs and many direct labour costs, but has a strategy of personalization of its services, the same system will be considered irrelevant. Hence there is not one relevant system, but relevant systems, relevancy ensuing from the balance between the theory of value underlining strategy and the structure of the costing system.

5.3 Relevance from the viewpoint of behaviour orientation Interest in the orientation of behaviours in organizations takes us back to two broad approaches to organizations: a mechanistic vision and an organic vision. In the first approach, man is just a cog swayed by the constraints of his environment and the goal of the organization. He is not autonomous. That being the case, the orientation of behaviour is set by internal and external relevance. Information provided being relevant, workers cannot but take the right decisions. As they are not autonomous, they cannot be called into question. In the other approach, inversely, the existence of autonomy in decisions precludes all automation between production of data by the

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system and its transformation into decisions. It is in this framework that one must ask oneself the question of the relevance of the presentation of data in view of the goals of the organization. Each situation is specific by virtue of the history of men and organizations, but a few symmetries ought to be evoked. Depending on the case, they will have greater or lesser importance, but, by definition, no combination offers a total guarantee because otherwise we will be back to a mechanistic organization! I have adopted three criteria that seem to be particularly important: adhesion, clarity and embedded help. These three criteria bring into play different workings of the transformation process of data into information and information into action. Adhesion This term undoubtedly is not the best. What I want to emphasize here is the necessity of minimal identification between the representation that managers have of their sphere of action and the representation conveyed by the model that furnishes them data for their decisions and actions. A totally integrated system from the point of view of supply of information (a unique hourly burden rate for the entire industrial establishment) is incompatible with a decentralized responsibility for action on costs (in a given workshop). This does not imply that it is impossible; it means simply that the costing system is not relevant and that it calls for another system. The incessant modifications in organizational structures make processing of this kind difficult. It can naturally be tackled during modification in costing systems by making operatives participate in the evolution or reconstruction of the system. But this is a rare operation, so that one must think of other operations like the annual budget preparation or some other operation that allows discussion of the design parameters of the organization model that serves as a base for economic valuations. Clarity One may adhere to the representation of one’s department or its activities in the costing system, but one still has to be capable of understanding how this local representation is integrated with the overall representation in order to produce available information for action. Multiplicity of reallocations associated with many and varied processing techniques, is expressed in operatives’ jargon by the term ‘gas factory’. Clearly this appellation indicates that information conveyed by the system is incomprehensible. In such a context, it is difficult to anticipate orientations that operatives will give to their decisions. The response

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to such a situation is twofold, firstly in structuring the costing system itself and secondly in a minimal training of users in order to understand the costing systems. Embedded help At each utilization of data conveyed by an information system, it should not be necessary to redo the analysis of the system that produced the data. This supposes that their interpretation is easy and non-equivocal. In order to obtain such a result, it is necessary that the restitution of information be structured in such a manner that the logic of construction remains apparent and calls naturally for a reflection on delicate points on the part of users. If the organization has a non-volumetric costing system, it is necessary to provide information on costs that brings out this trait instead of perpetuating unitary reconstructions that suppose a purely volumetric logic. The difficulty is considerable. Uses of the same information being multiple, it is not possible to satisfy all cases. Flexibility of information processing tools these days provides possible responses in the form of multidimensional analyses. So far from simplifying the problem, these tools duplicate it because one must make sure that each dimension is constructed in a relevant manner. Other elements must be taken into consideration in order to understand the capacity of the influence of information conveyed by costing systems on behaviours. These are all the usual attributes of loops of information, flexibility, rapidity and reliability. They have no specific characteristics in the field of costs, but I mention them only for the record. On the whole, the relevance of a costing system in matters of orientation of behaviours can only be achieved by reinforcement of the pedagogical dimension of management control. Whenever possible, it must be constructed with the users; failing that, they must be trained to understand the existing system and facilitate the interpretation of data by work on system restitutions. Short of fitting into a policy of manipulation, the orientation of behaviours is inseparable from the sharing of knowledge, which, to a great extent, hinges on communication.

6 From Enterprise Model to Cost Calculation

Whatever the value theory of reference, explicit or implicit, it is always approached through calculation of unit costs of objects. Unlike usual presentations of cost calculation methods that make them monolithic tools, I consider it important to distinguish the enterprise model from the actual procedure of cost calculation. All costing systems can be considered as bifacial tools, constituted on the one hand by an enterprise model and, on the other, by a calculator of cost objects. The first part of the tool defines all costs by their nature and destination, while offering support for their management by incorporating notions of causality, tractability and responsibility. In the second part of the tool, these costs are traced to objects; at this stage, it is simply a matter of reports without there being any immediate levers of action on the volume of resources consumed. However, these unit costs serve as a medium for relationships with the environment and, in this capacity, open two perspectives: firstly, assistance in adjustment of prices on the basis of the assignment of value in account; secondly, a return to resource consumption, and even to the model, depending on the difficulties (or easiness) found in the environment to withhold a value that is at least equal to the one added in-house. We will examine, below, principal facets of the procedure of unit cost calculation before tackling certain recent evolutions in this respect.

6.1 The tradition of unit costs Although the objective pursued by the implementation of costing systems is twofold – the better management of resources and the determination of cost objects – it is the second aspect that concerns manuals and preoccupies the vast majority of users. Actually, there are other 60

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Model of the organization Nomenclature of the object to be evaluated

Allocation bases

Cost of the object Figure 6.1 Mechanism of unit cost calculation

approaches to resources management, whereas this is the only way to cost calculation. In practice, there are two kinds of situations which go hand in hand, one purely unitary and the other more complex that takes into account non-volumetric behaviours. The second situation will be discussed in the next section. The starting point of any cost calculation is provided by hard figures from the models (allocation bases) irrespective of their appellation (Figure 6.1). These are then combined with technical information relating to cost objects that are currently collected in what is known as a bill of materials. This term, taken from production management, underlines that every object is a complex assemblage of physical and immaterial components of work executed in an organization represented (fully or partially) by the model. Ideally the integration of estimates from the model and the structure of the bill of materials are expressed in the form of a matrix where columns provide the bases for evaluation and rows express volumes to be evaluated and the sum of matrix products giving the requisite cost (Table 6.1). The functioning of such a calculator poses a certain number of problems, some of which are apparent in Table 6.1. In order that one may multiply a cost estimate from the model by a quantity from the bill of materials, it is essential that both of them use the same reference. If Q1 is the number of litres, C1 must be the cost per litre, whether it is the cost of the material or a cost derived from a unit of analysis. To put it plainly, this means that all dimensions in the bill of materials that are ignored by modelling are likewise absent from the estimate of objects, even though they are characteristic of them. These absences are the origin of the phenomenon of subsidization. This has been used, especially since the mid-1980s, to criticize the major traditional systems.

62 Cost Systems Design Table 6.1 Generic matrix of unit cost calculation of an object Outputs of the model Lines of the nomenclature N1 N2 N3 N4 N5 N6 N7 N8 N9 N10 Total

Quantity

C1

Q1 Q2 Q3 Q4

*

Q8

C2

C3

C4

C5

Total * * * *

* * *

*

*

*

Unit cost

Any estimate can be used for several lines of the nomenclature. A question that arises in this particular case is that of the homogeneity of a cost unit with respect to its measure of output in the face of the diversity of lines of materials to be estimated. If C2 is the mean hourly rate, it will serve to estimate total hours given in the nomenclature. If the resources actually used for processing hours differentiated by the nomenclature are not the same, we will also have here the phenomenon of subsidization as in the preceding case. If one line of materials is assigned costs derived from two different cost units, one is justified in asking questions about the model. Is it too complex? Why have the two cost units giving estimates C4 and C5 not been bracketed together since they have the same unit of measure? Doesn’t this situation hide an arbitrary allocation made by using in a cost unit a measure of output already known, though without any causal relationship with consumption of internal resources within this unit? If this is the case, here is another source of subsidization. These comments clearly serve to demonstrate that it is impossible to construct a costing system free from incidences of subsidization. Such a situation could only exist in the hypothesis of a strict variability of all resources on the basis of volume of cost objects. Facing this situation, two attitudes are possible. The first one tends to restrict the field of resources analysed so that they come as close as possible to the ideal condition. The other adopts processing conventions that authorize calculation on a broader perimeter that mirrors the entire organization.

From Enterprise Model to Cost Calculation

UA1

UA2

AB1

AB2

Nature of object O1 O2 O3 O4 O5 Volume V1 V2 V3 Vi Vn Total Lines of the nomenclature n1 n2 n3 nk nm Total

a1 a2 b1 b2

ai bi

Resources Model Uak

ABk

63

Uam

ABm

an N1 bn N2 Nk

m1 m2

mi Mn Nm Unit cost

Nk=ΣVk ABk= Resources of UAk/Nk

Figure 6.2 Autoclosure in the costing systems

The measure of subsidization is directly linked to the adopted processing conventions. Among these conventions, the most common is definitely the one that consists in taking a measure derived from the list of cost objects as output of unit of analysis. This choice offers two substantial advantages. On the one hand it guarantees the possibility of an estimate for all objects. On the other hand, it guarantees absorption by the objects of full costs within the analysed perimeter. This autoclosure of the costing system provides an illusory comfort, but it is appreciated by the users who are seldom aware of the conditions which have led to the attainment of this comfort (Figure 6.2).

6.2 Unit cost in non-volumetric context Recent modelling of the functioning of enterprises on the basis of activities or processes has shown the importance of non-volumetric factors in the explanation of resource consumption. At the level of principles, this qualitative change in output from units of analysis makes no difference to what has been said in the previous section. On the practical plane, things are less simple. Two ways of processing are arithmetically correct but only one of them is accurate from a viewpoint of management. The problem posed by the existence of diverse bases for allocation in their relationships with the objects abolishes their additive character as well as the autoclosures observed in the situation described above. The bases for allocation being defined not in relationship with the objects but according only to the units of analysis, their full use by the objects

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is no longer assured. This means that the totality of resources in the modelled perimeter is not automatically assigned to cost objects, and this is so irrespective of the perimeter. This situation leads many practitioners to maintain the traditional logic that consists in determining not the volume of the bases for allocation (actual or potential) presented by the cost units but in substituting instead the volume used. This ‘manipulation’ which can be assimilated to a processing convention reconstitutes the self-recording of the system. The non-additive character of bases for allocation stems from their divergent laws of behaviour. Certain bases are linked to volume of certain objects, others to volume of certain specific components, and others still to modalities of production or distribution of these objects. For one object that uses more than one different base in divergent laws, the only possibility of resuming additively is to look for the lowest common multiple of volume among these different bases. The simple technical solution to obtain this result consists in costing the total volume of the concerned object. The total cost having been obtained, it is possible to revert to unit cost by dividing it by the total volume. To put it plainly, this means that unit cost is the result of a division and no longer the result of an addition. In other words, unit cost is not broken down to unit cost per line of materials but is known overall. This change in mode of reasoning relating to a fundamental production of costing systems has also led here to practices which, while giving arithmetically accurate answers, are not nonetheless dangerous. Each allocation base is linked to the object that one is trying to estimate by a specific volume. Consequently, it is possible to bring each base down to its assigned unit cost by dividing it by the specific volume in question. Additive unitary values are additive on the mathematical plane but not on the level of management, since the change to unit value is done at the expense of the law of behaviour specific to each base. As one can see from these two characteristics, the introduction of non-volumetric allocation bases by itself will not guarantee improvement in costing systems: they still have to be correctly processed, which is far from the case in practice. Beyond this problem of organization of calculation, there is that of the choice of cost objects.

6.3 Predominance of a single cost object Cost computation is dominated by the notion of physical product. The modelling underlying the majority of costing systems transforms all enterprises into machine–manufacturing ones of physical products. This culture of the manufacturing cost of physical products is such that

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it remains predominant in the majority of systems called ‘renovated’ or ‘modern’. In the best of cases, the notion of ‘physical product’ is extended to that of ‘product service’. This absolute predominance of physical product undoubtedly poses numerous problems. The first among these is the exclusion of cost computation of whatever is immaterial with a progressive increase in the subsidization phenomenon. The second problem is linked with the nicety of the object. This uniqueness has led managers to rely upon product costs when proceeding to other estimates, especially those of customers, distribution channels or strategic segments. The change from cost of products to cost of these new objects is made by taking into account the volume of products in question. Following this practice, one has an impression that further information is generated, but, in fact, all information is already there at the level of products, nothing has been added at the level of objects, save a possible replacement of mean sale price by more specific sales figures. One looks at the same object (all products) from different angles, but, since nothing new is integrated, all angles are similar. The sum of apportioned costs remains unchanged. Certain recent proposals (VAU [Value Added Units method] and MBM [Management By Means method]) suggest the substitution of the product by another single, though more complex, object: the order or order line-up. This substitution actually offers another reading of the apportionment of costs, but is probably not more efficient for management at the level of information production. If you choose a single object, whatever it may be, you are confronted with the problem of assignment of common resources. From this point of view the product or order approach are equally good. If you want to proceed with estimation of new objects starting from the single object (customer, distribution channel or strategic segment), you find yourself in the same situation as with the product. The only potential advantage which these new approaches have is linked to the fact that an estimate of an order or order line-up presupposes estimate of the product(s) concerned. It is therefore likely that, if the information system is not too rigid, that two levels of costing are possible. But the interpretation of change from one to the other will not add to the information because the bases for divergence are wholly determined during the change from the product(s) to order line-up or order.

6.4 Multiplication of cost objects In order to enhance the possibilities of costing, the unicity of the cost object must be given up. This necessity has long been expressed in the

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form ‘one decision, one cost’. Ideally there would be only specific costs. This extreme system cannot be concretely envisageable, but there are two trends which endeavour to come close to it. The first one, that of directs costs, specific costs or evolved direct costs, predetermines its cost objects. Cost units are organized according to cost objects in such a way that allocations adhere strictly to the principle of causality. In this context each category of objects contains a characteristic fragment of information and the multiplication of objects enhances the quantum of information for the benefit of the management. The limitation of this approach is its rigidity. If cost objects structure the model and thereby the information system, it is difficult to envisage frequent changes in cost objects. The second trend that allows taking into consideration multiple cost objects is based on the reverse approach. Modelling is done independently of any cost object. The net result is that the usage of the cost-allocation bases that characterize each unit of analysis is not determined beforehand; their utilization depends only on their relevance with respect to the cost object in question. The nature and variety of cost objects are theoretically unlimited. The objects estimated and amounts of their cost depend on the level of convention that costing is subjected to in matters of causality and traceability. If requirement of tractability is exacting, one reverts to the preceding situation; cost objects structure information processing, and therefore the model. If this constraint is relaxed beyond possible materials and components, the principle of causality determines the perimeter to be taken into account for estimation. If no causality is ‘visible’ considering the structuring of the model, it means that the object cannot be estimated. Although leading inevitably to rough estimations, this solution has the advantage of emphasizing that importance lies not in the estimate of objects but in the management of units of analysis and their articulations. The change from unit cost of allocation bases to effective allocation has to reckon with the definition of conventions which may be more or less sophisticated. There is a danger of going too far in sophistication and deluding oneself that one has obtained more accurate costs, whereas, beyond the unit cost of the allocation base, all is arbitrary.

7 Widening of Perimeters in New Models

All the preceding sections are concerned with the usual subjects of costing, that is to say, the routine costing of products, services, clients, product families and strategic business units. Although integrating through depreciations or provisions some factors related to longer periods, these cost calculations come under short-term local management. These costs are increasingly insufficient, which makes it necessary to widen the temporal horizon so as to cover the production life cycle and, if possible, the overall life cycle of products before preparing to launch them, as well as to involve external partners in these estimations. Thus a management controller is confronted with a twofold widening of the perimeter: one spatial, the other temporal. Temporal widening is not new: it can be traced back to the development of variance analyses that result from a comparison of two situations of a given model over a period of time. However, in that case it is a mere duplication. Currently, a widening of the temporal horizon is associated with the development of techniques of middle-term projected costs, whether they are called target costs or design to costs. The widening of the spatial horizon is to be connected with the multiplication of outsourcing leading to more or less durable partnerships. The two movements currently go hand in hand with the approach to overall life-cycle costs, insofar as it becomes less and less likely that enterprises develop innovation by themselves. This leads the spatial horizon to integrate into its estimations relationships with its partners. The widening of the perimeter may also concern the nature of flows in question. Traditionally confined to recording monetary transactions, costing systems can free themselves by taking into account flows avoided or lost. Such a widening is particularly advisable in the administration

67

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of public utilities whose justification is more in externalities than in production, strictly speaking. Then there are cases where monetary approach turns out to be incapable of incorporating facts one wishes to include in the perimeter of costing. It is then necessary to combine the monetary with the non-monetary. This solution is often recommended in the environmental field. We now come back to these different aspects of widening perimeters of costing systems.

7.1

Total cost over the life cycle

We have recently moved from a vision of production cost to that of development and production cost. We have added costs-in-use, or possession, which leads with the inclusion of elimination costs to total cost over the life cycle. Such an extension is, to a large extent, virtual because we lack the equipment to carry out in a convincing manner this twofold extension, both temporally and spatially. At the temporal level, there is twice as much difficulty. This is due, on the one hand, to the capacity to anticipate events and potential behaviours. On the other, it is due to the capacity to provide the current value of resultant flows. At the spatial level, difficulties are even greater due to the multiplicity of partners involved (firms, social groups, professional organizations, communities) and the absence of connection between their respective systems of information. I represent this double challenge in two diagrams Figure 7.1 and 7.2. Let me start with the temporal challenge. In Figure 7.1 the curves represent the commonly accepted idea that designing costs are determinant of the entire life cycle of a product. Although resources consumed at this stage are relatively low, decisions taken bind future resource consumption at the stage of manufacturing, utilization and recycling. Choice of plastic material instead of a metal for car fenders is fraught with consequences during manufacture as well as during recycling. The manufacturing process is not the same; training of technicians is different. That the weight is different will have an impact on fuel consumption; eventually, recycling of the part will also be different from the viewpoint of both the process and the residues. These obvious facts explain why cost curves spent and costs incurred appeal to industrialists. But from theoretical evidence to empirical verification, there is a long distance that has not been covered. There is little documentation and it will take a long time to gather it, because one can always imagine that relationships between two types of curves will differ from one economic sector to another.

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Overall product costs

Committed manufacturing costs

Recycling costs

Costs

usage costs

Committed usage costs Committed recycling costs

Design costs

Total manufacturing and marketing expenditure

Tim

Design............................Manufacturing.....................Usage...Recycling Figure 7.1 product

Curves of expenses incurred and disbursed over the life cycle of a

The literature on target-costing is relatively abundant, but this literature is focused on management of costs, the problem of costing supposedly being resolved elsewhere. In my opinion all the ambiguity of this approach lies here. In the absence of a comprehension of costs (causality, traceability), how can one hope to manage them? The existing examples avoid this question as they place themselves in almost all cases in the zone of direct variable costs, materials and labour; and in the best of cases, in production costs. Here one has a real paradox insofar as you make a strategic use of a proper, pertinent approach in the context of short-term local management. For want of a global perspective, you are looking under the glow of a street lamp for it is the only spot that is lit! Production cost reigns supreme in departments responsible for estimating future costs. While the production function seldom represents a function that consumes most of the resources, decisions concerning the future of an enterprise continue to be based on it. The implicit hypothesis here is that production cost is assimilable to longterm marginal cost, and as such is relevant. In other words, this means that the cost of other functions, committed costs and even costs outside the enterprise are of no consequence for decision-making.

70 Cost Systems Design

In this context, two approaches are utilized for estimating future costs: the parametric approach and the analogical approach. The first, statistical in nature, infers future production costs from physical characteristics, forms, features, disposition and the number of elements. The second approach, less analytical, strives to deduce, from the past or the present, future costs by comparison between components of a future product with existing components. The Japanese ‘cost tables’ constitute a formalization of this approach. This option is all the more interesting because a product is rarely absolutely new, many systems and functionalities being common to several products or several generations of the same product. One can also try to clear a way that is as yet unexplored: strategic costs. The ambition this time is to take into account the impact on the entire organization, and not just the function of production of a new product. Starting from the idea that other functions contribute to production of value that will be carried by the product and associated services, a strategic approach to costs tries to understand the indirect links a product-service has with the structure, apart from the production function. These links, if they do exist, constitute cost drivers. It is simply a matter of extending a parametric approach to the non-physical dimensions of a product. A multitude of partners, components, functionalities, variances, sales outlets, etc., constitute potential cost drivers. There is an undisputable relationship between cost drivers found within the framework of analysis of activities and its value-bearing process structuring. This result is normal insofar as cost drivers that characterize processing are factors of long- and medium-term evolution of costs. Identification of these drivers and discovery of their effects over a period of time open the way to sharing profits or cost overruns between different actors involved over the entire life cycle of a product. As before, it is important at this stage to be able to set up a link between cost drivers and value-bearing attributes. This requires cooperation between marketing people who, thanks to their case studies, can identify value attributes and their importance, as well as between research and development people who break down a product into its functionalities. Effective analysis of value is that which can reconcile these two approaches and offer economic evaluations over the life cycle. Identification of cost drivers is inseparable from analysis of a special perimeter that goes much beyond the frontiers of the enterprise, if one is interested not in production cost but the whole life-cycle cost. The approach recommended here is based on identification of a constellation of organizational actors who are potentially concerned with the

Widening of Perimeters in New Models

Second line parts manufacturer

Other garages

71

Recycling

First line parts manufacturer First line parts manufacturer

Credit institutions

Second line pa ts manufacturer

Renter Manufacturer

Users

Dealers’s network

Figure 7.2

Example of spatial analysis framework in automotive industry

product at a given point in its life cycle. In Figure 7.2, these actors are identified as enterprises and users. In reality, it is rare that an enterprise is concerned in its entirety. Only a few activities are so concerned. One must specify for each actor the concerned activities. Once this work is done, one moves on to analysis of the impact of the new product. During this work, one must not forget to take into account supporting activities in relation to all concerned activities in order to obtain for cost analysis a perimeter that is as comprehensive as possible. Analysis of impact is done on the basis of the breakdown of the product into functionalities which are reflected in technical solutions. Each technical variance can have a different impact both in matter of perimeter and resources consumed or values added. The objective of an early economic evaluation is to select technical solutions that lead to improvement in the cost-value differential over the entire life cycle of the product. It goes without saying that the exercise is singularly complex. Transactions between different related activities are done on the basis of prices and not costs. And moving from information on prices to information on costs supposes a transparency, which will be difficult to achieve even in the best of partnerships. But nothing precludes construction of mixed models that associate costs,

72 Cost Systems Design

prices and information on volume of main drivers that will have been deduced from a qualitative analysis of the impacts. The more upstream one is in the life cycle, the more rough and ready is the information the nearer one draws to the production stage, the nearer one is to traditional conditions of production of cost estimates. The result is that it is pointless looking for a system of cost estimation. Rather, the solution lies in a continuity of models progressively honing the total cost over the life cycle.

7.2 Non-transactional costs The extension of the perimeter of costing beyond the enterprise and over the entire life cycle continues to be based on an analysis of transactions between concerned parties. There are situations where an analysis of transactions by itself turns out be insufficient. This is particularly so when it is a matter of analysis of public policies. These have a ‘direct’ cost, but they generate costs otherwise avoided by the public authorities, individuals or other organizations. When one wants to define the cost assessment of a public policy it is necessary to take into account all flows, actual and avoided. But beyond this application specific to decisions in which externalities are by definition important, inclusion of non-transactional costs may turn out to be useful, as has been shown by promoters of the hidden cost method. Whether it is the public context or private, the main difficulty in this approach lies in the fixation of agreement of evaluation in the processing of non-transactional costs. Let me illustrate this method by three scenarios. The State invests in the elimination of an accident black spot. Direct cost is easily determined: it is the cost of the case study and execution. It is possible to incorporate into it a fraction of the cost of the equipment department as well as the future costs of maintenance on the basis of currently available know-how. Beyond this cost, which gives rise to transactions directly recorded in the accounts of government departments, this operation will entail elimination of costs from those of the economic agents who are connected not with the State but with the road users. A certain number of lives are saved, persons remain active at work for longer periods, there are lower insurance costs, etc. As before, there crops up the problem of perimeter. Does one stop at insurance companies or does one consider the impact on the automotive repair market? More problematic is the estimation of the cost of lives and the injuries avoided.

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The situation is comparable to subsidies received by the private sector for carrying out tasks of public interest. The case of enterprises that integrate persons into the world of work is a good example. These enterprises, which employ the long-term unemployed for their reintegration into the job market, benefit from subsidizations. This involves a cost to the public authorities. In return, work is executed that leads to a sale at market price, without falsifying the conditions of trading. But at the same time, unemployment insurance and certain benefits (transport, canteen) are no longer dispensed; receipts appear along with earnings of persons working (VAT, local taxes), and the workers re-employed in an economic activity will probably find work again at the end of the period of reintegration. Public authorities will have to pay less by way of unemployment insurance, and especially they will benefit from additional production with resulting effects. We place ourselves now in a private enterprise where safety is not a priority. The result is occupational injuries that in turn entail recourse to hiring temporary personnel pending reinstatement of salaried personnel. If one wants to calculate the cost of an unsafe environment, one must take into account the differential in rate of contribution and the cost of temporary personnel. But the latter, being less experienced, will necessitate additional managerial staff. There is thus a double diminution in production potential (mobilized management and lower productivity with temporary personnel). This disorganization in production causes delays which, if nothing else, lower the image of the enterprise and may lead to penalties (transactional cost) or losses in future orders (non-transactional cost). These examples underline the limits of a conventional approach to costing that does not discount the difficulties encountered in obtaining the desired relevant estimations.

7.3

Composite costs

The sudden emergence of social and environmental issues in management poses the problem of a monetary filter that limits the possibilities of accounting, whether financial or managerial. In the face of difficulties in estimation and weighting of elements, certain authors recommend coupling economic information with the non-economic. One comes to multicriteria evaluations in the field of costing, as in the field of investment. The cost of developing a new engine is X euros and it goes with a reduction in the discharge of CO2 by Y tons. In the same way, one might, in the closure of an industrial site, estimate an amount E as savings and amount N as loss of jobs.

74 Cost Systems Design

This approach has the merit of recognizing that monetary evaluations have their limits, and it underlines the multidimensional aspect of most of the decisions. On the other hand, it is difficult to implement it, because evaluations are neither additive nor comparable. There exist methods of handling these multidimensional tools. They are based on a weighting of composite criteria of evaluations produced and on a definition of rules that put together collective preferences. In practical terms, there is an attempt to formalize a strategic policy decision, no more no less, by making the value system of concerned parties explicit.

8 Articulation with Other Tools of Control and Management

Enterprise modelling used for developing a costing system offers multiple opportunities for complementarities, as well as conflicts with other tools of management. The most surprising thing in numerous situations is the absence of relationship. My contention is that a full benefit of modelling is received through articulation of and search for complementarities between a costing system and other tools of management. Ideally, one imagines a modelling shared by all the organizational participants and used by them to construct their respective management tools. The reality, however, is far from the ideal. I will present first of all a version of key indicators designed as support for action on costs; after that, I will examine how these tools, developed independently of the costing system, can still contribute to the overall management of performance.

8.1 Key indicators as support for cost-value dialogue Deployment of strategy To paraphrase a famous maxim, one can say ‘managing costs without giving a thought to value is to bring ruin upon an organization’. Value being a substratum of strategy, it is through a formulation of a strategy in organizational units that one can start and sustain this indispensable dialogue between consideration of cost control and satisfaction of customer requirements, which is the source of value creation for all the stakeholders. Going back to a pedagogically convenient distinction made by Minztberg between formulated strategy and emergent strategy, one may presuppose the existence of a strategy and search for ways to deploy it in the organization. Strategy is expressed through key factors of success, or else by striving to achieve objectives deemed strategic and which express these key 75

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factors. Their deployment in an organization, even if part of a general communication, must technically be explicit in intermediate objectives, then in local objectives, and then in plans of action. The inverse course reverts to starting point results of action and information on inevitable variances, contributing thus to the concretization of the emerging strategy. Is this pattern compatible with all models underlining costing systems? The answer is no, in the case of systems based on cost units constructed from a single technical model of the product. On the other hand, the answer is yes for all models that process an organization, whether on the basis of pre-existing models or on the basis of specific models. Even then, deployment has to have a meaning. It is undoubtedly not significant to recall that this notion is recent and seems to have gained a following in the wake of the movement of total quality (Quality Function Deployment). After all, what is the point in deploying strategy in a model of a costing system if the theory of reference value is the theory of intrinsic value or exchange value? In the first case, the market must recognize value produced and determined in-house. Since this value is earned by a product or service, saturation of capacity must lead to optimal strategy. In the case of exchange value, it is the market that determines the value. The question then boils down to acquiring necessary resources at the best price in the market and to combine them in an efficient manner. It is only in the case of adhesion to value earned cost/value drivers that deployment of strategy can be combined usefully with cost modelling. A question that arises in this situation is that of coherence between modelling used by a costing system and the theory of value earned. We discussed this question earlier, underlining that a modelling based on a hierarchical and functional approach was irrelevant, because there is now a consensus that value-earning cost drivers are not formulated within specific functions but in a coordination of activities spread over different functions. Transfunctionality is necessary for efficient production of attributes like quality, reactivity, innovation or environmental protection. The only costing model that can be pertinently associated with deployment of a strategy not focused on cost reduction belongs to the activity and process-based family of models. But, in my view, only those in which the notion of transfunctionality is integrated deserve our attention. Among these, two very different scenarios may be considered. Firstly, there are transfunctional models that bring together dispersed functions like quality or logistics. Formulating strategy in these process functions is to recognize that attributes showing key success factors are autonomous and can be added up. Since we know that organizations

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develop functions in order to address expectations of the environment, this deployment amounts to confirming that it is a quality function recomposed which must manage the performance ‘quality’ independently of the obligation of R&D function that steers the performance ‘innovation’, or that of logistics managing the performance ‘reactivity’. This vision of competitiveness in excellence of functions is the one presented by Porter (2003, Figure 2.5). Secondly, there are those transfunctional models which, instead of bringing together a dispersed function, combine within processes activities related to various functions in order to deliver not one attribute but a set of attributes of an element which forms a part of transactions or which is capable of combining with other elements to constitute support for one or more transactions. It is only with this model that one gives up the conventional vision of organization, and the exercise of deployment of strategy constitutes, at the process level, a real contribution to the inevitable debate between cost and value. Deployment procedure Setting up a procedure that takes KPI or strategic goals to key indicators facilitates the transformation from an idea to its implementation. As in enterprise modelling, we use a procedure that remains qualitative as long as possible in order to focus thought on relationships, not on figures. This procedure is based on a simple, but efficient, tool that itself was used at the time of modelling: the double entry chart. The two entries are the KPI (or strategic objective) and the processes that constitute the enterprise model. The work to be done is simple: it consists in formalizing major contributions of each process in the KPI. In concrete terms, all processes in an enterprise contribute to the implementation of the KPI, with greater or lesser intensity. One emphasizes here major contributions of different processes with a view to achieving an enhanced overall performance. Each intersection between a KPI and a process gives rise to a definition of the measurement of performance, or formalization of an indicator of performance (Table 8.1).

Table 8.1 Deployment of the KPI at the process level Process 1 KPI1 KPI2 KPI3 KPI4

Process 2

*

Process 3 *

* * *

Process 4

* *

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The fact that process 4 is concerned on a priority basis with just KPI 2 does not mean that it is indifferent to other KPI. What it does mean is that appraisal of its performance will be based on a result indicator that spells out KPI 2. Processes are made up of coordinated activities that bring out a set of characteristics, at least one of which appears in Table 8.1. It is desirable to concretize the contribution of different activities to the implementation of this (or these) KPI. For this purpose the same method is used, intersecting this time KPI selected from the previous section and the activities that make up the process. Table 8.2 takes up process 1 and shows the contribution of its activities to the implementation of the two KPI (1 and 4). As at the level of process, each intersection (activity * KPI) is made explicit by a performance indicator. Full deployment of strategy must now be expressed by actions that improve performance indicators by mobilizing activity resources, firstly at the local level, then at the process level, thus implementing the strategy. However, if use of resources does not lead to the desired performances, the actions will be questioned, or else the objectives themselves will have to be redefined so as to let another strategy emerge progressively. Having discussed the qualitative phase, we move on to the quantitative phase, that is to say, we formulate indicators of activity process and plan of action. It is at this level that the exercise becomes difficult and complex. It is on the choice of modalities of measurement that the impact on behaviours of internal players depends, as well as the reactions of external partners. Talking of responsiveness like KPI and expressing it in response time poses no problem. Gathering concretely data for obtaining a measure of response time is more complex. What is the initial event, and what is the final one? How does one measure innovation? Or again, how does one measure flexibility of the personnel or the quality of reception? The transition from a basically physical field to a field where the immaterial is predominant was one of the factors in appraising loss of relevance in costing systems at the end of the 1980s. This still constitutes a challenge to the construction of key indicators. Table 8.2

KPI1 KPI4

Deployment of the KPI at the activity level Activity 1

Activity 2

Activity 3

*

* *

*

Activity 4 *

Tools of Control and Management

8.2

79

Presentation of key indicators

Key indicators of activities are incorporated into those of processes and the latter themselves into those of management. But all data do not come back up. The reason is that every key indicator breaks up into two parts: first, as a result or performance indicator; second, as an indicator of management or processes. The indicators convey the result of actions taken and must influence the local or distant, short- or medium-term, result indicators. The latter formulation underlines, if necessary, the difficulty in formalizing simple causal relationships within the framework of key indicators. The action plan, regardless of level, is based on partial modelling that marries the probable with the possible. The players, in order to improve their results, choose among multiple probable causes, immediate or distant, and those on which it appears possible to act successfully (Figure 8.1). If one places oneself at the level of process, it is evident that activity result indicators are indicators of management; these are not the only ones though, since there may be process-level action plans that necessitate a proper follow-up The same remark can be made at the level of top management vis–à-vis processes. Experience shows that the construction of key indicators encounters a difficulty, which is the acceptance on the part of players in a given perimeter that their performance (result indicator) will be appraised on the basis of expectations of their internal and external customers, and not on the basis of the utilization of means placed at their disposal. The functioning of key indicators also comes up against yet another

Result indicators R1

R2

R3

I1

I2

I3

Action plan 1

Action plan 2

Process indicators

Figure 8.1 Structure of the ‘Tableau de bord’

Action plan 3

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Cost Systems Design

obstacle, the requisite renewal of performance indicators, irrespective of the level. It is this difficulty in keeping active key business indicators that constitutes a major handicap for making it a tool of cost dynamics as well as of deployment of strategy.

8.3

Costing models and quality management

Setting up quality management in many enterprises has been the starting point of challenges to a functional, vertical and compartmentalized vision. In its latest version the process-oriented approach is explicitly recommended as a basis for enterprise modelling. An obvious question asked is whether the convergence or coherence of this major management procedure with respect to activity and process-oriented modelling is such as was presented for implementing costing systems. In order to answer this question, we must consider practical methods of modelling adopted by quality experts. What constitutes their organizational structure? How does one change from cost unit to process? What is the output of a process? Before going further into this analysis, one may note one important convergence and divergence. Convergence lies in defining process. The latter is defined as a series of activities carried out by certain means (people, equipment and information), where the envisaged result is a product meant for a client. Difference appears in the formalization of a process that is seen as a series of stages (points of control) and not as an articulation of phases (activities). Of course, there is a stage at the end of the phase but, since we are in a world of representations, it would not be neutral to take sides in the issue. Activities are often operations or tasks, rarely centres of management. And this stands to reason, because the aim is control of conformity at each stage, and not management of the means used to achieve it. Transfunctionality is present at the level of process and rarely at the unit level, because one looks at it at the highest level. In principle processes are determined by giving thought to the organization. Once these are chosen, one proceeds to analyse them, that is to say, note key stages, tasks and operations required for customer satisfaction. These processes are divided into three categories: processes of management, support processes and operational processes. The first category, if found in certain models of the ABC type, is often considered as coming under general support. Generally speaking, models of quality management remain focused on external customers and products or services offered. Ideally, a process links customer needs and is aimed at customer satisfaction. If this is

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carried to its logical conclusion, there is an enormous risk of the current vertical, compartmentalized vision being substituted for a horizontal, compartmentalized vision!

8.4 Costing model and stakeholders The balanced scorecard (Kaplan and Norton, 2001) takes a small step towards an explicit notice of stakeholders in strategic management. Shareholders, customers and employees are envisaged but financial orientation remains a priority. The customers and employees are considered only in the perspective of their respective contribution to enhancement of shareholders satisfaction (Figure 8.2). Is it possible, from a process analysis, to take a step further towards a vision of organizations where all stakeholders have a place without their being made subservient to anyone else among them? It is a gamble, but many elements are existent or easily conceivable. Principal stakeholders can be linked to a process. The suppliers are linked to the supply processes, whether they are called the management of reference supplies, the management of orders or the management of suppliers. The staff is directly linked to processes relating to human resources management. The customers, quite obviously, are directly concerned with processes delivering components, products or services. The financial market is rarely present in the modelling, whereas numerous activities, especially

Financial perspective

Mission and strategy

Customer perspective

Learning and growth perspective

Figure 8.2 The balanced scorecard

Internal perspective

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Financial and strategic information, dividends Shareholders, financial market Capital, loyalty

Preparing quarterly documents Speaking to Holding meeting in the press each division Designing a specific Strategic information system planning Mass communication

Figure 8.3 Example of a process linked to the stakeholder ‘financial market’

in large groups, are directly meant for its satisfaction. The community and the environment are undoubtedly more difficult to come across in the known traditional processes, but in certain cases they are apparent and one may think that this unusual situation is on the increase (Figure 8.3). Realization of the presence of stakeholders in the functioning of all processes is a step forward in the simultaneous management of cost and value. What is cost in-house is value for the stakeholders, but we know that value, no more than cost, cannot be reduced to the price of transaction between the organization and the stakeholder. Taking into account elements, to which no price can be attached, that is to say, attributes of non-monetary value, opens the way to real win–win relationships.

9 Evolution of Costing Systems

Costing systems that are only a depiction of economic calculation of the functioning of an organization in its environment ought to evolve with the latter. It is to be observed that this adaptation – that must be ongoing since structures and modes of functioning are in continuous evolution – is done poorly and/or slowly.

9.1

The slowing down of evolution

Historically speaking, several factors were put forward by Johnson and Kaplan ‘Only in the past sixty or seventy years have external auditing and financial reporting systems come to perform the original function of management accounting’ (p. XII) in respect of the Anglo-Saxon world and, in particular the subjection to financial accounting for the purpose of external communication. This argument is admissible in France as well to the extent that, since the Second World War, accounting has been organized within the framework of a plan that comprises a voluminous appendix dealing with cost calculation. Even though the appendix is not restrictive, it is in favour of a certain standardization. This factor, which may be linked to progressive financialization of industrial economies, is aggravated by two others, one technical, and the other sociological. Whether one likes it or not, the mechanism of a costing system is always complex, without being necessarily beyond all hope of comprehension. Thus organizations, both public and private, were not long in having recourse to information-processing technology for automating all operations, enabling them to attain an operational costing system. But computerization in turn proved to be costly and its processing circuits difficult to improve upon on account of the complexity of maintaining 83

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relationships between multiple and independent programs. This state of affairs, which prevailed on the technical level until the 1990s, was instrumental in fossilizing existing models in the state in which they had been programmed as much as 30 years earlier, in certain cases. These two phenomena were aggravated by the image of the nature of management tools in the minds of the managers. The scientific management movement, guided by the ideology of continuous progress and mastery of nature, remained vigorous till the end of the twentieth century. In the world of management this was articulated particularly by the idea of the scientific status of management tools and the tools of cost calculation, among others. This is a system of measures and a scientific domain above all else. Today, the prime quality of a scientific tool is its neutrality towards the environment and its users. Under these conditions, once a tool is set up, there is little reason to change it.

9.2

Promising trends in evolution

All this explains the extremely slow evolution of costing systems and a sluggishness that led to a diagnosis of their loss of relevance in the mid-1980s. Following this diagnosis, is it possible to monitor a change? Three factors can be mobilized to effect this. The diagnosis of a loss of relevance has been widely circulated and commented upon, and management tools are no longer conceived to sit upon a scientific pedestal. Data processing has considerably evolved and it offers today a flexibility and capacity for integration that enables it to convey immediately, to all concerned subsystems, changes that have taken place in such and such a section of the organization. Lastly, consideration of the importance of the non-monetary in economic relations has led to an ever so little decrease in dependence of costing systems vis-à-vis financial accounting (with parallel systems in Anglo-Saxon countries and a revival of customization in France). Are we, for all that, witnessing a rapid evolution of costing systems? It is difficult to answer this question, because a thorough knowledge of costs is fragmentary, in spite of numerous investigations, as costing systems appear only as black boxes in all these studies. Thus we know precious little about configurations actually used in organizations. Until now all attempts to identify the causes of change in costing systems have been in vain. Quanta of direct costs, diversity of products or complexities of production process do not reveal significant causes. These results seem logical to me insofar as no system is technically superior

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to another. The only interesting criterion is the relevance of a costing system with regard to the requirements of the organization. But these requirements themselves cannot be defined beyond those formulated by the organizational managers. One may infer that the only significant criterion of change in costing systems is relevance as perceived by users in a position to decide on the evolution of the system. Furthermore, an analysis of the evolution of systems is complicated by the phenomenon of inclusion of certain systems in others. Usually, a full costing system will not inhibit a partial estimate of variable costs, for example, or an estimate limited to the perimeter of production. There exist compatibilities ranging from the fully compatible to the least compatible. It is quite conceivable to keep a full cost system, though by giving more importance to information produced over a partial perimeter. One may just as well change a system in some parts of the organization. For instance, one group will be equipped with an ABC system in the functions that it wishes to charge to its subsidiaries (in the budget system context) without changing the cost calculation system of its products, where costs of the central functions appear in the form of a percentage of value added or the turnover. These few examples show that dealing with the overall evolution of systems remains out of reach for the moment. In particular, it is physically impossible to provide an applicable interpretation of the frequency of diffusion of a new system. Generally, commentaries make an implicit hypothesis that a new system is cut out to meet all exigencies, which is altogether unrealistic. Organizations are different for reasons of their structure, functioning or objectives. Therefore it is not possible that the same system should be applicable to all. Under these conditions, perhaps a frequency of diffusion of system X at 20 per cent corresponds not to a low frequency but to a saturation of its potential market. On the basis of the theoretical elements enunciated above, it seems to me that the driving force behind a change of costing systems is to be sought in an evolution of value supports. It is from an evolution of ‘customer’ (stakeholder) perception of value that a search for the performance of value supports is organized, thereby generating new needs for information. To begin with, these needs can be met by physical indicators, as was the case with quality or delivery dates at the end of the last century. But a time comes when the need for regrouping attributes is sensed and the solution can be found only in the tools of economic evaluation: the costing systems. It is these tools that must provide an adequate framework for reconciliation of value and cost if the new

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Improve calculation Search for accuracy

Need to identify new value attributes

Change models of representation

Everyone competes on the same bases: cost minimization

Environment markets, customer value

Increase relevance of description of the organization

Business process reengineering

Everyone adopts similar representation Continuous improvement

TIME

Figure 9.1

Evolution cycle of costing systems

attribute(s) no longer provide(s) the organization with sufficient surplus to ignore a detailed economic calculation. One may envisage a life-cycle evolution of costing systems in three phases, as illustrated in Figure 9.1. Identification by the environment of new value attributes leads progressively to a search for another model of enterprise that explains production of these attributes. Subsequently, this approach spreads, causing a disappearance of surplus in organizations that were the first to implement it and to capitalize on these attributes. This is the phase of performance management focused on the attributes in question. With time, competition becomes harder and comprehension of the cost/value relationship becomes necessary in resource allocation and also in dialogue with customers. Costing systems that made it possible to obtain an appropriate answer to questions raised by the new situation in competition then reach their maximum dissemination, but soon new attributes of value appear, inevitably, and the cycle starts all over again. Evolution may be radical with a new costing family like ABC that introduces transfunctionality in economic or incremental calculation through simple differentiation in allocation bases within the existing systems.

10 Costs and their Utilization

Information conveyed by costing systems is of two kinds: first, unit costs of objects which associated with selling prices which give profit margins; second, global cost in different perimeters. Without there being a concrete barrier between utilizations, one may consider that unit cost information is necessary for a relationship with the environment (pricing policy) and that overall expenditure information provides support to decisions on resource management and structure. A link between these two types of decisions is provided by integration of laws of causality with the costing system. Linked to traceability, information makes it possible to show in unit costs the impact of decisions on modification of overall expenditure. Its utilization is possible also at the overall level, with decisions based on any competitiveness problem noted at the cost object level. In both cases, perimeter and number of reallocation levels define the quality of implementation of global–local articulation.

10.1

Price and unit cost

Whatever the costing system, it is always linked to price. The link can be a priori, in the case where an organization refers to intrinsic value; and a posteriori if it refers to exchange value; or simultaneous if it conducts negotiations based on utility value. Let us examine these three cases successively. First case The organization considers that value is determined in-house and that the environment must recognize it by accepting a price that covers costs, all costs. When it comes to covering all costs, only those systems 87

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are useful whose perimeters mirror the entire enterprise. By allocating all costs to objects, such systems provide a basis for price fixing that covers all costs. Applying a price increase ratio to costs allows an anticipation of profit. Simplicity of this model of functioning is only in appearance. Two major parameters condition its functioning: perimeter and hypothesis of volume. The offer of a product or service supposes an acquisition of production capacity whose life cycle may not necessarily coincide with the life cycle of the product or service. Moreover, this production capacity is seldom dedicated. The problem of perimeter exists in both the temporal and the spatial dimension. Not being variable in unit production, capacity cost must be allocated on the basis of hypothesis of volume, volume itself being determined on the same temporal horizons which are utilized for the integration of capacity cost. These two difficulties are resolved in a simple manner in full cost systems that refer to intrinsic value. Since the market must accept a created value and the value depends on resources internalized by the organization, the entire structure of the costing system must focus on resources, not products. Watching the movement of resources in a value chain is what matters, not the process of offering a product or service. Admittedly the use of this resource needs a costly internal environment, but this makes little difference to the general principle: if need be, one may take this into account in order to distinguish between different paths followed by a resource before reaching the customer (Figure 10.1).

Unit cost of resources carrying value

Overall consumption of resources carrying value (volume)

Figure 10.1

Unit cost of objects

Mechanics of selling price fixing

(Coef.of

) = Selling price

Costs and their Utilization

89

The system presented here in its purest version can become more complex by the introduction of several unit costs of the resource carrying value depending on its environment (overhead rates) and possibly several resources (labour, materials, technical capacity) without causing a change in the general scheme of the system. The quality of information on cost depends on the quality of the follow-up of consumption by each object of the resource (bill of materials and operations). Likewise, action on costs is implemented first through action on this consumption and subsequently on the burden rate, that is to say, the other resources used. Second case The organization accepts external determination of value expressed by the market price. In this context, unit cost calculation of objects offered by the organization does not have to serve as a basis for working out prices but to ensure that the organization can take on its competitors. If purchase price of resources consumed directly by an object is lower than the market price, the object helps in covering other costs and therefore helps in the overall income of the organization. In case of difficulty, an effort is directed toward the acquisition price of resources, which gives a definite advantage to large entities that can obtain reduction in prices depending on quantities. The follow-up of efficiency in the utilization of resources in objects constitutes the second lever of competitivity. The organization must add a second tool of cost management at the overall level in order to monitor its profitability. This tool, in its simplest form, links the accrued margin on partial costs and all other non-allocated costs to the objects. The local–global articulation implemented by one tool (net profit margin) in the first case needs here two tools (contribution margin on partial cost and break-even point). Third case This concerns the simultaneous construction of cost and value. Fixing the selling price in the context of utility value theory is more difficult. It depends at once on the value attributes and laws of resource consumption connected with the production of these attributes. If one assumes, as in an approach to target cost, that functionalities or values can be added up, the costing system must be organized accordingly. It must produce costs of different subassemblies that support technical functionalities, as well as the cost of production of attributes like quality, reactivity and even innovation. If one thinks that attributes bear value

90 Cost Systems Design

only when put together or born by a physical object or service, the system must deliver the unit cost of sets of attributes. But whatever the approach, individualized functionality or set of attributes, these factors are seldom specific to a transaction. The innovating character of a material results from the implementation of the capacity for innovation, which is meaningful only when considered in its entirety. Any unitary expression in a particular object comes under an agreement of attribution. What appears fairly obvious about this function is seen actually in all functions or sets of attributes. Cost is inevitably uncertain. But if laws of causality were correctly incorporated in a system, it would make it possible to measure the partner’s sensitivity in negotiations for attribute variance and even the attribute itself. This new situation is uncomfortable because there is no determinism to prices, internal or external. For the customer, price is just one of the dimensions of the value of an object he or she thinks of acquiring; for the producer, price must help in covering all costs that are necessary for production of different attributes constituting the offer. Such an asymmetry in approach to price variance necessitates in an offer a sound knowledge of attributes valued by the customer, as well as a clear comprehension of laws of behaviour of the costs needed for production.

10.2 Information concerning costs and cost management Here it is a question, not of management of the relationship with the environment, but of internal resource management. The reasoning is not with reference to objects but to cost units and/or different intermediate perimeters that constitute the architecture of the costing system. Any approach to cost management is done at the level of a perimeter or the driver representing it. Cost control can only be expressed when resources are used for the first time, and not after multiple allocations or assignments irrespective of the quality of traceability. Cost units exclusively linked to objects In this particular case, a costing system is useful only in surveillance of input returns followed through a bill of materials and operation sheet. The other costs are managed globally irrelevant to the principles of the costing system and generally in the budget process (that may also incorporate direct material and labour that make up the costing system). Price and quantity variances are then the basic instruments of control and reflect purchase policy or quality management.

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91

Hierarchical–functional cost units Price and volume variances are not to be given up, but the control now must span all the cost units (derived from another model) that constitute the base for the costing system. The resource consumption control in these cost units must be implemented with reference to homogeneous units that characterize them. All the difficulties of these models are due to the fact that homogeneous units were constituted in such a manner that allocation to products or services did not pose any problem. They are therefore wholly dependent on the volume of products manufactured and/or sold. This ultimate causality rarely suffices to go back to the causes of resource consumption. Facing this difficulty, the tendency is toward the management on an ad hoc basis, a management that is hardly different from management of discretionary budgets in the preceding situations. Analyses of variances in activity, capacity or budget have been suggested at a technical level to enlighten the managers, but ordinarily these are ignored in nearly all the cases, and no doubt rightly so because these analyses recognize only one cause: volume of production and/or sales. Specific units of analysis The construction goes hand in hand with a search for a principal law of causality, a law of underlying causality and related causality. This transition from one cause to a plurality of causes makes even more necessary a training in new bases for modelling. Two particularly important factors modify the management principles. The volume of production of objects is seldom a benchmark. Consumption of each activity is analysed in view of its own production independently of the manner in which this production is incorporated in the overall and diversified offer by the organization to its customers. From this point of view, the traditional analyses of output production continue to be useful. Beyond this immediate cause of resource consumption, should an organization resort to the notion of process, the production of a cost centre will in turn be linked to a deeper cause, a cause on which action will have to be taken on a priority basis, beyond the traditional productivity efforts. The notion of process transforms action on costs in a local or individualized approach into a reasoned collective action based on drivers characterizing each activity and each process. All these various mechanisms are completed by another one that aims to figure out causes of resource consumption other than production. These are local problems, upstream problems and customer

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Cost Systems Design

dissatisfaction, or downstream problems. All these causes that are of little help in cost calculation and consequently excluded from the costing system are here the main issue in the approach to cost control. Because it is through progressive elimination of problems, whatever they might be, and without neglecting, for all that, the surveillance of output production, so one will implement a cost management that will not hinder maintenance and which will indeed improve the value perceived by customers.

Conclusion

The foregoing exploration brings to light the potential advantage of cost calculation models. It draws the attention of the reader and user to the importance of a small number of parameters in structuring concrete systems. This small number generates through permutation and combination a multiplicity of technical solutions. Beyond commercial names increasingly associated with models of cost calculation, it is these parameters over which decision-makers must be watchful. These parameters convey a potential or absence of potential of help in making decisions in three domains, namely resource management, dialogue with the environment and orientation of behaviours. But asking everything from a cost calculation model is to ignore the complexity of organizations and their management. It is important to combine cost calculation with other management tools like budget and performance indicators. Giving a thought to this coupling is one of the decisive factors in the choice of parameters in the design of a costing model. The ideal, no doubt, is to have one organizational model that serves as a support for all the various sets of management tools. Such a situation looks utopian, but nothing precludes coming close to it. Does process modelling of quality management systems not call naturally for a costing system that integrates a dose of transfunctionality? An answer in the affirmative restricts the choice to seven models. In a small entity, with one hierarchical level, the choice is reduced to two options and that will be made depending on the idea the organization has about the support for dialogue with its customers. In a large organization, the structure of power and the possibility of emergence of a transversal, non-functional power will reduce the four possibilities to one.

93

94 Cost Systems Design

I trust this clarification on costing systems will lead the reader to consider the choice of a new costing model as an important strategic exercise that necessitates a significant intellectual investment in the comprehension of the impact of technical parameters that determine the relevance of a selected model.

Appendix

A.1 Subsidization Subsidization phenomena intervene each time a resource slips from the conjunction of traceability and causality. If traceability is implemented on a basis other than strict causality, it means that resource receptacles are allocated arbitrary amounts of the resource. The allocation basis being a single mechanism – the average allocation – we see the subsidization phenomenon in receptacles (semi-finished or final products) consuming more than the average, or else less than the average, with the former subsidized by the latter. During construction of a costing system, one can choose between restricting the perimeter to a fraction of the resources, where causality and traceability go hand in hand (direct costing), and to broadening the perimeter by accepting subsidization phenomena. If the perimeter is considered in its entirety, as in the value-added unit method or in costing systems that have a single allocation basis for indirect costs, subsidization phenomena will be multiple and impossible to define. When ignored by a system, regardless of their meaning and importance, all causalities are aggregated into a single parameter. This single parameter, that for this very reason ignores traceability, makes utopian any attempt at reconstituting even a partial itinerary of a resource for measuring whatever subsidization phenomena there may be. In systems composed of subsystems (units of analysis), it is possible to proceed to local analyses for measuring subsidization phenomena circumscribed within a cost unit (an activity or process, a responsibility centre, for instance). But it is just as utopian hoping to measure in a given product all subsidization phenomena of which its cost is tributary. If such an analysis were possible, it would mean that all resources 95

96

Cost Systems Design

can directly be traced to the product concerned and that one is capable of calculating its true cost! On the technical level, one distinguishes usually three sources of subsidization: diversity in activities, their relative costs and modality of consumption by the cost objects. Given below is a detailed arithmetical example illustrating these three dimensions, with the first two possibly working inversely to the third one. This simple reminder ought to incite us to prudence in using the argument of subsidization for an overall reform. A new costing system is replacing subsidization by others, without any possibility of affirming that the new situation is more satisfactory on the technical level. On the other hand, this may be a valid argument for changing a specific cost unit processing.

A.2

Basic data

A production workshop constitutes a cost centre in the present costing system. In our example the cost centre is characterized by an allocation base which is the direct labour hour. One will note that this choice of allocation base, even though conforming to the current practice in enterprises, is totally independent of the phenomena studied. The same exercise can be carried out with machine hours or square metres of surface painted or tons machined. Calculation of unit cost of a homogeneous unit of this workshop supposes that costs pertaining to the latter are known as well as the number of allocation bases budgeted (or actually made). Determination of costs pertaining to a cost centre may involve more or less complex procedures: primary allocation (budget of the centre) and reallocation of service centres. In order to simplify presentation of this exercise and facilitate its interpretation, I will make a hypothesis that the centre considered receives no reallocation from service centres. Extracts from operation sheets:

Operation

Centre working station

Size of the series

Unit time (machine hours)

Unit time (DL. hours)

MM102

100

0.005

0.02

MA102

100

0.01

0.01

Product 1 Assembly of the components Product E Assembly of the components

Continued

Appendix

97

Continued Centre working station

Size of the series

Product F ................. Assembly of the components .................

MA102

100

0.025

0.005

Product K ................. Assembly of the components .................

MM102

100

0.01

0.04

Product S ................. Assembly of the components .................

MM102

100

0.004

0.01

Operation

Unit time (machine hours)

Unit time (DL. hours)

Note: products 1, K, S pass on manual equipment (MM); the products E and F use automatic equipment (MA).

The volume of the allocation base, at least in the example concerning us and situated in production supervision, is provided by the production management system. This system, through its basic documents, bill of materials and operation sheet, is effectively in a position to give an estimate of all direct consumption, and measure all characteristics of the production done in a cost centre (labour hours, machines hours, number of batches, etc.). Estimated volume of production Product 1 300,000

Product E

Product F

Product K

Product S

300,000

120,000

200,000

100,000

Taking into account sales forecasts, the CAM System makes it possible to obtain the theoretical activity in M102 Centre. This Centre has two types of workstation, one manual, designated MM102 in operation sheets, and the other automatic, designated MA102. The activity level in a centre is measured by the volume of direct labour. This is deduced from the preceding two documents. Thus product 1 consumes 300,000 times 0.02 h, that is to say, 6,000 h.

98 Cost Systems Design

Production time (DL H) – Centre M102 Stations MM and MA Product 1 6,000

Product E

Product F

Product K

Product S

Total

3,000

600

8,000

1,000

18,600

Costs charged to M102 Centre amount to €2 604 000. As the allocation base of M102 Centre is direct labour, only that information will be retrieved in the CAM System through the costing system. One then deduces the allocation unit cost as €140. The amount of expenditure of centre M102 to be incorporated into the actual cost of each product is: Product 1 2.80€

Product E

Product F

Product K

Product S

1.40€

0.70€

5.60€

1.40€

The result of this calculation seems unrealistic when it is presented for an operation and for only five products or subassemblies. In reality, one must imagine that the foregoing table is never drawn up. Either one calculates the actual cost of a product, or one is interested in the business of workstations MA102 and MM102. But there is no reason to link the two types of analysis. The problem will be revealed only by an investigation generated by the highlighting of an ‘anomaly’ during a specific study linked generally to a transaction with the environment (subcontracting, estimate, marginal order, etc.).

A.3 Effect of diversified activities in a cost centre Let us suppose that the anomaly is discovered and that a revision of allocation of costs accrued in M102 Centre is being examined. The mere observation of what is implemented within the M102 Centre shows a loss of homogeneity of the supposed activity of the cost centre. It is not one but two activities that coexist within this Centre: manual assembly and automatic assembly. This transformation was incorporated by the production management at the level of product line, but was not conveyed in the accounting scheme. In order to do so, it is necessary to separate consumption of resources generated by the manual activity from consumption of resources linked to machines. One must then propose

Appendix

99

sharing of these costs according to appropriate modalities that convey the idea of homogeneity. Let us suppose, for convenience in presentation, that after a rapid analysis the costs imputable to manual and automatic activities be €1,699,452 and €904,548 respectively. As there is no reason to call into question the allocation basis unit of manual activity, the direct labour hour will be maintained. For the automatic assembly, we suggest making use of the machine hour. This choice, in addition to corresponding to information already available in the CAM System, also offers an advantage of being neutral in relation to the nature of production (which will not have to be revised in the case of a change in products), organization of production (progression of a 1*8 organization to 2*8 or 3*8), and indirect labour required by the machine department (masked time). The department of management control will retrieve information on machine hours from the CAM, and thus find the volume of ‘production’ of homogeneous units of MA102. Production time (machine hours) – Centre M102 Workstations MA and MM Product 1 1,500

Product E

Product F

Product K

Product S

Total

3,000

3,000

2,000

400

9,900

M102 Centre processing can be schematized as follows: M 102 2604 000

Manual 1 699 452 Direct Labour Hours

NB DLH = 18600 Allocation rate 91,36

Automatic 904 548 Machine Hours Nb MH = 9900 Allocation rate 91,36

100 Cost Systems Design

Calculation of the actual cost of the five products in the M102 Centre is then possible, and gives the following results: Product 1 2.28€

Product E

Product F

Product K

Product S

1.83€

2.74€

4.57€

1.28€

The difference between initial cost and new cost makes it possible to measure the effect of subsidization for not having specifically taken into account machine activities in the initial system. The variance in respect of product works out as follows:

Original cost New cost Variance

Product 1

Product E

Product F

Product K

2.80€ 2.28€ 0.52€

1.40€ 1.83€

0.70€ 2.74€

−0.43€

−2.04€

5.60€ 4.57€ 1.03€

Product S 1.40 € 1.28€ 0.12€

Products making use of manual technology subsidize products using automatic technology. The mechanism of this subsidization is simple and it is worth going into the details. In the initial system, hypothesis of homogeneity leads to the supposition that all activities not represented by the allocation base are consumed by products in the same proportion as this base. In this particular case, machine hours add up to 9 900. These are supposed to have been consumed by products in the same proportions as direct labour hours, which are the designated allocation base. For each direct labour hour, one will impute therefore 9900 / 18600 ⫽ 0.5322 mach.

DLH MH Allocated MH real Variance (in MH) Variance in €

Product 1

Product E

Product F

Product K

Product S

0.02 0.0106 0.005 0.00560

0.01 0.0053 0.01

0.005 0.0026 0.025

−0.0047

−0.0223

0.04 0.0212 0.01 0.0113

0.01 0.0053 0.004 0.0013

0.52€

−0.43€

−2.04€

1.03€

0.12€

Note: Product 1: 0.0056*91.36 ⫽ 0.52

By multiplying these time variances by the new rates of allocation base, we find the subsidization amount measured above.

Appendix

101

The reader will have noticed that the cost of the allocation base is identical in both the activities. The subsidization phenomenon highlighted is therefore imputable only to variances in volume of consumption. This may be formulated in a general way: small consumers of an activity not incorporated into the actual cost calculation architecture subsidize big consumers of the same activity. In our example, products that consume automatic assembly hours are subsidized proportionately with respect to their consumption by products which come under manual technology.

A.4

Effect of relative costs of activities

As stated above, this was a rapid analysis. With the equality in hourly rates appearing as unlikely to the manager of the centre, a supplementary study was undertaken. Starting from a precise checking of all costs in the M102 Centre, this study culminated in an apportionment between two appreciably different activities of the previous work. The result of the analysis is schematized as follows: M 102 2604 000

Manual

Automatic 904 548

1 699 452 Direct Labour Hours

Machine Hours Nb MH = 9900 Allocation rate 91,36

NB DLH = 18600 Allocation rate 91,36

If we now recompute the costs of the centre M102 one obtains:

Cost Previous cost Variance

Product 1

Product E

Product F

Product K

Product S

1.95€ 2.28€

2.10€ 1.83€

4.05€ 2.74€

3.91€ 4.57€

1.20€ 1.28€

0.33 €

−0.27€

−1.31€

0.66 €

0.08€

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Cost Systems Design

The variance obtained here is a variance that originates in the difference in unit costs of the allocation base. It is added to the variance of activity diversity. The total shows the actual distortion that is imputable for not having taken into account the second activity within the M102 Centre, that is to say, for not having respected the hypothesis of homogeneity in the cost centre. The first variance is volume variance, the second is cost variance. Thus the product undergoes in the initial system an accretion of €0.52 ⫹ €0.33. That is to say, €0.85 corresponds to the effective machine hour rate multiplied by the number of machine hours which the initial system implicitly made it bear (0.0056*€150 ⫽ €0.84). This reasoning applies obviously to product E that benefits in the present system from an aggregate subsidization of €0.70 (that is to say, 0.0047*€150). When the unit cost of an activity ignored by a costing system is greater than the cost of the allocation base, distortion gets aggravated. In the inverse hypothesis it is lessened.

A.5

The effect of batch size

Among three sources of cost distortion, the batch effect is without a doubt the best known. Being known does not imply necessarily that it has been evaluated. The series are unequal and use resources that are largely independent of the duration of processing and the volume of the series. Only the distortions linked to differences in batch sizes will be examined below. Whereas it is public knowledge that this effect exists and that one knows how it is expressed, there are still all too few enterprises which have set-up processing procedures allowing its elimination or simply its appraisal. In the traditional vision of homogeneous sections, production is also organized in a homogeneous manner. This means one implicitly supposes that only one product is concerned, or else that different products consume homogeneously the resources of the section. If resources consumed vary proportionately to the volume manufactured, then it is the case. But, in such a situation, one cannot imagine why these costs continue to be considered as indirect. Generally, a large fraction of resources consumed in centres called ‘indirect’ is determined not by product volume but by the way in which this volume is produced, that is to say, by the phenomenon of batch production. Indeed each time a specific variety of products is put into production, we commit resources independently of the size of the series.

Appendix

103

Such is the case with machine regulation, conformity or quality control when it becomes operative in the first units of the batch; it is also true in part in the sphere of handling and supplies to workstations. In this sphere the number of batches handled may be greater than that of batches launched into production, but it is more closely related to the latter than to the total volume put into production. The batch phenomenon is also seen in any administrative task linked to production. When production orders are issued, obviously there is one for each batch. Development of new forms of production organization laying stress upon just-in-time only accentuate this phenomenon by reducing batch sizes and by increasing the determinism of batches on resource consumption in the organization. Lastly one will note that a significant development of product variety offered by enterprises for satisfying more and personalized requests reinforces the phenomenon by introducing a source of significant heterogeneity between batches because the markets serviced vary greatly in size. It is important to be able to measure the impact of this batch phenomenon on the calculation of actual product costs. To do so, we go back to our example. In operational sheet extracts, given at the beginning of this book, there is a column headed ‘batch size’. It is invariably filled in with ‘100’. In other words this information does not correspond to reality. In addition, management programs of production generally suggest an additional column for set-up time. Using these two columns, by putting reliable information in them, would be progressive. But it is likely to give only a minimal appraisal of the batch effect, because, as is stated above, there is interaction in the batch phenomenon of many elements other than the time of regulation of workstation. It would thus be prudent during modification of the system of actual cost calculation to proceed to an analysis that is broader and in greater conformity with reality. Statistical analysis of actual activity during the last months enables the estimation of the average batch size for different categories of products and therefore the deduction of the number of predictive batches. Estimated volume of production Products Volume

Product 1

Product E

Product F

Product K

Product S

300,000

300,000

120,000

200,000

100,000

Batch sizes

10,000

5,000

10,000

2,000

4,000

Number of batches

30

60

12

100

25

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Cost Systems Design

One still has to identify resource consumption that can be directly charged to batches. This applies to direct labour non-working hours, staff for production, regulation, control, handling, consumptions wasted at the beginning of a batch, etc. Let us suppose that this research work makes it possible to separate from current costs the consumption generated by the existence of batches:

Management of the batches Consumed resources Number of batches Cost per batch

732,000€ 227 3,224€

Here is another question: can the batches be considered as homogeneous from the point of view of resource consumption that has just been separated? If the fixed cost per batch is very different from one product to another, a specific analysis for each product must be carried out. If products that move through the centre are of the same family, it is likely that consumption will be fairly similar and that an average measure will be satisfactory. The change from cost per batch to actual cost of product necessitates an additional stage for transforming this fixed cost per batch into a cost attributable to an individualized product. All you have to do is to divide the batch cost by the batch size.

Products Cost per batch Batch size Attributable cost per individual product

Product 1

Product E

Product F

Product K

Product S

3,224 10,000 0.32€

3,224 5,000 0.64€

3,224 10,000 0.32€

3,224 2,000 1.61€

3,224 4,000 0.81€

It must be underlined that the attributable cost is an indirect cost in relation to the product, but if the size of the batch is identified, it is an easily interpretable indirect cost. If we follow up our modification of

Appendix

105

actual cost processing by incorporating this new data, we obtain the following allocation bases: M 102 2604 000

Manual

Batch management

Automatic

747 000

732 000

1 125 000

Direct Labour Hours

Batches

NB DLH = 18600 Allocation rate 40,16

Machine Hours

NB Batch = 227 Allocation rate 3224

Nb MH = 9900 Allocation rate 113,63

A more detailed look at actual costs processing is now possible:

Products

Product 1

Product E

Product F

Product K

Product S

DLH cost Mach. hour cost Cost attributable per batch

0.803€ 0.568€

0.402€ 1.136€

O.201€ 2.841€

1.606€ 1.136€

0.402€ 0.455€

0.322€

0.645€

0.322€

1.612€

0.806€

Total

1.694€

2.183€

3.364€

4.355€

1.662€

A comparison of costs in the previous stage enables the measurement of the batch effect: Products Latest cost Previous cost Variance

Product 1

Product E

Product F

Product K

Product S

1.694€ 1.95€ 0.26€

2.183€ 2.10€

3.364€ 4.05€ 0.69€

4.355€ 3.91€

1.662€ 1.20€

⫺0.08€

⫺0.45€

⫺0.46€

We come across again the familiar phenomenon of subsidization of small batches by the large ones. This third effect is without a doubt

106

Cost Systems Design

the most spectacular. But in reality, it is not quite the third effect; it still is the first one. Long production runs are small consumers of batch activity and therefore subsidize short production runs which are on the contrary large consumers of batch activity. We can verify this, for instance, from products F and K. The cost of batch processing was implicitly allocated from the perspective of machine hours and DLH hours in the previous calculation. The reconstitution establishes the link between the amount allocated to batches and the number of hours. In the manual activity, it is a sum of €372,000 (1,119,000 ⫺ 747,000) that was implicitly allocated through the homogeneous unit by way of batch processing. As regards machine activity, the sum is €360,000 (1,485,000 – 1,125,000). The cost of the first allocation basis comprised therefore €20 (372,000 / 18,600) corresponding to batch management, while the second incorporated €36.36. It is possible from the following table to reconstitute the calculation of the batch effect isolated above: Product F Implicit cost per batch (DLH) Implicit cost per batch (Mach hrs) Effective cost per batch Variance

Product K

0.005*20€ 0.025*36.36€ 0.32€ 0.069€

0.04*20€ 0.01*36.36€ 1.61€ ⫺0.448€

In total, if we compare the cost constructed initially and the one just constructed, we will find that the variance is significant: Products

Product 1

Product E

Product F

Product K

Product S

Initial cost Final cost Variation

2.800€ 1.694€ 1.106€

1.400€ 2.183€

0.700€ 3.364€

1.400€ 1.662€

⫺0.783€

⫺2.664€

5.600€ 4.355€ 1.245€

Variance 1

0.516€

⫺0.427€

⫺2.041€

1.032€

Variance 2

0.331€

⫺0.274€

0.078€

0.259€

⫺0.081€

⫺1.310€ 0.687€

0.662€

Variance 3

⫺0.449€

⫺0.461€

⫺0.262€ 0.121€

This rapid presentation of cross subsidizations yields several findings: ●

There is no doubt that enterprises generally work with costing systems in which subsidization phenomena are multiple and often appreciable;

Appendix ●

●

●

●

107

Reducing the level of distortion between product costs is implemented through the respect of the notion of homogeneity that was at the origin of the French costing system (1929); This respect of homogeneity has become almost impossible in traditional industrial organizations, except by imagining a true ‘gaz factory’ to calculate the costs; In order to have a costing system that remains simple while fully adhering to the principle of homogeneity it is first necessary that the structure and production processes are simplified; The accountant’s ambition must be to help clarify and simplify the organization, and not make the mode of representation more complex.

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Part II Presentation of the Cost Systems Families

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11 Cost Systems: Synthetic Presentation and Quantified Illustrations

The reader will find in the following pages a presentation of the architecture of all the systems evoked in the theoretical study as well as their illustration by a quantified example. The formalism used is the same one for all the systems. It aims at revealing the connection between the resources, the units of analysis and the objects of cost. The quantified illustration is also unique and the source data will be presented only once during this introduction. Then, according to specificities of each system, additional information or data reprocessed will be sandwiched between the presentation of the general architecture and its quantified translation. As indicated in Part I, each taxa is representative not of a well identified system but of a family of systems organized according to the same logic. The presentation and the illustration of each one of these families being unique, it is thus far from exhausting of the subject. The bases of the quantified example try to reconcile legibility with a minimum of complexity so that the reader can better understand the consequences of the choice of such or such system. One supposes that the studied period corresponds to the beginning of the activity of CLADO. There is no opening inventory but the evaluation of stocks at the end of period will be studied. Some comments will accompany the results so that the interested reader can modify certain parameters to go further into the compared analysis of the systems. Whatever the system, the problem of the articulation between the resources resulting from financial accountancy and those considered as incorporable are identical. This question is deliberately left apart 111

112

Cost Systems Design

from the field of analysis. In the same way the aspects concerning the regularity or the seasonality of the activity are ignored, with no system integrating it in its structure. The illustration used is borrowed from the industrial world. But the reader will be able easily to transcribe the results into the world of services by imagining the disappearance of consumption of materials and components, and considering instead the treatment of labour costs. Finally, the activity is supposed to be stabilized. This assumption is made to facilitate the integration of the financial data required by certain systems.

11.1

Cost architecture

The resources being the same for all the systems, the accent will be put on the determination of the cost items incorporated into the perimeter of each system. The architecture will be broken down so as to facilitate the follow-up of the quantified illustration.

11.2

Common characteristics

Company CLADO is an industrial company which manufactures and sells five products as illustrated in Figure 11.2. For the reference period the company’s income statement (excepting inventory change) is as shown in Table 11.1. The production process presented in Figure 11.2 is based on a technical documentation that is synthesized by the two basic documents of production control: the bill of materials (BOM) (Table 11.2) and the bill of operations (Table 11.3). Produced and sold volumes are given in Table 11.4.

Cost Systems

Resources

Architecture

Allocation bases Cost object Figure 11.1

The basic structure

Material 1

Material 2 Production of S1 Outsourcing

Component 1

Assembly and completion

Component 2 Product Product Product Product Product Figure 11.2

Manufacturing process

113

Cost of goods sold Gross margin Administrative expenses Marketing expenses Income before taxes

Beginning finished goods Cost of goods manufactured Cost of goods available for sale Less Ending finished goods

P2 P4 P5

40,512,500 €

Direct materials used Direct labour Factory overhead Cost of goods manufactured

Direct materials available less materials EB

Outsourcing

Purchases

M1 M2 C1 C2

M1 M2 C1 C2 SST

Direct materials BB

400,000 € 812,500 € 6,400,000 € 6,400,000 € 26,500,000 € 0€

Sales

P1 P2 P3 P4 P5

Cost of goods statement

Income statement

Table 11.1 Cost and income statement before inventory

360,000 € 8,225,000 € 3,584,000 € 1,525,000 € 840,000 €

0€

14,534,000 €

0€

14,534,000 €

0€ 14,534,000 €

Cost Systems

115

Table 11.2 Bill of materials

M1 M2 C1 C2 SST

P1

P2

P3

P4

0.2

0.1

0.05

2

8

P5 0.5 3

1

3 2

1 1.00

Notes: Data are in physical units. Weight or length is used for the materials M1 and M2 and number per product for the components C1 and C2. Subcontracting is an operation specific to P4.

Table 11.3

Bill of operations P1

P2

OP1MA

2

OP2MA OP3MACH OP4MA

3

1

1.5

2.5

P3

P4

P5 1

4 1 1.5

3

2 2

Notes: Data are in units of time: human times for operations 1, 2 and 4 and machine times for operation 3.

Table 11.4 Production and sales volume Products

P1

P2

P3

P4

P5

Sales (units)

1000

2500

8000

20000

50000

Production (units) Unit price

1000 400

2600 325

8000 800

21000 320

55000 530

116

Cost Systems Design

One also knows the unit prices of the materials, the components and the subcontracted operation. Table 11.5 gives the unit and the total consumption for each item. An identical work in Table 11.2 and 11.5 is realizable concerning the bill of operations. The manual operations are evaluated at the hourly cost (wages and social contributions) of the labour concerned and the machine operations are based on the value of the equipment and its useful lifespan (Table 11.6). Tax regulation will not be taken into account for the evaluation of stocks. That will be carried out depending on each system. The manufacturing process is of JIT type and the company does not evaluate its work in process, by using the assumption of their stability. Information on customers and their orders are in Tables 11.7 to 11.9. The systems are included in Chapters 12 and 13 in the order of their appearance in both cladograms (Figure 4.2 page 38 and Figure 4.3 page 43). Finally, for each system an appreciation of the relevance is proposed referring to the three dimensions of all cost systems: resources management, dialogues with the environment and orientation of the behaviours. This will be done while considering the three attributes: causality, responsibility and traceability. This delicate exercise engages only the author. So that the test acquires a greater validity, it would be necessary to characterize more finely the environment and the pursued strategy. The table on relevance (see Chapter 12) must be read like a methodological guide and not like a categorical judgement.

M1 M2 C1 C2 SST Unit cost Volume produced

58.40 € 1000

1

0.2

P1

Table 11.5 Materials used

121.20 € 2600

2

0.1 2

P2

280.60 € 8000

0.05 8

P3

1.00 208.00 € 21000

3

P4

136.00 € 55000

1

0.5 3

P5 28360 234200 64000 60200 21000

Material used (units) 30000 235000 64000 61000

Material purchased (units)

12 € 35 € 56 € 25 € 40 €

Unit price

14466320

340,320 € 8,197,000 € 3,584,000 € 1,505,000 € 840,000 €

Direct materials used

OP1MA OP2MA OP3MACH OP4MA Unit cost Volume produced

1

2.5 42.00 € 2600

1.5 91.20 € 1000

P2

2 3

P1

Table 11.6 Cost of operations

4 1 1.5 119.50 € 8000

P3

3 33.00 € 21000

P4

2 2 127.60 € 55000

1

P5

405600

57000 37600 118000 193000

Total (volume)

15.60 € 14.50 € 45.00 € 11.00 €

Unit price

8,867,400 €

889,200 € 545,200 € 5,310,000 € 2,123,000 €

Amount

Cost Systems

119

Table 11.7 Products by order P1 order 1 order 2 order 3 order 4 order 5 order 6 order 7 order 8 order 9 order 10 order 11 order 12 order 13 order 14 order 15 order 16 order 17 order 18 order 19 order 20 order 21 order 22 order 23 order 24 order 25 Ending balance Total

P2

P3

P4

200

100

500 6000

P5

50 100 20

150 450

50

800 2000

2000 2000

4000 400

7500

600 200 400

5000

150 50 200 200 150

8000

2500

600 100 300

200 150 20 50 300 100 10

8000 200 100 200 400

1500 3000

500

7500

800

10000 2500 1000

5000

21000

55000

400 100 0

100

200 500 0

1000

2600

8000

120

Cost Systems Design Table 11.8 Products by customer P1 Customer 1 Customer 2 Customer 3 Customer 4 Customer 5 Customer 6 Customer 7 Customer 8 Customer 9 Customer 10 Customer 11 Customer 12

P2

P3

P4

P5

650

100 3300 800 2600

4500 6000

15000

9500

12000

50 630 220

650 150

200 100 450

Total

5000 8000

400

50 50

500

400 200

1000

2500

8000

7500 2500 20000

Table 11.9 Orders by customer No of customer 1 2 3

4 5

6 7 8 9 10 11

12

No of order 1 2 6 3 9 11 13 18 22 25 4 5 12 16 20 8 10 14 15 17 19 21 23 7 24

50000

12 Conventional Systems

We begin here the technical study of the various families of systems of costs identified under the label ‘conventional’ at the time of the theoretical study. Their two common characteristics are the backing by one or more already existing models – product, process or responsibility – and the unicity of the object of analysis – the product in nearly all cases. The methods are presented by examining each taxa of the cladogram, going from left to right. Some methods, which have other ambitions other than simple calculation of costs, are here restricted with this last aspect (DAV – Direct Value Added; TOC – Theory of Constraints). Only dimensions specific to each family are retained for the presentation. For example one can, by using any method, calculate the profitability of a customer or an order while reusing the cost of the products to compute the cost relating to the order or the customer. As it is only the reuse of results, and not the result of the production of specific information, the question is not tackled. Generally, the diagnosis of relevance is negative in comparison with the dialogue with the environment. That does not exclude certain exceptions. It is the case in the organizations in which the value is still related quasi-exclusively to the potential of production and thus appreciable, using volumetric bases.

12.1 Direct value added (DVA) General presentation The DVA is, above all, an approach of the operations of the economic organizations. It rests on the distinction between the company (the owners and the financing) and the company (the productive function). The productive function transforms materials, goods and services into products. 121

122

Cost Systems Design

The difference between external consumption and the sales turnover gives the DVA. This wealth created allows the remuneration of the various stakeholders involved in the production process, the conservation of the physical capital, with the balance being available for the company. In the production process, the only direct connection that it is possible to establish between the inputs and the outputs is at the level of the materials, goods and services. This connection is expressed formally in the form of a bill of materials and is easy to handle at the product unit level. So one can write: Pi – ECi = DVAi and ∑DVAi = DVA In this approach the cost of the products is reduced to external consumption traceable to the product (ECi). All the other costs have to be managed, overall, without reference to the products, but in relation to the standard remuneration of each concerned stakeholder and with their efficiency (DVA/Hour of Labour). The system of costs is made of two disjoined subsets, the cost of the products and the cost of the productive function. The only objects selected are the products. Architecture Used resources Materials and others external resources used

Direct Value Added Sale price or revenue

Conventional Systems

Criteria of classification and judgement Characteristics of the family of systems in comparison with the criteria of structuring interns Units of analysis

Pre-existing

New

Product

Organization

Homogeneity

Yes

No

Transfunctionality

Yes

No

Origin of the units of analysis

Hierarchy

Yes

No

Nature of the allocation bases

Inputs

Outputs

Cost object

Unique

Multiple

Relevance on looking at resources management Causality

Weak

Strong

Traceability

Limited

Total

Responsibility

Distinct

Strongly linked

Relevance on looking at the dialogue with the environment Coherence with the intrinsic value

Yes

Coherence with the exchange value Coherence with the utility value

No No

Yes

No

Legibility

Weak

Strong

Built-in decision help

Weak

Strong

Relevance on looking at behaviours

123

0 58.40 €

SST

1000

0

C2

Units produced

0.2 0 1

M1 M2 C1

P1

2600

0 121.20 €

2

0.1 2 0

P2

0

0 0 3

P4

1

0.5 3 0

P5

8000

21000

55000

0 1 0 280.60 € 208.00 € 136.00 €

0

0.05 8 0

P3

Recall of data relating to consumption:

Quantified illustration

21000

60200

28360 234200 64000 61000

30000 235000 64000

Consumption (unit) Purchase

40 €

25 €

12 € 35 € 56 €

Unit price

14,466,320 €

840,000 €

1,505,000 €

340,320 € 8,197,000 € 3,584,000 €

Direct materials used

Conventional Systems

125

By comparing the selling price and the material cost we obtain the direct value added: Products

P1

P2

P3

P4

P5

400.00 €

325.00 €

800.00 €

320.00 €

530.00 €

58.40 €

121.20 €

280.60 €

208.00 €

136.00 €

DVA unit

341.60 €

203.80 €

519.40 €

112.00 €

394.00 €

DVA total

341,600 € 529,880 € 4,155,200 € 2,352,000 € 21,670,000 €

Price

Total

Other direct costs Material cost

Unit sold Ending balance

1000

2500

8000

20000

50000

0

100

0

1,000

5,000

28,208,680 €

900,120 €

This VAD can be brought back to the effort of production measured by the volume of direct labour: Products

P1

P2

P3

P4

P5

Hours of direct labour (DLH)

6.5

3.5

5.5

3

3

DVA/DLH

52.55 € 58.23 € 94.44 € 37.33 € 131.33 €

More important than the operating profit, what counts for the partisans of the DVA method, is the capacity of the company to meet the normal needs of the different stakeholders. To take into account the expectations of the shareholders it is necessary to introduce the remuneration of financing needs ensured by the company. Without developing the CLADO balance sheet, one sees that the invested capital rises to €20,000,000 and that it is sufficient with a contribution of external financing to cover the totality of the financial needs (fixed assets and working capital). The expected remuneration of the shareholders is 8 per cent.

126

Cost Systems Design

We are now able to calculate the cost of operating the production structure: Wages Other expenses Cost of equipment Cost of capital (equity and debts) Cost of the production structure VAD total

10,877,908 € 2,387,500 € 8,336,000 € 2,053,092 € 23,654,500 € 29,048,680 €

There results an effectiveness ratio given by the relationship between the DVA and the cost of operation of the production structure: Cost of the production structure VAD total Economic Efficiency Ratio

23654500 € 29,048,680 € 1,23

It is also possible to present an income statement of the economic organization. Its balance will be transferred to the finance company where the taxation on the results will be treated. The inventory change of materials and components is evaluated at the cost of purchase. The end finished products are evaluated at the production cost reduced to external consumption (reduced here to materials, components and subcontracting):

0€

R&D 4,891,800 €

Source: More information is available at http://www.directva.com/

Income before taxes

0€

5,656,630 €

Marketing

Administrative expenses

29,964,070 €

P5 10,548,430 €

680,000 €

P4

Cost of goods sold

12,120 € 208,000 €

P2

900,120 €

Gross margin

Less ending finished goods

Cost of goods manufactured

Factory overhead

Other direct costs

Direct labour

Direct materials used

less materials EB

30,864,190 €

Cost of goods available for sale

Outsourcing Direct materials available

0€ 30,864,190 €

0€

P4

P5

Cost of goods manufactured

Beginning finished goods

C1

6,400,000 €

26,500,000 €

P3

C2

C1

M2

M1

SST

C2

M2

812,500 €

6,400,000 €

P2

M1

400,000 €

P1 Purchases

Direct materials BB

Sales

40,512,500 €

Cost of goods statement

Income statement

7,530,470 €

5,310,000 €

3,557,400 €

20,000 €

0€

28,000 €

19,680 €

840,000 €

1,525,000 €

3,584,000 €

8,225,000 €

360,000 €

0€

0€

30,864,190 €

14,466,320 €

67,680 €

14,534,000 €

14,534,000€

128

12.2

Cost Systems Design

Theory of Constraints (TOC)

General presentation This approach to business management is not focused on the calculation and management of the costs but much more on the cash management. Its objective is to saturate the production constraints so as to increase the flow of production and reduce stocks (WIP) while generating more cash. A joint action on the production cost supplements the acceleration of the flow of production and the reduction in the needs for finance. The authors support the idea that the only recoverable cost consists of component and material costs. Other resource consumption brings value only at the moment of the transaction with the customer and thus they should not be incorporated in the cost of the products. The margin on material costs must cover all the other costs considered as fixed in the short run. Architecture Used resources Materials and others external resources used

Contribution on materials Sale price or revenue

Conventional Systems

Criteria of classification and judgement Characteristics of the family of systems in comparison with the criteria of structuring interns Units of analysis

Pre-existing

New

Product

Organization

Homogeneity

Yes

No

Transfunctionality

Yes

No

Hierarchy

Yes

No

Nature of the allocation bases

Inputs

Outputs

Cost object

Unique

Multiple

Origin of the units of analysis

Relevance on looking at resources management Causality Traceability Responsibility

Weak

Strong

Limited

Total

Distinct

Strongly linked

Relevance on looking at the dialogue with the environment Coherence with the intrinsic value

Yes

No

Coherence with the exchange value

Yes

No

Coherence with the utility value

Yes

No

Legibility

Weak

Strong

Built-in decision help

Weak

Strong

Relevance on looking at behaviours

129

C1 C2 SST Unit cost Units produced

M1 M2

Consumption:

0.1 2

P2 0.05 8

P3

1 0 0 0 2 0 0 0 0 58.40 € 121.20 € 280.60 € 1000 2600 8000

0.2 0

P1

Quantified illustration

0.5 3

P5

3 0 0 1 1 0 208.00 € 136.00 € 21000 55000

0 0

P4

64000 60200 21000

28360 234200

Consumption (unit)

64000 61000

30000 235000

Purchase

56 € 25 € 40 €

12 € 35 €

Unit price

14,466,320 €

3,584,000 € 1,505,000 € 840,000 €

340,320 € 8,197,000 €

Direct materials used

Conventional Systems

131

Cost and margin by product: Products

P1

P2

P3

400.00 €

325.00 €

58.40 €

121.20 €

Contribution 341.60 € 203.80 € margin (unit)

Price Materials costs

P4

P5

800.00 €

320.00 €

530.00 €

280.60 €

208.00 €

136.00 €

519.40 €

112.00 €

394.00 €

Total

Contribution 341,600 € 509,500 € 4,155,200 € 2,240,000 € 19,700,000 € 26,946,300 € margin (total) Units sold Ending balance (units) Ending balance (amount)

1000

2500

8000

20000

50000

0

100

0

1,000

5,000

208,000 €

680,000 €

12,120 €

Cost of the structure and operating profit Wages Other expenses Depreciation Cost of the structure and operating profit Contribution margin Operating profit

10,877,908 € 2,840,592 € 8,336,000 € 22,054,500 € 26,946,300 € 4,891,800 €

900,120 €

Income before taxes

Marketing expenses

Administrative expenses 0€

5,656,630 €

0€

680,000 €

P5

Gross margin

208,000 €

P4 0€

12,120 €

P2

Cost of goods sold

Less ending finished goods

4,891,800 €

0€

5,656,630 €

10,548,430 €

29,964,070 €

0€

0€

0€

900,120 €

30,864,190 €

0€

0€

0€

Cost of goods available for sale

P5 30,864,190 €

6,400,000 €

26,500,000 €

P4

0€ 0€

Cost of goods manufactured

Beginning finished goods

812,500 €

6,400,000 €

P2

P3

0€

40,512,500 €

Cost of goods manufactured

Factory overhead

Other direct costs

Direct labour

Direct materials used

less materials EB

Outsourcing

Purchases

Direct materials BB

400,000 €

Sales

P1

Cost of goods statement

Income statement

M1

C2

C1

M2

M1

SST

C2

C1

M2

360,000 €

7,530,470 €

5,310,000 €

3,557,400 €

20,000 €

0€

28,000 €

19,680 €

840,000 €

1,525,000 €

3,584,000 €

8,225,000 €

0€

30,864,190 €

14,466,320 €

67,680 €

14,534,000 €

Conventional Systems

133

12.3 Variable cost General presentation The variable cost is one of the alternatives of the partial costs. The criterion of selection of the costs to be incorporated in the perimeter of calculation being the law of consumption behaviour according to the volume of the objects for which one seeks to calculate the cost. This limits the number of objects to one, generally the product. The costs entering the perimeter of calculation are materials, components, packaging, direct labour and certain costs of distribution like sales commissions. Variability is measured either compared to physical volume (Q) or compared to the sales turnover (SR). In the first case the cost is expressed in absolute value, in the second case it is expressed in the form of a percentage. Mi + DLi + Ci = VCi VC = VCi * Q VC / SR = % vc where Mi is the direct cost of the material incorporated in the product i; DLi is the cost of the direct labour necessary for the production of the product i; Ci is the other variable costs; VCi is the unit variable cost; VC is the total variable cost; SR is the sales turnover; and %vc is the percentage of variable costs. Architecture Resources used Materials and others external resources

Variable cost

DL

Marketing variable costs

134 Cost Systems Design

Criteria of classification and judgement Characteristics of the family of systems in comparison with the criteria of structuring interns Units of analysis

Pre-existing

New

Product

Organization

Homogeneity

Yes

No

Transfunctionality

Yes

No

Hierarchy

Yes

No

Origin of the units of analysis

Nature of the allocation bases

Inputs

Outputs

Cost object

Unique

Multiple

Relevance on looking at resources management Causality

Weak

Strong

Traceability

Limited

Total

Responsibility

Distinct

Strongly linked

Relevance on looking at the dialogue with the environment Coherence with the intrinsic value

Yes

No

Coherence with the exchange value

Yes

No

Coherence with the utility value

Yes

No

Legibility

Weak

Strong

Built-in decision help

Weak

Strong

Relevance on looking at behaviours

Quantified illustration The construction of the quantified illustration attempts to specify some items and to fix conventions of treatment. There are four variable costs reduced to the costs proportional to the produced and/or sold volume: consumption, direct labour of production, sales commissions and the cost of the equipment carrying out the automatic operation (OP3). All the other costs are excluded from the perimeter and are found directly at the level of the income statement.

Production (units)

Unit cost

SST

C2

C1

M2

M1

2

2

0.1

P2

8

0.05

P3

1.00

3

P4

1

3

0.5

P5

1000

2600

8000

21000

55000

58.40 € 121.20 € 280.60 € 208.00 € 136.00 €

1

0.2

P1

Consumptions:

21000

60200

64000

234200

28360

61000

64000

235000

30000

40 €

25 €

56 €

35 €

12 €

Material used Unit (units) Purchase price

14,466,320 €

840,000 €

1,505,000 €

3,584,000 €

8,197,000 €

340,320 €

Material used (amount)

2600

1000

P3

P4

P5

Sales (units) Unit price Sales Salespersons’ salaries

2500 325.00 € 812,500.00 €

32,500.00 €

16,000.00 €

P2

1000 400.00 € 400,000.00 €

P1

Total

8000

21000

55000

256,000.00 €

8000 800.00 € 6,400,000.00 €

P3

256,000.00 €

20000 320.00 € 6,400,000.00 €

P4

Amount

P5

8,867,400 €

16 € 889,200 € 15 € 545,200 € 45 € 5,310,000 € 11 € 2,123,000 €

Unit price

Total

1,060,000.00 €

1,620,500.00 €

50000 405600 530.00 € 26,500,000.00 € 40,512,500.00 €

405600

1 57000 4 37600 1 2 118000 1.5 2.5 1.5 3 2 193000 91.20 € 42.00 € 119.50 € 33.00 € 127.60 € 1

2 3

P2

Variable cost of distribution (the rate of commission is 4 per cent):

OP1MA OP2MA OP3MACH OP4MA Unit cost Production (units)

P1

Variable costs of production:

Conventional Systems

137

Total variable cost: Materials Process Distribution Total

58.40 € 91.20 € 16.00 € 165.60 €

121.20 € 42.00 € 13.00 € 176.20 €

280.60 € 119.50 € 32.00 € 432.10 €

208.00 € 33.00 € 12.80 € 253.80 €

136.00 € 127.60 € 21.20 € 284.80 €

Contribution margin: P1

P2

P3

Unit price

400.00 €

325.00 €

800.00 €

320.00 €

530.00 €

Variable cost

165.60 €

176.20 €

432.10 €

253.80 €

284.80 €

Contribution 234.40 € margin (unit)

148.80 €

367.90 €

66.20 €

245.20 €

2500

8000

20000

50000

Units sold

1000

P4

P5

Total

Contribution 234,400 € 372,000 € 2,943,200 € 1,324,000 € 12,260,000 € 17,133,600 € margin (total)

The contribution margin rate is 17,133,600 / 40,512,500 which equals 42.29 per cent. The passage to the income statement is done by taking the cost of the period which doesn’t have the character of proportionality compared to volume. These costs are also qualified as fixed ones in the majority of books: Costs

Variable costs

Total available

Other expenses Taxes and insurance Wages Depreciation Financial costs Total

0€ 0€ 5,177,900 € 5,310,000 € 0€ 10,487,900 €

2,325,000 € 62,500 € 10,877,908 € 8,336,000 € 453,092 € 22,054,500 €

From contribution margin to operating profit: Contribution margin Period costs Operating profit

17,133,600 € 11,566,600 € 5,567,000 €

Period costs 2,325,000 € 62,500 € 5,700,008 € 3,026,000 € 453,092 € 11,566,600 €

Income before taxes

R&D

0€

1,620,500 €

Marketing expenses 5,567,000 €

12,844,130 €

5,656,630 €

Gross margin

Administrative expenses

27,668,370 €

Cost of goods sold

Cost of goods manufactured

Factory overhead

Others variable cost

Direct labour

C2 Direct materials used

241000

1318000

P4

P5

M2

M1

SST

C2

C1

C1

1,575,320 €

M1 M2

16320

P2

29,243,690 €

Cost of goods available for sale

Less ending finished goods

less materials EB

29,243,690 €

P5

Cost of goods manufactured

P4

Purchases

Outsourcing

6400000

26500000

P3

Beginning finished goods

812500

6400000

P2

40512500

Direct materials BB

400000

Sales

P1

Cost of goods statement

Income statement

360000

5,909,970 €

7,433,000 €

1,434,400 €

0€

20,000 €

28,000 €

19,680 €

840000

1525000

3584000

8225000

0

29,243,690 €

14,466,320 €

67,680 €

14534000

Conventional Systems

139

The main criterion in this type of system is the contribution margin rate, at the product level as well as at the company level. To finish one can evoke the concept of break-even point which is often attached to the study of the variable cost. The break-even point is the measurement of the level of activity necessary to cover the costs of a period. In our example, the break-even point would be: €11, 566,600 / 0.4229 = €27,350,674. This result is obtained only at the price of many assumptions and must be handled with precaution.

140

Cost Systems Design

12.4 Direct cost General presentation In the systems of direct costs, the analysis of resource consumption takes place according to two criteria. The first one is the cost calculation of the object; the second is the causality analysis. Only included in the perimeter are the resources which maintain a direct causal link with the objects. If the object is single and the law of causality proportional, a variable cost system is found. In the majority of the cases, the objects and the laws of causality are multiple. In that case the units of analysis used to collect the resources of the perimeter must be treated on a hierarchical basis. Hierarchization is dictated by the hierarchization of the objects themselves. Apart from the law of proportionality, specificity is the causal relation most used. The generic form of a direct cost is: Vci + Sci = DCi where Vci is the unit variable cost; Sci is the specific cost related to the object; and DCi is the total direct cost of the objects. It will be noted that, because of the existence of several laws of causality for the same object, only the total cost is meaningful for management. It is possible to calculate a unit direct cost, which can be extremely useful for the dialogue with the environment (price, estimate), but which is correct only for the specific volume which was used for its calculation. The margin which is calculated compared to a direct cost is known as contributive because it contributes to cover the costs not included in the perimeter, the indirect costs. Process cost: The process cost is modified compared to the usual use of the bill of operations. It proves that the robotized operation OP3MACH are individualizables but carried out on specific material. Moreover, it is possible to attach a certain number of costs directly to this equipment, maintenance, taxes, technical staff, etc. It has been decided to treat these costs as direct to the two products P3 and P5. There is also a sales commission of 4 per cent.

Conventional Systems

141

Architecture Resources used Direct materials Direct labour

Others direct resources

Variable costs

Direct costs

Direct cost of subset j

Contribution margin i

Direct cost of object i Revenue of object i

Criteria of classification and judgement Characteristics of the family of systems in comparison with the criteria of structuring interns Units of analysis

Pre-existing

New

Product

Organization

Homogeneity

Yes

No

Transfunctionality

Yes

No

Origin of the units of analysis

Hierarchy

Yes

No

Nature of the allocation bases

Inputs

Outputs

Cost object

Unique

Multiple

Relevance on looking at resources management Causality

Weak

Strong

Traceability

Limited

Total

Responsibility

Distinct

Strongly linked

Relevance on looking at the dialogue with the environment Coherence with the intrinsic value

Yes

No

Coherence with the exchange value

Yes

No

Coherence with the utility value

Yes

No

Legibility

Weak

Strong

Built-in decision help

Weak

Strong

Relevance on looking at behaviours

142

Production (units)

SST Unit cost

M1 M2 C1 C2

1

0,2

P1

2

0,1 2

P2 0,05 8

P3

1000

2600

8000

58,40 € 121,20 € 280,60 €

Consumption:

Quantified illustration

1

0,5 3

P5

21000

55000

1 208,00 € 136,00 €

3

P4

21000

28360 234200 64000 60200

Materials used (unit) 30000 235000 64000 61000

Purchase

40 €

12 € 35 € 56 € 25 €

Unit price

14,466,320 €

840000 €

340320 € 8197000 € 3584000 € 1505000 €

Materials used (amount)

143

530 €

50000

P5

256,000 €

8336000 € 453092 €

Depreciation

Financial costs

22,054,500 €

10877908 €

Wages and salaries

Total

62500 €

2325000 €

Total

Insurance and taxes

Other expenses

Items

5,177,900 €

0€

5,177,900 €

DL

2,340,600 €

0€

2100000 €

0€

5600 €

235000 €

Direct P3

4,984,750 €

0€

3210000 €

0€

8750 €

1766000 €

9,551,250 €

453,092 €

3,026,000 €

5,700,008 €

48,150 €

324,000 €

0€

0€

0€

405600

Total

Balance

1,060,000 €

Direct P5

256,000 €

The results are the following reprocessing table:

32,500 €

16,000 €

320 €

20000

P4

Salespersons’ salaries

800 €

8000

P3

400,000 € 812,500 € 6,400,000 € 6,400,000 € 26,500,000 €

325 €

2500

P2

Sales

1000

400 €

Unit price

P1

Sales (units)

Items

Calculation of the commission:

0€ 1,620,500 €

40,512,500 €

Total

144

Indirect costs Operating profit

Total direct cost Sales Contribution margin

91,200 €

165,600 € 400,000 € 234,400 € 234 €

149,600 € 149.60 € 0€ 149,600 € 16,000 €

58,400 €

Direct labour Other direct costs Production cost Unit cost less ending balance Cost of goods sold Marketing variable cost

P1

Materials

Total cost of the products

440,500 € 812,500 € 372,000 € 149 €

424,320 € 163.20 € 16,320 € 408,000 € 32,500 €

109,200 €

315,120 €

P2

5,437,400 € 6,400,000 € 962,600 € 120 €

596,000 € 2,340,600 € 5,181,400 € 647.68 € 0€ 5,181,400 € 256,000 €

2,244,800 €

P3

5,076,000 € 6,400,000 € 1,324,000 € 66 €

5,061,000 € 241.00 € 241,000 € 4,820,000 € 256,000 €

693,000 €

4,368,000 €

P4

14,271,591 € 26,500,000 € 12,228,409 € 245 €

2,068,000 € 4,984,750 € 14,532,750 € 264.23 € 1,321,159 € 13,211,591 € 1,060,000 €

7,480,000 €

P5

9,551,250 € 5,570,159 €

25,391,091 € 40,512,500 € 15,121,409 €

3,557,400 € 7,325,350 € 25,349,070 € 1,466 € 1,578,479 € 23,770,591 € 1,620,500 €

14,466,320 €

Total

To obtain the direct cost, the problem should be dealt with at the global level and not at the unit level insofar as certain costs are direct to the unit of product and others direct to the volume produced. The results are shown in the following table:

145

1,620,500 €

Income before taxes

R&D

Marketing expenses

1,321,159 €

P5

4,201,242 €

241,000 €

P4

Administrative expenses

Gross margin

Cost of goods sold

16,320 €

P2

5,570,159 €

Other direct costs

11,391,901 €

Cost of goods manufactured

Factory overhead

Direct labour

Direct materials used

less materials EB

Outsourcing

29,120,599 €

1,578,479 €

30,699,078 €

Cost of goods available for sale

Less ending finished goods

30,699,078 €

0€

P4

P5

Cost of goods manufactured

Beginning finished goods

6,400,000 €

26,500,000 €

P3

C2

5,350,008 €

7,325,350 €

3,557,400 €

20,000 €

0€

28,000 €

M2 C1

19,680 €

840000

1525000

3584000

8225000

360000

0€

M1

SST

C2

C1

812,500 €

6,400,000 €

P2

M1 M2

400,000 €

P1 Purchases

Direct materials BB

Sales

40,512,500 €

Cost of goods statement

Income statement

The operating profit is computed in the income statement:

0€

30,699,078 €

14,466,320 €

67,680 €

14,534,000 €

146

Cost Systems Design

12.5

Basic full cost

General presentation This unlabelled name denotes all the variants of full cost which, although taking into account the costs of the various functions of the organization, does not carry out any analysis apart from the costs directly related to the products. The total of the indirect costs is taken into account through a single coefficient which is used to multiply either the totality of the already calculated costs or a fraction of these. Among the most current practices, are the two following systems: Mpi + DLi (1 + a) = Fci or (Mpi + DLi) (1 + b) = Fci where Fci is the full cost of product; Mpi is the direct cost of the materials incorporated in the product i; DLi is the cost of the direct labour necessary to the production of the product i; a is the relationship between total DL and the indirect cost; and b is the relationship between the total (MP + DL) and the indirect cost. Architecture Resources used Materials and other external resources

Overhead (OVH) DL

α = DL /OVH

Full cost

147

Conventional Systems

Criteria of classification and judgement Characteristics of the family of systems in comparison with the criteria of structuring interns Units of analysis

Pre-existing

New

Product

Organization

Homogeneity

Yes

No

Transfunctionality

Yes

No

Origin of the units of analysis

Hierarchy

Yes

No

Nature of the allocation bases

Inputs

Outputs

Cost object

Unique

Multiple

Relevance on looking at resources management Causality

Weak

Strong

Traceability

Limited

Total

Responsibility

Distinct

Strongly linked

?

Relevance on looking at the dialogue with the environment Coherence with the intrinsic value

Yes

No

Coherence with the exchange value

Yes

No

Coherence with the utility value

Yes

No

Legibility

Weak

Strong

Built-in decision help

Weak

Strong

Relevance on looking at behaviours

Quantified illustration In its simplified version, the system of full cost rests on only one allocation base. Its choice is of a conventional nature. As our example is located in the industrial world, one will choose the hours of direct labour.

1

C1 C2 SST Unit cost Production (units)

2

0.1 2

P2 0.05 8

P3

1000

2600

8000

58.40 € 121.20 € 280.60 €

0.2

P1

M1 M2

Consumption:

1

0.5 3

P5

21000

55000

1.00 208.00 € 136.00 €

3

P4

64000 60200 21000

28360 234200

Materials used (unit)

64000 61000

30000 235000

Purchase

56 € 25 € 40 €

12 € 35 €

Unit price

14,466,320 €

3,584,000 € 1,505,000 € 840,000 €

340,320 € 8,197,000 €

Materials used (amount)

Conventional Systems

149

Variable costs of production: P1 OP1MA

2

OP2MA

3

OP4MA Unit cost Production (units)

P2

P3

1

4

P4

Unit price

P5

Total

1

57000

16 €

889,200 €

37600

15 €

545,200 €

193000

11 €

2,123,000 €

1.5

2.5

1.5

3

2

91.20 €

42.00 €

74.50 €

33.00 €

37.60 €

1000

2600

8000

21000

55000

287600

Amount

3,557,400 €

Indirect costs:

Other expenses Insurance and taxes Wages and salaries Depreciation Interest expense Total

Total

Allocated

Indirect

2,325,000 € 62,500 € 10,877,908 € 8,336,000 € 453,092 €

0€ 0€ 3,557,400 € 0€ 0€ 3,557,400 €

2,325,000 € 62,500 € 7,320,508 € 8,336,000 € 453,092 € 18,497,100 €

Computing the volume of the allocation base: Products OP1MA OP2MA OP4MA Total Production (units) Allocation basis (number)

P1

P2

P3

2 3 1.5 6.5 1000 6500

0 1 2.5 3.5 2600 9100

0 4 1.5 5.5 8000 44000

P4

Total

0 1 0 0 3 2 3 3 21000 55000 63000 165000 287600

Determination of the unit cost of the allocation base: Indirect cost Allocation base (number) Unit cost

P5

18,497,100 € 287600 64 €

150 Cost Systems Design

Computing the full absorption cost:

Material cost Variable cost Indirect cost Full absorption cost

P1

P2

P3

P4

P5

58.40 € 91.20 € 418.05 € 567.65 €

121.20 € 42.00 € 225.10 € 388.30 €

280.60 € 74.50 € 354.73 € 708.83 €

208.00 € 33.00 € 193.95 € 433.95 €

136.00 € 37.60 € 193.95 € 366.55 €

Computing the operating profit per product: Products Full absorption cost

P1

P2

P3

P4

P5

Total

567.65 €

388.30 €

708.83 €

433.95 €

366.55 €

34,215,313 €

320.00 €

530.00 €

Unit price

400.00 €

325.00 €

800.00 €

Operating profit

⫺167.65 €

⫺63.30 €

91.17 €

Sales (units)

1000

2500

8000

⫺113.95 € 163.45 € 20000

End balance evaluation: M1 M2 C1 C2

P1 P2 P3 P4 P5

⫺19,680 € ⫺28,000 € 0€ ⫺20,000 €

0.00 € 38,830.38 € 0.00 € 433,946.11 € 1,832,730.54 €

50000

6,297,187 €

0

0

Income before taxes

0€

3,159,550 €

Marketing expenses

R&D

5,138,550 €

Administrative expenses

6,297,187 €

14595287.01

1,832,731 €

P5

0

Gross margin

433,946 €

P4

0

2,305,507 €

25917212.99

38,830 €

P2

Cost of goods sold

Less ending finished goods

28222720

P5

Cost of goods available for sale

P4

28222720

6400000

26500000

P3

Cost of goods manufactured

Beginning finished goods

812500

6400000

P2

40512500

Cost of goods manufactured

Factory overhead

Other direct costs

Direct labour

Direct materials used

less materials EB

Outsourcing

Purchases

Direct materials BB

400000

Sales

P1

Cost of goods statement

Income statement

C2

C1

M2

M1

SST

C2

10,199,000 €

0€

3,557,400 €

20,000 €

0€

28,000 €

19,680 €

840000

1525000

3584000

M2 C1

360000 8225000

M1

0

28,222,720 €

14,466,320 €

67,680 €

14534000

152 Cost Systems Design

12.6 All direct General presentation In the mid-1990s, this term covered a certain number of reorganizations of cost systems. One can advance two ideas to explain this passing fad. The first is the one which fuelled the debate on cost systems from the end of the 1980s. Cost systems had lost their relevance and were to be replaced by simpler, more readable, systems. The second one is a placing in relation to the idea of the necessary responsibilization of the actors of the company so as to be able to act on the level of resource consumption. The ‘All direct’ promoters convinced a certain number of companies that returning to a simple system, with a structure which makes it look like ABC, which was starting to spread at the time, that they had the solution to their problems. In this system, which is not arranged hierarchically, all the resources are allocated to units of analysis covering the whole of the organization and generally merging with the perimeters of responsibility. Each unit of analysis is equipped with allocation bases which authorizes the ‘direct’ charge of all the units on the products. Fci = Mpi + Dli + ∑j = 1...N (NbCuoij * Cuoj) where Fci is the full cost of the product i; Mpi is the materials and components incorporated in the product i; DLi is the direct labour consumed by the product i; Cuoj is the unit cost of the allocation base of the centre J; and NbCuoij is the consumption of the allocation base of the centre J by the product I. Architecture Resources used Materials and other external resources

DL

Unit of analysis 1

Unit of analysis 2

Unit of analysis 3

Unit of analysis 4

Unit of analysis 5

Base1

Base2

Base3

Base4

Base5

Products

Conventional Systems

153

Criteria of classification and judgement Characteristics of the family of systems in comparison with the criteria of structuring interns Units of analysis Origin of the units of analysis

Pre-existing

New

Product

Organization

Homogeneity

Yes

No

Transfunctionality

Yes

No

Hierarchy

Yes

No

Nature of the allocation bases

Inputs

Outputs

Cost object

Unique

Multiple

Relevance on looking at resources management Causality

Weak

Strong

Traceability

Limited

Total

Responsibility

Distinct

Strongly linked

Relevance on looking at the dialogue with the environment Coherence with the intrinsic value

Yes

No

Coherence with the exchange value

Yes

No

Coherence with the utility value

Yes

No

Legibility

Weak

Strong

Built-in decision help

Weak

Strong

Relevance on looking at behaviours

Quantified illustration In the system ‘All direct’ the consumption and the variable costs are allocated directly to the products. The costs described as indirect are distributed in a certain number of centres, each equipped with an allocation base allowing the direct connection of these ‘indirect’ costs with the products. The required effect is more on the level of responsibility than on the level for homogeneity. One will distinguish in the example three cost centres: manufacturing, marketing and administration. The difference with the simplified full cost is due to the presence of three units of analysis instead of only one. The sequence of calculations is identical.

2

0.1 2

P2 0.05 8

P3

1000

2600

8000

1.5

OP4MA

2.5

1

P2

P3

4 1

1

0.5 3

P5

3

P4

21000

2

2

1

P5

55000

1000

2600

8000

21000

55000

405600

193000

37600 118000

57000

Total

21000

28360 234200 64000 60200

Materials used (unit)

91.20 € 42.00 € 119.50 € 33.00 € 127.60 €

3

OP2MA OP3MACH

Unit cost Production (units)

2

OP1MA

P1

3

P4

1.00 208.00 € 136.00 €

1.5

58.40 € 121.20 € 280.60 €

1

0.2

P1

Variable costs of production:

SST Unit cost Production (units)

M1 M2 C1 C2

Consumption:

11 €

15 € 45 €

16 €

Unit price

30000 235000 64000 61000

Purchase

Materials used (amount)

14,466,320 €

840,000 €

8,867,400 €

2,123,000 €

545,200 € 5,310,000 €

889,200 €

Amount

40 €

12 € 340,320 € 35 € 8,197,000 € 56 € 3,584,000 € 25 € 1,505,000 €

Unit price

Conventional Systems

155

Allocating cost to the cost centres: Total Other expenses Insurance and taxes Wages and salaries Depreciation Interest expense Total

Allocated

Production

Distribution Administration

2,325,000 €

0€

875,600 €

453,800 €

995,600 €

62,500 €

0€

12,400 €

18,750 €

31,350 €

10,877,908 €

3,557,400 €

2,134,000 €

2,345,000 €

2,841,508 €

8,336,000 €

5,310,000 €

1,867,000 €

342,000 €

817,000 €

453,092 €

0€

0€

0€

453,092 €

22,054,500 €

8,867,400 €

4,889,000 €

3,159,550 €

5,138,550 €

Computing the unit cost of the allocation bases: Unit of analysis

Manufacturing

Marketing

Administration

Allocation bases Volume Cost allocated Unit cost

DL 287600 4,889,000 € 16.999 €

Sales 40,512,500 € 3,159,550 € 0.078 €

Already allocated costs 31,382,270 € 5,138,550 € 0.164 €

The assignment of the administration cost is done according to the resources consumed at the stage concerned with the evaluation. The products sold support more administrative expenses than the products in stock. Computing the full absorption cost of product sold: Products Material cost Process cost Production cost Distribution cost Administration cost Full absorption cost

P1

P2

58.40 € 121.20 € 91.20 € 42.00 € 110 € 59 € 31.20 € 25.35 € 47.70 € 40.61 € 338.99 € 288.66 €

P3

P4

P5

280.60 € 208.00 € 136.00 € 119.50 € 33.00 € 127.60 € 93 € 51 € 51 € 62.39 € 24.96 € 41.33 € 91.04 € 51.90 € 58.28 € 647.03 € 368.85 € 414.21 €

156

Cost Systems Design

Computing the operational profit: Products

P1

P2

P3

P4

Full absorption cost

338.99 €

288.66 €

647.03 €

Unit price

P5

368.85 €

414.21 €

400.00 €

325.00 €

800.00 €

320.00 €

530.00 €

Operating profit (unit)

61.01 €

36.34 €

152.97 €

⫺48.85 €

115.79 €

Operating profit (total)

61,013 €

90,852 €

1,223,796 €

⫺977,057 €

5,789,354 €

Total

6,187,958 €

Ending balance evaluation: ⫺19,680 € ⫺28,000 € 0€ ⫺20,000 €

M1 M2 C1 C2

Products

P1

P2

P3

P4

P5

Material cost

58,40 €

121,20 €

280,60 €

208,00 €

136,00 €

Process cost

91,20 €

42,00 €

119,50 €

33,00 €

127,60 €

Production cost

110,50 €

59,50 €

93,50 €

51,00 €

51,00 €

Administration cost

42,59 €

36,46 €

80,82 €

47,81 €

51,51 €

Full absorption cost

0€

25916 €

0€

339810 €

1830552 €

P4

P5

Income before taxes

0€

3,159,550 €

R&D

5,138,550 €

Administrative expenses

Marketing expenses 6,187,958 €

14,486,058 €

P5 26,026,442 €

1,830,552 €

P4

Gross margin

25,916 € 339,810 €

P2

2,196,278 €

Cost of goods sold

Less ending finished goods

28,222,720 €

Cost of goods available for sale

0€ 28,222,720 €

0€

6,400,000 €

26,500,000 €

P3

Cost of goods manufactured

Beginning finished goods

812,500 €

6,400,000 €

P2

40,512,500 €

Cost of goods manufactured

Factory overhead

Other direct costs

Direct labour

Direct materials used

less materials EB

Direct materials available

Outsourcing

Purchases

Direct materials BB

400,000 €

Sales

P1

Cost of goods statement

Income statement

C2

C1

M2

M1

SST

C2

C1

M2

M1

4,889,000 €

5,310,000 €

3,557,400 €

20,000 €

0€

28,000 €

19,680 €

840,000 €

1,525,000 €

3,584,000 €

8,225,000 €

360,000 €

0€

0€

28,222,720 €

14,466,320 €

67,680 €

14,534,000 €

14,534,000 €

158 Cost Systems Design

12.7

Hierarchized responsibility centres

General presentation This method formalized, for France, in the appendix of the 1982 accounting charter is a compromise between the ideal model of the homogeneous sections and the actual practice of enterprises. The method borrows again the general architecture of the method resulting from the work of the 1930s, distinguishing the principal centres from the secondary centres, leading to the development of the cost of a single object: the product or service. The unit of analysis coincides with a perimeter of responsibility. Allocation of service centres is done by scales or allocation bases (principal centres). The method distinguishes the direct costs, allocated directly to the products, from the indirect costs, which are treated in an allocation table. It is the complexity of this method which differentiates the models belonging to this family. The number of levels of allocation, as well as the methods used to distribute the cost of the service centres, make the systems more or less complex. Reallocation can be direct, step or reciprocal. In the first case the service centres are allocated only to principal centres. In the second case the service centres are allocated at the same time to service centres and principal centres. In the last case, the service centres exchange services reciprocally, the balance (total equal to amount of the direct cost of the services centres) continuing to flow to the principal centres. The allocation bases are in almost all the cases issued from the zone of the direct costs. Euros of purchases and hours of direct labour, the man days and kilogrammes of material are the most frequently used units. Architecture Resources used Materials and other external resources

Indirect costs DL

SDa

SDb

SDc

PDe

PDf

PDg

PDh

PDe

PDf

PDg

PDh

Allocation Allocation Allocation Allocation base base base base

Product full costs

Conventional Systems

159

Criteria of classification and judgement Characteristics of the family of systems in comparison with the criteria of structuring interns Units of analysis

Pre-existing

New

Product

Organization

Homogeneity

Yes

No

Transfunctionality

Yes

No

Origin of the units of analysis

Yes

No

Nature of the allocation bases

Hierarchy

Inputs

Outputs

Cost object

Unique

Multiple

Relevance on looking at resources management Causality Traceability Responsibility

Weak

Strong

Limited

Total

Distinct

Strongly linked

Relevance on looking at the dialogue with the environment Coherence with the intrinsic value

Yes

No

Coherence with the exchange value

Yes

No

Coherence with the utility value

Yes

No

Weak

Strong

Strong at the first level

Strong

Weak after service departments allocation

Relevance on looking at behaviours Legibility

Built-in decision help

Weak

Production (units)

M1 M2 C1 C2 SST

2

0.1 2

P2 0.05 8

P3

1000

2600

8000

58.40 € 121.20 € 280.60 €

1

0.2

P1

Quantified illustration

0.5 3

P5

21000

55000

1 1.00 208.00 € 136.00 €

3

P4

87600

28360 234200 64000 60200 21000

Materials used (units) 30000 235000 64000 61000

Purchase

Materials used (amount)

14,466,320 €

12 € 340,320 € 35 € 8,197,000 € 56 € 3,584,000 € 25 € 1,505,000 € 40 € 840,000 €

Unit price

Conventional Systems

P1 OP1MA

2

OP2MA

3

P2

P3

1

4

OP3MACH

1

OP4MA

1,5

Unit cost

Unit price Sales

2,5

1,5

3

Unit price

Amount

57000

16 €

889200 €

37600

15 €

545200 €

2

118000

45 €

5310000 €

2

193000

11 €

2123000 €

P5

Total

1

91,20 € 42,00 € 119,50 € 33,00 € 127,60 €

Production (units)

Sales (units)

P4

161

1000

2600

8000

21000

55000

405600

8,867,400 €

P1

P2

P3

P4

P5

1000

2500

8000

20000

50000

400 € 400000 €

325 €

800 €

812500 € 6400000 €

320 €

Total

530 €

6400000 € 26500000 €

40512500 €

The indirect costs are allocated to four centres of responsibility of which three are principal and one secondary. The percentage of distribution of the service centre in the principal centres is given in the allocation table. Each principal centre is equipped with an allocation base. The purchasing centre is allocated by means of the € consumed and not bought. This allows the avoidance of having indirect purchasing cost in ending balance of materials.

8,336,000 €

Depreciation

Total

22,054,500 €

453,092 €

10,877,908 €

Wages and salaries

Financial costs

62,500 €

2,325,000 €

Total

Insurance and taxes

Other expenses

Items

Computing indirect costs:

9,500 €

875,600 €

Sales

10,300 €

326,750 €

Finishing operations

0€

0€

342,000 €

8,867,400 € 4,386,100 € 1,724,050 €

0€

5,310,000 € 1,867,000 €

3,557,400 € 1,634,000 € 1,045,000 €

0€

0€

Allocated

1,420,320 €

0€

231,000 €

965,000 €

8,720 €

215,600 €

Purchasing

5,656,630 €

453,092 €

586,000 €

3,676,508 €

33,980 €

907,050 €

Administration

22,054,500 €

453,092 €

8,336,000 €

10,877,908 €

62,500 €

2,325,000 €

Total

Conventional Systems

163

Allocation table:

Production

Finishing operations

Purchasing

Administration

Total

875,600 €

326,750 €

215,600 €

907,050 €

2,325,000 €

Insurance and taxes

9,500 €

10,300 €

8,720 €

33,980 €

62,500 €

Wages and salaries

1,634,000 €

1,045,000 €

965,000 €

3,676,508 €

7,320,508 €

Depreciation

Costs Other expenses

1,867,000 €

342,000 €

231,000 €

586,000 €

3,026,000 €

Financial costs

0€

0€

0€

453,092 €

453,092 €

First total

4,386,100 €

1,724,050 €

1,420,320 €

5,656,630 €

40.00%

40.00%

20.00%

⫺100.00%

2,262,652 €

2,262,652 €

1,131,326 €

⫺5,656,630 €

6,648,752 €

3,986,702 €

2,551,646 €

0€

Allocation basis

DL hours

No. of products

€ consumed

Number of allocation basis

287,600

87,600

14,466,320

Unit cost

23.12 €

45.51 €

0.18 €

Reallocation

Total after reallocation

13,187,100 €

0€ 13,187,100 €

Computing full cost: The presentation selected here is not specific to the method and it could have been used for all the other methods.

0.18

Purchasing

2.40

16.50

0.00

43.50

31.20

0.00

0.00

56.00

0.00

16500

0

43500

31200

0

0

56000

0

2400

45.51

44.32

Operating profit

44321

400.00 400000

Unit price

0.00

355.68 355679

0

1

3.5

2.5

1

2

2

0.1

45.51

80.91

27.50

0.00

14.50

0.00

0.00

50.00

0.00

70.00

1.20

14.00

34997

325.00 845000

311.00 777503

⫺100 ⫺31100

311.00 808604

55583

118327

210374

71500

0

37700

0

0

130000

0

182000

3120

Mt (€) Total (€)

P2

10301 121.2 21.38

45510

355.68 355679

58.4 10.30

1

6.5 150.27 150267

1.5

0

3

2

1

0.2

Cost of goods sold

Ending balance

Absorption cost

45.51

11

OP4MA

Finishing operations

45

OP3MACH

23.12

14.5

OP2MA

Production

40

15.6

OP1MA

C2

SST

56

25

C1

12

35

M2

Price (€) Qt Mt (€) Total (€) Qt

M1

Items

P1

4800

0

0

0

0

16.50 132000

45.00 360000

58.00 464000

0.00

0.00

0.00

0.00

280.00 2240000

0.60

Mt (€) Total (€)

0

177.75 1421974

800.00 6400000

622.25 4978026

0.00

622.25 4978026

395950

45.51 364082

280.6 49.49

1

5.5 127.15 1017194

1.5

1

4

8

0.05

Qt

P3

0

0

Total (€)

770451

955716

1456437

693000

0

0

0

840000

0

272.55 ⫺1451052

320.00 6720000

392.55

7851052

392.55 8243604

36.69

45.51

69.35

33.00

0.00

0.00

0.00

40.00

0.00

168.00 3528000

0.00

0.00

Mt (€)

⫺1,000 ⫺392553

208

1

3

3

1.00 €

3

Qt

P4

340320 3584000

545200

889200

840000

1319362 2551646

2503066 3986702

3814479 6648752

1210000 2123000

4950000 5310000

0

858000

0

1375000 1505000

0

5775000 8197000

330000

Total (€) Total (€)

20122643 34084903

127.55

6377357 6427597

530.00 29150000 43515000

402.45

0

402.45 22134907 36520820

23 99

45.51

69.35

22.00

90.00

0.00

15.60

0.00

25.00

0.00

105.00

6.00

Mt (€)

⫺5000 ⫺2012264

136

1

3

2

2

1

1

3

0.5

Qt

P5

392,553 €

2,012,264 €

P4

P5

Income before taxes

0€ 0€

R&D

5,656,630 €

31,100 €

P2

Marketing expenses

Administrative expenses

Gross margin

Cost of goods sold

Less ending finished goods

770,967 €

6,427,597 €

34,084,903 €

2,435,917 €

36,520,820 €

Cost of goods available for sale

0 36,520,820 €

0

Cost of goods manufactured

Factory overhead

Other direct costs

Direct labour

Direct materials used

less materials EB

Outsourcing

P4

P5

Cost of goods manufactured

Beginning finished goods

C1

6400000

26500000

P3

C2

15,310,100 €

5,310,000 €

1,434,400 €

0€

20,000 €

0€

28,000 €

M2 C1

19,680 €

0€

840,000 €

1,525,000 €

3,584,000 €

8,225,000 €

360,000 €

0€

M1

SST

C2

812500

6400000

P2

M1 M2

400000

P1 Purchases

Direct materials BB

Sales

40512500

Cost of goods statement

Income statement

0€

36,520,820 €

14,466,320 €

67,680 €

14,534,000 €

166

Cost Systems Design

12.8 Value added units method (VAU) General presentation The VAU method belongs to the large family of methods based on the concept of equivalent units. This practice is largely used in industry. It makes it possible to avoid having to make a detailed follow-up of all the models belonging to the same family and characterized only by minor modifications. The method VAU is the heir of the method GP (George Perrin). It pushes the logic of equivalence to its extreme limit. It makes all the companies into companies producing a single product: value added units (VAU). All the products or services are translated into equivalent VAU. The method of calculation rests on a strong assumption: the existence of a constant relationship between the costs of the working stations, set up in VAU stations. The implementation of the method starts with a detailed analysis of the operations of the company. This company is subdivided into as many VAU stations as there are homogeneous working stations. That is to say that in its purest form, a physical working station will be able to give rise to two or three VAU stations. For example, the extrusion machine in production gives rise to two other VAU stations, the extrusion machine in adjustment and the extrusion machine in maintenance. All the consumed resources are allocated ‘directly’ to these VAU stations. Then an article, real or imaginary, is evaluated on the basis of its nomenclature and the cost of the VAU stations which it consumes. Finally the cost of each VAU station is divided by the cost of this article, transforming the costs into VAU indices. This work being finished, from now on everything is evaluated by the VAU index. To return to the monetary cost it is necessary to determine the value of the VAU. This is carried out by bringing together the amount of resources consumed (except materials) and the total produced by the VAU index. This value being known, one obtains the cost of each product by multiplying its contents in the VAU index by this money value. The bringing together of the selling price makes it possible, in fine, to obtain a margin per product or per order, as the authors of the VAU method recommended in their last publications.

Conventional Systems

Architecture Year 0: Resources used Direct costs Others resources allocated

UVA work station

Non allocated resources

Nomenclature Products Order Margin Operational profit

Revenue

Year 1:

Resources used Unit cost of UVA Production volume Sales volume

Nomenclature Nomenclature

UVA produced UVA Index

UVA produced

Total UVA

Product cost

Cost of sales Income

Contribution margin

167

168 Cost Systems Design

Criteria of classification and judgement Characteristics of the family of systems in comparison with the criteria of structuring interns Units of analysis

Pre-existing

New

Product

Organization

Homogeneity

Yes

No

Transfunctionality

Yes

No

Origin of the units of analysis

Hierarchy

Yes

No

Nature of the allocation bases

Inputs

Outputs

Cost object

Unique

Multiple

Relevance on looking at resources management Causality

Weak

Strong

Traceability

Limited

Total

Responsibility

Distinct

Strongly linked

Relevance on looking at the dialogue with the environment Coherence with the intrinsic value

Yes

No

Coherence with the exchange value

Yes

No

Coherence with the utility value

Yes

No

Relevance on looking at behaviours Legibility

Weak

Strong

Built-in decision help

Weak

Strong

?

Production (units)

SST

C2

C1

M2

M1

1

0.2

P1

2

2

0.1

P2

8

0.05

P3

1000

2600

8000

58.40 € 121.20 € 280.60 €

Nomenclature:

1

3

0.5

P5

21000

55000

208.00 € 136.00 €

1.00

3

P4

87600

21000

60200

64000

234200

28360

Materials used (units)

13694000

61000

64000

235000

30000

Purchase

8,197,000 €

340,320 €

Materials used (amount)

40 €

14,466,320 €

840,000 €

25 € 1,505,000 €

56 € 3,584,000 €

35 €

12 €

Unit price

The installation of the VAU method requires a detailed analysis of all the working stations as well as the collection of information on the couple (orders, products). The object of cost is indeed not the product but the order.

Quantified illustration

170 Cost Systems Design

The stations used by the bill of operations are retained, like the VAU stations, but their rate changes. Moreover, the station OP3MACH is broken up into two VAU stations, one corresponding to the adjustment for each batch of products and the other with its use in production. Apart from these five stations, one isolates seven other stations. All 12 VAU stations receive almost the entire total cost of the period. The fraction of the costs that cannot be allocated ‘directly’ on VAU stations is regarded as outside the perimeter of the cost system.

VAU operation

Cost

Unit of usage

Volume

Unit cost 40.51 €

OP1MA

2309200 € DL hours

57000

OP2MA

1699500 € DL hours

37600

45.20 €

111

4,072.07 €

OP3MACHR

452000 € No. of batches

OP3MACHU

7051600 € Machine hours

118000

59.76 €

OP4MA

5153800 € DL hours

193000

26.70 €

Materials reception

1245300 € 1000 € materials used

13626

91.39 €

840,000 €

0.10 €

Outsourcing management

84000 € € used

Sending

112874 € No. of orders

25

4,514.96 €

Invoicing

150750 € No. of parcels

54

2,791.67 €

Materials preparation

988600 € 1000 € materials used

13626

72.55 €

575800 € No. of products

87600

6.57 €

Products control Management Total costs

2231076 € out of the perimeter 22054500 €

Computing the VAU Base:

VAU operation

Cost bases

Volume

VAU index

Operation index

OP1MA

DL hours

1

40.51 €

40.51 €

OP2MA

DL hours

0

45.20 €

0.00 €

OP3MACHR

No. of batches

0.001

4,072.07 €

4.07 € Continued

Conventional Systems

171

Continued

VAU operation

Cost bases

OP3MACHU

Machine hours

OP4MA Materials reception

Volume

VAU index

Operation index

0.02

59.76 €

1.20 €

DL hours

1.5

26.70 €

40.06 €

1000 € materials used

0.065

91.39 €

5.94 €

Outsourcing management

€ used

0

0.10 €

0.00 €

Sending

No. of orders

0.01

4,514.96 €

45.15 €

Invoicing

No. of parcels

0.01

2,791.67 €

27.92 €

Materials preparation

1000 € materials used

0.065

72.55 €

4.72 €

Products control

No. of products

1

6.57 €

6.57 €

VAU base

176.13 €

Computing the VAU index: VAU operation

Unit of usage

OP1MA

DL hours

OP2MA

DL hours

OP3MACHR

No. of batches

Unit cost 40.51 €

VAU index 0.230

45.20 €

0.257

4,072.07 €

23.120

OP3MACHU

Machine hours

59.76 €

0.339

OP4MA

DL hours

26.70 €

0.152

Materials reception

1000 € materials used

91.39 €

0.519

Outsourcing management

€ used

0.10 €

0.001

Sending

No. of orders

4,514.96 €

25.634

Invoicing

No. of parcels

2,791.67 €

15.850

Materials preparation

1000 € materials used

72.55 €

0.412

Products control

No. of products

6.57 €

0.037

The index of a station is equal to the rate of the station divided by the VAU base.

172

Cost Systems Design

Products and orders:

Sales (units) Unit price Sales (€) Production (unit)

P1

P2

P3

P4

P5

Total

1000

2500

8000

20000

50000

400

325

800

320

530

0

0

400000 812500

6400000

6400000

26500000

0

40512500

405600

0

1000

2600

8000

21000

55000

Lot size

50

100

200

1500

5000

Number of lots

20

26

40

14

11

Total

81500

111 No. of parcels

Order 1

50

Order 2 Order 3

1 200

100 20

150

50

200 150

8000

200

150

200

200

Order 18

20

Order 19

50 300 100 10

1500

3 2 3000

500

7500

3

800

10000

3 1

200 100

3 1

400

Order 24

Total

2 2

1

Order 21

Ending balance

3 2

400

Order 20

Order 23

2500 8000

100

2 2

600 100

Order 17

5000

400

300

Order 25

2

2

200

Order 15

Order 22

3 1

Order 14 Order 16

7500

600

200

Order 12 Order 13

4

150

Order 10 Order 11

2000 4000

400

50

3 1

2000

450

Order 8 Order 9

3 2000

800

Order 6 Order 7

500 6000

Order 4 Order 5

100

2500

500

2 2

0

100

0

1000

5000

0

1000

2600

8000

21000

55000

54

173

0.257

0.152

1000 € materials used

113.72 2600

56.32 1000 56315

0.037 Index value Volume produced Index volume

No. of products

Materials preparation

295661

1

1

0.412

No. of parcels

1000 € materials used

Invoicing

15.850

25.634

No. of orders

Sending

121.2

121.2

2.5

0

0.01

1

0

P2

0.001

58.4

58.4

1.5

0

0.02

3

2

P1

Outsourcing € used management

0.519

DL hours

Materials reception

23.120

OP4MA

OP3MACHR 0.339

DL hours

No. of batches

OP2MA

0.230

OP3MACHU Machine hours

DL hours

OP1MA

VAU index

Computing the production in equivalent units of VAU:

2103402

8000

262.93

1

280.6

280.6

1.5

1

0.005

4

0

P3

3294956

21000

156.90

1

168

40

168

3

0

0.0006667

0

0

P4

7031251

55000

127.84

1

136

136

2

2

0.0002

0

1

P5

12781585

Total

174

100

Order 3 Order 4 Order 5 Order 6 Order 7 Order 8 Order 9 Order 10 Order 11 Order 12

200

50

50

20

50

Order 1 Order 2

P1

200

150

150 450

200

P2

600 200 400

400

800 2000

100

P3

8000

4000

6000

500

P4

2500

5000

7500

2000

2000

P5

3 1 4 2 3 1 2 2 2 3

1 3

No. of parcels

25.63 25.63 25.63 25.63 25.63 25.63 25.63 25.63 25.63 25.63

25.63 25.63 47.55 15.85 63.40 31.70 47.55 15.85 31.70 31.70 31.70 47.55

15.85 47.55 1202729 210340 799716 678783 1066793 17057 160571 691790 116433 1597567

2816 127487

1202803 210382 799805 678840 1066866 17099 160628 691847 116490 1597640

2857 127560

Sending Invoicing Materials Cost of order

It is now possible to cost each order in equivalent UVA by taking into account the stations concerned and the structure of each order:

175

Total

Ending balance

Order 24 Order 25

Order 23

0

100

100

400

100

10

Order 21

Order 22

300

50

Order 19

Order 20

20

Order 18

Order 17

150

300

200

Order 15

Order 16

100

150

Order 14

Order 13

0

200 500

800

500

400

200

100

200

600

1000

1500

5000

2500

10000

7500

3000

8000

0

2 2

1

3

1

3

1

3

2

3

2

2

2

640.85

0.00

25.63 25.63

25.63

25.63

25.63

25.63

25.63

25.63

25.63

25.63

25.63

25.63

25.63

855.90

0.00

31.70 31.70

15.85

47.55

15.85

47.55

15.85

47.55

31.70

47.55

31.70

31.70

31.70

166202

12781585

807479

372187 137094

45486

1489313

11372

1124384

2816

489819

69642

272910

86700

1034099

166260

12783082

807479

372245 137151

45528

1489386

11413

1124458

2857

489892

69700

272983

86757

1034156

176

Cost Systems Design

Analysis of the orders: The total production of VAU index being known, we can determine its value. To do that one divides the total of the costs of the perimeter by the total volume of the VAU index. Determination of the value of UVA index: Total cost on the perimeter Production measured in VAU Index Unit cost of the VAU index

19823424 12783082 1.55

We can now compute the value, in euros, of the orders: VAU Index Order 1 Order 2 Order 3 Order 4 Order 5 Order 6 Order 7 Order 8 Order 9 Order 10 Order 11 Order 12 Order 13 Order 14 Order 15 Order 16 Order 17 Order 18 Order 19 Order 20 Order 21 Order 22 Order 23 Order 24 Order 25 Total

2,857 127,560 1,202,803 210,382 799,805 678,840 1,066,866 17,099 160,628 691,847 116,490 1,597,640 166,260 1,034,156 86,757 272,983 69,700 489,892 2,857 1,124,458 11,413 1,489,386 45,528 372,245 137,151 11,975,603

Cost (€)

Materials

Sales

4,431 € 2,920 € 20,000 € 197,815 € 156,300 € 305,000 € 1,865,252 € 1,525,840 € 3,020,000 € 326,250 € 224,480 € 640,000 € 1,240,301 € 852,548 € 2,716,750 € 1,052,714 € 886,540 € 1,426,250 € 1,654,447 € 1,135,160 € 4,315,000 € 26,516 € 18,180 € 48,750 € 249,095 € 171,280 € 500,000 € 1,072,885 € 736,120 € 2,810,000 € 180,648 € 123,920 € 400,000 € 2,477,548 € 2,028,240 € 3,950,000 € 257,828 € 177,120 € 540,000 € 1,603,723 € 1,100,120 € 4,272,500 € 134,539 € 92,480 € 257,500 € 423,329 € 351,740 € 640,000 € 108,087 € 74,300 € 208,750 € 759,703 € 521,408 € 1,918,000 € 4,431 € 2,920 € 20,000 € 1,743,758 € 1,196,660 € 4,472,500 € 17,699 € 12,120 € 32,500 € 2,309,672 € 1,585,064 € 5,944,000 € 70,602 € 48,480 € 130,000 € 577,260 € 396,120 € 1,485,000 € 212,688 € 146,140 € 440,000 € 18,571,222 € 13,566,200 € 40,512,500 €

Profit/order 12,649 € ⫺49,115 € ⫺371,092 € 89,270 € 623,901 € ⫺513,004 € 1,525,393 € 4,054 € 79,625 € 1,000,995 € 95,432 € ⫺555,788 € 105,052 € 1,568,657 € 30,481 € ⫺135,069 € 26,363 € 636,889 € 12,649 € 1,532,082 € 2,681 € 2,049,264 € 10,918 € 511,620 € 81,172 € 8,375,078 €

Conventional Systems

177

The value of the ending inventory of products is computed the same way: P1

P2

P3

P4

P5

0

100

0

1000

5000

Materials

0.00 €

12,120.00 €

0.00 €

208,000.00 €

680,000.00 €

VAU index

56.32

113.72

262.93

156.90

127.84

Index volume

0.00

11371.57

0.00

156902.67

639204.68

Index volume

900,120 €

807478.92

Value of the index

1,252,202 €

Total

2,152,322 €

It will be noted that the profit from the orders corrected by the costs not taken into account in the perimeter of calculation gives again the operating profit: 8375078 € 2231076 €

Profit on orders Cost out of the perimeter

6144022 €

Operating profit

P4

P5

0€

R&D

ncome before taxes

0€

2,231,076 €

Marketing expenses

Administrative expenses

6,144,002 €

8,375,078 €

0€

P5 32,137,422 €

0€

P4

Gross margin

2,152,322 €

P2

2,152,322 €

Cost of goods sold

Less ending finished goods

34,289,744 €

Cost of goods available for sale

0€ 34,289,744 €

0€

6,400,000 €

26,500,000 €

P3

Cost of goods manufactured

Beginning finished goods

812,500 €

6,400,000 €

P2

40,512,500 €

Cost of goods manufactured

Factory overhead

Other direct costs

Direct labour

Direct materials used

less materials EB

Direct materials available

Outsourcing

Purchases

Direct materials BB

400,000 €

Sales

P1

Cost of goods statement

Income statement

C2

C1

M2

M1

SST

C2

C1

M2

M1

19,823,424 €

0€

0€

20,000 €

0€

28,000 €

19,680 €

840,000 €

1,525,000 €

3,584,000 €

8,225,000 €

360,000 €

0€

0€

34,289,744 €

14,466,320 €

67,680 €

14,534,000 €

14,534,000 €

Conventional Systems

179

12.9 Homogeneous cost pools method General presentation The allocation base is at the same time the measurement of the production of the workshop and the basis of the flow of the costs to the products. Although other solutions can be considered (tons of cast iron, metres of linen, etc), it is the working hour of execution which is used and recommended as natural by Lieutenant Colonel Rimailho. The allocation base is at the same time the way of synthesizing information on what occurs in the section and a process making it possible to differentiate easily the cost of the products according to their actual consumption of resources. The cost of the allocation base is an average cost obtained by dividing the total cost accumulated within each section by the volume of the base (see above). The validity of this calculation of average cost is conditioned by the homogeneous character of the activities carried out in the section. This homogeneity is defined by Rimailho as follows: to be homogeneous a section is made up in such a way that the various professional fields which make it up are employed in theory in the same proportion on all the work carried out by the section and that the elements of different values, including the materials used in each speciality, are employed themselves in the same proportion on all work. One can criticize the treatment of the cost of provisioning apportioned to the supplied value and of the setting up of expenses integrated into the cost of the sections. However, it should be recognized that the method of cost calculation proposed satisfies the three criteria which characterize a good system of costs: responsibility, traceability and causality. The sections are autonomous and they have a person in charge of their management. Consumption of resources is monitored thanks to various vouchers, orders and tables up to the product absorption full cost. Lastly, the definition of the homogeneity, if it is respected, makes it possible to obtain, section by section, costs which are in direct relationship to the actual use of resources.

180

Cost Systems Design

Architecture Resources used Materials and other external resources

DL

Homog eneous centre 1

Homog eneous centre 2

Homog eneous centre 3

Homog eneous centre 4

Homog eneous centre 5

AB1

AB2

AB3

AB4

AB5

Products

Criteria of classification and judgement Characteristics of the family of systems in comparison with the criteria of structuring interns Units of analysis

Pre-existing

New

Product

Organization

Homogeneity

Yes

No

Transfunctionality

Yes

No

Origin of the units of analysis

Hierarchy

Yes

No

Nature of the allocation bases

Inputs

Outputs

Cost object

Unique

Multiple

Relevance on looking at resources management Causality

Weak

Strong

Traceability

Limited

Total

Responsibility

Distinct

Strongly linked

Relevance on looking at the dialogue with the environment Coherence with the intrinsic value

Yes

No

Coherence with the exchange value

Yes

No

Coherence with the utility value

Yes

No

Legibility

Weak

Strong

Built-in decision help

Weak

Strong

Relevance on looking at behaviours

In each cost pool

?

1000

2600

Production (units)

OP1MA OP2MA OP3MACH OP4MA Unit cost

8

0.05

P3

1000

2600

1

P2

8000

P3

1

3

0.5

P5

P4

21000

P5

55000

208.00 € 136.00 €

1.00

3

P4

8000

21000

55000

1 4 1 2 1.5 2.5 1.5 3 2 91.20 € 42.00 € 119.50 € 33.00 € 127.60 €

2 3

P1

Bill of operations:

Production (units)

SST

2

2

0.1

P2

58.40 € 121.20 € 280.60 €

1

M2 C1

C2

0.2

M1

P1

Bill of materials:

Quantified illustration

16 €

405600

15 € 45 € 11 €

57000 37600 118000 193000

Unit price

13694000

61000

235000 64000

30000

Purchase

Total

21000

60200

234200 64000

28360

Materials used (units) 340,320 €

Materials used (amount)

14,466,320 €

840,000 €

8,867,400 €

545,200 € 5,310,000 € 2,123,000 €

889,200 €

Amount

40 €

25 € 1,505,000 €

35 € 8,197,000 € 56 € 3,584,000 €

12 €

Unit price

182

Cost Systems Design

Sales and commission:

Sales (units)

P1

P2

1000

2500

Unit price Sales

400 €

P3 8000

325 €

800 €

P4

P5

20000 320 €

50000

Total (unit)

Total (€)

405600 8867400

530 €

400000 € 812500 € 6400000 € 6400000 € 26500000 €

40512500 €

Salespersons’ 16000 € 32500 € 256000 € 256000 € 1060000 € salaries

1620500 €

Indirect costs: Items Other expenses Insurance and taxes Wages and salaries Depreciation Interest expense Total

Allocated cost

Total cost

0€ 0€ 5177900 € 5310000 € 0€ 10487900 €

2325000 € 62500 € 10877908 € 8336000 € 453092 € 22054500 €

Indirect cost 2325000 € 62500 € 5700008 € 3026000 € 453092 € 11566600 €

183

57000

17.45 €

Volume

Unit cost of the allocation basis

994,400 €

625,000 €

DLH

11,566,600 €

453,092 €

189,000 €

4,500 €

175,900 €

26.54 €

37600

DLH

997,800 €

432,000 €

325,000 €

6,300 €

234,500 €

Workshop 1 Workshop 2

Allocation basis

Total

Interest expense

3,026,000 €

5,700,008 €

Wages and salaries

Depreciation

62,500 €

2,325,000 €

Other expenses

Insurance and taxes

Indirect cost

Items

Indirect costs allocation table:

17.87 €

118000

Mach H

2,109,000 €

0€

450,000 €

7,200 €

1,651,800 €

Workshop 3

8.31 €

193000

DLH

1,604,600 €

875,000 €

624,000 €

1,800 €

103,800 €

Workshop 4

61.10 €

13694

1000 € purchased

836,720 €

231,000 €

562,000 €

8,720 €

35,000 €

Purchasing

124.01 €

40512.5

1000 € sold

5,024,080 €

453,092 €

863,000 €

3,550,008 €

33,980 €

124,000 €

Administration

184 93,179 €

1,525,000 €

C2

C1

21,996 € 502,557 € 218,987 €

360,000 € 8,225,000 € 3,584,000 €

Purchasing burden

M2

M1

Purchases

Cost of materials used:

1,618,179 €

381,996 € 8,727,557 € 3,802,987 €

Total

61000

30000 235000 64000

Volume

26.53 €

12.73 € 37.14 € 59.42 €

Unit cost

1,596,957 €

361,114 € 8,697,847 € 3,802,987 €

Usage

21,222 €

20,882 € 29,711 € 0€

Ending balance

185

0.00 € 0€ 91 €

C1

C2

SST

DLH

20.78 €

345,747 €

Full absorption cost

Operating profit

Sales

54,253 €

400,000 €

346 €

49,605 €

Administration cost

Unit cost

16,000 €

0€

Ending balance (€)

Salespersons’ salaries

280,142 €

0

1000

Cost of goods sold

Ending balance (unit)

Production (units)

280.14 €

12.47 €

Production cost

WS4

0.00 €

0.00 €

WS3

134,420 €

812,500 €

271 €

678,080 €

100,761 €

32,500 €

21,793 €

544,819 €

100

2600

217 93 €

26.54 €

79.61 €

WS2

0.00 €

34.89 €

0€

42 €

0€

53.06 €

0.00 €

74.28 €

1.27 €

P2

WS1

0€

59.42 €

M2

Mach H

2.55 € 0.00 €

M1

Materials

P1

Cost of products available for sale:

920,414 €

6,400,000 €

685 €

5,479,586 €

793,684 €

256,000 €

0€

4,429,902 €

0

8000

553.74 €

12.47 €

17.87 €

106.15 €

0.00 €

45 €

75 €

0€

0.00 €

0.00 €

297.11 €

0.64 €

P3

6,002,461 €

5,067,197 €

40,512,500 €

34,510,039 €

5,024,080 €

1,620,500 €

2,006,645 €

27,865,459 €

11,077,003 €

1,604,600 €

2,109,000 €

997,800 €

994,400 €

5,310,000 €

3,557,400 €

840,000 €

1,596,957 €

3,802,987 €

8,697,847 €

361,114 €

Total

⫺173,823 €

429 €

21,432,803 €

3,286,347 €

1,060,000 €

1,708,646 €

17,086,456 €

5000

55000

341.73 €

16.63 €

35.75 €

0.00 €

17.45 €

90 €

38 €

0€

26.53 €

0.00 €

111.42 €

6.37 €

P5

6,400,000 € 26,500,000 €

329 €

6,573,823 €

793,684 €

256,000 €

276,207 €

5,524,139 €

1000

21000

276.21 €

24.94 €

0.00 €

0.00 €

0.00 €

0€

33 €

40 €

0.00 €

178.27 €

0.00 €

0.00 €

P4

186

P4

P5

Income before taxes

0€

1,620,500 €

Marketing expenses

R&D

5,024,080 €

Administrative expenses

6,002,461 €

27,865,459 € 12,647,041 €

P5

Gross margin

1,708,646 €

P4

Cost of goods sold

21,793 €

276,207 €

P2

2,006,645 €

Less ending finished goods

29,872,105 €

0€ 29,872,105 €

0€

6,400,000 €

26,500,000 €

P3

Cost of goods available for sale

Cost of goods manufactured

Beginning finished goods

812,500 €

6,400,000 €

P2

40,512,500 €

Cost of goods manufactured

Factory overhead

Other direct costs

Direct labour

Direct materials used

less materials EB

Direct materials available

Outsourcing

Purchases

Direct materials BB

400,000 €

Sales

P1

Cost of goods statement

Income statement

C2

C1

M2

M1

SST

C2

C1

M2

M1

6,542,520 €

5,310,000 €

3,557,400 €

21,222 €

0€

29,711 €

20,882 €

840,000 €

1,525,000 €

3,584,000 €

8,225,000 €

360,000 €

0€

0€

29,872,105 €

14,462,185 €

71,815 €

14,534,000 €

14,534,000 €

Conventional Systems

12.10

187

Hierarchized homogeneous cost pools method

General presentation We examine now the most usually used system. It distinguishes two categories of sections: the principal sections and secondary sections. The latter being allocated to the former by means of rates. The mechanics of computing the cost of the products is not modified. Architecture Resources used Materials and other external resources

Indirect costs DL HCs1

HCs2

HCs3

HCp1 HCp2

HCp3

HCp4

HCp1 HCp2 HCp3

HCp4

Allocation Allocation Allocation Allocation base base base base

Product full cost

188

Cost Systems Design

Criteria of classification and judgement Characteristics of the family of systems in comparison with the criteria of structuring interns Units of analysis Origin of the units of analysis Homogeneity

Pre-existing

New

Product

Organization

Yes

No

Transfunctionality

Yes

No

Hierarchy

Yes

No

Nature of the allocation bases

Inputs

Outputs

Cost object

Unique

Multiple

Locally

Relevance on looking at resources management Causality Traceability Responsibility

Weak

Strong

Limited

Total

Distinct

Strongly linked

Relevance on looking at the dialogue with the environment Coherence with the intrinsic value

Yes

No

Coherence with the exchange value

Yes

No

Coherence with the utility value

Yes

No

Legibility

Weak

Strong

Built-in decision help

Weak

Strong

Relevance on looking at behaviours

?

2

2

0.1

P2

8

0.05

P3

1000

1000

2600

42.00 €

8000

119.50 €

91.20 €

Unit cost

Production (units)

1 1.5

2.5

4

1.5

1

P3

21000

OP4MA

3

OP2MA

P2

8000

1

3

0.5

P5

21000

33.00 €

3

P4

55000

208.00 € 136.00 €

1.00

3

P4

OP3MACH

2

OP1MA

P1

2600

58.40 € 121.20 € 280.60 €

1

0.2

P1

Bill of operations:

Production (units)

SST

C2

C1

M2

M1

Bill of materials:

Quantified illustration

55000

127.60 €

2

2

1

P5

21000

60200

64000

234200

28360

Total

405600

193000

118000

37600

11 €

45 €

15 €

16 €

Unit price

13694000

61000

64000

235000

30000

Purchase (units)

57000

Materials used (units)

8,867,400 €

2,123,000 €

5,310,000 €

545,200 €

889,200 €

Amount

40 €

25 €

56 €

35 €

12 €

Unit price

14,466,320 €

840,000 €

1,505,000 €

3,584,000 €

8,197,000 €

340,320 €

Materials used (amount)

190

Cost Systems Design

Sales and commission:

Sales (units) Unit price Sales

P1

P2

1000

2500

400 €

P3 8000

325 €

800 €

P4

P5

20000 320 €

50000

256000 €

Total

405600 8867400

530 €

400000 € 812500 € 6400000 € 6400000 € 26500000 €

Salespersons’ 16000 € 32500 € salaries

Total

256000 € 1060000 €

40512500 € 1620500 €

Indirect costs determination: Items Other expenses Insurance and taxes Wages and salaries Depreciation Interest expense Total

Allocated cost

Total cost

Indirect cost

0€ 0€ 5,177,900 € 5,310,000 € 0€ 10,487,900 €

2,325,000 € 62,500 € 10,877,908 € 8,336,000 € 453,092 € 22,054,500 €

2,325,000 € 62,500 € 5,700,008 € 3,026,000 € 453,092 € 11,566,600 €

191

3,026,000 €

Depreciation

1,004,816 €

57000

26.26 €

Volume

Unit cost of the allocation basis

53.26 €

37600

DLH

2,002,616 €

502,408 €

1,496,808 €

20%

997,800 €

432,000 €

325,000 €

6,300 €

234,500 €

Workshop 2

10%

994,400 €

DLH

11,566,600 €

625,000 €

189,000 €

4,500 €

175,900 €

Workshop 1

Allocation basis

Total

Service department allocation

Total

453,092 €

5,700,008 €

Wages and salaries

Interest expense

62,500 €

2,325,000 €

Indirect costs

Insurance and taxes

Other expenses

Items

Indirect costs allocation table:

26.39 €

118000

Mach H

3,113,816 €

1,004,816 €

20%

2,109,000 €

0€

450,000 €

7,200 €

1,651,800 €

Workshop 3

18.73 €

193000

DLH

3,614,232 €

2,009,632 €

40%

1,604,600 €

875,000 €

624,000 €

1,800 €

103,800 €

Workshop 4

97.79 €

13694

1000 € purchased

1,339,128 €

502,408 €

10%

836,720 €

231,000 €

562,000 €

8,720 €

35,000 €

Purchasing

⫺5,024,080 €

⫺100%

5,024,080 €

453,092 €

863,000 €

3,550,008 €

33,980 €

124,000 €

Administration

192

C2

C1

M2

M1

35,204 € 804,318 € 350,477 € 149,129 €

1,339,128 €

13,694,000 €

Purchasing burden

360,000 € 8,225,000 € 3,584,000 € 1,525,000 €

Purchases

Cost of materials used:

15,033,128 €

395,204 € 9,029,318 € 3,934,477 € 1,674,129 €

Total 30000 235000 64000 61000

Volume 13.17 € 38.42 € 61.48 € 27.44 €

Unit cost

14,958,830 €

373,600 € 8,998,580 € 3,934,477 € 1,652,173 €

Usage

74,298 €

21,604 € 30,738 € 0€ 21,956 €

Ending balance

193

MACH

SH AT1

812,500 € 92,176 €

400,000 €

⫺11,704 €

Operating profit

288 €

720,324 €

32,500 €

27,513 €

687,824 €

100

2600

275.13 €

46.82 €

0.00 €

53.26 €

0.00 €

0€

42 €

0€

54.89 €

0.00 €

76.85 €

1.32 €

P2

Sales

412 €

411,704 €

Full absorption cost

Unit cost

16,000 €

0€

Ending balance (€)

Salespersons’ salaries

395,704 €

0

1000

395.70 €

Cost of goods sold

Ending balance (unit)

Production (units)

Production cost

28.09 €

0€

52.52 €

MOD

SH AT4

91 €

SST

0.00 €

0€

C2

SH AT3

0.00 €

C1

159.78 €

61.48 €

M2

SH AT2

2.63 €

0.00 €

M1

Materials

P1

583,503 €

6,400,000 €

727 €

5,816,497 €

256,000 €

0€

5,560,497 €

0

8000

695.06 €

28.09 €

26.39 €

213.04 €

0.00 €

45 €

75 €

0€

0.00 €

0.00 €

307.38 €

0.66 €

P3

Cost of goods available for sale and ending balance:

⫺128,168 €

6,400,000 €

326 €

6,528,168 €

256,000 €

313,608 €

6,272,168 €

1000

21000

313.61 €

56.18 €

0.00 €

0.00 €

0.00 €

0€

33 €

40 €

0.00 €

184.43 €

0.00 €

0.00 €

P4

5,770,556 €

26,500,000 €

415 €

20,729,444 €

1,060,000 €

1,966,944 €

19,669,444 €

5000

55000

393.39 €

37.45 €

52.78 €

0.00 €

26.26 €

90 €

38 €

0€

27.44 €

0.00 €

115.27 €

6.59 €

P5

6,306,364 €

40,512,500 €

34,206,136 €

1,620,500 €

2,308,066 €

32,585,636 €

61,139 €

3,614,232 €

3,113,816 €

2,002,616 €

1,496,808 €

5,310,000 €

3,557,400 €

840,000 €

1,652,173 €

3,934,477 €

8,998,580 €

373,600 €

Total

194

6,400,000 €

26,500,000 €

P4

P5

Income before taxes

0€

1,620,500 €

Marketing expenses

R&D

5,024,080 €

Administrative expenses

6,306,364 €

27,561,556 € 12,950,944 €

P5

Gross margin

1,966,944 €

P4

Cost of goods sold

27,513 €

313,608 €

P2

2,308,066 €

Less ending finished goods

29,869,622 €

0€

40,512,500 €

29,869,622 €

0€

812,500 €

6,400,000 €

P2

P3

400,000 €

P1

Cost of goods available for sale

Cost of goods manufactured

Beginning finished goods

Sales

Income statement

Cost of goods manufactured

Factory overhead

Other direct costs

Direct labour

Direct materials used

less materials EB

Direct materials available

Outsourcing

Purchases

Direct materials BB

Cost of goods statement

C2

C1

M2

M1

6,542,520 €

5,310,000 €

3,557,400 €

21,956 €

0€

30,738 €

21,604 €

840,000 €

1,525,000 €

C2 SST

3,584,000 €

C1

360,000 € 8,225,000 €

M1 M2

0€

0€

29,869,622 €

14,459,702 €

74,298 €

14,534,000 €

14,534,000 €

13 Non-conventional Models

The family of the models based on activities is too heterogeneous to be able to be treated as such. The methods of taking into account the transfunctionality and the choice of the drivers result in distinguishing four different models. The introduction of the possibility of regroupings and hierarchization leads to eight taxa as indicated in the theoretical part. A ninth, which bears the name of MBM (management by methods), is characterized by its unique cost object: the line of order. In practice, these nine models are rarely encountered in a pure state. If one formalizes these models using mathematics, there is no difference between them or between them and the model of the homogeneous sections type or responsibility centres. Initially all the costs are assigned to the units of analysis. Then, according to the situation, one might distinguish between those units of analysis contributing directly to the construction of the objects offered. The other units of analysis either contribute to the efficiency of the first or produce non-monetary attributes that the organization considers interesting to highlight with respect to partners other than the customers (community, personnel, financial system, etc.). Ci = Mpi + DLi + Σ j = 1... N (NbCIij * CIj) where Ci is the cost of object I; Mpi is the materials and components incorporated in the product i; DLi is the direct labor consumed by the product i; CIj is the cost I of the driver of the unit of analysis j; and NbCIij is the consumption of the driver j by product i. The system can continue to use the concept of DL, but this one is integrated more and more within the activities because of the disappearance of the direct connection between its volume and the volume of 195

196

Cost Systems Design

products. The differences between the systems are thus not observable in the formal aspects but in the practice of the constitution of the units of analysis, the choice of the bases of allowance, the criteria of possible hierarchization of the units and the focusing on one or more objects. The reader will have to make an effort to see behind the illustrations which follow. these parameter choices which are as many structuring conventions for the cost systems. Their impact on the costs at moment T is of little of interest; what matters is the interaction with the behaviours of the actors and the influence of information produced on the decisions accumulated, as well as on the organization itself. The models developed by real organizations borrow, without being thought to the various theoretical cost families we have identified. In the illustrations which follow, this arrangement will be sometimes used to draw the attention of the reader to the importance of the knowledge of the most minute adjustments so as to give an opinion on a cost system, especially when it is claimed to be innovating. We will not discuss the homogeneity of the units of analysis (which is allowed on the theoretical level but one knows that its practice is rare if one sticks to a strict definition; see the Homogeneous Sections Method). The models are numbered depending on the presence or the absence of the three characters of transfunctionality, hierarchization and the cost or value orientation of the drivers of the last level of the model.

13.1

ABC Model 000

General presentation In this model the resources flow initially through the functional structure of the organization. The functional structure is not called into question and all the activities retained in the model belong exclusively to a functional unit. Transfunctionality is not introduced at the level of the unit of analysis. It is more than a simple model, i.e. it is without hierarchization. All the units of analysis are consumed directly by the cost objects. Finally, the choice of the allocation bases (drivers are not exclusively coming from the outputs) results in saying that the method continues to favour cost management. When value preoccupations are present they are expressed at the level of the units of analysis and always in the form of elimination of costs and not in the form of a dynamic management of the cost–value relation. Theoretically, it is possible to calculate the cost of various objects, but in practice one notes that the product remains the single object studied.

Non-conventional Models

197

Architecture Resources Department 1

Department 2

Department 3

Department 4 A9

A10

I9

I10

A1

A2

A3

A4

A5

A6

I1

I2

I3

I4

I5

I6

A7

I7

A8

I8

Depending on causality relations

Cost objects

Criteria of classification and judgement Characteristic of the family of systems in comparison with the criteria of structuring interns Units of analysis

Preexisting

New

Product

Organization

Homogeneity

Yes

No

Transfunctionality

Yes

No

Hierarchy

Yes

No

Nature of the allocation bases

Inputs

Outputs

Cost object

Unique

Multiple

Origin of the units of analysis

Relevance on looking at resources management Causality

Weak

Strong

Traceability

Limited

Total

Responsibility

Distinct

Strongly linked

Relevance on looking at the dialogue with the environment Coherence with the intrinsic value

Yes

No

Coherence with the exchange value

Yes

No

Coherence with the utility value

Yes

No

Relevance on looking at behaviors Legibility

Weak

Strong

Built-in decision help

Weak

Strong

?

198 Cost Systems Design

Quantified illustration In this first subset of models, transfunctionality is not introduced at the level of the units of analysis. This means that all the activities are built inside a service or a function identified in the flow chart of the organization:

62500

568000

432000

87000

452000

215000

12500

40000

Warehousing

Receiving 234000

Quality

12500

Maintenance

25000

Scheduling

Insurance and taxes

2325000

Manufacturing department Production lines management

Other expenses

Orders management

Purchasing department

Vendors management

Costs

Wages and salaries

4946300

265000

85750

210000

215800

542000 232000 550000

225000

Social insurance

2374208

127199

41160

100799

103583

260158

107999

Depreciation

3026000

Interest expense Total Cost driver Volume of the driver Unit cost of the driver

111359

263998

327700 1245000

453092 13187100

417199 K€ purchased 14,534 €

139410

544799

No. of orders

No. of orders

55

55

29 € 2,535 €

9,905 €

1227583

2519158 430359 1265998

K€ DLH+ purchased Mach H 14,534 € 84 €

405600

No. of batches 111

6 € 3,877 €

DLH+ Mach H 405600 3€

547999 No. of controls 111 4,937 €

Non-conventional Models

Utilities

Administration

160000

Quality

62780

Human resources management

Sales promotion

65000

Administration department

Sending

Customer claims

Customer entertainment

Human resources management

Marketing department

9220

2500

10000

0

32500

500000

25400

32800

232000

436700

316000

325000

720350

15600

239998

12192

15744

111359

209615

151679

155999

345766

245000

845000

9300

212642

0

354000 238900 48100 No. of employees 54 891 €

1550

1397898

37592

112874

503359

No. of customers

No. of claims

No. of parcels

k€ sold

12 116,492 €

80 470 €

54 2,090 €

40512.5 12 €

646315

712679

1557861

1077916

No. of employees

No. of products

SurfaceM2

none

54 11,969 €

5 142,536 €

2400 649 €

199

200

50

20

20

Batch size

No. of batches

No. of controls

1000

26

26

100

2600

121.2

58.4

Volume produced

0

0

2

0

SST

1

C1

2

0.1

0

0

M2

P2

C2

0.2

M1

P1

40

40

200

8000

280.6

0

0

0

8

0.05

P3

14

14

1500

21000

208

1

0

3

0

0

P4

11

11

5000

55000

136

0

1

0

3

0.5

P5

Information leading to the evaluation of the volume of the inductors:

111

111

21000

60200

64000

234200

28360

40

25

56

35

12

Materials used (units) Unit price

14,466,320 €

840000

1505000

3584000

8197000

340320

Direct materials used

55

1

12

12

24

6

No. of orders

201

Total

Outsourcing

Components

Materials

Volume (products)

0

0

1000

C1

0

M2

C2

200

M1

1000

P1

P2

0

5200

0

5200

260

2600

2600

42.00 €

Consumption in volume and value:

1000

0

0

0

64000

400

8000

P3

8000

119.50 €

91.20 €

Unit cost

Production (units)

1 1.5

2.5

1.5

4

P3

OP4MA

1

P2

OP3MACH

2

3

OP1MA

P1

OP2MA

Bill of operations:

21000

0

63000

0

0

21000

P4

21000

33.00 €

3

P4

0

55000

0

165000

27500

55000

P5

55000

127.60 €

2

2

1

P5

21000

60200

64000

234200

28360

87600

Total

405600 HMOD⫹ HMACH

193000

118000

37600

57000

Total

840000

61000

64000

235000

30000

Materials purchased (units)

11 €

45 €

15 €

16 €

Unit price

14534000

840000

1525000

3584000

8225000

360000

Materials purchased (€)

8,867,400 €

2,123,000 €

5,310,000 €

545,200 €

889,200 €

Amount

202 235000 40.23 €

15.85 € 449,394 € 25,988 €

Unit cost

Materials used Ending balance

9,422,185 € 32,185 €

9,454,370 €

8,225,000 €

694707.0771

30000

30,407 €

237,731 €

Volume purchased

84 €

59,433 €

60,833 €

475,381 €

K€ purchased

Warehousing

9,905 €

15,208 €

236099.0057

M2

360,000 €

No. of orders

Receiving

2,535 €

10,334 €

M1

Total cost

No. of orders

Orders management

29 €

Unit cost of the driver

Materials

K€ purchased

Vendors management

Drivers

Cost of material used:

4,138,876 € 0€

64.67 €

64000

4,138,876 €

3,584,000 €

302714.9136

118,865 €

30,417 €

102879

C1

1,822,642 € 24,221 €

30.28 €

61000

1,846,863 €

1,525,000 €

128,806 €

118,865 €

30,417 €

43,775 €

C2

947,501 € 0€

45.12 €

21000

947,501 €

840,000 €

70,949 €

9,905 €

2,535 €

24,112 €

SST

16,780,598 € 82,394 €

16,862,991 €

16,862,991 €

14,534,000 €

1,227,583 €

544,799 €

139,410 €

417,199 €

Total

203

31,200 € 43,500 €

OP1MA

OP2MA

No. of batches

DLH+ Mach H

No. of controls

Scheduling

Maintenance

Quality control

4,937 €

3.12 € 98,739 €

20,288 €

77,542 €

40,371 €

DLH+ Mach H

Production lines management

3,877 €

16,500 €

OP4MA

0€

0€

0€

SST

OP3MACH

0€

0€

C2

128,360 €

28,404 €

100,805 €

56,520 €

71,500 €

0€

37,700 €

157,438 €

0€

209,203 €

0€ 64,670 €

C1

4,120 €

P2

M2

6.21 €

P1 3,169 €

Unit cost of the driver

M1

Drivers

Manufacturing cost of the period:

197,477 €

162,307 €

155,084 €

322,969 €

132,000 €

360,000 €

464,000 €

0€

0€

0€

0€

2,574,807 €

6,338 €

P3

0€

0€

69,117 €

196,642 €

54,280 €

391,289 €

693,000 €

0€

0€

0€

947,501 €

0€

4,074,206 €

P4

54,306 €

858,357 €

42,648 €

1,708,009 €

1,210,000 €

4,950,000 €

0€

858,000 €

0€

1,665,204 €

0€

6,638,175 €

435,766 €

P5

Continued

547,999 €

1,265,998 €

430,359 €

2,519,158 €

2,123,000 €

5,310,000 €

545,200 €

889,200 €

947,501 €

1,822,642 €

4,138,876 €

9,422,185 €

449,394 €

Total

204

No. of claims

Customer claims

Contribution margin

Sales

Ending balance

Cost of goods sold

Unit cost

Manufacturing cost

No. of products

Drivers

Quality control

Continued

470 €

142,536 €

Unit cost of the driver

812,500 € 289,418 €

2144,154 €

36,077 €

901,918 €

361 €

937,994 €

1,410 €

142,536 €

P2

400,000 €

0€

544,154 €

544 €

544,154 €

5,639 €

142,536 €

P1

1,882,481 €

6,400,000 €

0€

4,517,519 €

565 €

4,517,519 €

0€

142,536 €

P3

133,030 €

6,400,000 €

313,348 €

6,266,970 €

313 €

6,580,318 €

11,747 €

142,536 €

P4

9,607,457 €

26,500,000 €

1,689,254 €

16,892,543 €

338 €

18,581,798 €

18,796 €

142,536 €

P5

11,389,396 €

40,512,500 €

2,038,680 €

29,123,104 €

31,161,784 €

37,592 €

712,679 €

Total

Non-conventional Models

205

Customer orders:

Customer 1 Customer 2 Customer 3 Customer 4 Customer 5 Customer 6 Customer 7 Customer 8 Customer 9 Customer 10 Customer 11 Customer 12 Total

P1

P2

P3

P4

P5

No. of parcels

50 0 630 0 220 0 0 0 0 50 50 0

0 650 0 0 650 150 0 100 450 0 500 0

0 100 3300 800 2600 0 200 0 400 0 400 200

0 4500 6000 0 9500 0 0 0 0 0 0 0

0 0 15000 0 12000 0 5000 8000 0 0 7500 2500

1 5 17 1 13 1 2 2 4 1 5 2

1000

2500

8000

20000

50000

54

4,477,500 €

1,485,000 €

40512500

Total

20,000 €

Customer 12

388,221 €

466,250 €

Customer 9

Customer 10

Customer 11

2,738,884 €

4,272,500 €

Customer 8

54,115 €

1,397,898

116,492 €

116,492 €

116,492 €

116,492 €

116,492 €

116,492 €

116,492 €

116,492 €

116,492 €

116,492 €

116,492 €

116,492 €

Customer entertainment

3330191

Total

Operating profit

Cost of support

6,045,073 €

3330191

9,375,264 €

1077916

Administration

Customer profitability

1557861

Building utilities

503,359

18,451 €

55,632 €

248 €

5,793 €

53,085 €

34,914 €

606 €

146,355 €

7,952 €

158,565 €

21,510 €

248 €

Sales promotion

48100 646315

112,874

4,181 €

10,451 €

2,090 €

8,361 €

4,181 €

4,181 €

2,090 €

27,173 €

2,090 €

35,534 €

10,451 €

2,090 €

Sending

Human resources (Manufacturing) Human resources management (administration)

Support activities:

29,123,104

957,565 €

2,967,349 €

27,208 €

1,802,192 €

48,750 €

2,810,000 €

Customer 7

8,853,427 €

451,752 €

9,154,148 €

1,701,036 €

27,208 €

Manufacturing cost

Customer 6

640,000 €

11,779,250 €

Customer 3

Customer 5

12,762,000 €

Customer 2

Customer 4

20,000 €

1,731,250 €

Customer 1

Sales

31,137,236

1,096,688 €

3,149,924 €

146,038 €

518,867 €

2,912,641 €

1,957,778 €

173,303 €

9,143,447 €

578,286 €

9,464,739 €

1,849,489 €

146,038 €

Customer cost

9,375,264 €

388,312 €

1,327,576 €

⫺126,038 €

⫺52,617 €

1,359,859 €

852,222 €

⫺124,553 €

2,635,803 €

61,714 €

3,297,261 €

⫺118,239 €

⫺126,038 €

Profit/ customer

Income before taxes

0€

2,051,723 €

R&D

4,042,870 €

Marketing expenses 6,045,073 €

Cost of goods manufactured

Factory overhead

Other direct costs

Direct labour

12,139,667 €

Administrative expenses

Direct materials used

28,372,833 €

Gross margin

1,689,254 €

P5

Cost of goods sold

36,077 € 313,348 €

P4

2,038,680 €

Less ending finished goods

P2

less materials EB

30,411,513 €

Cost of goods available for sale

Outsourcing Direct materials available

0€ 30,411,513 €

0€

P4

P5

Cost of goods manufactured

Beginning finished goods

C1

6,400,000 €

26,500,000 €

P3

C2

C1

M2

M1

SST

C2

812,500 €

6,400,000 €

P2

M1 M2

400,000 €

P1 Purchases

Direct materials BB

Sales

40,512,500 €

Cost of goods statement

Income statement

7,092,506 €

5,310,000 €

3,557,400 €

24,221 €

0€

32,185 €

25,988 €

840,000 €

1,525,000 €

3,584,000 €

8,225,000 €

360,000 €

0€

0€

30,411,513 €

14,426,132 €

82,394 €

14,534,000 €

14,534,000 €

208 Cost Systems Design

13.2

ABC Model 001

General presentation The only difference between the model 000 and this one is due to the treatment of the non-value-added activities and the selection of the drivers of the activities delivering value. That has resulted in our example in taking out of the perimeter of calculation the complaints activity and activities of general support for which there is no driver directly linked to products or customers.

Architecture Resources Department 1

Department 2

Department 3

Department 4 A9

A10

I9

I10

A1

A2

A3

A4

A5

A6

I1

I2

I3

I4

I5

I6

A7

I7

Depending on causality relations

Cost objects

A8

I8

Non-conventional Models

209

Criteria of classification and judgement Characteristic of the family of systems in comparison with the criteria of structuring interns Units of analysis Origin of the units of analysis

Preexisting

New

Product

Organization

Homogeneity

Yes

No

Transfunctionality

Yes

No

Hierarchy

Yes

No

Nature of the allocation bases

Inputs

Outputs

Cost object

Unique

Multiple

Relevance on looking at resources management Causality

Weak

Strong

Traceability

Limited

Total

Responsibility

Distinct

Strongly linked

Relevance on looking at the dialogue with the environment Coherence with the intrinsic value

Yes

No

Coherence with the exchange value

Yes

No

Coherence with the utility value

Yes

No

Relevance on looking at behaviors Legibility

Weak

Strong

Built-in decision help

Weak

Strong

Quantified illustration In this first subset of models, transfunctionality is not introduced on the level of the units of analysis. That means that all the activities are built inside a service or a function identified in the organization flow chart.

Cost Systems Design

432000 87000

215000

Human resources (M)

452000

Insurance and taxes

62500

Wages and Salaries

4946300

265000

85750 210000

215800

542000 232000

550000 225000

32500

Social insurance

2374208

127199

41160

103583

260158 111359

263998

107999

15600

Depreciation

3026000

Interest expense

453092

Total

13187100

417199 139410

544799 1227583 2519158 430359 1265998

547999

48100

Cost driver

0

No. of No. of parts orders number

No. of orders

Volume of the driver Unit cost of the driver

12500

Sheduling

Production lines management

Warehousing

Receiving

12500 234000 568000

Quality control

25000

Maintenance

Administrative 2325000 expenses

Manufacturing department

Purchasing department

Vendors management

Charges

Orders management

210

100799

40000

327700 1245000

5€

55

55

No. of DLH+ No. of DLH No. of No. of parts Mach H batches +Mach H controls employees number 5 € 40560

83,440 € 2,535 € 9,905 € 245,517 €

111

62 € 3,877 €

40560

111

31 € 4,937 €

54 891 €

Non-conventional Models

65000

62780 160000

Administration

Bulding utilities

Quality control

Human resources management

Administration department

Sales promotion

Sending

Customor claims

Customer entertainment

Marketing department

9220

2500

10000

0

500000

25400 32800 232000

436700

316000

325000

720350

239998

12192

209615

151679

155999

345766

245000

845000

9300

212642

0

15744 111359

354000 238900

1550

1397898

37592 112874 503359

646315

712679

1557861 1077916

No. of No. of No. of k€ sold No. of No. of SurfaceM2 customers claims parcels employees products 12 116,492 €

80

54

12

54

5

470 € 2,090 € 41,947 € 11,969 € 142,536 €

2400 649 €

none

211

212

1 0 0 58.4 1000 50 20 20

C1 C2 SST

Volume produced Batch size No. of batches No. of controls

0.2 0

M1 M2

P1

0 2 0 121.2 2600 100 26 26

0.1 2

P2

0 0 0 280.6 8000 200 40 40

0.05 8

P3

3 0 1 208 21000 1500 14 14

0 0

P4

0 1 0 136 55000 5000 11 11

0.5 3

P5

111 111

64000 60200 21000

28360 234200

Consumption (unit)

Information leading to the evaluation of the volume of the drivers:

56 25 40

12 35

Unit price

14,466,320 €

3584000 1505000 840000

340320 8197000

Direct materials used

55

12 12 1

6 24

No. of orders

213

1000

Production (units)

2600

8000

119.50 €

91.20 €

Unit cost

42.00 €

0.1 0.15

0.25

0.15

0.4

P3

OP3MACH

0.1

P2

OP4MA

0.2

0.3

OP2MA

P1

OP1MA

Bill of operations:

21000

33.00 €

0.3

P4

55000

127.60 €

0.2

0.2

0.1

P5

40560 DLH⫹D Mach H

19300

11800

3760

5700

Total

110 €

450 €

145 €

156 €

Unit price

8,867,400 €

2,123,000 €

5,310,000 €

545,200 €

889,200 €

Amount

214

200 0 1000 0 0

Outsourcing

Components

1000

Materials

P1

Volume

M1 M2 C1 C2

Consumption in volume:

260 5200 0 5200 0

2600

P2

400 64000 0 0 0

8000

P3

0 0 63000 0 21000

21000

P4

27500 165000 0 55000 0

55000

P5

28360 234200 64000 60200 21000

87600

Total

30000 235000 64000 61000 840000

360,000 € 8,225,000 € 3,584,000 € 1,525,000 € 840,000 €

Materials Materials purchased purchased (units) (€)

215 25.45 € 721,854 € 41,743 €

Unit cost

Materials used

Ending balance

30000

245,517 €

Volume purchased

245,517 €

59,433 €

763,597 €

No. of parts number

Warehousing

9,905 €

15,208 €

360,000 €

No. of orders

Receiving

2,535 €

83,440 €

M1

Total cost

No. of orders

Orders management

83,440 €

Unit cost of the driver

Materials

No. of parts number

Vendors management

Drivers

Cost of materials used:

30,136 €

8,822,384 €

37.67 €

235000

8,852,520 €

8,225,000 €

245,517 €

237,731 €

60,833 €

83,440 €

M2

0€

4,062,238 €

63.47 €

64000

4,062,238 €

3,584,000 €

245,517 €

118,865 €

30,417 €

83,440 €

C1

26,272 €

1,976,966 €

32.84 €

61000

2,003,238 €

1,525,000 €

245,517 €

118,865 €

30,417 €

83,440 €

C2

0€

1,181,397 €

56.26 €

21000

1,181,397 €

840,000 €

245,517 €

9,905 €

2,535 €

83,440 €

SST

98,152 €

16,764,840 €

16,862,991 €

16,862,991 €

14,534,000 €

1,227,583 €

544,799 €

139,410 €

417,199 €

Total

216 6.21 €

0€

SST

No. of products

Quality control

Quality control

3.12 €

28,404 €

290,476 €

2139,239 €

Contribution margin

36,119 €

902,976 €

361 €

939,096 €

142,536 €

128,360 €

812,500 €

0€

539,239 €

539 €

539,239 €

142,536 €

98,739 €

20,288 €

400,000 €

142,536 €

4,937 €

100,805 €

56,520 €

71,500 €

0€

37,700 €

0€

0€

170,768 €

0€

195,886 €

6,618 €

P2

Sales

Ending balance

Cost of goods sold

Unit cost

Manufacturing cost

DLH+Mach H

No. of controls

Maintenance

No. of batches

Scheduling

77,542 €

40,371 €

3,877 €

16,500 €

DLH+Mach H

Production lines management

0€

OP4MA

OP3MACH

43,500 €

0€

C2

OP2MA

63,472 €

C1

31,200 €

0€

OP1MA

5,091 €

M2

P1

M1

Computing the manufacturing cost:

2,042,546 €

6,400,000 €

0€

4,357,454 €

545 €

4,357,454 €

142,536 €

197,477 €

162,307 €

155,084 €

322,969 €

132,000 €

360,000 €

464,000 €

0€

0€

0€

0€

2,410,899 €

10,181 €

P3

0€

0€

26,692 €

6,400,000 €

320,335 €

6,406,692 €

320 €

6,727,026 €

142,536 €

69,117 €

196,642 €

54,280 €

391,289 €

693,000 €

0€

0€

0€

1,181,397 €

0€

3,998,766 €

P4

9,640,347 €

26,500,000 €

1,685,965 €

16,859,653 €

337 €

18,545,619 €

142,536 €

54,306 €

858,357 €

42,648 €

1,708,009 €

1,210,000 €

4,950,000 €

0€

858,000 €

0€

1,806,199 €

0€

6,215,599 €

699,964 €

P5

11,446,485 €

40,512,500 €

2,042,419 €

29,066,015 €

31,108,434 €

712,679 €

547,999 €

1,265,998 €

430,359 €

2,519,158 €

2,123,000 €

5,310,000 €

545,200 €

889,200 €

1,181,397 €

1,976,966 €

4,062,238 €

8,822,384 €

721,854 €

Total

Non-conventional Models

217

Characteristics of the orders:

Customer 1 Customer 2 Customer 3 Customer 4 Customer 5 Customer 6 Customer 7 Customer 8 Customer 9 Customer 10 Customer 11 Customer 12 Total

P1

P2

P3

P4

P5

50 0 630 0 220 0 0 0 0 50 50 0

0 650 0 0 650 150 0 100 450 0 500 0

0 100 3300 800 2600 0 200 0 400 0 400 200

0 4500 6000 0 9500 0 0 0 0 0 0 0

0 0 15000 0 12000 0 5000 8000 0 0 7500 2500

1000

2500

8000

20000

50000

No. of parcels 1 5 17 1 13 1 2 2 4 1 5 2

20,000 € 1,731,250 € 12,762,000 € 640,000 €

11,779,250 € 48,750 € 2,810,000 € 4,272,500 € 466,250 €

20,000 € 4,477,500 € 1,485,000 €

40512500

Customer 1 Customer 2 Customer 3 Customer 4

Customer 5 Customer 6 Customer 7 Customer 8 Customer 9

Customer 10 Customer 11 Customer 12

Total

Sales

Customer profitability:

29,066,015

26,962 € 2,954,378 € 951,919 €

8,859,074 € 54,179 € 1,794,902 € 2,733,664 € 380,408 €

26,962 € 1,730,748 € 9,117,074 € 435,745 €

Manufacturing cost

1,397,898

116,492 € 116,492 € 116,492 €

116,492 € 116,492 € 116,492 € 116,492 € 116,492 €

116,492 € 116,492 € 116,492 € 116,492 €

Customer entertainment

112,874

2,090 € 10,451 € 4,181 €

27,173 € 2,090 € 4,181 € 4,181 € 8,361 €

2,090 € 10,451 € 35,534 € 2,090 €

Sending

503,359

41,947 € 41,947 € 41,947 €

41,947 € 41,947 € 41,947 € 41,947 € 41,947 €

41,947 € 41,947 € 41,947 € 41,947 €

Sales promotion

31,080,146

187,490 € 3,123,267 € 1,114,538 €

9,044,686 € 214,707 € 1,957,520 € 2,896,282 € 547,208 €

187,490 € 1,899,637 € 9,311,047 € 596,274 €

Customer cost

9,432,354 €

⫺167,490 € 1,354,233 € 370,462 €

2,734,564 € ⫺165,957 € 852,480 € 1,376,218 € ⫺80,958 €

⫺167,490 € ⫺168,387 € 3,450,953 € 43,726 €

Profit/ customer

Non-conventional Models

Activities outside the cost calculation perimeter: Human resources (Manufacturing) Human resources management (administration) Building utilities Administration Customer claims

48100 646315 1557861 1077916 37592

Total

3367783

From customer profitability to operational profit: Customer profitability Cost of support Operating profit

9,432,354 € 3,367,783 € 6,064,571 €

219

Income before taxes

0€

2,051,723 €

Marketing expenses

R&D

4,042,870 €

Administrative expenses

6,064,571 €

12,159,164 €

P5 28,353,336 €

1,685,965 €

P4

Gross margin

36,119 € 320,335 €

P2

2,042,419 €

Cost of goods sold

Less ending finished goods

30,395,755 €

Cost of goods available for sale

0€ 30,395,755 €

0€

Cost of goods manufactured

Factory overhead

Other direct costs

Direct labour

Direct materials used

less materials EB

Direct materials available

Outsourcing

P4

P5

Cost of goods manufactured

Beginning finished goods

C1

6,400,000 €

26,500,000 €

P3

C2

C1

M2

M1

SST

C2

812,500 € 6,400,000 €

P2

M1 M2

400,000 €

P1 Purchases

Direct materials BB

Sales

40,512,500 €

Cost of goods statement

Income statement

7,092,506 €

5,310,000 €

3,557,400 €

26,272 €

0€

30,136 €

41,743 €

840,000 €

1,525,000 €

3,584,000 €

8,225,000 €

360,000 €

0€

0€

30,395,755 €

14,435,848 €

98,152 €

14,534,000 €

14,534,000 €

Non-conventional Models

13.3

221

ABC Model 010 – functional

General presentation We are still in the case of activities defined within the various functions. There is no transfunctionality at this level. This is introduced at the time of the hierarchization of the activities. In this family of models, the tendency is to limit transfunctionality within a function (often suggested in the software of integrated management) or to rebuild functions broken up within the flow chart. For example, the function of staff management, which is visible at two places in the structure, will be reconstituted as a support function by assembling these two activities as ‘staff management’. This functional orientation is very frequently accompanied by an analysis reduced to products profitability. The profitability of the customers being only the result of the reallocation of the profitability of the products, the only information which could intervene would be information on different tariffs applied to the customers. This option is not treated in the illustration. Architecture Resources used Department 1 A1

A2

A3

Department 2 A4

A5

Department 3

Department 4

A6

A9

A7

A8

A10

Support process Value added process 1 I1

Value added process 2 I2 Depending on causality relations Cost objects

Value added process 3 I3

222

Cost Systems Design

Criteria of classification and judgement Characteristic of the family of systems in comparison with the criteria of structuring interns Units of analysis

Preexisting

New

Product

Organization

Homogeneity

Yes

No

Transfunctionality

Yes

No

Origin of the units of analysis

Hierarchy

Yes

No

Nature of the allocation bases

Inputs

Outputs

Cost object

Unique

Multiple

Relevance on looking at resources management Causality

Weak

Strong

Traceability

Limited

Total

Responsibility

Distinct

Strongly linked

Relevance on looking at the dialogue with the environment Coherence with the intrinsic value

Yes

No

Coherence with the exchange value

Yes

No

Coherence with the utility value

Yes

No

Relevance on looking at behaviors Legibility

Weak

Strong

Built-in decision help

Weak

Strong

?

223

Unit cost driver

Volume

Drivers

Total

Total cost

13187100

9,905 84

14 534

1227583 K purchased

Warehousing

6

2 4

Human resources management

Support activities 54

6

Sales management

Total

2

34

Quality management

Manufacturing facilities management

Providing materials

48100

Human resources (M)

4,937

111 116,492

12

No. of customers

1397898

No. of controls Volume Unit cost diver

Volume Unit cost diver

Quality management 1,286,397

112874

111 11,589

54 12,860

470

80 2,090

54

No. of claims No. of parcels

37592

Customer entertainment Custumer claims Sending

Human resources management 694,415 No. of employees

891

54

No. of controls No. of employees

547999

Quality control

Marketing department

77,157

694,415

77,157

77,157

25,719

437,224

Administration department

Administration

11,969

54

649

2400

Support Activities 2,712,934 No. of products sold Volume Unit cost diver

142,536

5

Sales management 2,128,881 No. of products sold Volume 5 Unit cost diver 425,776

12

40512.5

81,500 33

none

Building uti ities

1077916

712679

k sold No of emp oyees No. of products SurfaceM2

646315

Human resources Qua ity management control 1557861

503360

Sales's promotion

Breakdown of the cost of staff management (to avoid reciprocal allocation)

Manufacturing facilities management 4,652,739 HMOD+HMACH Volume 405,600 Unit cost diver 11

6

3

405600

111 3,877

DLH+Mach H

No. of batches

DLH+Mach H 405600

430359

1265998

Maintenance

Manufacturing department

2519158

Production lines management Scheduling

Breakdown of manpower

Providing materials 2,406,148 Drivers : K purchased Volume 14,534 Unit cost diver 166

2,535

555

29

No. of orders

No. of orders

14,534

55

544799

Receiving

139410

Orders management

417199 K purchased

Vendors management

Purchasing department

Passage to the functional processes:

Quantified illustration

224

0

SST

1000

50

20 20

Volume produced

Lot size

No. of lots No. of controls

58.4

1

0

C2

0

M2

C1

0.2

M1

P1

26 26

100

2600

121.2

0

2

0

2

0.1

P2

40 40

200

8000

280.6

0

0

0

8

0.05

P3

14 14

1500

21000

208

1

0

3

0

0

P4

11 11

5000

55000

136

0

1

0

3

0.5

P5

111 111

21000

60200

64000

234200

28360

Materials used (units)

Information leading to the evaluation of the volume of drivers:

14,534,000 €

840000

61000

64000

235000

30000

Purchase

40

25

56

35

12

Unit price

14,466,320 €

840000

1505000

3584000

8197000

340320

Direct materials used

55

1

12

12

24

6

No. of orders

225

1000

2600

42.00 € 8000

119.50 €

91.20 €

Total cost

Volume produced

1 1.5

1.5

4

P3

OP4MA

2.5

1

P2

OP3MACH

2

3

OP2MA

P1

OP1MA

Bill of operations:

21000

33.00 €

3

P4

55000

127.60 €

2

2

1

P5

405600 DLH+DMach H

193000

118000

37600

57000

Total

11 €

45 €

15 €

16 €

Unit Price

8,867,400 €

2,123,000 €

5,310,000 €

545,200 €

889,200 €

Amount

226

Order 24 Order 21 Order 23 Order 7 Order 19 Order 15 Order 17 Order 14 Order 10 Order 8 Order 5 Order 12 Order 16

Lot size Number of lots

Unit price Sales(€) Production (unit)

Sales (units)

200

20

50 50

50 20

400 400000 1000

1000

P1

Production and orders analysis:

150 150 200

300 150 100

100 400

100 26

325 812500 2600

2500

P2

100

2000

200

200 200

400

200

200 40

800 6400000 8000

8000

P3

8000 1500

1500 14

320 6400000 21000

20000

P4

2000 2500

8000 5000

7500

2500

5000 11

530 26500000 55000

50000

P5

111 No. of parcels 2 1 1 3 1 2 2 2 2 1 4 3 3

0 40512500 87600

81500

Total

Customer No 12 11 11 11 10 9 9 8 7 6 5 5 5

227

Order 20

10

100

Order 22

Order 25

Total

Ending balance

Order 1

1000

0

50

20

Order 18

2600

100

450

150

Order 13

Order 6

200

Order 11

200

50

Order 9

300

Order 2

100

Order 3

Order 4

500

8000

0

100

500

800

400

600

400

600

800

21000

1000

4000

500

6000

55000

5000

10000

3000

2000

7500

3

54

0

1

2

3

2

3

3

2

2

2

3

1

5

1

2

2

3

3

3

3

3

3

3

4

228

C2

M1 M2 C1

0 0

1000 200 0 1000

P1

396,661 € 22,938 €

Ending balance

13.99 €

Unit cost of material used

Material used

30000

419,599 €

Volume purchased

Total cost

59,599 €

M1

0 0

8000 400 64000 0

P3

360,000 €

166 €

Unit cost driver

5200 0

2600 260 5200 0

P2

Purchase

Providing materials K€purchased

Driver

Cost of materials used:

Outsourcing

Components

Volume Materials

Material purchased:

32,635 €

9,554,038 €

40.79 €

235000

9,586,674 €

8,225,000 €

1361673.95

M2

0 21000

21000 0 0 63000

P4

0€

4,177,342 €

65.27 €

64000

4,177,342 €

3,584,000 €

593342

C1

55000 0

55000 27500 165000 0

P5

23,311 €

1,754,157 €

29.14 €

61000

1,777,468 €

1,525,000 €

252,468 €

C2

60200 21000

87600 28360 234200 64000

Total

0€

979,065 €

47 €

21000

979,065 €

840,000 €

139,065 €

SST

61000 840000

30000 235000 64000

Materials purchased (units)

78,885 €

16,861,264 €

16,940,148 €

16,940,148 €

14,534,000 €

2,406,148 €

Total

1,525,000 € 840,000 €

360,000 € 8,225,000 € 3,584,000 €

Materials purchased (€)

229

11 €

0€

SST

No. of controls

No. of products

No. of products sold

Quality management

Sales management

Activities support

33 €

425,776 € 33,288 €

425,776 €

231,783 €

74,563 €

11,589 €

16,500 €

HMOD+HMACH

Manufacturing facilities management

0€

OP4MA

OP3MACH

43,500 €

0€

C2

OP2MA

65,271 €

C1

31,200 €

0€

OP1MA

2,797 €

M2

P1

M1

Manufacturing cost:

83,219 €

425,776 €

301,318 €

104,388 €

71,500 €

0€

37,700 €

0€

0€

151,522 €

0€

212,131 €

3,637 €

P2

266,300 €

425,776 €

463,567 €

596,505 €

132,000 €

360,000 €

464,000 €

0€

0€

0€

0€

2,610,839 €

5,595 €

P3

0€

0€

665,751 €

425,776 €

162,248 €

722,689 €

693,000 €

0€

0€

0€

979,065 €

0€

4,112,071 €

P4

1,664,377 €

425,776 €

127,481 €

3,154,594 €

1,210,000 €

4,950,000 €

0€

858,000 €

0€

1,602,635 €

0€

6,731,069 €

384,633 €

P5 396,661 €

Continued

2,128,881 €

1,286,397 €

4,652,739 €

2,123,000 €

5,310,000 €

545,200 €

889,200 €

979,065 €

1,754,157 €

4,177,342 €

9,554,038 €

230

Gross margin

Sales management

Ending balance

Cost of goods sold

Unit cost

Manufacturing cost

Continued P2

535 €

666 €

5,324,582 €

P3

812,500 €

53,507 €

2524,678 € 2525,183 €

400,000 €

0€

1,075,418 €

6,400,000 €

0€

924,678 € 1,337,683 € 5,324,582 €

925 €

924,678 € 1,391,191 €

P1

1,918,960 €

2,342,020 €

19,189,604 € 34,167,595 €

384 €

21,108,565 € 36,509,615 €

P5

2991,047 €

7,310,396 € 6,344,905 €

6,400,000 € 26,500,000 € 40,512,500 €

369,552 €

7,391,047 €

370 €

7,760,600 €

P4

Non-conventional Models

231

Characteristic of the customers:

Customer 1 Customer 2 Customer 3 Customer 4 Customer 5 Customer 6 Customer 7 Customer 8 Customer 9 Customer 10 Customer 11 Customer 12 Total

P1

P2

P3

P4

P5

No. of parcels

50 0 630 0 220 0 0 0 0 50 50 0

0 650 0 0 650 150 0 100 450 0 500 0

0 100 3300 800 2600 0 200 0 400 0 400 200

0 4500 6000 0 9500 0 0 0 0 0 0 0

0 0 15000 0 12000 0 5000 8000 0 0 7500 2500

1 5 17 1 13 1 2 2 4 1 5 2

1000

2500

8000

20000

50000

54

Customer profitability:

Sales Customer 1 Customer 2 Customer 3 Customer 4 Customer 5 Customer 6 Customer 7 Customer 8 Customer 9 Customer 10 Customer 11 Customer 12 Total

20,000 € 1,731,250 € 12,762,000 € 640,000 € 11,779,250 € 48,750 € 2,810,000 € 4,272,500 € 466,250 € 20,000 € 4,477,500 € 1,485,000 € 40512500

Cost of goods sold

Customer cost

Customer profitability

46,234 € 2,077,341 € 10,753,133 € 532,458 € 10,397,969 € 80,261 € 2,052,075 € 3,123,844 € 507,012 € 46,234 € 3,458,440 € 1,092,595 €

46,234 € 2,077,341 € 10,753,133 € 532,458 € 10,397,969 € 80,261 € 2,052,075 € 3,123,844 € 507,012 € 46,234 € 3,458,440 € 1,092,595 €

⫺26,234 € ⫺346,091 € 2,008,867 € 107,542 € 1,381,281 € ⫺31,511 € 757,925 € 1,148,656 € ⫺40,762 € ⫺26,234 € 1,019,060 € 392,405 €

34,167,595

34,167,595

6,344,905 €

6,400,000 € 6,400,000 € 26,500,000 €

P3

P4

P5

Income before taxes

R&D

0€

2,712,934 € 2,128,881 €

Marketing expenses 6,344,905 €

11,186,720 €

Gross margin

Administrative expenses

29,325,780 €

Cost of goods sold

Cost of goods manufactured

Factory overhead

Other direct costs

Direct labour

8,345,285 €

5,310,000 €

3,557,400 €

0€ 23,311 €

C2

32,635 €

22,938 €

840,000 €

1,525,000 €

3,584,000 €

8,225,000 €

360,000 €

0€

C1

M2

369,552 € 1,918,960 €

SST

P4

Direct materials used

C1 C2

P5

less materials EB

M1 M2

M1

2,342,020 €

Less ending finished goods

Direct materials available

Outsourcing

Purchases

Direct materials BB

Cost of goods statement

53,507 €

31,667,800 €

Cost of goods available for sale

0€

40,512,500 €

31,667,800 €

P2

812,500 €

P2

0€

400,000 €

P1

Cost of goods manufactured

Beginning finished goods

Sales

Income statement

0€

31,667,800 €

14,455,115 €

78,885 €

14,534,000 €

14,534,000 €

Non-conventional Models

233

13.4 ABC Model 011 (hierarchized and value creation oriented) General presentation We are still in the case of activities not transversal to the functions. Transfunctionality is introduced here during the simplification of the activity chart. The idea is not, as in the preceding model, to reconstitute burst functions but to highlight the value creation processes existing within the organization. The regrouping of the activities into processes makes it possible to find, within the same perimeter of management, the operational activities, the activities of support which are dedicated to them and the activities correcting their dysfunctions (see the composition of the process ‘having products ready for sale’). The value not being only carried by the physical products, we will have two levels of analysis of the contribution: by products and by customers. The support processes are consumed by the operational processes on the basis of a driver representing a consumption of the provided service. In our example, that is acceptable for human resources management but the treatment of the process of general support could be better because the driver maintains direct causal relation only with one third of the resources concerned (it would have been judicious to leave certain activities out of the perimeter of cost calculation). Architecture Resources A1

A2

A3

A4

A5

A6

A7

A8

A9

Support process

Value creating process 1

Value creating process 2

Value creating process 3

Cost driver 1

Cost driver 2

Cost driver 3

Depending on causality relations Cost objects

A10

234 Cost Systems Design

Criteria of classification and judgement

Characteristic of the family of systems in comparison with the criteria of structuring interns Units of analysis

Preexisting

New

Product

organization

Homogeneity

Yes

No

Transfunctionality

Yes

No

Origin of the units of analysis

Hierarchy

Yes

No

Nature of the allocation bases

Inputs

Outputs

Cost object

Unique

Multiple

Relevance on looking at resources management Causality

Weak

Strong

Traceability

Limited

Total

Responsibility

Distinct

Strongly linked

Relevance on looking at the dialogue with the environment Coherence with the intrinsic value

Yes

No

Coherence with the exchange value

Yes

No

Coherence with the utility value

Yes

No

Relevance on looking at behaviours Legibility

Weak

Strong

Built-in decision help

Weak

Strong

?

235

2,535

Employees per process Providing materials Having products ready for sale Customers management Product management Human resources management Building utilities General administration Total

Volume Unit cost diver

5

3,877

Volume Unit cost diver

3

405,600

111 55,755

Having products ready for sale 6,188,835 No. of batches

6

111

DLH+Mach H

405,600

DLH+Mach H No. of batches

Maintenance 1265998

Scheduling 430359

2519158

Production ines management 48100

Human resources (M) 1397898

Customer entertainment

4,937

111 116,492

12

37592

470

80

12 120,650

2,090

54

646315

712679

Quality control

1557861

Bu lding u il ties

Administration department Human resources management

11,969

54

No. of products Volume Un t cost diver

M2 650 1400 40 60 25 150 75 2400

649

2,400

none

1077916

5 140,611

General administration 2,024,685 No. of products sold 81,500 Volume Unit cost diver 25

142,536

5

Administration

Allocated cost 421,921 908,752 25,964 38,947 0 0 162,277 1557861

Product management 703,056

12

40 513

k sold No. of employees No. of products SurfaceM2

503360

Sales's promo ion

Surface occupied Providing materials Having products ready for Customers management Product management Human resources Building utilities General administration Total

Customers management 1,447,800 No. of customers Volume Unit cost diver

112874

Sending

No. of claims No. of parcels

Custumer claims

Marketing department

Human resources management 646,315 No. of employees (without those of General administration) Volume 54 Unit cost diver 11,969

891

54

No. of controls No. of employees No. of customers

547999

Qual ty control

Manufacturing department

No. of employees Allocated cost 6 71,813 36 430,877 2 23,938 4 47,875 1 0 1 0 4 71,813 54 646,315

564,545

84

14,534

9,905

K purchased

1227583

Warehousing

55

544799

No. of orders

Receiving

Providing materials 2,822,724 No. de références spécifiques

29

55

14,534

Unit cost driver

No. of orders

K purchased

Orders management

Drivers

Vendors management

Volume

13187100

139410

Total cost

417199

Total

Purchasing department

Activities are non-transverse: Passage of the vision activity to the vision of the value added process:

Quantified illustration

236

100 26 26

50 20 20

Volume produced Lot size No. of lots No. of controls

0 2 0 121.2 2600

1 0 0 58.4 1000

C1 C2 SST

0.1 2

0.2 0

P2

M1 M2

P1

200 40 40

0 0 0 280.6 8000

0.05 8

P3

1500 14 14

3 0 1 208 21000

0 0

P4

5000 11 11

0 1 0 136 55000

0.5 3

P5

111 111

64000 60200 21000

28360 234200

Materials used (units)

Information leading to the evaluation of the volume of the drivers:

14,534,000 €

64000 61000 840000

30000 235000

Purchase

56 25 40

12 35

Unit price

14,466,320 €

3584000 1505000 840000

340320 8197000

Direct materials used

55

12 12 1

6 24

No. of orders

237

1000

2600

42.00 € 8000

119.50 €

91.20 €

Total cost

Volume produced

1 1.5

2.5

4

1.5

1

P3

OP4MA

3

P2

OP3MACH

2

OP2MA

P1

OP1MA

Bill of operations:

21000

33.00 €

3

P4

55000

127.60 €

2

2

1

P5

405600 DLH+Mach H

193000

118000

37600

57000

Total

11 €

45 €

15 €

16 €

Unit price

8,867,400 €

2,123,000 €

5,310,000 €

545,200 €

889,200 €

Amount

238 Cost Systems Design

Production and orders analysis:

Sales (units) Unit price Sales(€) Production (unit)

P1

P2

P3

P4

1000

2500

8000

20000

325

800

400 400000

812500 6400000

P5

Total

50000

81500

320

530

0

6400000

26500000

40512500 87600

1000

2600

8000

21000

55000

Lot size

50

100

200

1500

5000

Number of lots

20

26

40

14

11

111

924,545 € 30000 30.82 € 874,003 € 50,542 €

Volume

Unit cost

Cost of materials used

Ending balance

564,545 € 360,000 €

564,545 €

M1

0

0

0

64000

400

8000

P3

Total cost

No. of parts numbers

Unit cost driver

0

5200

0

5200

260

2600

P2

Purchase

Providing materials

Driver

0

0

Cost of materials used:

Outsourcing

1000

C1

0

M2

C2

200

Materials

Components

1000

M1

Volume

P1

Computing the consumption in volume and euros:

29,922 €

8,759,623 €

37.40 €

235000

8,789,545 €

8,225,000 €

564,545 €

M2

21000

0

63000

0

0

21000

P4

0€

4,148,545 €

64.82 €

64000

4,148,545 €

3,584,000 €

564,545 €

C1

0

55000

0

165000

27500

55000

P5

27,404 €

2,062,141 €

34.25 €

61000

2,089,545 €

1,525,000 €

564,545 €

C2

21000

60200

64000

234200

28360

87600

Total

2,822,724 €

Total

840,000 €

1,525,000 €

3,584,000 €

8,225,000 €

360,000 €

Amount

0€

1,404,545 €

67 €

21000

1,404,545 €

107,868 €

17,248,857 €

17,356,724 €

17,356,724 €

840,000 € 14,534,000 €

564,545 €

SST

21000

61000

64000

235000

30000

Purchase

0€

SST

No. of products

No. of products sold

Customers management

Building utilities

Sales Gross margin

Ending balance

Cost of goods sold

Unit cost

Manufacturing cost

No. of batches

Having products ready for sale

OP4MA

OP3MACH

812,500 €

82,392 €

2,059,793 €

824 €

2,142,185 €

62,107 €

140,611 €

1,449,637 €

71,500 €

0€

37,700 €

0€

0€

178,125 €

0€

194,492 €

8,013 €

P2

21,042,744 € 21,247,293 €

400,000 €

0€

1,442,744 €

1,443 €

1,442,744 €

24,843 €

140,611 €

1,115,105 €

16,500 €

0€

43,500 €

0€

C2

OP2MA

64,821 €

C1

31,200 €

0€

OP1MA

6,16 4 €

M2

P1

M1

Manufacturing cost:

6,400,000 € 468,360 €

0€

5,931,640 €

741 €

5,931,640 €

198,742 €

140,611 €

2,230,211 €

132,000 €

360,000 €

464,000 €

0€

0€

0€

0€

2,393,748 €

12,327 €

P3

0€

0€

6,400,000 € 2837,437 €

361,872 €

7,237,437 €

362 €

7,599,309 €

496,855 €

140,611 €

780,574 €

693,000 €

0€

0€

0€

1,404,545 €

0€

4,083,724 €

P4

26,500,000 € 10,211,859 €

1,628,814 €

16,288,141 €

326 €

17,916,955 €

1,242,138 €

140,611 €

613,308 €

1,210,000 €

4,950,000 €

0€

858,000 €

0€

1,884,016 €

0€

6,171,383 €

847,499 €

P5 874,003 €

40,512,500 € 7,552,745 €

2,073,078 €

32,959,755 €

35,032,833 €

2,024,685 €

703,056 €

6,188,835 €

2,123,000 €

5,310,000 €

545,200 €

889,200 €

1,404,545 €

2,062,141 €

4,148,545 €

8,759,623 €

Non-conventional Models

241

Customer characteristics:

P1 Customer 1 Customer 2 Customer 3 Customer 4 Customer 5 Customer 6 Customer 7 Customer 8 Customer 9 Customer 10 Customer 11 Customer 12 Volume produced

50 0 630 0 220 0 0 0 0 50 50 0 1000

P2

P3

P4

P5

No. of parcels

0 650 0 0 650 150 0 100 450 0 500 0 2500

0 100 3300 800 2600 0 200 0 400 0 400 200 8000

0 4500 6000 0 9500 0 0 0 0 0 0 0 20000

0 0 15000 0 12000 0 5000 8000 0 0 7500 2500 50000

1 5 17 1 13 1 2 2 4 1 5 2 54

Total

Customer 1 Customer 2 Customer 3 Customer 4 Customer 5 Customer 6 Customer 7 Customer 8 Customer 9 Customer 10 Customer 11 Customer 12

40512500

20,000 € 1,731,250 € 12,762,000 € 640,000 € 11,779,250 € 48,750 € 2,810,000 € 4,272,500 € 466,250 € 20,000 € 4,477,500 € 1,485,000 €

Sales

Customer profitability:

32,959,755

72,137 € 2,238,115 € 10,413,403 € 593,164 € 10,127,669 € 123,588 € 1,777,105 € 2,688,494 € 667,345 € 72,137 € 3,223,899 € 962,698 €

Manufacturing cost

1,447,800

120,650 € 120,650 € 120,650 € 120,650 € 120,650 € 120,650 € 120,650 € 120,650 € 120,650 € 120,650 € 120,650 € 120,650 €

Customer entertainment

34,407,555

192,787 € 2,358,765 € 10,534,053 € 713,814 € 10,248,319 € 244,238 € 1,897,755 € 2,809,144 € 787,995 € 192,787 € 3,344,549 € 1,083,348 €

Customer cost

6,104,945 €

⫺172,787 € ⫺627,515 € 2,227,947 € ⫺73,814 € 1,530,931 € ⫺195,488 € 912,245 € 1,463,356 € ⫺321,745 € ⫺172,787 € 1,132,951 € 401,652 €

Customer profitability

Income before taxes

0€

2,150,856 €

R&D

2,024,685 €

Marketing expenses 6,104,945 €

10,280,486 €

Administrative expenses

30,232,014 €

Gross margin

Direct materials used

Cost of goods manufactured

Factory overhead

Other direct costs

Direct labour

9,011,559 €

5,310,000 €

3,557,400 €

0€ 27,404 €

29,922 € C2

M2

361,872 €

1,628,814 €

P4

P5

50,542 €

840,000 €

1,525,000 €

3,584,000 €

8,225,000 €

360,000 €

0€

C1

M1

less materials EB

82,392 €

2,073,078 €

Cost of goods sold

Less ending finished goods

Direct materials available

32,305,092 €

Cost of goods available for sale

C1 SST

P2

M1 M2

Outsourcing

26,500,000 €

P5

Purchases

32,305,092 €

6,400,000 €

P4

Direct materials BB

Cost of goods manufactured

6,400,000 €

P3

40,512,500 €

C2

812,500 €

P2

0€

400,000 €

P1

Cost of goods statement

0€

Beginning finished goods

Sales

Income statement

0€

32,305,092 €

14,426,132 €

107,868 €

14,534,000 €

14,534,000 €

244 Cost Systems Design

13.5

ABC Model 100

General presentation With this model we look at the models which introduce transfunctionality at the activity level. The bond with functions or departments, present in the preceding models, disappears. They are no longer visible in the model’s architecture. The model of the organization is disconnected from the hierarchical organization. This modification, fundamental for the operation of the costs system, as much for its maintenance use does not change anything concerning the formalism used to describe the mechanics of costs calculation. The model is product oriented and the drivers are usually input measures or sales turnover. Architecture Resources

A1

A2

A3

A4

A5

A6

I1

I2

I3

I4

I5

I6

A7

I7

Depending on causality relations

Cost objects

A8

I8

A9

A10

I9

I10

Non-conventional Models

245

Criteria of classification and judgement Characteristic of the family of systems in comparison with the criteria of structuring interns Units of analysis

Preexisting

New

Product

Organization

Homogeneity

Yes

No

Transfunctionality

Yes

No

Origin of the units of analysis

Yes

No

Nature of the allocation bases

Hierarchy

Inputs

Outputs

Cost object

Unique

Multiple

Relevance on looking at resources management Causality

Weak

Strong

Traceability

Limited

Total

Responsibility

Distinct

Strongly linked

?

Relevance on looking at the dialogue with the environment Coherence with the intrinsic value

Yes

No

Coherence with the exchange value

Yes

No

Coherence with the utility value

Yes

No

Legibility

Weak

Strong

Built-in decision help

Weak

Strong

Relevance on looking at behaviors

Quantified illustration Into this subset of models transfunctionality is introduced at the level of the units of analysis. The departments still appear, but they do not have any role in the structuring of the activities. The activities result from tasks carried out in various departments, and their borders no longer coincide.

246

2 644

55

37

14534

Unit cost driver

Volume

145400

535400

No. of orders

Purchase order completion

Costs

Vendors aud t

10 831

55

595700

No. of orders

Receiving

2328991

Purchasing department

K purchased

13187100

Total cost

Drivers

Cost

Production planning

Production lines management

84

14534

1227583 4 980

111

552800 405600 3

6

1265998

DLH+Mach H

Maintenance

405600

2519158

K purchased No. of batches DLH+Mach H

Warehousing

4811615

Providing customer service

Manufacturing department

22

40513

875900

K sales

Shipping

2

81500

123450

No. of products

12

40513

503360

K sales

Sales promotion

2051723

Marketing department

Bu lding facil ties

10 861

111

1205550

38

40513

1557861

No. of controls K sales

Quality control

3

287600

792400

DLH

32

40513

1286540

K sales

Employees Adminismanagement tration

3994770

Administration department

247

50 20

20

No. of controls

58.4

Lot size No. of lots

0

SST

1000

121.2

0

C2

Volume produced

0

1

C1

26

100 26

2600

2

0

2

0

0.1

0.2

M2

P2

M1

P1

40

200 40

8000

280.6

0

0

0

8

0.05

P3

14

1500 14

21000

208

1

0

3

0

0

P4

11

5000 11

55000

136

0

1

0

3

0.5

P5

111

111

21000

60200

64000

234200

28360

Materials used (units)

Information leading to the evaluation of the volume of the drivers:

14,534,000 €

840000

61000

64000

235000

30000

Purchase

40

25

56

35

12

Unit price

14,466,320 €

840000

1505000

3584000

8197000

340320

Materials used (€)

10

1

2

2

3

2

55

1

12

12

24

6

No. of No. of vendors orders

248

OP1MA OP2MA OP3MACH OP4MA Unit cost Volume produced

Bill of operations:

2 3 0 1.5 91.20 € 1000

P1

0 1 0 2.5 42.00 € 2600

P2 0 4 1 1.5 119.50 € 8000

P3 0 0 0 3 33.00 € 21000

P4 1 0 2 2 127.60 € 55000

P5

405600 DLH + Mach H

57000 37600 118000 193000

Total

16 € 15 € 45 € 11 €

Unit price

8,867,400 €

889,200 € 545,200 € 5,310,000 € 2,123,000 €

Amount

249 30000 16.15 € 458,029 € 26,487 €

Unit cost of materials used

Cost of materials used

Ending balance

30,407 €

64,985 €

Volume purchased

84 €

10,831 €

484,515 €

Warehousing

15,862 €

360,000 €

145400

K€purchased

Receiving

2,644 €

13,262 €

M1

Total cost

No. of orders

Purchase order completion

37 €

Cunit IND

Purchase

K€purchased

Vendors audit

Inducteur

Cost of materials used:

32,497 €

9,513,589 €

40.62 €

235000

9,546,087 €

8,225,000 €

694,707 €

259,942 €

63,447 €

302,991 €

M2

0€

4,180,436 €

65.32 €

64000

4,180,436 €

3,584,000 €

302715

129,971 €

31,724 €

132027

C1

24,547 €

1,847,131 €

30.68 €

61000

1,871,678 €

1,525,000 €

128,806 €

129,971 €

31,724 €

56,178 €

C2

1,227,583 €

595,700 €

145,400 €

535,400 €

Total

17,038,083 €

0€

83,531 €

955,367 € 16,954,552 €

45.49 €

21000

955,367 € 17,038,083 €

840,000 € 14,534,000 €

70,949 €

10,831 €

2,644 €

30,944 €

SST

250

6€

0€

SST

DLH+ Mach H

No. of controls

K€sales

K€sales

Maintenance

Quality control

Sales promotion

Providing customer service

22 €

12 €

10,861 €

3€

8,648 €

4,970 €

217,216 €

20,288 €

99,604 €

No. of batches

Production planning

4,980 €

40,371 €

DLH+ Mach H

Production lines management

0€ 16,500 €

OP4MA

OP3MACH

43,500 €

0€

C2

OP2MA

65,319 €

C1

31,200 €

0€

OP1MA

3,230 €

M1

P1

M2

Manufacturing cost:

17,567 €

10,095 €

282,381 €

28,404 €

129,485 €

56,520 €

71,500 €

0€

37,700 €

0€

0€

159,553 €

0€

211,233 €

4,199 €

P2

138,371 €

79,519 €

434,432 €

162,307 €

199,207 €

322,969 €

132,000 €

360,000 €

464,000 €

0€

0€

0€

0€

2,599,785 €

6,460 €

P3

0€

0€

138,371 €

79,519 €

152,051 €

196,642 €

69,723 €

391,289 €

693,000 €

0€

0€

0€

955,367 €

0€

4,115,117 €

P4

572,943 €

329,257 €

119,469 €

858,357 €

54,782 €

1,708,009 €

1,210,000 €

4,950,000 €

0€

858,000 €

0€

1,687,578 €

0€

6,702,571 €

444,139 €

P5

875,900 €

503,360 €

1,205,550 €

1,265,998 €

552,800 €

2,519,158 €

2,123,000 €

5,310,000 €

545,200 €

889,200 €

955,367 €

1,847,131 €

4,180,436 €

9,513,589 €

458,029 €

Total

251

K€sales

Employees management

Administration

Operating profit

2198,355 €

400,000 €

Sales promotion

598,355 €

598 €

598,355 €

12,703 €

17,909 €

15,382 €

1,515 €

0€

32 €

2.76 €

38 €

2€

Ending balance

Cost of goods sold

Unit cost

Full absorption cost

K€sales

DLH

Building utilities

No. of products

Shipping

203,242 €

173,579 €

246,105 €

30,294 €

354 €

0€

354,490 €

5,481,746 € 7,089,808 €

685 €

5,481,746 € 7,444,298 €

203,242 €

121,229 €

246,105 €

12,118 €

1,989,639 €

19,896,391 €

398 €

21,886,030 €

841,550 €

454,611 €

1,019,027 €

75,736 €

2239,943 €

918,254 € 2689,808 €

6,603,609 €

812,500 € 6,400,000 € 6,400,000 € 26,500,000 €

42,098 €

1,052,443 €

421 €

1,094,541 €

25,802 €

25,072 €

31,244 €

3,787 €

6,393,758 €

40,512,500 €

2,386,227 €

34,118,742 €

36,504,96 9 €

1,286,540 €

792,400 €

1,557,861 €

123,450 €

252

Cost Systems Design

Information on customers: Products Sales (units) Unit price Sales(€) Customer 1 Customer 2 Customer 3 Customer 4 Customer 5 Customer 6 Customer 7 Customer 8 Customer 9 Customer 10 Customer 11 Customer 12 Total

P1

P2

1000 400 400000 50 0 630 0 220 0 0 0 0 50 50 0

2500 325 812500 0 650 0 0 650 150 0 100 450 0 500 0

1000

2500

P3

P4

8000 20000 800 320 6400000 6400000 0 0 100 4500 3300 6000 800 0 2600 9500 0 0 200 0 0 0 400 0 0 0 400 0 200 0 8000

P5

Total

50000 81500 530 0 26500000 40512500 0 0 15000 0 12000 0 5000 8000 0 0 7500 2500

20000

50000

Customer profitability:

Customer 1 Customer 2 Customer 3 Customer 4 Customer 5 Customer 6 Customer 7 Customer 8 Customer 9 Customer 10 Customer 11 Customer 12 Total

Sales

Products cost

Customers cost

Customer profitability

20,000 € 1,731,250 € 12,762,000 € 640,000 € 11,779,250 € 48,750 € 2,810,000 € 4,272,500 € 466,250 € 20,000 € 4,477,500 € 1,485,000 €

29,918 € 1,937,364 € 10,734,043 € 548,175 € 10,329,633 € 63,147 € 2,126,683 € 3,225,520 € 463,527 € 29,918 € 3,498,952 € 1,131,863 €

29,918 € 1,937,364 € 10,734,043 € 548,175 € 10,329,633 € 63,147 € 2,126,683 € 3,225,520 € 463,527 € 29,918 € 3,498,952 € 1,131,863 €

⫺9,918 € ⫺206,114 € 2,027,957 € 91,825 € 1,449,617 € ⫺14,397 € 683,317 € 1,046,980 € 2,723 € ⫺9,918 € 978,548 € 353,137 €

34,118,742

34,118,742

6,393,758 €

40512500

Income before taxes

0€

1,379,260 €

R&D

4,842,351 €

Marketing expenses 6,393,758 €

Cost of goods manufactured

Factory overhead

Other direct costs

Direct labour

12,615,369 €

Gross margin

Administrative expenses

Direct materials used

27,897,131 €

M2

354,490 €

1,989,639 €

P4

P5

C2

C1

M1

less materials EB

42,098 €

2,386,227 €

Cost of goods sold

Less ending finished goods

Direct materials available

30,283,358 €

Cost of goods available for sale

C1 SST

P2

M1 M2

Outsourcing

26,500,000 €

P5

Purchases

30,283,358 €

6,400,000 €

P4

Direct materials BB

Cost of goods manufactured

6,400,000 €

P3

40,512,500 €

C2

812,500 €

P2

0€

400,000 €

P1

Cost of goods statement

0€

Beginning finished goods

Sales

Income statement

6,965,489 €

5,310,000 €

3,557,400 €

24,547 €

0€

32,497 €

26,487 €

840,000 €

1,525,000 €

3,584,000 €

8,225,000 €

360,000 €

0€

0€

30,283,358 €

14,450469 €

83,531 €

14,534,000 €

14,534,000 €

254 Cost Systems Design

13.6 ABC Model 101 General presentation As in the preceding model, transfunctionality is introduced at the activity level. The bond with functions or departments does not exist any more. Here, one builds a model of the organization disconnected from the hierarchical organization. This modification, fundamental for the operation of the costs system as much as for its maintenance as for its use, does not change anything to the formalism used to describe the mechanics of costs calculation. The model is different from the precedent by the choice of the drivers, which are value oriented, and by the organization of profitability analysis.

Architecture Resources

A1

A2

A3

A4

A5

A6

I1

I2

I3

I4

I5

I6

A7

I7

Depending on causality relations

Cost objects

A8

I8

A9

A10

I9

I10

Non-conventional Models

255

Criteria of classification and judgement Characteristic of the family of systems in comparison with the criteria of structuring interns Units of analysis Origin of the units of analysis Homogeneity

Preexisting

New

Product

Organization

Yes

No

Transfunctionality

Yes

No

Hierarchy

Yes

No

Nature of the allocation bases

Inputs

Outputs

Cost object

Unique

Multiple

Relevance on looking at resources management Causality

Weak

Strong

Traceability

Limited

Total

Responsibility

Distinct

Strongly linked

?

Relevance on looking at the dialogue with the environment Coherence with the intrinsic value

Yes

No

Coherence with the exchange value

Yes

No

Coherence with the utility value

Yes

No

Legibility

Weak

Strong

Built-in decision help

Weak

Strong

Relevance on looking at behaviours

?

Quantified illustration Into this subset of models transfunctionality is introduced at the level of the units of analysis. The departments still appear, but they do not have any role in the structuring of the activities. The activities result from tasks carried out in various departments, and their borders no longer coincide.

256

Unit cost driver

Volume

Costs

Drivers

Total

13187100

Total cost

Purchase orders completion

Receiving

Warehousing Production planning

53,540

10

535400

2,644

55

145400

10,831

55

595700

306,896

4

1227583

4,980

111

552800

6

405600

2519158

3

405600

1265998

DLH+Mach H

72,992

2,286

54

123450

875900 12

No. of products

Shipping

100,672

5

503360

K sales

Sales promotion

Quality control

10,861

111

649

2400

14,674

54

1205550 1557861 792400 1286540

DLH K sales

Building Employees Administration utilities management

3994770

Administration department

No. of controls K sales

2051723

Marketing department

K sales

Maintenance Providing Production lines customer management service

4811615

Manufacturing department

0 No. of vendors No. of orders No. of orders K purchased No. of batches DLH+Mach H

Vendors auditing

2328991

Purchasing department

257

50 20 20

58.4

Lot size No. of lots No. of controls

0

SST

1000

121.2

0

C2

Volume produced

0

1

C1

100 26 26

2600

2

0

2

0

0.1

0.2

M2

P2

M1

P1

200 40 40

8000

280.6

0

0

0

8

0.05

P3

1500 14 14

21000

208

1

0

3

0

0

P4

5000 11 11

55000

136

0

1

0

3

0.5

P5

111 111

21000

60200

64000

234200

28360

Materials used (units)

14,534,000 €

840000

61000

64000

235000

30000

Purchase

Information leading to the evaluation of the volume of the drivers.

40

25

56

35

12

Unit price

14,466,320 €

840000

1505000

3584000

8197000

340320

Direct materials used

10

1

2

2

3

2

55

1

12

12

24

6

No. of No. of vendors orders

258

OP3MACH OP4MA Unit cost Volume produced

OP1MA OP2MA

Bill of operations:

0 1.5 91.20 € 1000

2 3

P1

0 2.5 42.00 € 2600

0 1

P2

1 1.5 119.50 € 8000

0 4

P3

0 3 33.00 € 21000

0 0

P4

2 2 127.60 € 55000

1 0

P5

405600 DLH+ Mach H

118000 193000

57000 37600

Total

45 € 11 €

16 € 15 €

Unit price

8,867,400 €

5,310,000 € 2,123,000 €

889,200 € 545,200 €

Amount

Non-conventional Models

259

Sales: P1 Sales (units) 1000 Unit price 400 Sales(€) 400000

Client 1 Client 2 Client 3 Client 4 Client 5 Client 6 Client 7 Client 8 Client 9 Client 10 Client 11 Client 12

P2

P3

P4

2500 325 812500

8000 800 6400000

20000 320 6400000

50000 530 26500000

0 650 0 0 650 150 0 100 450 0 500 0

0 100 3300 800 2600 0 200 0 400 0 400 200

0 4500 6000 0 9500 0 0 0 0 0 0 0

0 0 15000 0 12000 0 5000 8000 0 0 7500 2500

81500 0 40512500 No. of shipping 1 5 17 1 13 1 2 2 4 1 5 2

Total

Purchase (unit)

50 0 630 0 220 0 0 0 0 50 50 0

P5

Consumption in volume:

Volume

P1

P2

P3

P4

1000

2600

M1

200

260

400

M2

0

5200

64000

Components C1

1000

0

C2

0

5200

0

0

Materials

Outsourcing

P5

8000 21000

55000

87600

27500

28360

30000

0 165000

234200

235000 64000

0

0 63000

0

64000

0

55000

60200

61000

0 21000

0

21000

840000

0

260 30000 28.49 € 808,093 € 46,730 €

Unit Cost of materials used

Cost of materials used

Ending balance

306,896 €

854,823 €

306,896 €

64,985 €

Volume purchased

K€ purchased

Warehousing

10,831 €

15,862 €

Total cost

No. of orders

Receiving

2,644 €

107,080 €

M1

360,000 €

No. of orders

Purchase orders completion

53,540 €

Cost driver unit cost

Purchase orders completion

K€ purchased

Vendor auditing

Driver

Cost of materials used:

30,692 €

8,985,212 €

38.37 €

235000

9,015,905 €

8,225,000 €

306,896 €

259,942 €

63,447 €

160,620 €

M2

0€

4,159,670 €

64.99 €

64000

4,159,670 €

3,584,000 €

306,896 €

129,971 €

31,724 €

107080

C1

27,550 €

2,073,121 €

34.44 €

61000

2,100,670 €

1,525,000 €

306,896 €

129,971 €

31,724 €

107,080 €

C2

0€

907,015 €

43 €

21000

907,015 €

840,000 €

0€

10,831 €

2,644 €

53,540 €

SST

104,973 €

16,933,110 €

17,038,083 €

17,038,083 €

14,534,000 €

1,227,583 €

595,700 €

145,400 €

535,400 €

Total

261

0€

SST

No. of batches

DLH⫹Mach H

No. of controls

No. of products

Production planning

Maintenance

Quality control

Sales promotion

Gross margin

Sales

Ending balance

Cost of goods available for sale

Unit cost

Absorption cost

40,371 €

812,500 € 2238,119 €

2240,045 €

42,025 €

1,050,619 €

420 €

1,092,644 €

100,672 €

282,381 €

28,404 €

129,485 €

56,520 €

71,500 €

0€

37,700 €

0€

0€

179,074 €

0€

199,501 €

7,408 €

P2

400,000 €

0€

640,045 €

640 €

640,045 €

100,672 €

217,216 €

20,288 €

99,604 €

16,500 €

DLH⫹ Mach H

Production lines management

0€

OP4MA

OP3MACH

43,500 €

0€

C2

OP2MA

64,995 €

C1

31,200 €

0€

OP1MA

5,699 €

M2

P1

M1

Manufacturing cost:

1,757,619 €

6,400,000 €

0€

4,642,381 €

580 €

4,642,381 €

100,672 €

434,432 €

162,307 €

199,207 €

322,969 €

132,000 €

360,000 €

464,000 €

0€

0€

0€

0€

2,455,395 €

11,398 €

P3

0€

0€

0€

109,460 €

6,400,000 €

314,527 €

6,290,540 €

315 €

6,605,067 €

100,672 €

152,051 €

196,642 €

69,723 €

391,289 €

693,000 €

9,347,964 €

26,500,000 €

1,715,204 €

17,152,036 €

343 €

18,867,239 €

100,672 €

119,469 €

858,357 €

54,782 €

1,708,009 €

1,210,000 €

4,950,000 €

0€ 0€

858,000 €

0€

1,894,047 €

0€

6,330,316 €

783,588 €

P5

0€

907,015 €

0€

4,094,675 €

P4 808,093 €

10,736,879 €

40,512,500 €

2,071,755 €

29,775,621 €

31,847,376 €

503,360 €

1,205,550 €

1,265,998 €

552,800 €

2,519,158 €

2,123,000 €

5,310,000 €

545,200 €

889,200 €

907,015 €

2,073,121 €

4,159,670 €

8,985,212 €

262

Total

Customer 1 Customer 2 Customer 3 Customer 4 Customer 5 Customer 6 Customer 7 Customer 8 Customer 9 Customer 10 Customer 11 Customer 12

40512500

20,000 € 1,731,250 € 12,762,000 € 640,000 € 11,779,250 € 48,750 € 2,810,000 € 4,272,500 € 466,250 € 20,000 € 4,477,500 € 1,485,000 €

Sales

Customer profitability:

875,900

72,992 € 72,992 € 72,992 € 72,992 € 72,992 € 72,992 € 72,992 € 72,992 € 72,992 € 72,992 € 72,992 € 72,992 €

Providing customer service

123,450

2,286 € 11,431 € 38,864 € 2,286 € 29,719 € 2,286 € 4,572 € 4,572 € 9,144 € 2,286 € 11,431 € 4,572 €

Shipping

Customer profitability Building utilities Employees management Administration Operational profit

9,737,529 € 1,557,861 € 792,400 € 1,286,540 € 6,100,728 €

From customer profitability to operating profit:

29,775,621

32,002 € 1,746,562 € 9,350,983 € 464,238 € 9,027,240 € 63,037 € 1,831,263 € 2,786,351 € 421,231 € 32,002 € 3,047,051 € 973,661 €

Cost of goods sold

30,774,971 €

107,280 € 1,830,984 € 9,462,839 € 539,516 € 9,129,951 € 138,315 € 1,908,827 € 2,863,914 € 503,367 € 107,280 € 3,131,473 € 1,051,225 €

Customer cost

9,737,529 €

⫺87,280 € ⫺99,734 € 3,299,161 € 100,484 € 2,649,299 € ⫺89,565 € 901,173 € 1,408,586 € ⫺37,117 € ⫺87,280 € 1,346,027 € 433,775 €

Customer profitability

263

Income before taxes

0€

1,502,710 €

R&D

4,842,351 €

Marketing expenses 6,100,728 €

Cost of goods manufactured

Factory overhead

Other direct costs

Direct labour

Administrative expenses

Direct materials used

12,445,789 €

P5

less materials EB

Direct materials available

Outsourcing

28,066,711 €

1,715,204 €

P4

2,071,755 €

30,138,466 €

30,138,466 €

0€

Gross margin

42,025 €

314,527 €

P2

0€

P4

P5

Cost of goods sold

Less ending finished goods

Cost of goods available for sale

Cost of goods manufactured

Beginning finished goods

C1

6,400,000 €

26,500,000 €

P3

C2

C1

M2

M1

SST

C2

812,500 €

6,400,000 €

P2

M1 M2

400,000 €

P1 Purchases

Direct materials BB

Sales

40,512,500 €

Cost of goods statement

Income statement

6,842,039 €

5,310,000 €

3,557,400 €

27,404 €

0€

29,922 €

50,542 €

840,000 €

1,525,000 €

3,584,000 €

8,225,000 €

360,000 €

0€

0€

30,138,466 €

14,429,027 €

104,973 €

14,534,000 €

14,534,000 €

264 Cost Systems Design

13.7 ABC Model 110 (functional) General presentation This model takes again the elements of model 100 but introduces a hierarchization of the activities. The simplification of the activities chart is done on a functional basis. However, as the construction of the activities uses the concept of transfunctionality, the model obtained is very different from model 010. The question is no longer one of reconstituting burst functions, by starting from a detailed analysis of the existing functions and by preserving the possibility of an articulation between the two visions. On the contrary it pushes the logic of reinterpretation of the organization, which is initiated by the constitution of the activities chart without links to the existing functions. The outcome of this procedure is dubious. Either the organization is restructured to lead in fine to model 010 or 011, or the model remains a simple computational tool of costs without interaction with the real operation of the organization, a model which will be called into question sooner or later. In both cases it should be a transitory model. Architecture Resources A1

A2

A3

A4

A5

A6

A7

A8

A9

Support process Functional process1 Cost driver 1

Functional process 2 Cost driver 2 Depending on causalityrelations Cost objects

Functional process 3 Cost driver 3

A10

Non-conventional Models

265

Criteria of classification and judgement Characteristic of the family of systems in comparison with the criteria of structuring interns Units of analysis

Preexisting

New

Product

Organization

Yes

No

Transfunctionality

Yes

No

Hierarchy

Yes

No

Nature of the allocation bases

Inputs

Outputs

Cost objet

Unique

Multiple

Origin of the units of analysis Homogeneity

Relevance on looking at resources management Causality

Weak

Strong

Traceability

Limited

Total

Responsibility

Distinct

Strongly linked

Relevance on looking at the dialogue with the environment Coherence with the intrinsic value

Yes

No

Coherence with the exchange value

Yes

No

Coherence with the utility value

Yes

No

Legibility

Weak

Strong

Built-in decision help

Weak

Strong

Relevance on looking at behaviors

Quantified illustration One finds here activities made up without reference to the formal structure. These activities are then gathered under names of basic functions like supplying, producing and selling. The system presented does not use the concept of process of support. All the identified functional processes are considered directly attributable to the cost objects.

266

Drivers Costs Volume Unit cost driver

Total

13187100

Total cost

Vendors auditing

Materials procurement K purchased 2504083 14534 172

Purchase Receiving Warehousing Production order planning completion

2328991

Total cost

Manufacturing DLH+Mach H 5543506 405600 14

Production Maintenance Providing lines customer management service

4811615

Manufacturing

Shipping

Selling K of sales 1502710 40513 37

Sales promotion

2051723

Marketing and distribution

Quality control

Building ut lities

Managing K of sales 3636801 40513 90

Employees Adminismanagement tration

3994770

Administration

267

Lot size No. of lots No. of controls

50 20 20

100 26 26

121.2 2600

58.4 1000

Quantity

0

0

2

0

SST

1

C1

2

0.1

0

0

M2

P2

C2

0.2

M1

P1

200 40 40

280.6 8000

0

0

0

8

0.05

P3

1500 14 14

208 21000

1

0

3

0

0

P4

5000 11 11

136 55000

0

1

0

3

0.5

P5

111 111

21000

60200

64000

234200

28360

Materials used (unit)

Information leading to the evalution of the volume of drivers:

14,534,000 €

840000

61000

64000

235000

30000

Purchase (unit)

40

25

56

35

12

Unit price

14,466,320 €

840000

1505000

3584000

8197000

340320

Direct materials used

10

1

2

2

3

2

No. of vendors

55

1

12

12

24

6

No. of orders

268

Unit cost Volume produced

OP1MA OP2MA OP3MACH OP4MA

Bill of operations:

91.20 € 1000

2 3 0 1.5

P1

42.00 € 2600

0 1 0 2.5

P2

119.50 € 8000

0 4 1 1.5

P3

33.00 € 21000

0 0 0 3

P4

127.60 € 55000

1 0 2 2

P5

405600 DLH+ Mach H

57000 37600 118000 193000

Total

16 € 15 € 45 € 11 €

Unit price

8,867,400 €

889,200 € 545,200 € 5,310,000 € 2,123,000 €

Amount

269 0 2500

0

630

0

220

0

0

0

0

50

50

0

1000

Client 3

Client 4

Client 5

Client 6

Client 7

Client 8

Client 9

Client 10

Client 11

Client 12

500

0

450

100

0

150

650

0

0

650

0

50

Client 1

Client 2

812500

325

2500

400000

400

Unit price

P2

Sales(€)

1000

Sales (units)

P1

800

8000

P3

8000

200

400

0

400

0

200

0

2600

800

3300

100

0

6400000

Characteristics of the customer orders:

20000

0

0

0

0

0

0

0

9500

0

6000

4500

0

6400000

320

20000

P4

50000

2500

7500

0

0

8000

5000

0

12000

0

15000

0

0

26500000

530

50000

P5

54

2

5

1

4

2

2

1

13

1

17

5

1

40512500 No. of shipping

0

81500

270

Cost Systems Design

Consumption in volume: P1 Volume Materials Components Outsourcing

1000 M1 200 M2 0 C1 1000 C2 0 0

P2

P3

2600 260 5200 0 5200 0

8000 400 64000 0 0 0

P4

P5

Total

21000 55000 87600 0 27500 28360 0 165000 234200 63000 0 64000 0 55000 60200 21000 0 21000

Purchase

30000 235000 64000 61000 840000

271 398,954 € 23,071 €

Cost of materials used

Ending balance

14.07 €

422,025 €

360,000 €

62,025 €

Unit cost

172 €

M1

30000

K€ purchased

Driver unit cost

Volume purchased

Total

Purchase

Materials procurement

Driver

Cost of materials used:

32,824 €

9,609,272 €

41.03 €

235000

9,642,097 €

8,225,000 €

1,417,097 €

M2

0€

4,201,492 €

65.65 €

64000

4,201,492 €

3,584,000 €

617492

C1

23,446 €

1,764,299 €

29.31 €

61000

1,787,744 €

1,525,000 €

262,744 €

C2

0€

984,725 €

46.89 €

21000

984,725 €

840,000 €

144,725 €

SST

79,341 €

16,958,742 €

17,038,083 €

14,534,000 €

2,504,083 €

Total

272

Cost of goods sold Ending balance Sales Gross margin

Cost of goods available for sale Unit cost

M2 C1 C2 SST OP1MA OP2MA OP3MACH OP4MA Manufacturing

M1

HMOD+ HMACH

Manufacturing cost:

14 €

23,192 € 812,500 € 232,706 €

0€ 400,000 € 151,500 €

232 € 579,794 €

249 €

248,500 €

602,986 €

213,357 € 0€ 152,398 € 0€ 0€ 37,700 € 0€ 71,500 € 124,374 €

3,658 €

P2

248,500 €

0€ 65,648 € 0€ 0€ 31,200 € 43,500 € 0€ 16,500 € 88,838 €

2,813 €

P1

0€ 6,400,000 € 2,101,734 €

4,298,266 €

537 €

4,298,266 €

2,625,933 € 0€ 0€ 0€ 0€ 464,000 € 360,000 € 132,000 € 710,706 €

5,627 €

P3 0€

317,839 € 6,400,000 € 43,223 €

6,356,777 €

318 €

6,674,616 €

0€ 4,135,844 € 0€ 984,725 € 0€ 0€ 0€ 693,000 € 861,048 €

P4

1,776,844 € 26,500,000 € 8,731,563 €

17,768,437 €

355 €

19,545,280 €

6,769,983 € 0€ 1,611,901 € 0€ 858,000 € 0€ 4,950,000 € 1,210,000 € 3,758,541 €

386,856 €

P5 398,954 €

2,117,874 € 40,512,500 € 11,260,726 €

29,251,774 €

31,369,648 €

9,609,272 € 4,201,492 € 1,764,299 € 984,725 € 889,200 € 545,200 € 5,310,000 € 2,123,000 € 5,543,506 €

273

299,245 €

100,755 €

Full absorption cost

Operational profit

Selling

35,908 €

248,500 €

14837.0009

Cost of goods sold

Managing

400,000 €

Sales

P1

Product full absorption cost:

129,630 €

682,870 €

72,938 €

30137.6581

579,794 €

812,500 €

P2

1,289,815 €

5,110,185 €

574,527 €

237392.0148

4,298,266 €

6,400,000 €

P3

-768,696 €

7,168,696 €

574,527 €

237392.0148

6,356,777 €

6,400,000 €

P4

5,369,711 €

21,130,289 €

2,378,901 €

982951.3113

17,768,437 €

26,500,000 €

P5

6,121,215 €

34,391,285 €

3,636,801 €

1,502,710 €

29,251,774 €

40,512,500 €

Total

274

Total

Customer 1 Customer 2 Customer 3 Customer 4 Customer 5 Customer 6 Customer 7 Customer 8 Customer 9 Customer 10 Customer 11 Customer 12

40512500

20,000 € 1,731,250 € 12,762,000 € 640,000 € 11,779,250 € 48,750 € 2,810,000 € 4,272,500 € 466,250 € 20,000 € 4,477,500 € 1,485,000 €

Sales

Customer profitability:

29,251,774

12,425 € 1,634,750 € 9,167,154 € 429,827 € 8,886,247 € 34,788 € 1,884,300 € 2,866,142 € 319,276 € 12,425 € 3,008,563 € 995,878 €

Cost of goods sold

1,502,710

742 € 64,216 € 473,375 € 23,739 € 436,922 € 1,808 € 104,230 € 158,478 € 17,294 € 742 € 166,082 € 55,082 €

Selling

3,636,801

1,795 € 155,414 € 1,145,643 € 57,453 € 1,057,421 € 4,376 € 252,253 € 383,542 € 41,855 € 1,795 € 401,944 € 133,308 €

Managing

34,391,285 €

14,962 € 1,854,380 € 10,786,171 € 511,018 € 10,380,590 € 40,972 € 2,240,784 € 3,408,161 € 378,426 € 14,962 € 3,576,589 € 1,184,269 €

Customer cost

6,121,215 €

5,038 € ⫺123,130 € 1,975,829 € 128,982 € 1,398,660 € 7,778 € 569,216 € 864,339 € 87,824 € 5,038 € 900,911 € 300,731 €

Customer profitability

275

Income before taxes

0€

1,502,710 €

R&D

3,636,801 €

Administrative expenses

Marketing expenses

6,121,215 €

Cost of goods manufactured

Factory overhead

Other direct costs

Direct materials used Direct labour

29,251,774 €

P5 11,260,726 €

1,776,844 €

P4

Gross margin

23,192 €

317,839 €

P2

2,117,874 €

Cost of goods sold

Less ending finished goods

less materials EB

31,369,648 €

Cost of goods available for sale

Outsourcing Direct materials available

0€ 31,369,648 €

0€

P4

P5

Cost of goods manufactured

Beginning finished goods

C1

6,400,000 €

26,500,000 €

P3

C2

C1

M2

M1

SST

C2

812,500 €

6,400,000 €

P2

M1 M2

400,000 €

P1 Purchases

Direct materials BB

Sales

40,512,500 €

Cost of goods statement

Income statement

8,047,589 €

5,310,000 €

3,557,400 €

23,446 €

0€

32,824 €

23,071 €

840,000 €

1,525,000 €

3,584,000 €

8,225,000 €

360,000 €

0€

0€

31,369,648 €

14,454,659 €

79,341 €

14,534,000 €

14,534,000 €

276 Cost Systems Design

13.8

ABC Model 111

General presentation This model is somewhat hypothetical because it leads to a double negation of the formal structure of the organization. The first time would be during the construction of the activity chart on a transfunctional base and the second time would be by gathering these activities into processes delivering value for a customer. Clearly that means that if the model is set up, it should lead to the reorganization of the organization on the basis of process instead of functions. Although it is not impossible, the probability is weak for the moment. Functional logic and hierarchy seems difficult to eliminate from the representation of the organizations. Like the precedent model, this one is also likely to be transitory; the most probable solution being the reorganization of the existing functions to make them coincide with a set of activities. Model 011 would then be found.

Architecture Resources used Department 1 A1

A2

A3

Department 2 A4

Department 3

A5

A6

A7

Departement 4

A8

A9

A10

Support process Value added process 1 I1

Value added process 2

Value added process 3

I2

I3

Depending on causality relations Cost objects

Non-conventional Models

277

Criteria of classification and judgement Characteristic of the family of systems in comparison with the criteria of structuring interns Units of analysis

Preexisting

New

Product

Organization

Homogeneity

Yes

No

Transfunctionality

Yes

No

Origin of the units of analysis

Hierarchy

Yes

No

Nature of the allocation bases

Inputs

Outputs

Cost object

Unique

Multiple

Relevance on looking at resources management Causality

Weak

Strong

Traceability

Limited

Total

Responsibility

Distinct

Strongly linked

?

Relevance on looking at the dialogue with the environment Coherence with the intrinsic value

Yes

No

Coherence with the exchange value

Yes

No

Coherence with the utility value

Yes

No

Legibility

Weak

Strong

Built-in decision help

Weak

Strong

Relevance on looking at behaviors

Quantified illustration One finds here activities made up without reference to the formal structure. These activities are then gathered in processes delivering an attribute or a bundle of value attributes for an internal customer (process of support) or external customer (operational process). In our example the process of general support is not allocated to the other processes. It is a specific convention which, like any convention, could be called into question. One could for example think of allocating building utilities and human resources management to the operational processes.

4811615

Manufacturing

Unit cost

Volume of the drivers

Cost

Unit cost

No. of orders

No. of vendors

53540

10 13 475

55

741 00

orders management

535400

55 3

306 896

1 227 583 4 15 8419

111

1 758 350

No. of batches

9

405 600

3 785 156

DLH+ Mach H

6

No. of part numbers

4 980

111 405600 405600

Production ines mangement

4

Part numbers Volume management complexity management

2 644 10 831 306 896

vendors management

53 540

55

535400 145400 595700 1227583 552800 2519158 1265998 10

Purchase order completion

No. of vendors

Volume of the driver

Receiving No. of orders

Activity cost

Vendors auditing

Warehousing

Cost driver

No. of part Production numbers planning

No. of orders

2328991

Production lines management No. of batches

Purchasing dpt

Shipping 114 938

1 379 260

No. of customers

Customers management

72 992

12

875900

No. of customers

2

2 286

54

123 450

No. of shipping

Shipping

2 286

54

123450

100 672

5

503360

No. of product references

2051723

Marketing and distribution

Qua ity control

Charges

Maintenance DLH + Mach H

13187100 3994770

Administration

10 861

3 636 801

Aucun

54 14 674

General support

649

111 2400

1205550 1557861 792400 286540

No. of Building controls utilities No. de M2 Employees management No. of employees

Total

Providing customer service DLH + Mach H

Sales promotion No. of shipping

Administration Aucun

0

58.4

SST

20

20

No. of lots

No. of controls

2

0

1000

91.20 €

Unit cost

Volume produced

0

1.5

OP4MA

3

OP3MACH

2

OP2MA

P1

26

26

100

2600

OP1MA

Bill of operations:

50

Lot size

1000

121.2

0

C2

Volume produced

0

1

C1

2

0

0.1

0.2

M2

P2

M1

P1

2600

42.00 €

2.5

0

1

0

P2

40

40

200

8000

280.6

0

0

0

8

0.05

P3

14

14

1.5

1

4

0

P3

11

11

5000

55000

136

0

1

0

3

0.5

P5

8000

119.50 €

1500

21000

208

1

0

3

0

0

P4

21000

33.00 €

3

0

0

0

P4

111

111

21000

60200

64000

234200

28360

Materials used (units)

55000

127.60 €

2

2

0

1

P5

14,534,000 €

840000

61000

64000

235000

30000

Purchase

Information leading to the determination of the volume of the driver:

405600

193000

118000

37600

16 €

11 €

45 €

15 €

545,200 €

889,200 €

Amount

55

1

12

12

24

6

No. of orders

8,867,400 €

2,123,000 €

5,310,000 €

10

1

2

2

3

2

No. of vendors

Unit price

14,466,320 €

840000

1505000

3584000

8197000

340320

Direct materials used

57000

Total

40

25

56

35

12

Unit price

280 Cost Systems Design

Characteristics of orders: P1 Sales 1000 (units) Unit price 400 Sales(€) 400000

Client 1 Client 2 Client 3 Client 4 Client 5 Client 6 Client 7 Client 8 Client 9 Client 10 Client 11 Client 12 Total

P2

P3

P4

P5

20000

50000

Total

2500

8000

325 812500

800 6400000

320 530 0 6400000 26500000 40512500 No. of shipping 1 5 17 1 13 1 2 2 4 1 5 2

50 0 630 0 220 0 0 0 0 50 50 0

0 650 0 0 650 150 0 100 450 0 500 0

0 100 3300 800 2600 0 200 0 400 0 400 200

0 4500 6000 0 9500 0 0 0 0 0 0 0

0 0 15000 0 12000 0 5000 8000 0 0 7500 2500

1000

2500

8000

20000

50000

81500

54

Consumption in volume: P1 Volume Materials Components Outsourcing

M1 M2 C1 C2

P2

P3

1000 2600 8000 200 260 400 0 5200 64000 1000 0 0 0 5200 0 0 0 0

P4

P5

Total Purchase

21000 55000 87600 0 27500 28360 30000 0 165000 234200 235000 63000 0 64000 64000 0 55000 60200 61000 21000 0 21000 840000

281 46,730 €

Ending balance

28.49 € 808,093 €

Unit cost

Cost of material used

30000

Volume purchased

306,896 €

854,823 €

306,896 €

80,847 €

360,000 €

No. of part numbers

Part numbers management

13,475 €

107,080 €

M1

Total cost

No. of orders

Orders management

53,540 €

Unit cost

Purchase

No. of vendors

Vendors management

Cost driver

Cost of materials used:

30,692 €

8,985,212 €

38.37 €

235000

9,015,905 €

8,225,000 €

306,896 €

323,389 €

160,620 €

M2

0€

4,159,670 €

64.99 €

64000

4,159,670 €

3,584,000 €

306,896 €

161,695 €

107,080 €

C1

27,550 €

2,073,121 €

34.44 €

61000

2,100,670 €

1,525,000 €

306,896 €

161,695 €

107,080 €

C2

0€

907,015 €

907,015 €

1

907,015 €

840,000 €

13,475 €

53,540 €

SST

104,973 €

16,933,110 €

17,038,083 €

17,038,083 €

14,534,000 €

1,227,583 €

741,100 €

535,400 €

Total

282 539,373 €

Gross margin

Ending balance Sales

382 € 953,819 €

71,500 € 84,923 €

0€ 38,153 € 400,000 € 812,500 € 2139,373 € 2141,319 €

539 € 539,373 €

991,972 €

316,820 €

15,841 €

Unit cost Cost of goods sold

411,866 €

16,500 € 60,660 €

9€

OP4MA Production lines DLH+ Mach H mangement Volume No. of batches complexity management Manufacturing cost

179,074 € 0€ 0€ 37,700 € 0€

0€ 0€ 31,200 € 43,500 € 0€

C2 SST OP1MA OP2MA OP3MACH

7,408 € 199,501 € 0€

P2

5,699 € 0€ 64,995 €

P1

M1 M2 C1

Manufacturing cost:

0€ 6,400,000 € 1,858,291 €

568 € 4,541,709 €

4,541,709 €

633,640 €

132,000 € 485,276 €

0€ 0€ 0€ 464,000 € 360,000 €

11,398 € 2,455,395 € 0€

P3

174,251 €

1,210,000 € 2,566,366 €

1,894,047 € 0€ 858,000 € 0€ 4,950,000 €

783,588 € 6,330,316 € 0€

P5

31,344,016 €

1,758,350 €

2,123,000 € 3,785,156 €

2,073,121 € 907,015 € 889,200 € 545,200 € 5,310,000 €

808,093 € 8,985,212 € 4,159,670 €

309,733 € 1,706,052 € 2,053,937 € 6,400,000 € 26,500,000 € 40,512,500 € 205,338 € 9,439,484 € 11,222,421 €

310 € 341 € 6,194,662 € 17,060,516 € 29,290,079 €

6,504,395 € 18,766,567 €

221,774 €

693,000 € 587,931 €

0€ 907,015 € 0€ 0€ 0€

0€ 0€ 4,094,675 €

P4

283

40512500

Total

Client 10

4,477,500 €

20,000 €

Client 9

1,485,000 €

466,250 €

Client 8

Client 12

4,272,500 €

Client 7

Client 11

48,750 €

2,810,000 €

Client 6

640,000 €

11,779,250 €

Client 3

Client 5

12,762,000 €

Client 2

Client 4

20,000 €

1,731,250 €

Client 1

Sales

Customer profitability:

1,379,260

114,938 €

114,938 €

114,938 €

114,938 €

114,938 €

114,938 €

11 4,938 €

114,938 €

114,938 €

114,938 €

114,938 €

114,938 €

Customers management

123,450

4,572 €

11,431 €

2,286 €

9,144 €

4,572 €

4,572 €

2,286 €

29,719 €

2,286 €

38,864 €

11,431 €

2,286 €

Shipping

30,792,789 €

1,086,079 €

3,130,264 €

144,193 €

522,856 €

2,887,346 €

1,939,105 €

174,454 €

9,024,356 €

571,395 €

9,343,616 €

1,824,932 €

144,193 €

Customer cost

Customer profitability General support Operating profit

9,719,711 € 3,636,801 € 6,082,910 €

From customer profitability to operating profit:

29,290,079

966,569 €

3,003,895 €

26,969 €

398,773 €

2,767,835 €

1,819,594 €

57,229 €

8,879,699 €

454,171 €

9,189,813 €

1,698,563 €

26,969 €

Cost of goods sold

9,719,711 €

398,921 €

1,347,236 €

⫺124,193 €

⫺56,606 €

1,385,154 €

870,895 €

⫺125,704 €

2,754,894 €

68,605 €

3,418,384 €

⫺93,682 €

⫺124,193 €

Customer profitability

284

Income before taxes

0€

1,502,710 €

Marketing expenses

R&D

3,636,801 €

Administrative expenses

6,082,910 €

11,222,421 €

P5 29,290,079 €

1,706,052 €

P4

Gross margin

38,153 €

309,733 €

P2

2,053,937 €

Cost of goods sold

Less Ending finished goods

Cost of goods manufactured

Factory overhead

Other direct costs

Direct labour

Direct materials used

less materials EB

31,344,016 €

Cost of goods available for sale

Outsourcing Direct materials available

0€ 31,344,016 €

0€

Cost of goods manufactured

Beginning finished goods

C1

C2

C1

M2

M1

SST

C2

6,400,000 €

26,500,000 €

P4

P5

M1 M2

P3

Purchases

812,500 €

6,400,000 €

P2

Direct materials BB

40,512,500 €

400,000 €

Sales

P1

Cost of goods statement

Income statement

8,047,589 €

5,310,000 €

3,557,400 €

27,550 €

0€

30,692 €

46,730 €

840,000 €

1,525,000 €

3,584,000 €

8,225,000 €

360,000 €

0€

0€

31,344,016 €

14,454,659 €

104,973 €

14,534,000 €

14,534,000 €

Non-conventional Models

285

13.9 MBM (Management by Means) General presentation This method is based on the concept of activity and process. It is distinguished from the other alternatives of the ABC by two aspects. The first one is relative to the grouping of activities under three major processes: the first relates to the management of the current activity, the second to the development of the future activity and the third to the activities of support. Nevertheless it seems that the costs calculation is done starting from the activity level. The authors suggest using multiple drivers within these processes, to allocate the resources to the cost objects. The second aspect relates to the cost objects. Whereas the other models ABC authorize and suggest the multiplication of cost objects, the method MBM retains only one of them: the line of order. It is a combination of two objects, the product and the customer, which are linked at the level of each line of order. All other analyses – product, customer, area, distribution channel, etc. – are realized by the aggregation of the lines of orders. From this point of view the method is close to the method VAU.

Architecture

Resources used Department 1

Department 2

A1

A4

A2

A3

Generate the volume of business

A5

Department 3

A6

Prepare the future

Order line

A7

A8

Département 41

A9

Finance structure the

A10

286

Cost Systems Design

Criteria of judgement Characteristic of the family of systems in comparison with the criteria of structuring interns Units of analysis

Preexisting

New

Product

Organization

Homogeneity

Yes

No

Transfunctionality

Yes

No

Origin of the units of analysis

Hierarchy

Yes

No

Nature of the allocation bases

Inputs

Outputs

Cost object

Unique

Multiple

Relevance on looking at resources management Weak

Strong

Traceability

Causality

Limited

Total

Responsibility

Distinct

Strongly linked

Relevance on looking at the dialogue with the environment Coherence with the intrinsic value

Yes

No

Coherence with the exchange value

Yes

No

Coherence with the utility value

Yes

No

Legibility

Weak

Strong

Built-in decision help

Weak

Strong

Relevance on looking at behaviors

Quantified illustration One finds here activities made up without reference to the formal structure. These activities are then gathered under three objectives: to feed the business volume, finance the structure and finance the innovation. The system does not use the concept of support process. The three identified processes are regarded as attributable to the cost objects either directly or by means of the drivers attached to the activities constitutive of each process. The system recognizes only one object of cost: the line of order.

287

Receiving

Purchase order completion

17

377250

Driver volume

Unit cost

6430089

Activity cost

Vendors auditing

DLH+ Mach H

Running normal business

45

81500

3636801

No. of product references

Financing the structure

Maintenance

4811615

Providing customer service

Production lines management

Manufacturing department 2051723

Marketing department

624 042

5

3120210

No. of part numbers

Financing innovation

Sales promotion

2328991

3994770

Administration department

Building utilities

Purchasing department

Employees management

Cost

13187100

Warehousing

Cost driver

Total

Administration

Quality control

Shipping

Production planning

288

Quantity Lot size No. of batches No. of controls

C1 C2 SST

M1 M2

0 2 0 121.2 2600 100 26

26

20

0.1 2

P2

1 0 0 58.4 1000 50 20

0.2 0

P1

40

0 0 0 280.6 8000 200 40

0.05 8

P3

14

3 0 1 208 21000 1500 14

0 0

P4

11

0 1 0 136 55000 5000 11

0.5 3

P5

111

111

64000 60200 21000

28360 234200

14,534,000 €

64000 61000 840000

30000 235000

Materials Materials used purchased (units) (unit)

Information leading to the evaluation of the volume of drivers:

56 25 40

12 35

14,466,320 €

3584000 1505000 840000

340320 8197000

10

2 2 1

2 3

Unit Direct materials No. of price used vendors

55

12 12 1

6 24

No. of orders

289

91.20 €

1000

1000 6.5

Unit cost

Volume produce

Volume sold DLH+Mach H

0

1.5

OP3MACH

OP4MA

2500 3.5

2600

42.00 €

2.5

0

1

0

2

3

OP1MA

P2

P1

OP2MA

Bill of operations:

8000 6.5

8000

119.50 €

1.5

1

4

0

P3

20000 3

21000

33.00 €

3

0

0

0

P4

50000 5

55000

127.60 €

2

2

0

1

P5

377250 HMOD+HMACH

405600

193000

118000

37600

57000

Total

11 €

45 €

15 €

16 €

Unit price

8,867,400 €

2,123,000 €

5,310,000 €

545,200 €

889,200 €

Amount

290 Cost Systems Design

Consumption in volume:

Volume Materials Component

P1

P2

P4

P5

Total

Purchase

1000

2600

8000

21000

55000

87600

M1

200

260

400

0

27500

28360

30000

M2

0

5200

64000

0

165000

234200

235000

C1

1000

0

0

63000

0

64000

64000

C2

0

5200

0

0

55000

60200

61000

0

0

0

21000

0

21000

840000

P5

Total

outsourcing

Sales (units) Unit price Sales(€) Production (unit) Lot size Number of lots

P3

P1

P2

P3

1000

2500

8000

400 400000 1000

325 812500 2600

800 6400000 8000

50 20

100 26

200 40

P4 20000

50000

81500

320 530 0 6400000 26500000 40512500 21000 55000 87600 1500 14

5000 11

111

Cost of materials used: M1

M2

Purchase 360,000 € 8,225,000 € Volume Unit cost

C2

3,584,000 €

1,525,000 €

30000

235000

64000

61000

12.00 €

35.00 €

56.00 €

25.00 €

8,197,000 €

3,584,000 €

1,505,000 €

28,000 €

0€

20,000 €

Cost of 340,320 € materials used Ending balance

C1

19,680 €

SST

Total

840,000 € 14,534,000 € 210000 4.00 € 840,000 € 14,466,320 €

0€

67,680 €

0€

SST

Ending balance

Cost of goods sold

0€

149,600 €

149.60

149,600 €

Unit cost

Cost of goods available

0€

16,500 €

OP4MA

OP3MACH

43,500 €

0€

C2

OP2MA

56,000 €

C1

31,200 €

0€

OP1MA

2,400 €

M2

P1

M1

Manufacturing cost:

16,320 €

408,000 €

163.20

424,320 €

71,500 €

0€

37,700 €

0€

0€

130,000 €

0€

182,000 €

3,120 €

P2

0€

3,200,800 €

400.10

3,200,800 €

132,000 €

360,000 €

464,000 €

0€

0€

0€

0€

2,240,000 €

4,800 €

P3 0€ 0€

241,000 €

4,820,000 €

241.00

5,061,000 €

693,000 €

0€

0€

0€

840,000 €

0€

3,528,000 €

P4

1,318,000 €

13,180,000 €

263.60

14,498,000 €

1,210,000 €

4,950,000 €

0€

858,000 €

0€

1,375,000 €

0€

5,775,000 €

330,000 €

P5 340,320 €

1,575,320 €

21,758,400 €

23,333,720 €

2,123,000 €

5,310,000 €

545,200 €

889,200 €

840,000 €

1,505,000 €

3,584,000 €

8,197,000 €

292

Cost Systems Design

Characteristics of orders:

Customer 1 Customer 2 Customer 3 Customer 4 Customer 5 Customer 6 Customer 7 Customer 8 Customer 9 Customer 10 Customer 11 Customer 12 Total

P1

P2

P3

P4

P5

No. of orders

50 0 630 0 220 0 0 0 0 50 50 0

0 650 0 0 650 150 0 100 450 0 500 0

0 100 3300 800 2600 0 200 0 400 0 400 200

0 4500 6000 0 9500 0 0 0 0 0 0 0

0 0 15000 0 12000 0 5000 8000 0 0 7500 2500

1 3 4 1 5 1 2 2 2 1 4 2

1000

2500

8000

20000

50000

28

Non-conventional Models

293

Relations between customers, orders, lines of orders and products: Product/ customer

Volume

C1P1 C2P2 C2P3 C2P4 C3P1 C3P3 C3P4 C3P5 C4P3 C5P1 C5P2 C5P3 C5P4 C5P5 C6P2 C7P3 C7P5 C8P2 C8P5 C9P2 C9P3 C10P1 C11P1 C11P2 C11P3 C11P5 C12P3 C12P5

50 650 100 4500 630 3300 6000 15000 800 220 650 2600 9500 12000 150 200 5000 100 8000 450 400 50 50 500 400 7500 200 2500

Total

81500

No. of order C1 C2 C3 C4 C5 C6 C7 C8 C9 C10 C11 C12 C13 C14 C15 C16 C17 C18 C19 C20 C21 C22 C23 C24 C25 Total

No. of line 1 3 3 1 4 2 3 1 2 2 2 3 2 2 2 3 2 3 1 3 1 3 1 2 2 54

No. of customer

No. of order

1 2

1 2 6 3 9 11 13 18 22 25 4 5 12 16 20 8 10 14 15 17 19 21 23 7 24

3

4 5

6 7 8 9 10 11

12

294

Cost Systems Design

L124

Order24

200

L224

2500

Financing innovation

Financing the structure

Running normal business

Materials

No. of order lines

P5

P4

P3

P2

P1

Analysis by line of order:

1

80,020 €

22,158 €

8,925 €

15,601 €

1

659,000 €

213,058 €

111,558 €

31,202 € 24,962 €

L121

Order21

100

1

16,320 €

5,966 €

4,462 €

L123

Order 23

400

1

65,280 €

23,862 €

17,849 €

99,847 €

L107

Order 7

1

7,480 €

5,540 €

2,231 €

31,202 €

50

L207

400

L307

7500

L119

Order 19

L115

Order 15

50 300

L215 L117

200 Order 17

150

L217 L114

200 Order 14

100

L214 L110

8000 Order 10

200

L210

5000

L108

Order 10

L105

Order 5

150 20

L205

150

L305

2000

L405 L112

2000 Order 12

200

L212

8000

L312 L116

2500 Order 16 200

L216

100

L316 L120

1500 Order 20

300

L220

500

L320

7500

L104

Order 4

L103

Order 3

800 100

L203

6000

L303 L109

2000 Order 9

50

L209 L111

600 Order 11 200

L211 L113

400 Order 13

150

Order 18

20

L213 L118 L218 L318

600 400 3000

1

160,040 €

44,316 €

17,849 €

31,202 €

1

1,977,000 €

639,174 €

334,675 €

93,606 €

1

7,480 €

5,540 €

2,231 €

31,202 €

1

48,960 €

17,897 €

13,387 €

74,885 €

1

80,020 €

22,158 €

8,925 €

15,601 €

1

24,480 €

8,948 €

6,693 €

37,443 €

1

80,020 €

22,158 €

8,925 €

15,601 €

1

16,320 €

5,966 €

4,462 €

24,962 €

1

2,108,800 €

681,785 €

356,987 €

99,847 €

1

80,020 €

22,158 €

8,925 €

15,601 €

1

1,318,000 €

426,116 €

223,117 €

62,404 €

1

24,480 €

8,948 €

6,693 €

37,443 €

1

2,992 €

2,216 €

892 €

12,481 €

1

24,480 €

8,948 €

6,693 €

37,443 €

1

800,200 €

221,580 €

89,247 €

156,011 €

1

527,200 €

170,446 €

89,247 €

24,962 €

1

32,640 €

11,931 €

8,925 €

49,923 €

1

1,928,000 €

409,071 €

356,987 €

249,617 €

1

659,000 €

213,058 €

111,558 €

31,202 €

1

29,920 €

22,158 €

8,925 €

124,808 €

1

40,010 €

11,079 €

4,462 €

7,801 €

1

361,500 €

76,701 €

66,935 €

46,803 €

1

48,960 €

17,897 €

13,387 €

74,885 €

1

200,050 €

55,395 €

22,312 €

39,003 €

1

1,977,000 €

639,174 €

334,675 €

93,606 €

1

320,080 €

88,632 €

35,699 €

62,404 €

1

14,960 €

11,079 €

4,462 €

62,404 €

1

1,446,000 €

306,803 €

267,740 €

187,213 €

1

527,200 €

170,446 €

89,247 €

24,962 €

1

7,480 €

5,540 €

2,231 €

31,202 €

1

240,060 €

66,474 €

26,774 €

46,803 €

1

29,920 €

22,158 €

8,925 €

124,808 €

1

160,040 €

44,316 €

17,849 €

31,202 €

1

22,440 €

16,619 €

6,693 €

93,606 €

1

240,060 €

66,474 €

26,774 €

46,803 €

1

2,992 €

2,216 €

892 €

12,481 €

1

160,040 €

44,316 €

17,849 €

31,202 €

1

790,800 €

255,670 €

133,870 €

37,443 €

Profitability P5

126,704 €

160,000 €

33,296 €

0€

0€

33,296 €

0€

0€

1,325,000 €

310,182 €

0€

0€

0€

0€

310,182 € 0€

Margin

L124

L224 1,014,818 €

Sales

Total cost

Profitability P4

Profitability P3

295

No. Order line

Profitability P1

Profitability P2

Non-conventional Models

L121

51,710 €

32,500 €

⫺19,210 €

0 € ⫺19,210 €

0€

0€

L123

206,839 €

130,000 €

⫺76,839 €

0 € ⫺76,839 €

0€

0€

0€

L107

46,453 €

20,000 €

⫺26,453 €

⫺26,453 €

0€

0€

0€

0€

L207

253,407 €

320,000 €

66,593 €

0€

0€

66,593 €

0€

0€

L307 3,044,455 €

3,975,000 €

930,545 €

0€

0€

0€

0€

930,545 €

⫺26,453 €

0€

0€

0€

0€

0 € ⫺57,629 €

0€

0€

0€

33,296 €

0€

0€

L119

46,453 €

20,000 €

⫺26,453 €

L115

155,129 €

97,500 €

⫺57,629 €

L215

126,704 €

160,000 €

33,296 €

0€

0€

L117

77,564 €

48,750 €

⫺28,814 €

L217

126,704 €

160,000 €

33,296 €

L114

51,710 €

32,500 €

⫺19,210 €

0 € ⫺19,210 €

0€

0€

0€

L214 3,247,419 €

4,240,000 €

992,581 €

0€

0€

0€

0€

992,581 €

L110

0 € ⫺28,814 € 0€

0€

0€

0€

0€

33,296 €

0€

0€

126,704 €

160,000 €

33,296 €

0€

0€

33,296 €

0€

0€

L210 2,029,637 €

2,650,000 €

620,363 €

0€

0€

0€

0€

620,363 €

L108

77,564 €

48,750 €

⫺28,814 €

L105

18,581 €

8,000 €

⫺10,581 €

L205

77,564 €

48,750 €

L305 1,267,037 €

1,600,000 €

L405

811,855 €

1,060,000 €

L112

103,419 €

65,000 €

0 € ⫺28,814 €

0€

0€

0€

0€

0€

0€

0€

⫺28,814 €

0 € ⫺28,814 €

0€

0€

0€

332,963 €

0€

0€

332,963 €

0€

0€

248,145 €

0€

0€

0€

0€

248,145 €

⫺38,419 €

0 € ⫺38,419 €

0€

0€

0€ 0€

⫺10,581 €

L212 2,943,675 €

2,560,000 € ⫺383,675 €

0€

0€

0 € ⫺383,675 €

L312 1,014,818 €

1,325,000 €

0€

0€

0€

0€

80,000 € ⫺105,811 € ⫺105,811 €

0€

0€

0€

0€

63,352 €

80,000 €

0€

0€

16,648 €

0€

0€

L116

185,811 €

L216

310,182 € 16,648 €

310,182 €

L316

551,939 €

480,000 €

⫺71,939 €

0€

0€

0€

⫺71,939 €

0€

L120

155,129 €

97,500 €

⫺57,629 €

0 € ⫺57,629 €

0€

0€

0€

L220

316,759 €

400,000 €

83,241 €

0€

0€

83,241 €

0€

0€

L320 3,044,455 €

3,975,000 €

930,545 €

0€

0€

0€

0€

930,545 €

640,000 €

L104

506,815 €

L103

92,906 €

133,185 €

0€

0€

133,185 €

0€

0€

40,000 € ⫺52,906 €

⫺52,906 €

0€

0€

0€

0€

L203 2,207,756 €

1,920,000 € ⫺287,756 €

0€

0€

0€

⫺287,756 €

0€

L303

1,060,000 €

248,145 €

0€

0€

0€

0€

248,145 €

811,855 €

L109

46,453 €

20,000 €

⫺26,453 €

⫺26,453 €

0€

0€

0€

0€

L209

380,111 €

480,000 €

99,889 €

0€

0€

99,889 €

0€

0€

L111

185,811 €

L211

253,407 €

L113 L213

80,000 € ⫺105,811 € ⫺105,811 €

0€

0€

0€

0€

0€

66,593 €

0€

0€

320,000 €

66,593 €

0€

139,358 €

60,000 €

⫺79,358 €

⫺79,358 €

0€

0€

0€

0€

380,111 €

480,000 €

99,889 €

0€

0€

99,889 €

0€

0€

L118

18,581 €

8,000 €

⫺10,581 €

⫺10,581 €

0€

0€

0€

0€

L218

253,407 €

320,000 €

66,593 €

0€

0€

66,593 €

0€

0€

L318 1,217,782 €

1,590,000 €

372,218 €

0€

0€

0€

0€

372,218 €

Continued

296 Cost Systems Design

L122

Order 22

10

L222

L102

L106

62,404 €

1

2,636,000 €

852,232 €

446,233 €

124,808 €

1

14,960 €

11,079 €

4,462 €

62,404 €

1

200,050 €

55,395 €

22,312 €

39,003 €

1

32,640 €

11,931 €

8,925 €

49,923 €

1

40,010 €

11,079 €

4,462 €

7,801 €

500

1

120,500 €

25,567 €

22,312 €

15,601 €

1

73,440 €

26,845 €

20,080 €

112,328 €

4000

1

964,000 €

204,536 €

178,493 €

124,808 €

7,480 €

5,540 €

2,231 €

31,202 €

100 Order 6

450

L206 L101

Order 1 Ending balance Total

50 0 100

Financing innovation 6,240 €

35,699 €

200

L302

Financing the structure 446 €

88,632 €

500

LZ02

Running normal business 1,108 €

320,080 €

10000

Order 2

Materials 1,496 €

1

Order 25 100

L225

No. of order lines 1

800

L323 L125

P5

P4

P3

P2

P1

Continued

1 0 1000

5000

0

1000 2600 8000 21000 55000

54

21,758,400 € 6,430,089 €

3,636,801 € 3,120,210 €

297

Profitability P3

⫺5,291 €

⫺5,291 €

0€

0€

0€

0€

133,185 €

0€

0€

133,185 €

0€

0€ 1,240,727 €

L323 4,059,273 € L125

92,906 €

L225

316,759 €

L102 LZ02

Profitability P4

5,300,000 € 1,240,727 €

0€

0€

0€

0€

40,000 € ⫺52,906 €

⫺52,906 €

0€

0€

0€

0€

0€

0€

83,241 €

0€

0€

400,000 €

83,241 €

103,419 €

65,000 €

⫺38,419 €

63,352 €

80,000 €

16,648 €

L302

183,980 €

160,000 €

⫺23,980 €

L106

232,693 €

146,250 € ⫺86,443 €

L206 1,471,837 €

1,280,000 € ⫺191,837 €

0€

⫺26,453 €

⫺26,453 €

L101

Profitability P5

Profitability P1

4,000 € 640,000 €

Sales

9,291 € 506,815 €

Total cost

L122 L222

No. Order line

Margin

Profitability P2

Non-conventional Models

0 € ⫺38,419 €

0€

0€

0€

16,648 €

0€

0€

0€

0€

⫺23,980 €

0€

0 € ⫺86,443 €

0€

0€

0€

0€

0€

⫺191,837 €

0€

0€

0€

0€

0€

34,945,500 € 40,512,500 € 5,567,000 € ⫺529,055 € ⫺480,241 € 1,331,850 €

⫺959,187 €

6,203,633 €

46,453 €

20,000 €

0€

0€

0€

298

Cost Systems Design

Contribution by order and by customer: No Order

Contribution by order

Customer No

Order 24

343,478 €

12

order 21 order 23 order 7 order 19 order 15 order 17 order 14 order 10 order 8 order 5 orde 12 order16 order 20 order 4 order 3 order 9 order 11 order 13 order 18 order 22 order 25 order 2 order 6 order1

⫺19,210 € ⫺76,839 € 970,685 € ⫺26,453 € ⫺24,333 € 4,482 € 973,372 € 653,660 € ⫺28,814 € 541,712 € ⫺111,912 € ⫺161,102 € 956,157 € 133,185 € ⫺92,516 € 73,436 € ⫺39,219 € 20,530 € 428,229 € 1,368,621 € 30,335 € ⫺45,751 € ⫺278,281 € ⫺26,453 €

Total

5,567,000 €

11 10 9 8 7 6 5 4 3 2 1 Total

Profitability 343,478 € 874,636 € ⫺26,453 € ⫺19,851 € 973,372 € 653,660 € ⫺28,814 € 1,224,855 € 133,185 € 1,789,417 € ⫺324,032 € ⫺26,453 € 5,567,000 €

3,120,210 €

R&D

Income before taxes

3,636,801 €

Administrative expenses 5,567,000 €

12,324,011 €

P5

Gross margin

1,318,000 €

P4

1,575,320 €

29,763,809 €

29,763,809 €

0€

28,188,489 €

16,320 €

241,000 €

P2

0€

Cost of goods manufactured

Factory overhead

Other direct costs

Direct labor

Direct materials used

less materials EB

Direct materials available

Outsourcing

P4

P5

Cost of goods sold

Cost of goods available for sale Less Ending finished goods

Beginning finished goods Cost of goods manufactured

C1

6,400,000 €

26,500,000 €

P3

C2

C1

M2

M1

SST

C2

812,500 €

6,400,000 €

P2

M1 M2

400,000 €

P1 Purchases

Direct materials BB

Sales

40,512,500 €

Cost of goods statement

Income statement

6,430,089 €

5,310,000 €

3,557,400 €

20,000 €

0€

28,000 €

19,680 €

840,000 €

1,525,000 €

3,584,000 €

8,225,000 €

360,000 €

0€

0€

29,763,809 €

14,466,320 €

67,680 €

14,534,000 €

14,534,000 €

300 Cost Systems Design

13.10

Tables of synthesis

It is obvious that the exploration of the various models of calculation of costs does not lead to recommendations. The choice of a particular approach depends only partially on the technical study. As was underlined, the context, i.e. the characteristics of the organization, its environment and its strategy, are the determinant variables of the choice to be realized. In the following tables certain boxes remain empty. That is due to the fact that we were interested only in the costs, supposing an identical selling price for each order or for each customer. In this context the unicity of cost object, which characterizes the majority of the models, results in a non-production of information for the complementary objects which are evaluated. The sum of the costs of the basic object is equal to the sum of the costs, whatever is the new evaluated object. Finally it is necessary to remind the reader that for each model illustrated in this study we have adopted a certain number of conventions of treatment and division of the organization. These choices, which can be called into question inside each model, generate as many specific models. We leave this detailed exploration to the initiative of the reader.

301

411.70 €

544.15 €

539.24 €

924.68 €

1,442.74 €

Hierarchical homogeneous cost pools

ABC000

ABC001

ABC010

ABC011

823 92 €

535.07 €

361.19 €

360.77 €

288.13 €

271.23 €

345.75 €

288.66 €

Homogeneous cost pools

338.99 €

All directs

388.30 €

176.36 €

567.65 €

Simple full cost

176.20 €

163.20 €

87.37 €

149.60 €

Direct cost

Units of value added

165.60 €

Variable cost

121.20 €

311.00 €

58.40 €

Theory of constraints

121.20 €

P2

Responsability 355.68 € centers

58.40 €

Direct Value Added

P1

741.45 €

665.57 €

544.68 €

564.69 €

727.06 €

684.95 €

407.68 €

622.25 €

647.03 €

708.83 €

647.68 €

432.10 €

280.60 €

280.60 €

P3

361.87 €

369.55 €

320.33 €

313.35 €

326.41 €

328.69 €

243.31 €

392.55 €

368.85 €

433.95 €

241.00 €

253.80 €

208.00 €

248.00 €

P4

Cost of products sold

⫺21,956 €

⫺24,221 € ⫺26,272 € ⫺23,311 € ⫺27,404 €

414.59 € ⫺21,604 € ⫺30,738 €

337.85 € ⫺25,988 € ⫺32,185 € 337.19 € ⫺41,743 € ⫺30,136 € 383.79 € ⫺22,938 € ⫺32,635 € 325.76 € ⫺50,542 € ⫺29,922 €

82,392 €

53,507 €

36,119 €

36,077 €

27,513 €

21,793 €

⫺21,222 €

31,100 €

25,916 €

428.66 € ⫺20,882 € ⫺29,711 €

⫺20,000 €

414.21 € ⫺19,680 € ⫺28,000 €

38,830 €

⫺20,000 € 2,542,681 €

⫺20,000 €

366.55 € ⫺19,680 € ⫺28,000 €

16,320 €

16,320 €

198.26 € ⫺19,680 € ⫺28,000 €

⫺20,000 €

264.23 € ⫺19,680 € ⫺28,000 €

⫺20,000 €

⫺20,000 €

284.80 € ⫺19,680 € ⫺28,000 €

12,120 €

12,120 €

P2

361,872 €

369,552 €

320,335 €

313,348 €

313,608 €

276,207 €

392,553 €

339,810 €

433,946 €

241,000 €

241,000 €

208,000 €

248,000 €

P4

Continued

1,628,814 €

1,918,960 €

1,685,965 €

1,689,254 €

1,966,944 €

1,708,646 €

2,012,264 €

1,830,552 €

1,832,731 €

1,321,159 €

1,318,000 €

680,000 €

680,000 €

P5

Product ending balance

402.45 € ⫺19,680 € ⫺28,000 €

⫺20,000 €

C2

136.00 € ⫺19,680 € ⫺28,000 €

M2 ⫺20,000 €

M1

136.00 € ⫺19,680 € ⫺28,000 €

P5

Materials ending balance

302

598.35 €

640.05 €

248.50 €

539.37 €

149.60 €

ABC101

ABC110

ABC111

MBM

P1

ABC100

Continued

163.20 €

381.53 €

231.92 €

420.25 €

420 98 €

P2

400.10 €

567.71 €

537.28 €

580.30 €

685.22 €

P3

241.00 €

309.73 €

317.84 €

314.53 €

354.49 €

P4

cost of products sold

⫺27,550 € ⫺23,446 € ⫺27,550 € ⫺20,000 €

355.37 € ⫺23,071 € ⫺32,824 € 341.21 € ⫺46,730 € ⫺30,692 € 263.60 € ⫺19,680 € ⫺28,000 €

C2 ⫺24,547 €

M2

397.93 € ⫺26,487 € ⫺32,497 €

M1

343.04 € ⫺46,730 € ⫺30,692 €

P5

Materials ending balance

16,320 €

38,153 €

23,192 €

42,025 €

42,098 €

P2

241,000 €

309,733 €

317,839 €

314,527 €

354,490 €

P4

1,318,000 €

1,706,052 €

1,776,844 €

1,715,204 €

1,989,639 €

P5

Product ending balance

303 114,78 €

93,08 €

⫺56,53 €

⫺192,10 €

151,50 €

⫺139,37 €

⫺529,06 €

ABC110

ABC111

MBM

⫺95,98 €

⫺95,25 €

⫺198,35 €

⫺240,05 €

ABC101

58,55 €

⫺1 042,74 € ⫺498,92 €

ABC011

ABC100

134,43 €

⫺210,07 €

⫺524,68 €

ABC010

235,31 €

⫺36,19 €

166,48 €

232,29 €

262,72 €

219,70 €

255,32 €

⫺35,77 €

⫺144,15 €

⫺139,24 €

72,94 €

ABC001

36,87 €

⫺11,70 €

Hierarchical homogeneous cost pools

0,00 €

⫺47,96 €

10,27 €

2,16 €

5,47 €

⫺34,49 €

⫺41,87 €

⫺49,55 €

⫺0,33 €

6,65 €

⫺6,41 €

124,07 €

188,79 €

174,63 €

186,96 €

132,07 €

204,24 €

146,21 €

192,81 €

192,15 €

115,41 €

101,34 €

127,55 €

⫺8,69 €

152,97 €

⫺72,55 €

177,75 €

152,97 € ⫺48,85 €

244,57 €

245,20 €

394,00 €

394,00 €

P5

163,45 €

66,20 €

66,20 €

112,00 €

72,00 €

P4

91,17 € ⫺113,95 €

120,33 €

367,90 €

519,40 €

519,40 €

P3

ABC000

53,77 €

54,25 €

14,00 €

36,34 €

148,80 €

Homogeneous cost pools

Units of value added

61,01 €

44,32 €

Simple full cost

Responsability centers

234,40 €

⫺167,65 €

Direct cost

All directs

148,80 €

⫺63,30 €

234,40 €

Variable cost

203,80 €

203,80 €

341,60 €

341,60 €

Theory of constraints

P2

Direct Value Added

P1

Unit product margin

1 502 710 €

5 139 511 €

999 350 €

0€

1 447 800 €

0€

2 014 132 €

2 014 132 €

0€

0€

0€

0€

0€

0€

0€

0€

0€

Customer costs

19 554 096 € 13 187 100 €

11 222 421 €

11 260 726 €

10 736 879 €

6 393 758 €

7 552 745 €

6 344 905 €

11 446 485 €

11 389 396 €

6 306 364 €

6 002 461 €

8 765 437 €

6 427 597 €

6 187 958 €

6 297 187 €

15 121 409 €

17 133 600 €

26 946 300 €

26 986 300 €

Total

0€

3 636 801 €

0€

3 636 801 €

0€

0€

0€

3 367 783 €

3 330 191 €

0€

0€

2 231 076 €

0€

0€

0€

9 551 250 €

11 566 600 €

22 054 500 €

23 654 500 €

5 567 000 €

6 082 910 €

6 121 215 €

6 100 728 €

6 393 758 €

6 104 945 €

6 344 904 €

6 064 570 €

6 045 073 €

6 306 364 €

6 002 460 €

6 534 361 €

6 427 597 €

6 187 957 €

6 297 187 €

5 570 159 €

5 567 000 €

4 891 800 €

3 331 800 €

Cost outside Income before perimeter taxes

304 Cost Systems Design

Customer profitability CL1

CL2

CL3

CL4

CL5

Direct Value Added

17,080 €

508,410 €

8,271,228 €

415,520 €

6,970,062 €

Theory of constraints

17,080 €

688,410 €

8,511,228 €

415,520 €

7,350,062 €

Variable cost

11,720 €

431,410 €

5,436,942 €

294,320 €

4,676,128 €

Direct cost

11,720 €

406,653 €

4,610,467 €

96,260 €

4,024,851 €

⫺8,382 € ⫺544,788 €

1,963,358 €

72,932 €

1,037,958 €

All directs

3,051 € ⫺180,919 €

1,986,943 €

122,380 €

1,360,121 €

Responsability centers

2,216 € ⫺299,613 €

2,092,378 €

142,197 €

1,322,307 €

Simple full cost

Units of value added

0€

Homogeneous cost pools

2,713 €

7,344 €

1,881,862 €

92,041 €

1,479,581 €

Hierarchical homogeneous cost pools

⫺585 €

2,422 €

1,926,038 €

58,350 €

1,535,083 €

ABC000

⫺126,038 € ⫺118,239 €

3,297,261 €

61,714 €

2,635,803 €

ABC001

⫺167,490 € ⫺168,387 €

3,450,953 €

43,726 €

2,734,564 €

ABC010

⫺26,234 € ⫺346,091 €

2,008,867 €

107,542 €

1,381,281 €

ABC011

⫺172,787 € ⫺627,515 €

2,227,947 €

⫺73,814 €

1,530,931 €

ABC100

⫺9,918 € ⫺206,114 €

2,027,957 €

91,825 €

1,449,617 €

3,299,161 €

100,484 €

2,649,299 € 1,398,660 €

ABC101 ABC110 ABC111 MBM

⫺87,280 €

⫺99,734 €

5,038 € ⫺123,130 €

1,975,829 €

128,982 €

⫺93,682 €

3,418,384 €

68,605 €

2,754,894 €

⫺26,453 € ⫺324,032 €

1,789,417 €

133,185 €

1,224,855 €

⫺124,193 €

Non-conventional Models

305

Customer profitability CL6

CL7

CL8

CL9

CL10

CL11

CL12

30,570 € 2,073,880 € 3,172,380 €

299,470 €

17,080 € 3,281,740 €

1,088,880 €

30,570 € 2,073,880 € 3,172,380 €

299,470 €

17,080 € 3,281,740 €

1,088,880 €

22,320 € 1,299,580 € 1,976,480 €

214,120 €

11,720 € 2,072,280 €

686,580 €

22,320 € 1,246,906 € 1,971,425 €

115,090 €

11,720 €

⫺9,496 €

835,503 € 1,301,301 €

7,979 €

1,968,511 €

635,485 €

⫺8,382 € 1,222,336 €

426,868 €

5,451 €

609,530 €

929,931 €

77,543 €

3,051 €

950,814 €

320,063 €

2,100 €

673,285 € 1,021,777 €

77,398 €

2,216 €

1,036,918 €

354,417 €

8,065 €

529,730 €

816,128 €

70,216 €

2,713 €

835,697 €

276,370 €

5,531 €

591,643 €

926,976 €

45,767 €

⫺585 €

912,609 €

303,115 €

⫺124,553 €

852,222 € 1,359,859 €

⫺52,617 € ⫺126,038 €

1,327,576 €

388,312 €

⫺165,957 €

852,480 € 1,376,218 €

⫺80,958 € ⫺167,490 € 1,354,233 €

370,462 €

757,925 € 1,148,656 €

⫺40,762 €

⫺31,511 € ⫺195,488 €

⫺26,234 €

1,019,060 €

392,405 €

912,245 € 1,463,356 € ⫺321,745 € ⫺172,787 €

1,132,951 €

401,652 €

⫺9,918 €

978,548 €

353,137 €

⫺87,280 € 1,346,027 €

433,775 €

⫺14,397 €

683,317 € 1,046,980 €

2,723 €

⫺89,565 €

901,173 € 1,408,586 €

⫺37,117 €

7,778 € ⫺125,704 € ⫺28,814 €

569,216 €

864,339 €

87,824 €

5,038 €

900,911 €

300,731 €

870,895 € 1,385,154 €

⫺56,606 € ⫺124,193 € 1,347,236 €

398,921 €

653,660 €

⫺19,851 €

343,478 €

973,372 €

⫺26,453 €

874,636 €

32,959,755 €

9,737,529 € 6,121,215 € 9,719,711 € 5,567,000 €

ABC101

ABC110

ABC111

MBM

6,104,945 € 6,393,758 €

ABC010

ABC011

9,432,354 € 6,344,905 €

ABC001

ABC100

36,509,615 €

9,375,264 €

ABC000

0€ 0€

0€ 0€ 0€ 0€

Customer cost

21,758,400 €

29,290,079 €

29,251,774 €

29,775,621 €

34,118,742 €

29,066,015 €

29,123,104 €

13,187,100 €

1,502,710 €

5,139,511 €

999,350 €

0€

1,447,800 €

0€

2,014,132 €

2,014,132 €

0€ 31,747,063 € 34,510,039 € 0€ 34,206,136 € 0€

34,084,903 €

6,427,597 € 8,765,437 € 6,002,461 € 6,306,364 €

Responsibility centres Units of value added Homogeneous cost pools Hierarchical homogeneous cost pools

34,215,313 € 34,324,542 €

14,466,320 € 13,566,200 € 23,378,900 € 25,391,091 €

6,297,187 € 6,187,958 €

26,146,300 € 26,946,300 € 17,133,600 € 15,121,409 €

Products cost

Simple full cost All directs

Direct value added Theory of constraints Variable cost Direct cost

Customer profitability

0€

3,636,801 €

0€

3,636,801 €

0€

0€

0€

3,367,783 €

3,330,191 €

0€ 2,231,076 € 0€ 0€

0€ 0€

23,654,500 € 22,054,500 € 11,566,600 € 9,551,250 €

Cost outside perimeter

40,512,500 €

40,512,500 €

40,512,500 €

40,512,500 €

40,512,500 €

40,512,500 €

40,512,500 €

40,512,500 €

40,512,500 €

40,512,500 € 40,512,500 € 40,512,500 € 40,512,500 €

40,512,500 € 40,512,500 €

40,512,500 € 40,512,500 € 40,512,500 € 40,512,500 €

Sales

5,567,000 €

6,082,910 €

6,121,215 €

6,100,728 €

6,393,758 €

6,104,945 €

4,002,884 €

6,064,570 €

6,045,073 €

6,427,597 € 6,534,361 € 6,002,461 € 6,306,364 €

6,297,187 € 6,187,958 €

2,391,680 € 4,891,800 € 5,567,000 € 5,570,159 €

Income before taxes

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308 Bibliography Perrin, G. (1962) Prix de revient et contrôle de gestion par la méthode G.P. (Paris: Dunod). Plan comptable général (1983) (Paris: Imprimerie nationale). Porter, M. (2003) L’avantage concurrentiel (Paris: Interéditions). Ramirez, R. (1999) ‘Value Coproduction: Intellectual Origins and Implications for Practice and Research’ Strategic Management Journal, 20: 49–65. Rimailho, E. (1936) L’organisation à la française (Paris: Delmas). Savall, H. and V. Zardet (1995) Maîtriser les coûts et les performances cachés (Paris: Dunod). Scovell, C.H. (1981) Cost Accounting and Burden Application, reprint by Ayer Publishing. Shank, K. and V. Govindarajan (1993) Strategic Cost Management: The New Tool for Competitive Advantage (New York: The Free Press). Thomas, T. (1977) A Behavioural Analysis of Join Cost and Transfer Pricing: A Behavioural Approach (Lancaster: Arthur Andersen lectures). Turney, P. (1991) Common Cents (Portland: Cost Technology). Yoshikawa, T., J. Innes and Falconer Mitchell (1989) ‘Cost Management Through Functional Analysis’, Journal of Cost Management, Spring: 14–19.

Index ABC, 33, 44, 48, 84, 196–284 accuracy, 48, 57, 66 acquisition cost, 6 activity, 18, 24 additive character, 63, 64 adhesion, 58 all direct, 40, 152–7 allocation base, 37, 61 process, 37, 39 analogical cost, 70 architecture, 11, 33, 113 assets, 8 attributes carrying value, 44, 77 see also value autoclosure, 63 bases for allocation, 32, 64 batch effect, 102 behaviour (orientation), 8, 21, 46, 57, 78 bill of materials, 18, 22, 36, 47, 61, 90, 115 bill of operations, 18, 22, 36, 115 break-even point, 52, 89 BSC, 81 budget, 15, 26, 52, 93 burden rate, 89 canonical ABC, 44 capacity, 39, 88 causality, 24, 25, 30, 41, 46–9, 66, 79, 87, 91, 95 cladistics, 33 cladogram, 38, 43, 116 clarity, 58 coherence, 21 computer science, 1 consolidation techniques, 14 consumption (modality of), 96 contribution margin, 89 conventional systems, 121

cost allocation, 31 attributable, 31, 90 behaviour, 26 committed, 69 drivers, 27, 70, 76 externalized, 12 incorporable, 111 internalized, 12 management, 52, 89 model, 93 objects, 60, 64 price, 5 tables, 70 cost centre method, 48 cost systems, evolution, 83 conventional, 37, 66 non-conventional, 37 cost/value, 12, 37, 44, 46, 55, 71, 76, 82, 85 customer, 79 departmentalization costing, 40 deployment (strategy), 78, 80 design parameter, 33 see parameters design to cost, 67 direct costs, 33, 39, 140–5 direct labour, 9, 18, 32, 42, 47, 56, 57, 96 diversity of activities, 96 drivers, 48, 70 DVA, 39, 121–7 embedded help, 59 environment, 68, 73 challenge, 27 interaction with, 5, 7, 12, 46 equivalent index, 39 equivalent units, 22, 40 exchange value, 56 externalities, 68, 72 3 309

310

Index

financial accounting, 13, 16 flowchart, 18 food industry, 17 full costs, 14, 15, 16, 33, 40, 49 basic, 146–51 functional approach, 31 functional processes, 28 functionalities, 56, 70, 71 global cost, 87 global sourcing, 14 hidden costs, 6, 72 hierarchical costing systems, 30, 37 homogeneity, 26, 37, 62, 98 homogeneous cost pools, 179–86 hierarchized, 187–94 homogeneous sections (or units), 23, 41, 42 hourly rates, 9, 52 inputs, 22 intrinsic value, 56 investment (intellectual), 94 Japanese companies, 9 Johnson, H.T., 83 joint cost, 47 just-in-time, 27 Kaplan, R.S., 81, 83 key indicators, 75, 78 knowledge, 59 KPI, 77–8 language, 11 monetary, 11, 13 law of cost behaviour, 50, 64 see also cost behaviour law of causality see causality Lebas, 29 legal system, 35 life cycle, 12, 14, 67, 68–72, 88 managing resources, 5 marginal cost, 69 MBM, 65, 285–99 Mevellec, P., 30 Mintzberg, H., 75

model existing, 17, 18 new, 17, 18, 22 product based, 21 nomenclature, 62 see also bill of material non-transactional cost, 72 Norton, D.P., 81 object, 30, 31, 55 offer, 32 order, 55, 65 the line of, 55, 65 organization (modelling), 22 operations, 24 organization chart, 36 orientation of behaviour, 5 outsourcing, 9 parallel system, 16, 36 parameters, 21, 93 parametric cost, 70 partial system, 15, 16, 49 partnership, 8, 67, 71 performance indicators, 46, 53, 77–9, 93 performance management, 27, 75 perimeter, 13, 15 Perrin, G., 40 physical product, 64 Plato, 33 principal unit of analysis, 40 process, 28, 44, 80, 91 product, 6, 22 product model, 36 product variety, 103 production cost, 69 production function, 17 production management, 13 product-service, 70 profit margin, 89 projects, 15 public authorities, 8 push costing systems, 41 quality management, 80

Index reallocation, 26, 50, 52 reciprocal services, 54 relative costs, 96 relevance, 21, 32, 83, 94 behaviour orientation, 57–9 external, 54–7 internal, 46–54 table, 118 reliability, 21 relocation, 8 resources, 6 resources management, 5, 46 resources consumption, 46 responsibility, 46, 51–4 responsibility centre, 6, 40, 52 hierarchized, 158–65 Rimailho, E., 23 risk, 53 sale price, 7 Savall, H., 6 scientific management, 83 Scovell, C.H., 23 seasonality, 114 service units, 40 shareholders, 81 signal, 13, 15, 16 socio-economic analysis, 6 stakeholders, 32, 75, 81, 82 standard cost, 9 statements cost, 114 income, 114 status, 16 strategic costs, 70 strategy, 75 subsidizing, 61, 62, 65, 95–107 supply chain, 8

311

target cost, 67, 69 tasks analysis, 24 taxa, 37, 113 Taylorism, 9 theory of constraints (TOC), 17, 18, 39, 128–32 Toshiro, H., 9 total quality, 27 traceability, 21, 39, 46, 49–51, 66, 87, 95 transfunctional vision, 31 transfunctionality, 26, 27, 37, 44, 48, 53, 76 true cost, 96 Turney, P., 29 unit cost, 54, 55, 60–4, 87 unit of analysis, 17, 21, 24, 26, 36, 44, 95 utility value, 56 value, 32, 85 added processes, 45, 53 analysis, 9, 13 attributes, 28, 30, 35, 57, 70, 86 chain, 30 creation, 44, 75 driver, 56 exchange, 56 food, 17 intrinsic, 56 system of, 35, 74 variable cost, 39, 52, 133–8 variance analysis, 67, 90, 91 VAU, 40, 50, 65, 166–78 volume (of product), 26 volumetric, non-volumetric, 63 Zardet, V., 6