Activity Based Costing and Budgeting - PowerPoint

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					    Activity-Based Budgeting


              T-FLEx Spring Conference
              Las Vegas
              April 5, 2006




1
    DART’s Current Operating Budget
    Alignment

       Horizontal:
        –   Line Items
        –   Object Classes

       Vertical:
        –   Cost Centers
        –   Divisions
        –   Departments


2
    What is the Value of the Current
    Operating Budget?

       To a cost center manager?

       To an executive decision maker?

       To the Board?




3
    DART’s Current Operating Budget
    Alignment – Advantages

       Traditional, consistent
       Easy to understand, high level of detail
       Year-to-year trending data
       Departmental line-of-sight




4
    DART’s Current Operating Budget
    Alignment – Disadvantages

       Limited context information
       Lack of visibility
        –   Budget cuts can be arbitrary
        –   Insufficient data to evaluate cost effectiveness or
            prioritize expenditures

       Weakened inter-departmental communication


5
    First Step:
    ‘Context’ Information

       Direct Service Costs (66%) – Costs directly
        related to providing transportation service to
        the customer
       Indirect Service Costs (25%) – Costs that are
        one step removed from direct costs; generally
        impact service quality
       General and Administrative (9%) – Costs not
        directly related to service but that provide
        essential business functions
6
    Next Step:
    Activity-Based Management

       Activity-Based Budgeting (ABB)
        –   Build the Budget

       Activity-Based Costing (ABC)
        –   Track Expenditures

       Activity-Based Management (ABM)
        –   Prioritize Projects and Processes
        –   Drive Efficiency
        –   Identify Opportunities for Continuous Improvement
7
     What does Activity Based Budget
     look like?

               Traditional Budget                         Activity-Based Budget

    Salaries & Wages                $1,000,000   Maintan Hardware                  $395,421
    Benefits                          $450,000   Maintain Software Applications    $864,185
    Materials & Supplies              $250,000   Develop New Applications          $266,359
    Services                          $100,000   Provide End-User Support          $286,094
    Utilities                          $50,000   Provide Training Services         $187,941
    Travel & Training                 $100,000
    Other                              $50,000

    Total                           $2,000,000   Total                            $2,000,000




8
    Activity Elements

       Name                  Work Partners
       Type (process or      Work outputs,
        project)               measures, and metrics
       Description           Cost Drivers
       Work Triggers         Customers/Clients of
       Suppliers              Activity
       Resources

9
     Why Activity Based Budgeting?
        Communication with the Board
         –   Context information
         –   Agency activities >> Board Goals
        Internal Communication
         –   Program changes not made in isolation
         –   Break down the silos
        Prioritize Activities
         –   Eliminate across-the-board cuts, cut lowest value activities
        Identify of areas to target for process reengineering
         –   The “A-Ha Factor”
         –   Understanding the Cost of Quality
10
     Rapid Prototype Implementation

        Quick, highly summarized initial effort
        Top-Down Approach
        Promoting Buy-in
         –   Involves every department
         –   Provides an immediate work product
         –   Avoids “Death by Details”
        First model is not an exercise in precise
         costing
        Iterative Process
11
     ABM Implementation Phasing

        FY06 – Phase I
         –   Define Agency activity dictionary (Model Zero), create
             draft activity-based budget (information only), begin to
             evaluate tracking systems requirements
        FY07 – Phase II
         –   Reinforce ABM culture, enhance activity list detail,
             develop tracking systems, create usable ABB for FY08
        FY08 – Phase III
         –   Full implementation, tracking time and expenditures,
             system maintenance, identify opportunities for
             efficiencies and process re-engineering
12
     Phase I Timeline

        Jan-Mar – Develop Model Zero
         –   6-10 half-day ABM sessions
                 Agency-wide Team
                 Create Activity List
                 Trace Agency Costs to Activities
        Apr-Jun – Review with Management
         –   Departmental Management
         –   ELT / EMT
        Jun-Sep – Create and present an Activity-
         Based Budget
13
     What Activity-Based Budgeting Isn’t

        It is not a control budget
         –   It does not replace the department / line item
             budget, it is supplemental information

        Activities are owned at the agency level, not
         the departmental level
        It is not a Panacea, it is a tool


14
     Lessons Learned So Far

        Communicate “Why”
        Agency-wide inclusiveness vs. isolated
         department work sessions
         –   Team Members

        Top-down vs. Bottom-up approach
         –   Rapid-prototype
         –   # of Activities / Activity Count envy

15
     Lessons Learned So Far (Cont’d)

        Don’t sweat the small stuff
        Activity intersections – Project vs. Process?
        How much detail do you need?
         –   Cost vs. Benefit




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