Abc with CIS presentation

Ken Manning

President

ACTIVITY-BASED ACTIVITY-BASED COSTING:COSTING:

Its More Than Just a Costing Its More Than Just a Costing ToolTool

So What is ABC?

• “ABC cost ontology enables the mapping of resource drivers to our resource cost units; whereas, the resource cost assignment of ABC is achieved through the cost micro-theory for the resource cost point of an activity.” ( US Government)

Let’s try this

• Activity-based costing is a method of costing products or services based upon the activities required to produce the product or service.

• Producing products or services does not use resources, but, instead, uses activities.

• ABC identifies and associates the costs required to perform the activity.

SHIPMENT CROSS-SUBSIDIES CAN BE VERY LARGE

ABC is needed...

...To avoid cross-subsidization

Costs

Shipments

Average $ Cost

High VolumeLeast Complex

Low VolumeMost Complex

Over Cost

Under Cost

ABC is also:• a flexible Pricing Tool• a tool for Simulation or “what if” analysis• an invaluable Repository of

– Marketing Data– Operating Data– Productivity Data

Waiting to be mined with the right tools

TruckingReality

• An increase in revenue does not necessarily increase profit

• Some shipments are money makers and some are money losers

• The “losers” sometimes outweigh the “winners”

• Is anyone sure where money is being made and lost?

ACTIVITY-BASED COSTING:ACTIVITY-BASED COSTING:

an LTL Overviewan LTL Overview

Ask Yourself These Questions.

• Do you know the profitability of each customer you do business with?

• Does your current system highlight opportunities for cost improvement?

• Do you understand the various activities performed in your company?

• Do you have tools needed to estimate the profitability of prospective customers?

• Can you simulate the profitability of freight under forecast operating conditions and cost?

Cost of ServiceCost of Service

Labor Operating Expenses

OverheadOther

Traditional Cost Model

Amount Per Shipment

Revenue 10,000,000$ 125.00$

Labor 5,100,000 63.75$ Oper. Exp. 3,050,000 38.13$ Overhead 1,500,000 18.75$

Other 250,000 3.13$

Total Exp. 9,900,000$ 123.75$

Oper. Inc. 100,000$ 1.25$

No. of Shipments 80,000

Traditional Costing

P&D Dock Linehaul B & CCost of Providing Service

Labor

Di r e c t

Labor

Di r e c t

Di r e c t

Di r e c t

Labor

Labor

Overhead

Traditional Cost Model - Advanced

ABC Basic Premise

• Providing a service (freight transportation) consumes activities

• Activities consume resources

• The consumption of resources is what drives cost

• Each activity has independently associated overhead costs

Cost of Providing Service

Activity-Based Cost Model

P&D Dock Linehaul B & C

Di r e c t

Di r e c t

Di r e c t

Di r e c t

Labor

Labor

Labor

Labor

Ovhd.

Ovhd.

Ovhd.

Ovhd.

Ovhd.

Ovhd.

Ovhd.

Ovhd.

OK, so how is this useful?

• Trucking does not transport hundredweight.

• Trucking does not transport average shipments.

• Trucking does transport specific shipments with specific characteristics.

A Specific Shipment

• Canada Trucking, Ltd did $10 million revenue, 80,000 shipments, and 1,025,000 cwt.

• Shipment no. 576389 is 1,090 lbs from Toronto to Chicago with revenue of $180.00.

• The shipment consists of 30 loose pieces with 8 lbs/cu.ft. density.

Canada Trucking decides to implement ABC.

Analyze Activities

Gather Cost

EstablishOutput

Measures

Link Activitiesto Providing Service

Linehaul, P&D, Dock?, Trailer Pool?

General Ledger, statistics

Per mile, per minute, per day?

Canada Trucking is clicking!Activity-based Costing

Amount Per Shipment

Revenue 10,000,000$ 125.00$ Linehaul 3,500,000 43.75$ B&C/Ovhd/Other 610,000 7.63$ LINEHAUL Activity 4,110,000 51.38$

P&D 3,025,000 37.81$ B&C/Ovhd/Other 535,000 6.69$ P&D Activity 3,560,000 44.50$

Dock 1,850,000 23.13$ B&C/Ovhd/Other 380,000 4.75$ Dock Activity 2,230,000 27.88$

Oper. Exp. 9,900,000$ 123.75$

Oper. Inc. 100,000$ 1.25$

What is the True Cost?

Revenue 125.00$

Linehaul(Cost Driver) 57.85 P&D(Cost Driver) 37.30 Dock(Cost Driver) 26.00

Tot Cost 121.15$

Profit(Loss) 3.85$

Oper. Ratio 96.9%

130.00

93.2%

Why does this make a difference?

• To discover opportunities for cost improvement (process engineering)

• To improve strategic decision making

• To identify money makers & money losers

• To compare different options– Pricing Adjustments– Operating Adjustments

• The ABC System must be able to associate The ABC System must be able to associate different handling characteristics to the cost of different handling characteristics to the cost of providing service.providing service.

• May not be practical to allocate all costs to May not be practical to allocate all costs to activities.activities.

• The allocation must be based upon use of The allocation must be based upon use of resources not arbitrary assumptions.resources not arbitrary assumptions.

• Establishing an ABC system is not an accounting Establishing an ABC system is not an accounting project.project.

ACTIVITY-BASED COSTING:ACTIVITY-BASED COSTING:

a Truckload Overviewa Truckload Overview

Activity Based Costing for Irregular Route Carriers

• Unit Costs

• Application

• Round Trip Accounting

Direct Unit Costs• Linehaul Cost per Mile

• Linehaul Cost per Stop*

• Rail Linehaul and Drayage

• Trailer Pools

• Extra Costs (Accessorials)

• Billing & Collecting per Load

• Loss & Damage Components

• Local (Hourly) Drivers * Tailored to Driver Pay Basis

Application

• Cost of activities specific to a customer to be borne by that customer.

• Activities specific to a trip to be borne by all customers served on that trip.

Activities Specific to a Customer

• Loading and Unloading

• Loaded Miles

• Trailer Pools

• Accessorial Services

Activities Specific to a Trip

• Empty Miles

• Layovers

Traditional Cost Analysis

Loaded Miles + Assigned Empties = Total Miles

Total Miles x Unit Cost Per Mile = Cost of Load

New Concepts

• Cost is incurred for the entire trip required to serve the customer.

• That cost is NOT divisible using cost per mile.

• Round trip cost must be jointly allocated to specific loads based on contribution.

U.S. Patent 6,604,081

Cost of Material

10 lbs @ $1 per pound = $10

Cost of Material

10 lbs @ $1 per pound = $10

Cost of Material

5 lbs @ $1 per pound = $5

Cost of Material

5 lbs @ $1 per pound = $5

Cost of Material

UNIT PRICE IS IRRELEVANT

Cost =

Total Cost of Material

Less the Value of the “Leftovers”

Leftovers

• Waste

• Scrap

• Byproduct

Cost of Material

UNIT PRICE IS IRRELEVANT

Cost =

Total Cost of Material

Less the value of the “leftovers”

Round Trip is Your Cost

When you send a driver out on a trip, there is an implicit understanding that you will, eventually, pay for

his return.

U.S. Patent 6,604,081

Cost of a Load

COST PER MILE IS IRRELEVANT

Cost of a Load =

Total Cost of Round Trip

Less the Value of the “Leftovers”

U.S. Patent 6,604,081

Leftovers

• Waste

• Scrap

• Byproduct

Leftovers

• Deadhead

• Scrap

• Byproduct

Round Trip with Two Loads

Load OR = 85

Domicile

Round Trip with Two Loads

Load OR = 85

Round Trip OR = 160!

Domicile

Leftovers

• Deadhead

• Scrap

• Byproduct

Leftovers

• Deadhead

• Backhaul

• Byproduct

Round Trip with Two Loads

Load A

Load B

Domicile

Cost of Each Load Based on all Activities

Load A

Load B

Domicile

90 O/R

130 0/R

Round Trip: 110 0/R

Cost of Each Load Based on all Activities

Load A

Load B

Domicile

110 O/R

110 0/R

Round Trip: 110 0/R

TCG Philosophy:

If you’re not making money on the round trips run to serve a customer, you’re not making money on that customer.

Leftovers

• Deadhead

• Backhaul

• Byproduct

Leftovers

• Deadhead

• Backhaul

• Other Headhaul Loads on the Same Trip

Multi-Load Round Trips

TerminalRound Trip: 90 0/R

60 O/R

120 O/R 160 O/R

70 O/R

110 O/R

Multi-Driver Loads

60 O/R

110 O/R

Driver A Round Trip = 110 O/R

90 O/R

120 O/R

Driver B Round

Trip = 80 0/R

Load A =

75 0/R

Multi-Driver Loads

80 O/R

80 O/R

Driver A Round Trip = 110 O/R

110 O/R

110 O/R

Driver B Round

Trip = 80 0/R

Load A =

95 0/R

LTL Trip with Truckload

Outbound LTL

TL return

Terminal

LTL Trip with Truckload

Outbound LTL

TL return

Terminal

90 OR

130 0/R

Round Trip: 110 0/R

LTL Trip with Truckload

Outbound LTL

TL return

Terminal

110 OR

110 0/R

Round Trip: 110 0/R

Cost of Outbound LTL:

Total Round Trip Cost

Less Net Revenue from Load B

U.S. Patent 6,604,081

Balance Concept

• Cost is incurred for the entire trip required to serve the customer.

• That cost is NOT divisible using cost per mile.

• Round trip cost must be jointly allocated to specific loads based on contribution.

U.S. Patent 6,604,081

Three Essential Ingredients:

Data Completeness

Data Consistency

Data Integrity

GIGO = Garbage In, Garbage Out

SHIPMENT CROSS-SUBSIDIES CAN BE VERY LARGE

ABC is needed...

...To avoid cross-subsidization

Costs

Shipments

Average $ Cost

High VolumeLeast Complex

Low VolumeMost Complex

Over Cost

Under Cost

TRANSPORTATIONCOSTING GROUP

ACTIVITY-BASED COSTING SYSTEMS1-800-328-9700