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Key Questions for ABC What?So what? Then what?
Gary [email protected]://blogs.sas.com/cokins919 531 2012 Cary, North Carolina
ABC ForumMay 5 , 2011Oslo, Norway
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About Gary Cokins
B.S. Industrial Engineering & Operations Research; Cornell
University, 1971
M.B.A. Finance & Accounting; Northwestern University,Kellogg Graduate School of Management, 1974
Previous Associations:- FMC Corporation- Consultant with: Deloitte,
KPMG Peat Marwick, &Electronic Data Systems [EDS]
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Gary Cokins 2001 book ranks #1
Gary Cokins 1996 book ranks #2
Of 151 ABC titles,ranked by bestselling volume ..
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SAS is the Worlds Largest Privately-Held SoftwareCompany(Prepackaged Software)
52 countries
11,115 employees
$2.5 billion sales
More than 400 offices
2010 - 2011 Best Company toWork for Fortune Magazine
Hundreds of user groups
43,000+ customer sitesin 112 countries
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Managers who have previously failed or arestruggling at promoting or implementing ABCinto their decision support systems.
Who will benefit from this presentation?
Managers who intend to champion any or all
improvement techniques and need a compellingcall to action.
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Key questions
What? So what? Then what?
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Six Eras of Managerial Accounting
20,000 BC 1492 1910 1930 1980 2015
Ancient
Medieval
Industrial
RegulatoryCompliance
Consumer
Predictive
Analytics
StageOf
Costing
Maturity
A shift ofemphasis froma historical to apredictive viewof strategy and
operations
precious metaland papermoney piles,ultimatelyleading to
double-entrybookkeeping(Luca Pacioli,1492).
standard costaccounting (toreflectFrederickWinslowTaylors
manufacturingscientificmethods, 1910)
The USAs
GreatDepressionresulted inregulatoryreforms toprotectinvestors(1930s).
Causal cost
tracing ofincreasingly
diverse typesof products,services,channels andcustomers
Rocks andstone piles.
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Will our young managers herald the BA era?
Your young generation of managers are already veryclever. The next slides demonstrate examples of howthey answered university exam questions.
http://www.youtube.com/watch?v=_CqgnZhb--Q
http://www.youtube.com/watch?v=_CqgnZhb--Qhttp://www.youtube.com/watch?v=_CqgnZhb--Qhttp://www.youtube.com/watch?v=_CqgnZhb--Qhttp://www.youtube.com/watch?v=_CqgnZhb--Q8/3/2019 Cokins SAS May 5 2011 No 2
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AGENDA
What is enterprise performance management?
What is business analytics?
Three barrier categories: technical, design andorganizational behavior
5 Design Barriers obstacles and impedimentswith measurements, accounting, customer valuemanagement, budgeting and their root causes.
How to overcome the barriers
What does enterprise performance managementlook like?
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A simple explanation of ABC
Mistrust of the managerial
accounting system for accuracy and transparency lead to
applying activity based costing.
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Multiple-Stage Cost Assignment Tracing
SimpleABM
ExpandedABM
Resources
Resources
Activities
Objects
Objects
Activities
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ABC/M Cost Assignment Network
Salary, FringeBenefits
DirectMaterial
Phone,Travel
SuppliesDepreciation
Rent,Interest,
Tax
Customers
BusinessSustaining
Products,Services
Resources(general ledger view)
Work
Activities(verb-noun)
FinalCost
Objects
Suppliers
(1)DemandsOnWorkC
osts(2)
CostsMeasuretheEffects
Support
Activities
EquipmentActivities
PeopleActivities
cost-to-servepaths
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$ 30 sales- 28 expenses
= $ 2 profit
$ 2 profit
Unrealized profit revealed by ABM
Net RevenuesMinusABM costs=profit
More important than a better costing method are its results.
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ActivityCosts
each activitys
driver quantity
unit activitydriver cost
x
(eg. # of registrations)
Price/Fee(Revenue)
ABM provides insight for the products or services cost
drivers and driver quantities.Work
Activities
Activity Costs pile up into outputs.
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Supplier(direct material)
Key:
Enterprise
Cost
BusinessProcesses
Process A
Processes include activities that have high tolow value-addingcontent.
VA
NVA
Processes: Six Sigma, Lean Management,and Value Stream Mapping
$
$
$
$
$$
$
$
ABM also provides unit costs of outputs forcost visibility and benchmarking.
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Rapid Prototyping withIterative Remodeling
Each iteration enhances the use of a PM system.
PM Models
3
PM System
(repeatable, reliable, relevant)
#0
#1
#2
#3210
ABC Error has Offsetting Properties
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ABC Error has Offsetting PropertiesWith ABC, it is counter-intuitive that error does not compound. It dampens out.
The Dispersion of Error contained
in upstream assignments offset as
each downstream paths aggregated
into each final cost object.
Assignment error has a zero-sum
property:Over-
costedpath $s
(+)
Undercostedpath $s
(-)
=
+ -
+ -
Resource
Activities
FinalCost
Objects
Assignment
View
+ + -Contribution
View
Many-to-One
One-to-Many
The Two Path Views
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Balancing Levels of Accuracy with Effort
Accuracyof
Final CostObjects
100%
0%
World ClassABC System Design
Little
Level of Data Collection Effort
GreatModest
A
B
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Proof of error dampening from academics
ERRORS IN COSTING SYSTEMSSOMETIMES ONE MISTAKE COMPENSATES FOR THE OTHER!
-- MCA November, 2007 (p. 18-24) by Dr. Eva Labro, London School of Economics
A Simulation Analysis of Interactions among Errors in Costing
Systems
-- THE ACCOUNTING REVIEW, Vol. 82 No. 4, 2007 (p. 939-962) by Dr. Eva Labro,
London School of Economics; and Dr. Mario Vanhoucke, Ghent University
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20
Correlation Analysis of Activity Drivers
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Why are some customers more profitable than others?
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Recursive Partitioning / Decision Trees
The single, largest factor forexplaining the profitvariation is AverageTransaction Value
Customers with lots of asmall average transactionvalue are less profitable
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Managing IT as a business is now an imperative. No longer can ITbe seen as a technology supplier it must be seen to be addingvalue to the organization and providing strategic capability. ITperformance management enables IT to become service oriented,aligning itself with the organization to provide internal customer-driven solutions to problems.
Managing IT as a business
But it is difficult to maximize returns from IT when the productsand services appear to be free to internal customers.
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Two Types of IT expenses: Assets and People
Hardware
People
Fixed Costs (virtual)IT assets become sunk costsimmediately at purchase. Theobjective to is maximize capacity use.
Flexible / Variable Costs (physical)People-related expenses (e.g.,salaries) can be flexibly assigned to
different work. Headcount isadjustable. The objective is to usepeople efficiently.
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An existing Tile Chart as seen through the SASInformation Delivery Portal
IT Assets as a Visual Tile Chart
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January OctoberOptimizing the Factory driven improvements
A tile chart illustrates how IT workloads can be analyzed and optimized. The left hand chartshows a number of servers that are significantly under-utilized (shaded blue). Under-utlizedservers were removed and the existing workload was shifted to lower-cost, multi-core servers.After 10 months, the chart on the right shows a fairly balanced workload (reds and orangesindicating workloads higher in processor utilization).
Asset Expenses are virtual (Fixed Costs)
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AGENDA
What is enterprise performance management? What is business analytics?
Three barrier categories: technical, design andorganizational behavior
5 Design Barriers obstacles and impedimentswith measurements, accounting, customer valuemanagement, budgeting and their root causes.
How to overcome the barriers
What does enterprise performance managementlook like?
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Products and standard service-lines are not the onlything for which accountants should compute costs.
What about costs that have nothing to do with productsand standard service-lines?
The problem with traditional accountings gross marginreporting is you dont see the bottom half of the picture.
But what about the Other Below-the-GM-lineCalculated Costs?
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29
INCOME STATEMENT
Sales $ 100
- Product direct costs -20
- Overhead cost -10
----------------------------------------------
= Gross profit margin $ 70
What about Costs Below Product Costs ?
- selling costs -20
- distribution costs -10
- marketing costs -20
- administrative costs -10----------------------------------------------
= Total Profit $ 10
The accountantsreport these byeach product (butthey are wrong
without ABC).
?We have no visibility
of these costs bycustomer (except intotal) !
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Indirect expenses
Distribution, Sales & Marketing
General, and Administration
Customer+
Direct material,
Direct labor &Equipment
Costs from Sales & Marketing are not Products
Channel+
Product
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# 1- Customer Retention It is relatively much more
expensive to acquire a new customer than to retainan existing one.
# 2 Sources of Competitive Advantage As products
and standard service-lines become commodity-like,then the shift is towards service-differentiation.
Why Do Customer-related Costs Matter?The Perfect Storm
Wh D C l d C M ?
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# 4 - Power ShiftThe Internet is shifting power irreversibly from sellers to buyers.
# 3 - CRMs One-to-One Marketing Pepper &Rodgers have hailed technology as the enabler to (1)identify customer segments, and (2) tailor marketingoffers.
Why Do Customer-related Costs Matter?The Perfect Storm
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A C t P fit & L St t t
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CUSTOMER: XYZ CORPORATION (CUSTOMER #1270)
Sales $$$ Margin $ Margin(Sales - Costs) % of Sales
Product-RelatedSupplier-Related costs (TCO) $ xxx $ xxx 98%
Direct Material xxx xxx 50%Brand Sustaining xxx xxx 48%Product Sustaining xxx xxx 46%Unit, Batch* xxx xxx 30%
Distribution-RelatedOutbound Freight Type* xxx xxx 28%Order Type* xxx xxx 26%Channel Type* xxx xxx 24%
Customer-RelatedCustomer-Sustaining xxx xxx 22%
Unit-Batch* xxx xxx 10%
Business Sustaining xxx xxx 8%
Operating Profit xxx 8%
*Activity Cost Driver Assignments use measurable quantity volume of Activity Output(Other ActvityAssignments traced based on informed (subjective) %s)
Product-relatedcosts
Channel &Customer-relatedcosts
A Customer Profit & Loss Statement
Mi ti C t t Hi h P fit bilit
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High(Creamy)
Low(Low Fat)
Low High
Cost-to-Serve
Product MixMargin
VeryProfitable
Veryunprofitable
Types of Customers
Migrating Customers to Higher Profitability
KPI Li k f C t P fit t th S d
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High(Creamy)
Low(Low Fat)
Low High
Cost-to-Serve
Product MixMargin
VeryProfitable
Veryunprofitable
Types of Customers
KPI Target
KPI Linkage of Customer Profits to the Scorecard
C t V l M t
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Who is more important to pursue with the scarceresources of our marketing spend budget?
Our most profitable customers?Or our most valuable customers?
What is the difference?
The customer lifetime value is intended to
answer this question.
Customer Value Management
I i h ti l li
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Dentist A
Sales = $750,000
profits = $100,000
Age 61
Dentist B
Sales = $375,000
profits = $40,000
Age 25
Which is more profitable?Which is more valuable?
Imagine you are pharmaceutical supplier.Which Customer is more Important?
V l C ti i CLV
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Value Creation via CLV
Source: Customer Equity
Marketing;European Mgmt.
Journal; Vol 20, No. 3; June, 2002
Get more valuefrom these
Protectthese
After a CLV (or CP) is calculated and rank-orderedhighest to lowest customer, then
CustomerLifetime Value $
Existing Customers
retaindevelop,streamline
Actions for each customer produces Profit lift
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Actions for each customer produces Profit-lift
Get more valuefrom these
Existing Customers*
retaindevelop,streamline
What actionswill lift theprofit curve?
Protectthese;grow them
* Ranked most to least valuable
CustomerLifetime Value $
Source: Customer Equity
Marketing;European Mgmt.
Journal; Vol 20, No. 3; June, 2002
V l C ti i CLV
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Value Creation via CLV
Existing Customers Possible New Customers
retaindevelop,
streamlinedo notacquire
acquireSource: Customer EquityMarketing;European Mgmt.
Journal; Vol 20, No. 3; June, 2002
Get more valuefrom these
Be selectivepursing these
Protectthese;
grow them
CustomerLifetime Value $ also, be prudent attracting new customers.
Here is a real compan s CLV Form la
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Here is a real companys CLV Formula
t
T
t
t
tt
N
i
itt
Pd
SLkR
ICLV
0
1
0)1(
)(
Sub. Maintenance
- Retention
(L)
- Customer Care (S)
Net Present Value of the Relationship(CLV)
Revenues
(R)
Cost ofProduct i
ki)
Cost of
Acquisition
I
DiscountRate
(d)
Probability forperiod t
(P)
Probabilityfor
Churn
Cross/Up
Sale
Willingnessto expend
more
My which type how much Hypothesis
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The spending budget for sales and marketing is critical
but it should be treated as a preciously scarce resource tobe aimed at generating the highest long-term profits.
This means answering questions like:
Which type of customer is attractive to newly acquire,
retain, grow, or win back? And which types are not?How much should we spend attracting, retaining, growing,or recovering each customer segment?
My which-type how-much Hypothesis
A Shift in the CFOs Emphasis
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The CFO must now help Sales and
Marketing to better target customers.
Segmentation, predictability, churn, offers,deals, risk and uncertainty must be
understood in the language of money.
A Shift in the CFOs Emphasis
AGENDA
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AGENDA
What is enterprise performance management?
What is business analytics?
Four barrier categories: technical, perceptions,design and organizational behavior
5 Design Barriers obstacles and impedimentswith measurements, accounting, customer valuemanagement, budgeting and their root causes.
How to overcome the barriers
What does enterprise performance managementlook like?
Why is the budgeting process broken?
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Why is the budgeting process broken?
The budget is typically a fiscal exercise by theaccountants that is:
-- disconnected from the executive teams strategy.
-- not based on future driver volumes.
What are the Organizational Behavior Barriers?
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What are the Organizational Behavior Barriers?
Budgeting (and Rolling Financial Forecasts)
Excel Hell.
Excess power of managers with the loudest voice or
strongest muscles and with sandbag padding expertise.
Tradition incremental / decremental cost center line-item without cost driver interdependencies.
Spreadsheet Budgeting Its Incremental !
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Current Year Budget YearWages 400,000.00$ Formula = Column B * 1.05
Supplies 50,000.00$
Rent 20,000.00$ Copy down
Computer 40,000.00$Travel 30,000.00$
Phone 20,000.00$
Total 560,000.00$
a b c
1
2
3
4
5
6
7
8
Sheet 1
Source: John Antos, The Value Creation Group
Spreadsheet BudgetingIt s Incremental !
Match the Budget Method to its Category
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Match the Budget Method to its Category
Demand-driven
Project-driven
Integrated
Budget(Rolling
FinancialForecasts)
Source: Mike Tinkler; www.synerma.com
(1) Non-Recurring Expenses // Strategic Initiatives
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Budgeting is typically disconnected fromthe strategy. But this problem is solved ifmanagement funds the managers projects.
(1) Non-Recurring Expenses // Strategic Initiatives
MeasurementPeriod;
1st Quarter
StrategicObjective
IdentifyProjects,
Initiatives,
orProcesses
KPIMeasure KPI Target KPI Actual
comments /explanation
Executive Team X X
Managers andEmployees X X their score X
(2) Recurring Expenses // Future Volume & Mix
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Activity-Based Costing- Historical & Descriptive
- Starts with known:
spending
driver measuresoutput quantities
- Calculates costs
Activity-Based Planning- Predictive
- Requires capacity analysis
- Starts with estimated outputs
- Applies ABC/M rates
- Solves for Resource expenses
NowPast Future
ABC/M
ABP
(2) Recurring Expenses // Future Volume & Mix
Operational Resource Capacity Planning
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Customers andService-recipients
Resources
Process Costs
Output &Outcome Costs
inputs
Resourceexpenses canbe calculated
withbackwards
ABC/M
Operational Resource Capacity Planning
Start Here.
The Shift towards Predictive Accounting
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ABC/M ABP
Known
?
?
resources
workactivities
cost
objects
Provides consumptionrates
NowPast Future
ABC/M
ABP
The Shift towards Predictive Accounting
The Shift towards Predictive Accounting
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ABC/M ABP
?
?
Estimated
resources
workactivities
cost
objects
NowPast Future
ABC/M
ABP
The Shift towards Predictive Accounting
Match the Budget Method to its Category
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Recurringexpenses
Non-recurringexpenses
Demand-driven
Project-driven
volume & mixof drivers
productionand
ABP/B
strategymap andrisk grid
IntegratedBudget
(rollingfinancial
forecasts)
Budget method
Strategic & riskmitigation projects
Match the Budget Method to its Category
Linking Strategy and Risk to the Budget
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Define and adjust
strategy and risk, and
create strategy map
Create balanced
scorecard
Identify and
manage strategic
initiatives
Approve strategyrisk and capital
budget
Managerial
Accounting(e.g., Activity-based
Costing)
Derived budget
(and rolling
financial forecasts)
Strategy methods
(e.g., SWOT)
Manage and
improve core
processes
Financial Modeling
KPI dashboardfeedback
(2) capital budget(3) strategy budget
(4) risk budget
Operational Modeling(by employee teams)Strategic
objectives
knowledge
= financial information (e.g. $)
Strategy Modeling(by executives)
priority projects and processes
Forecast drivers(e.g. sales) ;
develop productionplan
Traditional and
driver-based
budgeting (e.g. PBB)
Capacity
resource plan
Driver volumesand mix
Results andoutcomes
Changes andresponses
e.g., hours,Pounds,
# employees
(1) Operationalbudget
KPItargets
Driver consumption rates
Acceptable?
Reviseplan
OK
No
Yes
Linking Strategy and Risk to the Budget
Accounting Treatments and Behavior of Capacity (expenses)Historical versus Predictive Accounting
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NowPast Future
Descriptive
Predictive
unused
used
sunk
fixed(unadjustable)
variable(adjustablecapacity;
avoidable)
Traceable to
products,
channels,customers,
sustaining
unused
Historical versus Predictive Accounting
International Federation of Accountants Report
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Evaluating the Costing Journey:A Costing Levels ContinuumMaturity ModelBy Gary Cokins, SAS Most organizations are
typically at lower levels ofmaturity in adopting
progressive managerialaccounting practices,methods and systems.
International Federation of Accountants Report
ACCOUNTING Source data capture
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ACCOUNTING
FinancialAccounting
Cost Measurement
ManagerialAccounting
Cost AccountingFinancial Reporting
regulatory compliance
Cost Reporting &Analysis
(feedback on performance)
Decision Support/Cost Planning
[e.g., GAAP, IFRS]Costs of goods soldInventory valuation
Spending vs. budget varianceanalysis Profitability reporting Process analysis (e.g., lean,benchmarking, COQ) Performance measures Learning; corrective actions
Fully absorbed & incremental pricing Driver-based budgeting & rolling
financial forecasts What-if analysis Product, channel & customerrationalization Outsourcing & make vs. buy analysis
History FutureLow value-add Modest value-add High value-add
Source data capture(transactions /bookkeeping)
Non-financial datacapture
The Domain of Costing
TaxAccounting
Source: A Costing Levels Continuum Maturity Model by Gary Cokinspublished by the International Federation of Accountants, 2010
Costing Continuum / Levels of Maturity(most companies are Level 4D and 0P)
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1D
Level
#
2D 3D4D
5D
6D
7D
8D
Blind
ProcessVisibility
Output Visibility
ImprovedOutput
Information/Approximate
Accuracy
ImprovedTreatmentof Indirect
Costs
CustomerDemandSensitive
UnusedCapacity
Aware
(1) Descriptive Continuum
EXPENSE TRACKING, COSTREPORTING
and CONSUMPTION RATES
(2) Predictive Continuum
DEMAND DRIVEN PLANNINGwith CAPACITY SENSITIVITY
bookkeepingprocess andLean accounting
Direct costswithout (3) and with
(4) support coststo output groups
PushActivity-Basedcosting(ABC);
Productcosts
Standard
costing toindividualoutputs;
Project acct;Job ordercosting
Level 6 withChannel andcustomerprofitabilityReporting;
Cost-to-serve
Unused
capacitycosts(estimated)
(most companies are Level 4D and 0P)
Source: A Costing Levels Continuum Maturity Model by Gary Cokins published by the International Federation of Accountants, 2010
1P
2P
3P
4PPullActivity-based
ResourcePlanning
Time-drivenABC
ResourceConsumptio
nAccounting
Simulation
(ABRP);
ForecastdriverquantitiesX unitconsumption rates;
Driverbasedbudgeting
(TDABC);ForecastdriverquantitiesX time
consumptionrates;
Direct costfocus;
Repetitiveworkconditions
(RCA);Level 9 withproportionalcosting atdirect andsupportdepts.
Ultimate inconsumption rates;
0P
%G/L acct.
Incremental
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Key questions
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Key questions
What? So what? Then what?
The Intelligence Hierarchy
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Power ofInformation
$ROI
RawData
StandardReports
Ad hoc
Reports &OLAP
DescriptiveModeling
(with analytics)
PredictiveModeling
Data Information Knowledge Intelligence
Optimization
The Intelligence Hierarchy
Transactional systems (e.g., ERP)the reptilian brain stem
(breathing, blinking, digesting)
Business Analytics and Performance Managementthe cerebral cortex
(thinking and decision making)
Two types ofsoftware arelike a brains
two halves.
How Does It All Fit Together?
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OrganizationsResources
(capacity)
Strategy,Mission
How Does It All Fit Together?
ERP, etc.Customer
Satisfaction
Scorecards
CRM
ROI
$Shareholders
SupplierInputs
In Summary first, we energize
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OrganizationResources
(capacity)
Strategy,Mission
In Summary first, we energizewith good managerial accounting.
ERP, etc.Customer
Satisfaction
Scorecards
CRM
ROI
$Shareholders
SupplierInputs
Managerial
accounting
PM is Circulatory and Simultaneous
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OrganizationsResources
(capacity)
CRM
ROI
$
ERP, etc.
Risk Mgmt.,Strategy map,KPIs
KPIScoresFeedback
Order fulfillment
Strategy,Mission
CustomerSatisfaction
PM is Circulatory and Simultaneous
SupplierInputs
Scorecards
Targeting
needs
Shareholder Wealth Creation is not a goal. It is a result!
Shareholders
PM is Circulatory and Simultaneous
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OrganizationsResources
(capacity)
CRM
ROI
$
ERP, etc.
Risk Mgmt.,Strategy map,
KPIs
KPIScoresFeedback
Order fulfillment
Strategy,Mission
CustomerSatisfaction
Shareholders
PM is Circulatory and Simultaneous
SupplierInputs
Scorecards
Targeting
Shareholder Wealth Creation is not a goal. It is a result!
leakage(waste)
wasted resources
needs
Less productivity reduces Shareholder Wealth
A 30 Minute Webcast of points made during
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http://videoplayer.nlps.com/?FMN_SEPT09_SEG2
A 30 Minute Webcast of points made duringthis presentation
By www.smartpros.com Financial Management Network
The Complete Vision of Analytics-based Performance Management
http://videoplayer.nlps.com/?FMN_SEPT09_SEG2http://www.smartpros.com/http://www.smartpros.com/http://videoplayer.nlps.com/?FMN_SEPT09_SEG2http://videoplayer.nlps.com/?FMN_SEPT09_SEG2http://videoplayer.nlps.com/?FMN_SEPT09_SEG2http://videoplayer.nlps.com/?FMN_SEPT09_SEG28/3/2019 Cokins SAS May 5 2011 No 2
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e Co p ete s o o a yt cs based e o a ce a age e t
Make the RPM of the PM and BA gears spin better, faster, cheaper and smarter
From Theory to Practice
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o eo y to act ce
Your success depends
on how well and how fastthe right information andintelligence gets to theright people.
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Thank You
Visit our corporate Web Site:www.sas.com
Or feel free to contact:Gary Cokins, CPIMSAS Performance Managementwww.sas.com919 531 [email protected]
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