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Oman Telecommunications Company (S.A.O.C) Activity Based Costing Model

Oman Telecommunications Company (S.A.O.C) Activity Based Costing Model. By Khurshid Mohammad Ashraf Manager Costing. For Arab Regional Workshop on Calculation of Costs, Tariffs and Rates for Telephone Services “COSITU” Cairo (Egypt) 9-13 March 2003. Activity Based Costing. 2 /27.

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Oman Telecommunications Company (S.A.O.C) Activity Based Costing Model

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  1. Oman Telecommunications Company (S.A.O.C)Activity Based Costing Model By Khurshid Mohammad AshrafManager Costing For Arab Regional Workshop on Calculation of Costs, Tariffs and Rates for Telephone Services “COSITU” Cairo (Egypt) 9-13 March 2003

  2. Activity Based Costing 2/27 OmanTel / Cairo (Egypt) 9-13 March 2003 Knowing what your real product costs are, is The Key to surviving in today's competitive environment….

  3. Activity Based Costing 3/27 OmanTel / Cairo (Egypt) 9-13 March 2003 Meeting this daunting challenge often requires: Determine the true and actual cost of services Implementing process improvements Evaluating different options Aligning activities to the organization’s mission and its strategic plan Meaning… Operational managers will have to change their ways of thinking about the true costs and value of the services they provide.

  4. Activity Based Costing 4/27 OmanTel / Cairo (Egypt) 9-13 March 2003 These restrictions will create a lot more reasons to understand cost. Efficiency and performance will increasingly be part of the language of organization. Activity Based Costing/Management (ABC/M) offer potential solutions to this problem. Providing meaningful, fact based information to organization officials, managers, and employee teams, can be a cost-effective means of bringing about beneficial change and improved performance in very competitive environments.

  5. Activity Based Costing 5/27 OmanTel / Cairo (Egypt) 9-13 March 2003 Traditional Cost Accounting vs. Activity Based Costing Traditional cost accounting systems have evolved primarily to serve the function of inventory valuation for external audiences such as creditors and investors. However, these traditional systems have failed to address : • There inability to report individual product costs to a reasonable level of accuracy. • There inability to provide useful feedback to management for the purpose of operational control.

  6. Activity Based Costing 6/27 OmanTel / Cairo (Egypt) 9-13 March 2003 • Focus on the product in the costing process. • Costs are traced to the product with assumption to consuming of the resources in proportion to the volume produced. • These volume drivers, fails to account for product diversity in the form of size or complexity. • There is not a direct relationship between production volume and cost consumption. Traditional Product Costing Costs Allocation: Costs are allocated to products based on assumed linkages or convenient alternatives such as direct labor hours Consumed by: Products

  7. Activity Based Costing 7/27 OmanTel / Cairo (Egypt) 9-13 March 2003 • ABC focuses on activities in the costing process. • Costs are traced from activities to products, based on the product’s demand for these activities during the production process. • ABC theory contends that, virtually all of a company’s activities exists to support production and delivery of services, they should all be included as product costs. Activity Based Costing Costs Resource Drivers: Costs are assigned to activities based on effort expended Consumed by: Activities Activity Drivers: Activity costs are assigned to products on unique consumption patterns Consumed by: Products

  8. Activity Based Costing 8/27 OmanTel / Cairo (Egypt) 9-13 March 2003 ABC is extremely valuable to an organization, because it provides information on the range, cost and consumption of operating activities. Specific benefits of and strategic use for this information are: • More accurate product costs enable better strategic decisions regarding: • Product pricing • Product mix. • Make vs. Buy • Investments in R&D, Process automation, etc..

  9. Activity Based Costing 9/27 OmanTel / Cairo (Egypt) 9-13 March 2003 • Increased visibility of the activities performed enables a company to: • Focus more on the management of activities, such as improving the efficiency of high cost activities. • Identify and reduce non-value added activities.

  10. Activity Based Costing 10/27 OmanTel / Cairo (Egypt) 9-13 March 2003 The relevant aspects to be considered during the transition of a telecommunications company from a scenario of full regulation to one of full competition, considering an interim stage of regulated competition, are highlighted below. • State Ownership/Full Regulation • Negotiate cost recovery • Social policy pricing • Design subsidies and achieve universal service • Structure social subsidies and maintain regulatory liaison • Functional efficiency • Manage demand (product extensions leveraged from network as designed) • Rate period performance • Managed Competition • Manage cost recovery • Cost based pricing • Manage subsidies and Universal Service Obligation • Increased subsidies awareness and maintain supportive regulatory liaison • Functional cooperation • Meet demand (new products leveraged from customer need e.g. interconnection) • Balanced short/long term view • Full Competition • Manage margins • Market price based pricing • Manage comprehensive business portfolio • Competitive awareness and maintain proactive regulatory liaison • Process effectiveness /efficiency • Stimulate demand (new products with emphasis on cycle time to market) • Shareholder value

  11. Activity Based Costing 11/27 OmanTel / Cairo (Egypt) 9-13 March 2003 The need for ABC in OmanTel Cost Model will establish the vital linkage between the physical work of OmanTel and historical financial performance of the company. It will give insight to the causes of cost and link those cost to the physical work.

  12. Activity Based Costing 12/27 OmanTel / Cairo (Egypt) 9-13 March 2003 The need for ABC in OmanTel….. • Cost Based Pricing • Enhance Performance/efficiency through various activities • Solid understanding of cost causation. • Cost Model will provide credible data by which OmanTel can interact with Regulatory Body

  13. Activity Based Costing 13/27 OmanTel / Cairo (Egypt) 9-13 March 2003 Primary Benefit of ABC Results: The most tangible and immediate benefits of ABC will be the provision of accurate cost information relating to the following: • Cost of Network Blocks • - Used capacity • - Spare capacity

  14. Activity Based Costing 14/27 OmanTel / Cairo (Egypt) 9-13 March 2003 Primary Benefit of ABC Results: • Cost of International Routes • - by Carrier • Cost of Services • - Basic services • - Final services • Cost of Activities

  15. Activity Based Costing 15/27 OmanTel / Cairo (Egypt) 9-13 March 2003 Primary Benefit of ABC Results will leads to: Deeper understanding of network components costs will help in • Costing of calls using such network components • Calculation of returns on network investments by region

  16. Activity Based Costing 16/27 OmanTel / Cairo (Egypt) 9-13 March 2003 Primary Benefit of ABC Results will leads to: • Cost of sharing network components by services - Fixed line, GSM, etc. In a telecom company, same resources are used to provide multiple services. ABC will identify and cost the extent of resources used by each service.

  17. Activity Based Costing 17/27 OmanTel / Cairo (Egypt) 9-13 March 2003 Primary Benefit of ABC Results will leads to: Information will be available by Used and Spare Capacities within network blocks. This will facilitate: • Network capacity planning. • Optimization of network capacities Network planning and roll-out of services

  18. Activity Based Costing 18/27 OmanTel / Cairo (Egypt) 9-13 March 2003 Primary Benefit of ABC Results will leads to: Cost of International Routes by: • Carriers • Profitability analysis of international calls by routes and by carriers • Informed decisions on call routings to minimize cost • Cost of sharing international routes by different services - Fixed line, GSM, etc.

  19. Activity Based Costing 19/27 OmanTel / Cairo (Egypt) 9-13 March 2003 Primary Benefit of ABC Results will leads to: Cost of Services • Service profitability analysis for better decision making. • Accurate information of call termination costs will facilitate inter-connection costing and pricing in the future competitive environment • Will provide verifiable data to the regulatory environment

  20. Activity Based Costing 20/27 OmanTel / Cairo (Egypt) 9-13 March 2003 Primary Benefit of ABC Results will leads to: Cost of Services • Profitability analysis of business units by service line. • Cost plus Tariff Setting • Better understanding of the economics of cross subsidization – which services are profitable and are subsidizing other services…

  21. Activity Based Costing 21/27 OmanTel / Cairo (Egypt) 9-13 March 2003 Primary Benefit of ABC Results will leads to: Cost of Activities • Will enable in-depth understanding of cost causation - Why, Where and When costs occur. • Managing performance and efficiency of departments can be based on cost of activities within the departments

  22. Activity Based Costing Activities Activities Resources Cost Objects Resources Cost Objects 1 Level 1 Level st st Equipment Equipment 1 Level st Equipment Groups Groups Groups Network Blocks by Region Network Blocks by Region Switching Switching Transmission Eqmt BTS’s Fiber Optic Cable Fiber Optic Cable Cross-connects Cross-connects Etc. Etc. Resource Pools Resource Pools 2 Level Resource Pools 2 Level nd nd 2 Level nd - Personnel - Personnel Client Facing Client Facing Client Facing Departments Departments Departments - Fleet International Routes by Carrier - Fleet International Routes by Carrier Activities by Activities by Activities by OmanTel Organizational Cost Centers General Directorate HEM General - Buildings - Buildings Business Unit / Business Unit / Business Unit / Carrier’s Directorate HEP Carrier’s - Communications - Communications Global Global Corp. Planning Global Products & Services Products & Services Hardware/ Software - Hardware/ Software - Financial Serv . Regions Customer Groups Customer Serv . Network Activities Network Activities Network Activities Regions Other Cost Objects 3 Level 3 Level rd rd Support Serv . 3 Level rd by Business Unit / by Business Unit / by Business Unit / Other Cost Objects Mobile C.U. Network Block Network Block Network Block Basic Services b y Region Fixed C.U. Basic Services b y Region Network Blocks Other Costs Network Blocks Other Costs International - Depreciation Support Activities - Depreciation Support Activities Support Activities Administration Hardware & Software Customer Groups Regions Hardware & Software - Cost of Capital - Cost of Capital Etc. by Business Units/ by Business Units/ by Business Units/ Hardware & Hardware & - Maintenance - Maintenance Global Global Global Regions Software Software - External Supplies - External Supplies Groups Groups Hardware & - Etc. - Etc. Software Billing Systems Hardware Groups Hardware Groups Hardware Groups Payroll System 4 Level Groups 4 Level th th 4 Level th Etc. TIMS Products / Services by Region TABS Products / Services by Region Software Groups Software Groups Software Groups Payroll and Customer Group Etc. Other Cost Objects Other Cost Objects Revenues Revenues Revenues Common Costs and Revenues Common Costs and Revenues 22/27 OmanTel / Cairo (Egypt) 9-13 March 2003 ABC Design at OmanTel

  23. Activity Based Costing 23/27 OmanTel / Cairo (Egypt) 9-13 March 2003 PSTN-PSTN Basic Product & Services Network Block wise Costing

  24. Activity Based Costing 24/27 OmanTel / Cairo (Egypt) 9-13 March 2003 Main Issues to Deal with before and after ABC • Development of Organization Culture • Time Report System • WIP/Capitalization • Fixed Asset Register Auditing/De-merger • Fast Closing of Monthly & Year End Accounts • Update of Tariff Manual with Switch plus Fixing Revenue Leakage • Update of Telecom Network Details • Switch • Transmission • Trunks • Local Loops

  25. Activity Based Costing 25/27 OmanTel / Cairo (Egypt) 9-13 March 2003 Main Issues to Deal with before and after ABC • Complete Understanding of Interconnect Costing Requirements • Facilitating Regulatory Body and Understanding Regulations.

  26. Activity Based Costing 26/27 OmanTel / Cairo (Egypt) 9-13 March 2003 ABC will lead to • ABC is the foundation for moving into Activity Based Management (ABM). • ABC will help a long way for implementation of Activity Based Budgeting/Planning (ABB). • ABC will create a data repository containing information from all financial and operational system, and can be used to generate various types of management information. • ABC will be first step towards the implementation of Strategic Enterprise Management tools such as Balanced Scorecard, Performance Management, Etc..

  27. Activity Based Costing 27/27 OmanTel / Cairo (Egypt) 9-13 March 2003 Thank You For Your Attention • ABC/M Resources on Web • www.abctech.com • www.bettermanagement.com

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