IMPLEMENTING ACTIVITY BASED COSTING IN A SMALL ORGANIZATION

1. IMPLEMENTING ACTIVITY BASED COSTINGIN A SMALL ORGANIZATION

2. The City of Willcox began implementation of ABC in Fiscal Year 2001-02. With limited resources, the organization began with pilot projects and then will phase in the concept over a 3-year time frame.

3. The Implementation Team • A study team was developed to review and outline the concept of ABC. This team was comprised of elected officials and city staff. • Meetings were schedule to review the ABC concept, as well to identify obstacles to implementation. • Many of these meeting occurred during the strategic planning process. This allowed for collaborative discussions.

4. Mapping out a Plan for Successful Implementation • Full support and buy in of the City Manager. • Support and understanding by the elected official. • Education (persuading) the Department Directors. • Preparing Departmental Staff.

5. Convincing the Organization to Change • Implementation of an effective ABC system will never occur unless it is supported at all levels within the organization. Management must first be shown that existing cost accounting practices do not meet all of its cost information requirements. • Management, particularly senior management, and the elected official must be persuaded that ABC belongs on top of everyone's agenda.

6. It is important when selling the concept of ABC to the organization that not only the accounting issues be emphasized, but that the people issues be stressed. This is particularly true in the area of performance measures, which undoubtedly will need to be revised to incorporate the ABC concepts that will be included in the new system. • Organization-wide education will be an important element in convincing management and staff to change as well as in effecting the change. To accomplish this, the organization's managers were shown:

7. how one or more of the dysfunctional portions of the organization's cost system worked and how it did not address important management information needs; • how these conditions can lead to inaccurate and misleading information; and • how that information can lead them to make decisions at variance with both the organization's goals and their own individual goals.

8. Common Beliefs • Most government services and programs are efficient, no reason to implement. • “Our services and programs are sound, we just have a lack of revenue!” • ABC could not be applied to services and programs. • There are insufficient resources for a City the size of Willcox to implement.

9. Reality • An increase in taxes does not necessarily mean an improved service or programs. • Some services and programs are money makers and some are money losers. • There are often too many losers. • Most find it hard to know which are money makers and which are money losers.

10. Goals of the implementation team: (Staff) • Explain why a new cost management system was needed. Answer - To determine the “true” cost for a cost object (product, job, service,program,or customer.) • Explain why the knowledge of the “true” cost is important. Answer – To identify money makers/losers, find an economic break-even point, to compare different options.

11. Goals of Implementation Team: (Council) • Before embarking on this project, we want to know what the project will accomplish.

12. The Pilot Programs • The City utilized a two-stage approach to ABC in the Pilot studies. • The City’s pilot program took a variety of programs and service of the organization and used its actual or budgeted costs for a specific period. Activities were identified as were cost drivers and their related volumes. Cost attachment points were defined, and costs were attached.

13. The Pilot Programs • The insights gained from the pilot studies were then used to evaluate our internal strengths and weaknesses and will be used to save time and resources when the full implementation of ABC begins.

14. What was learned from the pilot programs: • The elected official and manager enjoyed the quantifiable data that was produced. It assisted them in making some tough decisions. • Some Department Directors rebelled against the practice because they lost programs that were near and dear to them personally.

15. What was learned from the pilot programs: • The capabilities of the financial accounting system will play a key role in implementing the practice. • A review of organization charts, facility floor plans, marketing materials, and detailed financial information gave a number of clues as to the organization's major activities and costs.

16. What was learned from the pilot programs: • They also provided information for establishing the basis for selecting strategic cost drivers around which the subsequent interview process could be designed for full implementation.

17. Year 1 • The City elected to look at the activities of the Public Works in year 1, the Police Department in year 2, and all others that have not come on line in year 3. • In the Public Works Dept, the City took a multiple-stage approach which mirrors the actual flow of costs through the department.

18. Year 1 (Public Works) • Instead of trying to move costs from incurrence to cost objects in just two stages, this approach places its emphasis on the relationships between activities, and other activities, as well as between activities and cost objects. Following this approach, costs move from incurrence to cost objects in a series of steps, all based on cause/effect relationships.

19. Information Gathering by staff • Identified those activities provided by the department (for both the cost assignment and process views); • Identified the departments elements of cost (for the cost assignment view) and performance measures (for the process view);

20. Information Gathering • Determined the relationships between the various activities and elements of cost (for the cost assignment view); and • Identified and measured the cost drivers that determine the work load (for the process view), cause costs to flow into activities, and cause accumulated activity costs to flow to other activities or to the organization's products and services (for the cost assignment view).

21. Identifying Element Costs • Element costs are the costs of the department’s resources including labor, capital, machinery, buildings, materials, supplies, equipment, and utilities. • Performance measures are indicators of the work performed and the results achieved in an activity. They can be financial or non-financial and indicate how well the activity meets the needs of its internal and external customers.

22. Determining the relationship between activities and element costs • Finance and Dept. staff assigned the cost information contained in the general ledger to activities. This assignment is determined by the relationships between the various activities and the elements of cost .

23. Determining the relationship between activities and element costs. • The element costs were assigned to activities by charging them in some directly measurable manner (e.g., metering electric consumption, charging maintenance via a work order, charging requisitioning activities for supplies) or estimation (as determined through questionnaires and interviews).

24. Identifying & measuring cost drivers. • Cost drivers are the variables that can be used to explain the behavior of activity costs. They reflect the consumption of costs by activities and the consumption of activities by other activities, products, or services. City staff reviewed possible cost drivers for the dept. and associated with different purchasing activities.

25. Year 2 & 3 will mirror this process for the remaining departments. In year’s 3 & 4 the organization will review those activities that cross over between dept’s.

26. Words of Wisdom • Get buy in from all levels of the organization. • There are various approaches for designing and implementing an ABC system. There is no "one approach fits all" solution. Without a clearly stated purpose, the ABC system resulting from the project will not meet the needs of the organization in a cost-effective manner.

27. Words of Wisdom • Identify an implementation team that is open to change. • Educate and train staff. • Stay committed. Especially during those time of resistance.