they received from implementing activitiy-based budgeting with FullCost. You'll find a compelling case for investing in bit of time in understanding how FullCost might be applied within your organization.
FullCost can be a cornerstone of a CIO's transformation process. It can change an entire organization's culture in a matter of months.
4. How can FullCost help me implement activity-based budgeting?
Activity-based budgeting is simple in concept, but the devil's in the details. Success requires a carefully designed method that addresses the complexities of across-the-board activity-based costing, crystal-clear definitions, practical tools, and consistency across all groups in the organization.
FullCost is a practical tool-kit that makes ABB straightforward.
These tools are not the typical financial systems that feed corporate accounting. Instead, they are used during the budget preparation and negotiation process, prior to finalizing the numbers that then feed the accounting systems. They are also used for creating a service catalog and implementing fair allocations or chargebacks.
FullCost includes a detailed, step-by-step manual (a "cookbook") that walks an organization through the budget preparation process, step by step.
NDMA also offers a series of educational workshops on activity-based budgeting that train the project manager and the leadership team as they develop their actual budget.
5. What, exactly, is activity-based budgeting?
Activity-based Budgeting (ABB) means presenting a budget in terms of the cost of that organization's (department's) products and services, rather than the traditional budget that describes cost factors (expense codes) such as compensation, travel, and training.
It involves identifying all the organization's products and services, and assigning costs -- both direct and a fair share of indirect -- to each.
6. Why are people interested in activity-based budgeting?
Traditional budgets -- listing cost factors like compensation, travel, and training by group -- cause numerous problems. Two problems are really damaging:
* First, they don't support sound financial decision making, since the full cost of individual projects and services is not known.
* Second, they don't define exactly which projects and services are covered by the budget. As a result, organizations (departments) face expectations well beyond their resources, and are blamed when they can't satisfy every request.
Activity-based budgets calculate the true cost of every project and service and specify exactly what's funded by the budget. As a result client expectations are matched to resources.
7. How is activity-based budgeting different from activity-based costing?
"Activity-based costing" (ABC) means associating costs with activities, and activities with results. The intent is to determine the true cost of an organization's products and services. True cost includes both direct costs and a fair share of all indirect costs.
The principles of ABC can be applied in two ways: cost accounting, and budgeting.
ABC Accounting augments general-ledger accounting systems, and associates actual expenditures with activities and deliverables. It's after-the-fact accounting, which helps managers track actuals against plans, and provides a basis of history to improve future planning efforts.
ABC principles can also be applied before-the-fact as a planning process. This is termed "activity-based budgeting" (ABB). ABB has two very different uses: process modelling, and budgeting.
ABB for process modeling is used for internal process improvements. Those who use ABB this way may never define the cost of end products/services.
ABB for budgeting presents an actual budget that describes the cost of an organization's products and services. It provides a basis for fiscally sound budget decision-making. It also provides the data needed for pricing (rate setting) based on true costs.
ABB for budgeting is the low-cost, high-payoff use of the concepts of ABC.
8. Which is higher-payoff and lower risk, activity-based budgeting (ABB) or activity-based cost accounting (ABC Accounting)?
Activity-based cost accounting (ABC Accounting) is the more commonly cited application. ABC Accounting helps managers understand costs to improve the efficiency of the business. But the data is after the fact! Improvements may affect future years, but short duration projects, regardless of payoff, are below the radar.
ABC Accounting is not easy to implement. It generally involves expensive changes to accounting system software to capture the required source data and to enhance reporting. It also requires a significant investment in training your staff, and it's not uncommon to experience significant resistance to the ongoing administrative burden.
True, some of this investment has already been made if the organization bills (charges back) for its services. But if your organization isn't ready for full-scale chargebacks, the benefits of implementing all this change may be limited to what you learn from the data, a fine-tuning of costs and next year's budget estimates.
On the other hand, activity-based budgeting (ABB) is relatively easier to implement, and it has many immediate benefits.
Implementation involves changing only the budget preparation process. Meanwhile, the rest of the staff are not affected. The tools are inexpensive and do not impact production accounting systems, so implementation risk is far lower.
Although the costs of ABB are far less than ABC Accounting, our experience shows that benefits are greater. And the impacts on the bottom line are more immediate since the discovery of opportunities to drive costs out of the system occurs before the year begins, in time to do something about them.
9. How is FullCost related to ITIL?
Service catalog, demand management, service management, service costing -- these are the key ITIL concepts that can put IT's clients in control of what they buy from IT while aligning IT's resources to fulfill those sales.
The key challenge in addressing these processes is being able to calculate the true cost of IT products and service. That's where FullCost can help. More on FullCost and ITIL....
10. How is FullCost related to operational planning?
Operational planning defines what your managers will deliver in the year ahead, how they'll produce it, and what resources they'll need to do so. It includes a business forecast, budget and resource requirements, and rates.
It makes no sense to develop a budget outside the context of an operating plan. The plan and the budget should be developed together in a seamless process.
Within an operational plan, there is little value presenting a budget in the traditional way, eg expense codes by group. What is required is the true cost (including all indirect costs) of each proposed and approved product or service; in other words, an activity-based budget. And that is what FullCost provides.
Furthermore, rates for chargebacks (or for performance comparisons with outside vendors) should be directly rated to the budgeted costs of deliverables. Rates can be extracted from an activity-based budget in a relatively easy step at the end of an integrated planning-budgeting process.
World-class organizations adopt a disciplined approach to operational planning, budgeting, and rate setting. They document a step-by-step method that all their managers use, both individually and as a team, to plan their interdependencies. Done well, such a process cultivates entrepreneurship, improves efficiency, coordinates resources, and justifies investments.
11. How is FullCost related to portfolio management?
Internal portfolio management means managing investments in service providers (such as IT) as one would manage a portfolio of financial investments. Portfolio managers use their finite budget to "buy" products (projects) and services from internal staff based on returns on investments (ROI).
Understanding investment options begins with identifying the internal service provider's products and services and calculating the true costs of each. FullCost provides the cost information you need for internal portfolio management decisions, while helping to define products and services at optimal granularity.
Although there's more to internal portfolio management than just knowing the organization's products and services and their costs, ABB is an essential first step. FullCost makes it practical.
12. How can FullCost help with chargebacks?
In those organizations that charge some or all their clients for the purchases, the price list is critical.
It's not advisable to develop prices as an analytic process separate from the budget process. Not only does this amount to a lot more work, but also the price list must always be linked to the budget. If pricing doesn't match the budget, clients may get budget to spend on your organization and later find it won't buy what they thought it would. Meanwhile, staff may find themselves collecting insufficient revenues to pay their costs (running at a loss), or making a profit and exposing themselves to criticism for overcharging clients.
Furthermore, if prices are not based on activity-based costs, the organization is vulnerable to the accusation that it's overcharging some customers to subsidize others.
Products which are overpriced will appear uncompetitive, inappropriately inviting outsourcing and decentralization. Conversely, when other products are underpriced, the corporation will tend to buy more than is economically wise and waste money on poor investments.
The price list, like the budget, should be based on true activity-based costs. When it is, prices are fair, equitable, explainable, and compatible with the budget.
With FullCost, very little additional effort is need to extract a price list (rate sheet) for chargebacks from the budget data. Integrating the budgeting and pricing processes saves considerable time and ensures consistency.
13. Does FullCost require that I modify or replace my accounting systems?
No changes are needed in production financial systems. Past investments in software and customization are secure.
The FullCost software can, with minimal effort, feed the budget "plan" data (as in "plan versus actual") to any existing accounting systems.
14. How can I learn more about FullCost?
NDMA offers the Full-cost Maturity Model report, as well as books and tapes on activity-based budgeting.
NDMA also offers speeches on the Full-cost Maturity Model and on activity-based budgeting for executives in your firm, as well as speeches for multi-organiztion conferences.
Call us at 203-431-0029 to schedule a complimentary telephone consultation about how FullCost can help your organization.
