What’s the benefit of defining a model’s scope before beginning a model build?

Defining a model’s scope before beginning to build it may be the difference between developing a useable, defendable and pertinent model that can answer multiple operational and management questions, and that of a model that may struggle to be relevant and robust 12 months down the track.

What does a scoping study involve?

A scoping study would normally involve an on-site visit to meet with model owners, model users, and source data managers to determine:

• What are the goals of the project?
• What will the model be used for? Immediately? Short term? Long term?
• Who will use the model? Will there be specific roles for specific users?
• What is the structure of the organisation?
• What source system data is available?
• Can data be obtained from a central source (BI platform etc) or will it need to be sourced from each individual source system?
• What data fields can be obtained? What format will each data set be in? What is the quality of the data set?
• What does the organisation want to cost? Measure? Track?
• Are there other sources of data outside of source systems such as KPIs or other metrics?
• Does the organisation want to survey staff, or do they want time to be allocated via a series of business rules?
• How often will the model need to be updated?

It is also important to obtain sample data sets from each of the major source systems.

What are the benefits of a scoping study?

Prior to the model being built, the soon-to-be model owners and users will have a vision regarding what the model will look like and how it will be used. It is not uncommon to find out that this vision differs remarkably depending on who you talk to.

So the primary purpose of undertaking a scoping study is two-fold: firstly that there is a clear (and single!) vision regarding the outcomes of the project and what the model will be able to do, and secondly, confirmation that the data that is available is able to support the model requirements based on that vision.

Where the data doesn’t support that vision, the scoping study will provide management with possible alternative solutions, or where feasible, a migration path between what is able to be incorporated into the current version of the model and that in the future – this can occur where there are other longer term projects underway, such as the implementation of a new enterprise finance or HR system etc.

In summary, a scoping study will confirm the outputs of the model prior to the start of the project and minimises any future misunderstandings regarding the model’s scope and boundaries. It also provides management with a more granular specification of the structure and capabilities of the model, and the resulting reporting functionality.

Assigning personnel in a cost model without staff surveys

Wow! I found out this morning that I can use my iPhone as a remote control for PowerPoint presentations....so I apologise in advance to any clients that I’m presenting to in the next few weeks...you will no doubt be my guinea pigs :-)

Talking about clients, many of Pilbara Group’s university clients have asked the question on how best to assign personnel time to activities within their cost allocation models. This blog will take a look at some of the options available to Australian universities.

Staff Surveys 

Surveying staff is always an option, however while it may result in a detailed division of labour between key activities, it will normally require significant effort to not only collect and enter the data into a cost allocation model, but also to maintain it on an on-going basis, especially when staff move between schools, faculties and/or research projects.

For those universities who like this idea, ensure that you select software that will allow you to set up individual logins for either all staff or nominated key staff that restricts the user to only viewing a subset of the model. This not only removes the burden on model owners to collect and enter the data, but also provides a degree of privacy relating to time allocation splits. For example a Dean of a School could have a login that provides him or her with the ability to view their own School’s allocations, but is restricted from viewing any other School’s splits.

Academic Workload Profiles

Many universities have elected to base activity allocations on the academic workload profiles of their staff.
 
What is an academic workload profile?
 
Each university will have set a maximum number of annual ‘allocatable’ hours for a typical staff member. For the sake of this article, let’s assume that it is set to 1640 hours (approximately based on a 37.5 hour week less six weeks of holiday and sick leave and 11 days of public holidays). Each academic staff member will have a work function of ‘Teaching Only’, ‘Research Only’, or ‘Teaching and Research’. For those staff belonging to the Teaching and Research category, academic workload profiles are set to describe the split of time between Teaching, Research, Community Service and where applicable, Leadership and/or Administration.

It is important to note that the Teaching component covers a number of activities and not just the time spent performing subject delivery (including off-campus, off-shore, online and face-to-face). It also needs to encompass:

• subject / course development;
• subject / course administration and co-ordination, including arranging practicums and other industry placements;
• preparation of teaching materials;
• supervision of teaching staff;
• supervision of non-undergraduate students;
• supervision of undergraduate students undertaking research projects or fieldwork;
• preparing and marking of exams and other forms of student assessment; and
• student contact / consultation outside of the classroom.  

In addition to the time spent conducting research, the Research component also needs to encompass the time spent preparing grant applications and satisfying internal and external research reporting requirements.

How can academic workload profiles be used in a cost model?

There are a number of ways to use academic workload information to determine activity time splits, including:

•  If the academic workload profile is held in an electronic format, then it can be directly imported into the cost model, removing the need to survey individuals but still providing the benefit of individual allocations.
• Some universities have profile averages at the School and Award Level, for example:

  

• For those universities where this level of data is not yet available, using software that allows an iterative approach to refining the data is a good idea. As can been from a screenshot below, this would start with the entry of a university wide allocation – in this case 70% Teaching, 3% Admin, 2% Community Service and 25% Research. Faculties can then refine this split – for example, in the Faculty of Engineering there is a greater focus on research with 24% Teaching, 19% Admin, 4% Community Service and 53% Research. 

  

•  If authorized users were to click on the Faculty of Engineering, they would be able to enter School-specific percentages, below that Award Level percentages, and finally if available, individual percentage splits.
• 
  
  One of the benefits of this approach is that a cost model can be rapidly developed (in around six weeks) and then refined over time. For example during the initial model build, the university-wide split may be used. During the refinement phase, faculties can be invited to add in their specific splits, followed by Schools at yet a later date and so on. 

Hours Delivery Method

Another alternative is to use your costing software to calculate the effort spent on teaching and then send the remaining (unused) time to Research and Community Service etc. based on predetermined splits.

For example, if the subjects / courses taught by a particular school added up to 100,000 delivery hours per year (noting that delivery hours takes into account all the other activities related to teaching), and there were 100 full time equivalent (FTE) academic staff performing teaching duties within that School, then 164,000 hours (100 FTE x 1640 hours/FTE) less 100,000 hours of teaching delivery leaves 64,000 hours to be split between Research and Community Service. If that School had nominated this split to be 90% / 10%, then 57,600 hours would go to Research and 6,400 hours to Community Service. This then works out as an overall split of 61% Teaching, 35% Research and 4% Community Service.

While this method still relies on an estimation of the split between Research and other activities, the time spent on teaching delivery is based on a relatively robust formula using timetable data as one of the primary inputs (including hours of lectures, tutorials, labs, practicums etc). The remaining inputs come from a series of business rules regarding preparation times (e.g. a two hour lecture requires two hours of preparation, but only 30 minutes for repeats of the same lecture), unit administration (e.g. 30 hours per undergraduate unit), and student consultation time (e.g. 1.5 hours per student per semester for undergraduates, 15 hours per post-graduate student etc). These business rules can be set at the faculty, school, year (1st year, 2nd year etc) or unit level, allowing universities to refine the calculation of delivery hours to any desired degree.

In theory this is a good alternative to using surveys and academic workload profiles, however it does rely on being able to use quality timetabling data. Without this, the basis for the Hours Delivery calculations is degraded and as such, the reliability of the remaining time available for Research, compromised.

Summary

We know from experience that many universities believe they aren’t in a position to build a robust cost model as they view the challenge of personnel allocations as a brick wall where the effort required to scale it outweighs many of the advantages gained from having a cost model.

  

My aim was to provide you with a degree of knowledge and comfort that there are alternatives out there other than surveying academic staff that:

• do not require significant effort to collect and/or maintain;
• allow universities to refine and enhance their model at their own pace, rather than waiting until such time as the ‘perfect’ data is available; and
• provide universities with results that they can start using within weeks, not months.

By the way, the allocation of general or non-academic staff is just as easy but those options will have to be the topic for another blog.....

Michelle Brooke

Senior Manager

Activity-Based Costing

Today's post comes from our good friend at Arkonas, John Miller.  With 40 years experience both in industry where he held the position of CFO for a publicly held New York Stock Exchange company and as a principal to industry for an international consulting firm, John combines the skills of a consultant with the mindset of a CFO.  John is a frequent and featured speaker at international and domestic conferences, seminars, summits, and training events. A prolific author, John has published over 50 articles, papers, and books.

This post is a general introduction to Activity-Based Costing (ABC).  ABC is a powerful methodology and is the fundamental thinking underlying our Cost Wise College modeling. We have taken the basic ABC and enhanced it to provide a more sophisticated and automated model, saving time, money and manhours in building and maintaining the model.

Please enjoy John's overview.

ACTIVITY-BASED COSTING

The roots of Activity-Based Costing (ABC) go back almost 100 years.  In 1919, the earliest know reference to ABC, Dexter S. Kimball Professor of Industrial Engineering and Dean, College of Engineering, Cornell University published Cost Finding.  Dated in terms of examples (in 1919 the fully burdened direct labor rate was 38 cents an hour), the emphasis was on activity costing and accounting for activity cost, activity output, and activity performance.

In 1971, George J. Staubus, Professor of Business Administration at the University of California Berkeley, published Activity Costing and Input-Output Accounting. Again the focus was on activity costing and accounting.

In 1988, CAM-I published Cost Management for Today’s Advanced Manufacturing: The CAM-I Conceptual Design.

The concepts included the ABC two-stage cost assignment methodology where resources (costs) are first traced/assigned to activities (work) and the resultant activity costs are then traced/assigned to products, services and customers (cost objects).

Known as the CAM-I Cross, the focus of ABC was no longer just activity costing and activity accounting but rather a tool for cost analysis, profitability analysis, and performance measurement.

SAP, SAS, IBM and other Enterprise class software providers recognized the power of ABC and acquired most of the standalone ABC software providers between 2002 and 2006, embedding ABC in their suite of products with a broader emphasis on performance excellence and management.

Today, ABC is more of a best practice for cost assignment, included in projects for product /service profitability analysis, process improvement, shared service charge back, customer profitability or even for vendor analysis.

ABC has been around for 100 years because it is aligned with the basic mission of any commercial organization: convert resources to products and services customers want to buy. Resources fund the activities (work) required to make and provide products and services to customers. Activities are the means of conversion, the so called “value add” by the business.

Improve you analytical capability. Know your ABC’s

John A. Miller

Do you “model” your Greenhouse Gas emissions and know the impact on cost, profit and performance?

If so, we would like to talk to you. We are looking to interview organizations who are currently modelling their carbon emissions from a Management Accounting perspective, rather than statutory reporting perspective. We are currently researching best/common practice at organizations globally.

CAM-I (Consortium of Advanced Management – International) is an international not-for-profit collaborative forum of thought leaders who develop practical and effective management tools, techniques and methods to advance the way organizations manage cost, processes and performance. CAM-I has managed over three decades of industry-led collaborative research with some notable members including Boeing, Rockwell Collins, Whirlpool and Navistar Truck Group just to name a few.

We have recently formed the Sustainability Interest Group with the objective of developing practical solutions for organizations to measure and manage sustainability impacts including the relationship between greenhouse gas emissions, cost, profitability and performance. We currently have representatives from the Certified Management Accountants of Canada, International Federation of Accountants, Grant Thornton and Pilbara Group on the team.

CAM-I meets quarterly and the next three meetings for 2010 are:

• June 6-9 – Sheraton Fisherman’s Wharf, San Francisco, CA
• September 12-15 – Snow King Resort, Jackson Hole, WY
• December 5-8 – Royal Sonesta, New Orleans, LA

If you would like to attend one of these meetings please register at the CAM-I website http://www.cam-i.org/ under meetings and events, it’s free registration. Also please feel free to contribute any thoughts to this discussion thread.

Sustainability for Higher Education - Part 2

At the moment in Australia and the US there is currently little real incentive for any organization to manage or understand its overall carbon footprint, except if it is physically emitting global warming gases and comes under Scope 1 emissions or is a large energy user and falls under Scope 2 emissions.

Scope 1 Emissions are direct emissions from within the organization and needs to be reported if it exceeds the threshold, in the US the EPA has set this threshold at 25,000 T CO2 equivalents per year. Examples of  scope 1 include electricity generation, industrial processes, fuel usage for transporting good, fugitive emissions, on-site waste.

Scope 2 Emissions are indirect emissions from purchased electricity and again is only reported if over the threshold.

Scope 3 are emissions embedded in inputs and includes waste disposal, purchased materials, business travel, fuel usage for transporting of outputs and outsourced activities. At the moment reporting of Scope 3 is voluntary only.

Managers of organizations outside of those parameters (and some large emitters can sit just outside these parameters) can quite rightly say that they will wait for further clarification from Governments.

However, those that take practical steps now will be the organizations that will have developed long term, sustainable strategies to survive a more intense and accountable version of the various Emission Trading Schemes (ETS) / Carbon Taxes about to be introduced, or being introduced by, Governments around the world. The ETS will ultimately develop a requirement to manage lower levels of emissions under Scope 2 emissions and the incorporation of Scope 3 emissions into the emission management structure. Currently Scope 1 and 2 emissions have been clearly defined while Scope 3 emissions have not.

Why Undertake an Emission Accounting Exercise?

Just as organizations account for their expenses, so too should they account for their carbon emissions and hence the eventual additional emission costs (i.e. carbon taxes) they pay. Also there is a direct link between energy use and expense, so a reduction in energy use will result in a reduction in emissions and a reduction in costs.  But there are other reasons as well. For organizations a sound emission calculation model allows them to:

• Comply with EPA requirements if organizations fall into the >25,000 T CO2e category.
• Monitor and understand energy consumption and emissions.
• Define the boundaries of corporate responsibility. That is, an emissions model “ropes-off” those areas of the organization whose emissions are not its responsibility – thereby minimizing the cost.
• Open new paths for staff buy-in of cost cutting measures through targeted energy reduction steps.
• Prepare staff for the time when Scope 1 and other large emitters start to look at passing their carbon emissions to others via increased costs.
• Help identify the carbon footprint of courses and individual subjects. Course or Subjects with a high concentration of carbon inputs may become less viable. Research and Development needs direction to find the best carbon outcome as well as the best return.
• Set an example and expectation for suppliers to do the same.
• Enhance the organizations public profile.
• Build a valuable knowledge-base to help measure and justify future corporate environmental and financial decisions.

How to Proceed

Now that we understand why there is a need to determine an auditable carbon footprint and emissions profile, we need to go through a systematic approach to implementing the model.

Undertaking an emissions calculation/reduction program requires a number of strategic steps.

• Development of a company-wide policy and commitment to manage emissions and reduce energy consumption agreed at the Senior Management levels.
• Development of a behavior change program in parallel with the gathering of data on a pilot program.
• Engagement of an experienced environmental consultant to provide access to the appropriate emissions data sets.
• Development of baseline data such that it is easy to track changes to the baseline into the future.
• Identification of corporate datasets, such as financial and asset records that would form the cornerstone of data to which all emission calculations must reconcile.

With the strategic goals in place, as well as a clear commitment from senior management, the first steps in establishing a model to measure the emissions profile can begin.

Sustainability for Higher Education – Part 1

We have recently formed a Sustainability* Interest Group at the Consortium of Advanced Management, International (CAM-I) and want to share some of our general research with the Higher Education community. We have also drafted a white paper titled “Carbon, Cost & Profitability - Practical suggestions to create an auditable carbon footprint/emissions profile.” If you would like to participate in the interest group or would like me to email you a copy of our whitepaper please leave a comment below or contact us at CostWiseCollege.

Now I’m not going to get into any heated debate about human impacts on the environment, have we really caused climate change? Is it all part of natural solar cycles? Should we implement an Emissions Trading Scheme? I approach this whole argument from a more pragmatic view point, we know that our standard sources of energy – crude oil, natural gas, and coal are finite resources. Yes we have an awful lot of it and we probably have many more years left but one day it will all run out, so it makes sense to look for renewable energy sources. Also the more energy we use the more expensive it is, so if we try to do things more efficiently and use less energy we should also save money. How we transition globally from fossil fuels to renewable energy sources in a cost-effective way is what the economists get paid the big money for, although in practice it will be the politicians that create the catalyst for change, whether that’s an open market trading solution or a tax is up for debate.

For this posting I’m just going to discuss the benefits of modelling your emissions rather than just measuring it. The first thing we need to figure out is how much energy the organization is actually using and where it’s being used. The calculation of a “carbon footprint” is a great starting point, but we want to take it one step further and model this footprint through the organization.

What do I really mean when I talk about modelling? It’s really about identifying how an organization works, what are the cause and effect relationships inside the organization. This model can contain financial and non-financial measures as well as a range of other measures, in this case, greenhouse gas emissions. The carbon footprint can be used as an input into the model or the carbon footprint could be calculated inside the model, by simply including the readily available ‘emissions factors’ in the model associated with the appropriate energy source, by way of very simple example see the image below for the calculation of CO2 equivalent emissions for electricity using an emissions factor of 0.87 Kg CO2-e per kWh.

 The benefits of modelling your carbon emissions are that: 

• Management can identify high carbon activities and processes and can actively manage them.
• Organizations can report the true emissions profile of the individual product or service they provide to a customer or client.
• The approach is auditable, repeatable and disciplined.
• Once in place can be used to calculate the impact of any proposed tax or emissions trading scheme on the organization.

 “Whenever possible, environment-driven costs should be allocated directly to the activity that causes the costs and to the respective cost centers and cost drivers.”

The United Nations Division for Sustainable Development “Environmental Management Accounting Procedures and Principles”  

*There are three components to sustainability: social, environmental and economic, or the alliterative People, Planet, Profit. Because this scope is very broad the interest group will initially focus on economic and environmental and in particular greenhouse gases for the environmental aspects. It is the intention of the group to expand this scope over time to cover all aspects of Sustainability.

2010 National University Finance & Procurement Conference

We will be attending and exhibiting at the 2010 National University Finance and Procurement Conference from 26-28 July at the Hyatt Regency Coolum, Sunshine Coast QLD Australia. Please look for us at Booth 16. The link to the conference website is here: http://www.hes.edu.au/page/conferences---events/2010-national-university-finance---procurement-conference/

This year's conference theme is:

The Global Financial Crisis has drawn attention to the importance of universities having business sustainability strategies in place to ensure business continuity. Many universities globally have lost significant sources on income through diminished investment returns that have the potential to impact the quality of teaching and research and even the image of the university as a desirable destination for local and international students. Universities are starting on a new journey, exploring the benefits of innovative business practices, including outsourcing and shared services and the benefits of collaboration. There is a renewed focus on understanding the University as a Business. So, how far "over the Horizon" are universities prepared to go to adopt business innovation in developing their Road Maps for Business Sustainability?

SRE 2010 Transparent Costing (TC)

As promised, posted below is the start of our discussion on research costing developed by Andrew Faulkner. We would like to start an open debate / discussion on this topic which seems to be of interest to all Universities in Australia at the moment, so please add your comments / suggestions below.

Cheers,

Lea


SRE 2010 Transparent Costing (TC)

The funding available for the indirect costs of research is designed to be calculated on two key components

1. A set of allowable indirect costs, falling into one of four indirect cost categories; and
2. A single indirect cost driver to support the calculation of the proportion of indirect costs incurred by universities attributable to ACGs.

Four categories of indirect costs will be adopted in the 2010 trial TC framework:

1. non-academic salaries and on-costs;
2. costs of maintaining physical university infrastructure;
3. finance and insurance costs;
4. other costs indirectly associated with research.

One of two cost drivers will be adopted in the 2010 trial TC framework relating to the relative effort of academic staff on ACG research. The preferred method, takes the universities research related indirect costs (derived from a cost model or comprehensive financial systems) and allocates them to ACG based upon the percentage of staff time performing ACG research.

  

          % time spent on ACG research * FTE ACG associated staff / total Research Active staff FTE

  The second method allocates the universities total indirect costs to ACG. 

        % time spent on ACG research * FTE ACG associated staff / Total staff FTE

The methodology is simple enough to use and most universities should not have any issues calculating this indirect ACG costs once the Active ACG FTE Percentage is known. The major issue facing universities is collecting this data through staff surveys which will be a burden on the academics to accurately describe how they spend their time. Surveying has its own traditional issues such as adequate response rates as well encountering political/sensitivity issues.

Universities are expected to undertake two full surveys of academic time in semester one of 2010, it is unknown how frequently they will be expected to repeat them.

 
If the university has a comprehensive cost model in place (like an ACE Management Model) then the model can calculate these figures for the university (a small advantage) as well as improving the cost methodology used and possibly reducing the survey burden on the university. Some of the areas where the costing process can be improved are outlined below.

One issue with the second method is that FTE ACG/Total Staff FTE will calculate ACG as a percentage of Total staff, which includes all the corporate support staff that are supposed to be allocated via these methods. These FTE which often support each other in reciprocal relationships should end up being allocated to either research, teaching or other products based upon the direct effort being expended upon the products. What you effectively want to achieve is:

          FTE ACG/(Total Staff FTE-Indirect Staff FTE).

Otherwise, ACG is receiving a smaller indirect portion than it really should.

Similar issues arise if attempting to define the total research related indirect costs and the Total Research Active Staff FTE for the first method without the use of a cost model.

If a cost model is used that calculates ACG Research as one of its product lines then this has the advantage of isolating the direct ACG Research and FTE, calculating the relative FTE ratios between ACG and the rest of the university and apportioning the indirect costs according to a suitable driver (FTE). The key to making such a model accurate and usable from a SRE reporting viewpoint is having an accurate allocation of staff time to ACG Research. If the model is already fully allocating academic (and research staff) time according to workloads, payroll data and faculty/school business rules then the only piece of information required to complete the model for ACG research costing is the time spent by staff on ACG Research. This means that rather than a full survey of all staff, only a partial survey of research involved staff is required covering their research time.

  

Because this would reduce the survey burden it seems more likely to receive willing input from the academics than a full staff survey, especially as the results of it relate to the research funding received by the university. One issue is that the survey responses could be skewed towards too much time spent on ACG research. This should be countered by the fact that the results will be used to calculate the direct research costs as well as the indirect research costs, thus showing up as an over-expense in relation to direct funding if they over-estimate their time.

Where have we been?

It's been quite a while since the last post. Things have been a bit busy for us over the last few years, which has been great but no excuse for not even attempting to update this blog. Just an update we have been busy outside of the Higher Education community with government and military contracts and entered into the world of oil and gas with quite an exciting project.

We have recently been busy with two new clients and would like to welcome Deakin University and Edith Cowan University to the Cost Wise College community. I feel we have an appropriate quorum now to be able to discuss various aspects of our solution with the community.

Our first topic will be the requirement to cost university research. Andrew Faulkner will be posting this article soon so please check back and provide comments.