Activity-Based Costing Management Presented by Andrew Lim General Manager

Activity-Based Costing/Management Presented by: Andrew Lim General Manager ABC Technologies Asia

ABC Technologies Inc. Leading ABM Software Supplier in the industry Founded 1989, Singapore office set up 1997 Over 4, 000 installations world-wide Global sales/support offices world-wide World-wide HQ in Beaverton, Oregon USA Over 800 trained Affiliates world-wide ranging from “Big 5” to the private consultants Over 400 Academic Affiliates world-wide ã 2001 ABC Technologies, Inc. Confidential Page 2

Activities ã 2001 ABC Technologies, Inc. Confidential Page 3 Product or Service Customer Needs Business Process are made of

Overview of ABC ã 2001 ABC Technologies, Inc. Confidential Page 4

Definition: Activity-Based Costing “A methodology that measures the cost and performance of activities, resources, and cost objects. Resources are assigned to activities, then activities are assigned to cost objects based on their use. ” Adapted from The CAM-I Glossary of Activity-Based Management, Edited by Norm Raffish and Peter B. B. Turney, (Arlington: CAM-I, 1991. ) ã 2001 ABC Technologies, Inc. Confidential Page 5

CAM-I Cross Cost Assignment View Resources Process View Why things have cost. . . Cost Drivers Resource Cost Assignment Activities What things cost. . . Resource Drivers Performance Measures Activity Cost Assignment Activity Drivers Cost Objects ã 2001 ABC Technologies, Inc. Adapted from The CAM-I Glossary of Activity-Based Management, Edited by Norm Raffish and Peter B. B. Turney, (Arlington: CAM-I, 1991. ) Confidential Page 6

Outputs of ABM evaluates the activities critical to your business Cost of Activities Cost of Non-Value Added Activities Performance Measures Accurate Product/Service Cost Drivers ã 2001 ABC Technologies, Inc. Confidential Page 7

ABC/M : Main Usage Areas Product / Service Costing Performance Improvement Cost Reduction Others - make/buy decisions - strategic planning - project management - budgeting ã 2001 ABC Technologies, Inc. Confidential Page 8

TECHNOLOGY ENABLER FOR MEASURING BUSINESS INITIATIVES Industries initiatives ACTIVITY-BASED INFORMATION SYSTEMS EVA TQM BPR ECR Banking Medical Government Manufacturing Value Chain Insurance Utilities ã 2001 ABC Technologies, Inc. Confidential Page 9 Performance Measurement Telcos Automotive

Traditional vs ABC HOW DANA DISCOVERS WHAT ITS TRUE COST ARE The material-control department in Plymouth, Minnesota OLD WAY Process sales order Source parts Expedite supplier orders Expedite internal process Traditional accounting SALARIES $371, 917 FRINGES $118, 069 NEW WAY SUPPLIES 76, 745 FIXED COSTS $23, 614 TOTAL $590, 345 $144, 846 $136, 320 $72, 143 $49, 945 Resolve supplier quality $47, 599 Reissue purchase orders Expedite customer orders Schedule intracompany sales Request engineer change Resolve problems Schedule parts $45, 235 $27, 747 $17, 768 $16, 704 $16, 648 $15, 390 TOTAL $590, 345 Source: Fortune Magazine ã 2001 ABC Technologies, Inc. Confidential Page 13

ABM Benefits Provides a way to continuously improve processes Focuses on the important costs Creates a relationship between business cost and creating value ã 2001 ABC Technologies, Inc. Confidential Page 14

ABM Benefits (Cont’d) Provides non financial performance measures Includes all business functions in an organization ã 2001 ABC Technologies, Inc. Confidential Page 15

Summary of Benefits (1) Better Cost Information : Cost of product/product types Cost of customer/customer types Cost of services / transactions Activity/Process costs Multi-dimensional Profitability Performance Management : Activity Analysis Benchmarking Identification of Cost Drivers ã 2001 ABC Technologies, Inc. Confidential Page 16

Value Added Activity Example. . . Raw Material 4 Weeks Raw Material RECEIVE INSPECT STORE ISSUE MACHINE INSPECT STORE ISSUE ASSEMBLE INSPECT STORE TEST STORE PACK STORE SHIP RECEIVE MACHINE ASSEMBLE TEST PACK SHIP Minimize Cost Drivers for Non-Value Added Activities Finished Product ã 2001 ABC Technologies, Inc. Confidential Page 17 4 Days

Profitability Profile Profitability profiles are like electrocardiograms of a company’s health. After sales are attached to the ABC costs, this graph reveals that $8 million was made on the most profitable 75% of products—and then $6 million was conceded back! $8 Cumulative Profit (Millions) $6 Net Revenues $4 Minus ABC Product Costs Unrealized profit revealed by ABC $2 $1. 8 profit $0 0 100 200 300 400 500 600 700 800 Specific Products and Services Ranked from highest to lowest ABC profit-margin percentage (%). ã 2001 ABC Technologies, Inc. Confidential Page 19

SAMPLE CUSTOMERS IN ASIA n Manufacturing n Texas Instruments Compaq Computers Coats/Tootal Samsung Electronics Motorola Nokia Osram-Opto Siemens Delco Electronics Manufacturing Adaptec Manufacturing Philips Lighting National Printers KL Cypress Semiconductors n Micron Semiconductor TSMC (Taiwan) Likon Electronics Allied. Signal Avionics Allied. Signal Laminates Fujitsu-Quantum Advanced Micro-Devices Astec International Taiwan Synthetic Rubber Everest Textiles Philips Luminaires ã 2001 ABC Technologies, Inc. Telcos / Utilities Taiwan Fixed Network PT Telkom Indonesia PUB Singapore Telecoms Telekom Malaysia Celcom Malaysia LG Telekom Nippon Telegraph & Telecom TOT Dacom Korea Tokyo Gas Globe Telecom (Phil) n Oil & Gas Mobil Exxon Confidential Page 20

SAMPLE CUSTOMERS IN ASIA n n Banking & Finance Healthcare Singapore General Hospital National Cancer Centre National Heart Centre National Neuroscience Inst. IJN Hospital Pantai Medical Centre Subang Jaya M C Seoul National Univ Hospital n Others Bintulu Port PSA Singapore Sealand Hongkong 7 -Eleven Hongkong Asiana Airlines Safra Radio US Naval Logistics Diethlem Holdings Bexcom E-Healthcare Hong Kong ECICS Credit Lyonnais CIBC OCBC Bank DBS Bank Fukuoka Bank China. Trust Bank of Tokyo-Mitsubishi Sakura Bank UOB Bank n Food & Beverage Cadbury-Schweppes Coca-Cola ã 2001 ABC Technologies, Inc. Confidential Page 21

ABC Wiring Diagrams - Segment the Diversities Resources Salary, Fringe Benefits Work Activities Direct Material Rent, Phone, Travel Depreciation Interest, Supplies Tax People Activities Support Activities “cost-to-serve” paths Equipment Activities Final Cost Objects Products, Services Business Sustaining Suppliers Customers ã 2001 ABC Technologies, Inc. Confidential Page 22

Modeling the Business: Wiring Resource Module General Ledger Work Groups GL Salary, Supplies, Utilities. . . Activity Module Origination Activities Balances & Revenue Processing Activities Products Services Cost Object Module Reporting/ Executive Information Systems ã 2001 ABC Technologies, Inc. Confidential Page 23

ABC Technologies Thank You Visit the ABC Authority at www. abctech. com ã 2001 ABC Technologies, Inc. Confidential Page 24