Performance Based Costing.Introduction In a Winter 2001-02 DISAM DISAM Defense Institute of Security Assistance Management DISAM Direct Indexed Sequential Access Method Journal article, Volume 24 No. 2, pp 57-64, Lieutenant General Tome H. Walters, Jr., Director, Defense Security Cooperation Agency The Defense Security Cooperation Agency (DSCA), as part of the United States Department of Defense, provides financial and technical assistance, transfer of defense matériel, training and services to allies, and promotes military-to-military contacts. , indicated that several financial management initiatives are presently underway in the security cooperation community that will move us in the direction of a government that works better and is more efficient costs less. Among these are Performance Based Budgeting Adopting Public Sector’s Performance Based Budgeting to the private sector using the CPM framework. [1] [2] Introduction Today, when the management of money is more important than ever for public and private entities, budgeting plays an (PBB PBB: see polybrominated biphenyl. ) and Performance Based Costing (PBC PBC 1 Peripheral blood cells 2 Primary biliary cirrhosis, see there ). In the above DISAM Journal article, Lt Gen Lt Gen or LtGen abbr. lieutenant general Walters addressed the details of PBB. This article complements that discussion, and focuses on PBC and its implementation. This article focuses on PBC and its implementation. Since the time of that article, the PBB process has been extended to include all claimants of the foreign military sales That portion of United States security assistance authorized by the Foreign Assistance Act of 1961, as amended, and the Arms Export Control Act of 1976, as amended. This assistance differs from the Military Assistance Program and the International Military Education and Training Program (FMS FMS - Flexible Manufacturing System (factory automation). ) administrative budget, including the military departments (MILDEPs) and defense agencies, as well as the foreign military financing (FMF FMF 1. Familial Mediterranean fever 2. Fetal movement felt 3. Forced mid-expratory flow 4. Free molecular flow ) administrative budget. Similarly, the budgetary details of the overseas security assistance organizations (SAOs) will be incorporated in the PBB data, via download To receive a file transmitted over a network. In any communications session, "download" means receive, and "upload" means send. The download/upload often implies a big/little scenario, in which data is being downloaded from the "big" server into the "little" user's computer. from the Security Assistance Automatic Resource Management System (SAARMS SAARMS Security Assistance Automated Resource Management Suite ). Used in the context of the security cooperation community, PBC is synonymous with synonymous with adjective equivalent to, the same as, identical to, similar to, identified with, equal to, tantamount to, interchangeable with, one and the same as Activity Based Costing (ABC ABC in full American Broadcasting Co. Major U.S. television network. It began when the expanding national radio network NBC split into the separate Red and Blue networks in 1928. ) as an approach to management and costs that is gaining popularity in both the private and public sectors. PBC also includes the use of performance measures as a way of assessing accomplishments in keeping with the 1992 Government Performance and Results Act The Government Performance and Results Act (GPRA) is a US Law enacted in 1993. It is one of a series of laws designed to improve government project management. The GPRA requires agencies to engage in project management tasks such as setting goals, measuring results, and reporting (GPRA GPRA Government Performance and Results Act of 1993 GPRA Gouvernement Provisoire de la Republique Algerienne GPRA Government Procurement Reform Act (Philippines) GPRA General Practice Registrars Australia ) and the 2001 President's Management Agenda The President's Management Agenda is an initiative, announced by U.S. President George W. Bush in 2001, to make the U.S. federal government more efficient and effective. In its drive to make government more "citizen-centered, market-based, and results-oriented," the agenda . The essence of PBC is that it establishes a relationship between the three main parts of an organization's business processes: resources, activities and outputs (See Figure 1). Figure 1 indicates that PBC is a cost allocation methodology that identifies and analyzes costs associated with an organization's activities and links these costs to products, services, customers, and other cost objects based on their consumption of those activities. It is a principal tenet TENET. Which he holds. There are two ways of stating the tenure in an action of waste. The averment is either in the tenet and the tenuit; it has a reference to the time of the waste done, and not to the time of bringing the action. 2. of PBC that resources, such as labor, funding, and material are used or consumed by an organization's key activities. The costs of performing these activities are then assigned as·sign tr.v. as·signed, as·sign·ing, as·signs 1. To set apart for a particular purpose; designate: assigned a day for the inspection. 2. to specific outputs or cost objects. Cost objects are the products and services and sometimes the customers of an organization. Costs are assigned to objects based on how they are consumed. PBC provides a more dynamic way of viewing and assessing an organization's costs. The focus is on the activities that an organization performs, rather than on the discrete costs elements that make up these activities. Figure 2 highlights this more dynamic, a focused way of viewing costs in the context of activity. Similarly, PBC traces costs to cost objects according to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. the activities performed to produce them. If the costs appear to be high or in some way out-of-line, PBC allows us to understand which activities are driving this cost. In this way, it provides a framework for analysis and management decision-making. The uses of PBC are both strategic and tactical. It is the natural complement to Performance Based Budgeting. PBC provides an important source of information regarding businesssustaining activities and removes much of the distortion distortion, in electronics, undesired change in an electric signal waveform as it passes from the input to the output of some system or device. In an audio system, distortion results in poor reproduction of recorded or transmitted sound. in costs that is usually inherent in conventional unit-based costing systems. Activity Based Costing in the Public Sector The Bush Administration has placed considerable emphasis on understanding the costs of government, and, particularly, on assessing the results that come from these costs. Additionally, the President's Management Agenda highlights the integration of budgets and performance. Among the factors underlying this integration is a clear appreciation of the costs associated with performing specific missions and functions. Along these same lines, most public sector organizations are facing intense pressure to do more with less. This has proven to be a tremendous challenge that often requires: * Determining the true costs of services; * Implementing process improvements; * Determining make vs buy outsourcing (1) Contracting with outside consultants, software houses or service bureaus to perform systems analysis, programming and datacenter operations. Contrast with insourcing. See netsourcing, ASP, SSP and facilities management. decisions; and * Aligning a·lign v. a·ligned, a·lign·ing, a·ligns v.tr. 1. To arrange in a line or so as to be parallel: align the tops of a row of pictures; aligned the car with the curb. activities to mission and strategic planning Strategic planning is an organization's process of defining its strategy, or direction, and making decisions on allocating its resources to pursue this strategy, including its capital and people. It appears that many of the case studies examined agreed that activity based costing, a private sector financial management tool, is the best solution to address these challenges. Activity based costing (ABC) has been intermittently in·ter·mit·tent adj. 1. Stopping and starting at intervals. See Synonyms at periodic. 2. Alternately containing and empty of water: an intermittent lake. applied by federal agencies over the last decade. Several researchers agree that activity-based costing In a business organization, Activity-based costing (ABC) is a method of allocating costs to products and services. It is generally used as a tool for planning and control. This is a necessary tool for doing value chain analysis. targets a chronic weakness in Federal financial systems. These systems are good at tracking how agencies spend their budgets, but do not show the full cost of activities and programs. However, ABC captures these costs by apportioning ap·por·tion tr.v. ap·por·tioned, ap·por·tion·ing, ap·por·tions To divide and assign according to a plan; allot: "The tendency persists to apportion blame as suits the circumstances" spending across an agency's programs. Many of the public sector proponents of ABC view it as a financial management tool for solving federal management problems. The early 1990s witnessed the use of ABC in the public sector. The Internal Revenue Service (early 1900s) and the General Services Administration The General Services Administration (GSA) was established by section 101 of the Federal Property and Administrative Services Act of 1949 (40 U.S.C.A. § 751). The GSA sets policy for and manages government property and records. (1997 and 1998) were the-first to conduct ABC pilot tests. The Patent and Trademark Office (PTO PTO abbr. 1. Parent Teacher Organization 2. or p.t.o. please turn over 3. power takeoff PTO or pto please turn over Noun 1. ) was the first agency to deploy ABC agency-wide. It was used to persuade Congress to change patent and trademark fees in 1999. By showing the cost of achieving a unit of output given certain levels of labor inputs, ABC provided an empirical basis for raising or lowering fees. PBC Project Security Cooperation The DSCA DSCA Defense Security Cooperation Agency DSCA Defense Support of Civil Authorities DSCA Differential Strain Curve Analysis DSCA Deep Sound Channel Axis DSCA Debt Service Coverage Account DSCA Document Signer Certification Authority and the MILDEPs are engaged in a PBC project within FMS administrative funded organizations. This effort, called performance based costing, supports the DSCA implementation of a performance based budgeting system. The overall objective of the PBC project is to provide an accurate and thorough cost infrastructure of the security cooperation community to support the new performance based budgeting (PBB) process by providing costs of core functions, processes, and MILDEP MILDEP Military Department MILDEP Military Deputy products/services, which will ultimately be used to better justify budgets, provide management with improved cost data, and to act as the foundation for future strategic needs. PBC is designed to provide decision-makers at all levels in the security cooperation community with sufficient cost and programmatic pro·gram·mat·ic adj. 1. Of, relating to, or having a program. 2. Following an overall plan or schedule: a step-by-step, programmatic approach to problem solving. 3. information to manage their organizations. Additionally, PBC will help managers better understand macro-level aspects of the security cooperation business, such as the costs structure underlying the FMS administrative rate, the FMF administrative budget and the appropriate level of the annual FMS administrative ceiling. The need to better understand the costs of conducting the security cooperation operations has been a major concern for a long time. Specific objectives of the PBC effort include, but are not limited to the following: * To be able to calculate total costs and cost by core function(s) for each country program, as well as other cost objects; * To compare costs for similar processes across MILDEPS, training commands and military headquarters; * To calculate cost for each core function to compare the PBB FMS administrative budget and the FMF administrative budget to actual costs; * To highlight costs in total and by program for all non-FMS functions; and * To provide cost data to each MILDEP for the purposes of allocating the FMS Administrative budget and the FMF administrative budget. PBC will provide the optimum method for gathering and understanding these costs. It will assign resource costs to activities based on the use of resources, and assigns Individuals to whom property is, will, or may be transferred by conveyance, will, Descent and Distribution, or statute; assignees. The term assigns is often found in deeds; for example, "heirs, administrators, and assigns to denote the assignable nature of activity costs to products based on the use of activities. These activity costs are rolled up to the six FMS core functions at various organizational levels. Furthermore, the PBC program will show the costs of core business functions to better justify the FMS administrative budget inputs and lead to a better understanding of the costs in support of the security cooperation program. Figure 3 highlights the core function approach being used in both PBC and PBB. As background to the PBC effort, initial assessments were done in the September 2000 thru February 2001 time period of the existing costing infrastructure in DSCA and the military departments. The overall purpose of the assessments was to establish an appropriate cost system for DSCA and the MILDEPs to support PBB in the future. However, the following three specific objectives of the assessments were identified: * To show the organizational complexity Organizational Complexity may refer to:
* To show their existing cost model capability; and * To show the role that cost data played in the budgetary process. Based on the assessments and other information, "to-be cost" models, and an overall architecture of the PEG peg 1. To fix the price of a new security issue during the issuance period through buying and selling it in the open market in order to ensure that the price in the secondary market will not fall below the offering price. system were developed. This overall architecture as exhibited in Figure 4 provides for a diverse number of models at the activity level while still rolling up to a corporate model. Following a series of briefings to the MILDEPS and to the DSCA leadership, a decision was made to move towards these costs models. Figure 4 provides a high level schema of the PEG corporate model for a diverse number of models at the activity level while still rolling up to a corporate. The development of the PBC project entails a number of critical planning, technical and process-related steps. Five distinct technical tasks, occurring in two phases, were identified. These tasks are delineated de·lin·e·ate tr.v. de·lin·e·at·ed, de·lin·e·at·ing, de·lin·e·ates 1. To draw or trace the outline of; sketch out. 2. To represent pictorially; depict. 3. in Figure 5. Figure 5 shows an integrated and robust cost system that includes PEG models at the MILDEPs and others level linked to a corporate model that will reside at DSCA Additionally, Figure 6 shows the scope of the PBC project. The creation of the Corporate model includes, DSCA headquarters, DSADC DSADC Defense Security Assistance Development Center (Mechanicsburg, Pennsylvania) , DJSAM, DIALS, DLO DLO abbr. dead letter office DLO n abbr (= dead-letter office) → oficina de Correos que se encarga de las cartas que no llegan a su destino and the MILDEPs. The five distinct tasks are as follows: * Design costing infrastructure; * Complete detailed planning; * Create static ABC models; * Migrate ABC models to PEG; and * Mature PBC to PBB. Two of the tasks, design costing infrastructure and complete detailed planning, occurred during Phase I of the project. The three remaining tasks, Phase II, are currently in progress. The creation of static PBC models is important because it begins the development of a static or non-automated PBC model. Since some of the MILDEPs already have models, this stage was comprised of refining refining, any of various processes for separating impurities from crude or semifinished materials. It includes the finer processes of metallurgy, the fractional distillation of petroleum into its commercial products, and the purifying of cane, beet, and maple sugar existing models. The objective of this task was to develop a static model for the organizations participating in the PBC project that conforms to the structure as developed in Phase I, meets the needs of the Corporate Model, and provides operational use to the MILDEPs and the DSCA. Figure 6 shows the various agencies that are being modeled. Each agency is currently in varying stages of development. Migrating ABC models includes taking the static ABC model to an active or live state by developing automated au·to·mate v. au·to·mat·ed, au·to·mat·ing, au·to·mates v.tr. 1. To convert to automatic operation: automate a factory. 2. feeds/links to update the resources (i.e., personnel names and salaries) by interfacing between the appropriate legacy system and the ABC model and developing methods to update the resource drivers (i.e., percent of time spent on or against activities by resources). The final task of Phase II, mature PBC to PBB, entails using the PBC model to support the new PBB process, and to assist in organizational decision-making. Additionally, this phase is very important because it is concerned with maintaining the model and using the system for cost based scenario development to support PBB. Finally, Figure 6 shows the various agencies that are being modeled and the overall scope of the PBC project. Each agency is currently in varying stages of development. Summary The rapidly changing and complex world of security cooperation requires a thorough and accurate system of capturing costs, justifying budgets, as well as providing managers with solid decision support data. As security cooperation relies more on hybrid and commercial vehicles, the structure and fabric of the FMS case is continuing to become more varied and tailored to specific customer and/or regional needs. Along with the difficulty of pricing and tracking costs in this new environment, the need to justify even the traditional base and mix of services has been requested by various constituents. To this end, DSCA and the MILDEPs embarked on the task of assessing the current ability of the FMS community to develop and report accurate cost information for the FMS core functions, as well as to devise an optimum FMS costing system. The results of this assessment indicated that PBC was the optimum costing system.
What type of business is this?
Traditional View
Salaries $12,400,000
Supplies $800,000
Travel $1,500,000
Facilities $2,100,000
Equipment $2,200,000
$19,000,000
Figure 2
This starts to tell you a little more about what this business does
PBC View
Hold/Attend Meetings $450,000
Notify Congress $1,500,000
Administer Funds $1,350,000
Legal Reviews $700,000
Marketing/New Business $7,500,000
Policy/Strategic Planning $3,000,000
Manage/Run IT Solutions $4,500,000
$19,000,000
Figure 3 Core Functions
FMS Administration
Core Functions Definition
Pre-Letter of Request (LOR) Efforts expended prior to receipt of a
LOR, includes responding to inquiries,
pre-requirements determination,
developing a Total Package Approach
(TPA), if required or specifying the
mix of FMS and Direct Commercial Sales
(DCS) under a hybrid approach.
Case Development Efforts required to process customer
request, gather, develop and integrate
price and availability data for
preparation of a Letter of Offer and
Acceptance (LOA). These efforts continue
from receipt of a customer's LOR through
case preparation, staffing, and customer
acceptance.
Case Execution Overall coordination of initiate case
implementation efforts required to
conduct and execute case management,
security assistance, team management,
technical, logistical, and financial
support, and the contractual efforts
under acquisition and contraacting.
Case Closure All actions required to perform
logistical reconciliation, financial
reconciliation, certify line, and case
closure.
Other Security Cooperation All efforts involved in the
administration and management of special
programs and projects associated with
Security Cooperation requirements,
particularly, the non-FMS Security
Cooperation programs authorized under
the Foreign Assistance Act, such as
International Military Education and
Training (IMET), the Foreign Military
Financing (FMF) program, the grant
Excess Defense Articles (EDA) program,
and Direct Commercial Sales.
Business Sustaining Efforts required in providing
automation/information technology,
training, resouce management and
personnel management that cannot be
traced directly to one of the other five
core functions or specific cost
objectives.
Figure 6
Agencies Being Modeled
DSCA
DSCA-HQ Crystal City, Virginia
DISAM WPAFB, Dayton, Ohio
DSADC Mechanicsburg, Pennsylvania
DLO Denver, Colorado
DIALS Newport, Rhode Island
Army
DASA (DE&C) Arlington, Virginia
SAS-FM&C Arlington, Virginia
USACE Washington, D.C.
Publications Washington, D.C.
USAREUR Germany
USARPAC Fort Shafter, Hawaii
TRADOC
SATFA Fort Monroe, Virginia
SATMO Fort Bragg, North Carolina
OTSG
MEDCOM Fort Sam Houston, Texas
USAMMA Fort Detrick, Maryland
USASAC Alexandria, Virginia and
New Cumberland, Pennsylvania
AMCOM Huntsville, Alabama
CECOM Fort Monmouth, New Jersey
OSC Rock Island, Illinois
SBCCOM Rock Island, Illinois
STRICOM Orlando, Florida
TACOM Warren, Michigan
Navy
Navy IPO Washington, D.C.
NAVAIR Pax river, Maryland
NAVSEA Crystal city, Viginia
SPAWAR San Diego, California
NETSAFA Pensacola, Florida
USMC Quantico, Virginia
NAVICP Philadelphia, Pennsylvania
NALC Mechanicsburg, Pennsylvania
Coast Guard Washington, D.C.
Air Force
SAF
SAF/IA Rosslyn, Virginia
SAF/FM Washington, D.C.
AFMC
AFMC HQ WPAFB, Dayton, Ohio
AFSAC WPAFB, Dayton, Ohio
OO-ALC Hill AFB, Odgen, Utah
OO-ALC Tinker AFB, Oklahoma
WR-ALC Robbins AFB, Georgia
AAC Eglin AFB, Florida
SAC WPAFB, Dayton, Ohio
ESC Hanscom AFB, Massacheusetts
SMC Los Angeles AFB, California
ACC Langley AFB, Virginia
AMC Scott AFB, Virgnia
AFSAT Randolph AFB, Texas
About the Authors Dr. Bobby Davis is an Associate Professor of Marketing, School of Business and Industry at Florida A&M University in Tallahassee, Florida For other uses, see Tallahassee (disambiguation). Tallahassee is the capital of the State of Florida and the county seat of Leon County. Tallahassee became the capital of Florida in 1824. As of 2006, the population recorded by the U.S. . He is presently serving as a Summer Faculty Fellow in the Office of the Secretary of Defense's Minority Institutions Program, working with the Resource Management Division, Office of the Comptroller, Defense Security Cooperation Agency. |
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