1. Introduction to Cost management
DASA-CE Training
Introduction to Cost management

2. Cost Management – Overview
Cost Management = Managing Business Operations Efficiently & Effectively Through the Accurate Measurement & Thorough Understanding of the "Full Cost" of an Organization's Business Processes, Products & Services in Order to Provide the Best Value to Customers
Cost Management Process consists of Cost Planning, Cost Accounting, Cost Analysis, and Cost Controlling
Cost Management involves Operational Managers and Resource Managers
In this section, we will present an overview of cost management.
Cost Management means Managing Business Operations Efficiently & Effectively Through the Accurate Measurement & Thorough Understanding of the "Full Cost" of an Organization's Business Processes, Products & Services in Order to Provide the Best Value to Customers.
Cost Management Process consists of Cost Planning, Cost Accounting, Cost Analysis, and Cost Controlling
Cost Management involves Operational Managers and Resource Managers

3. Cost Management is a New Process
Cost Accounting / Management is new to most of the Army as a formalized process
Provides Financial and Managerial Information
Cuts across financial and operational organizations
Is driven by information needs of the Operational Army not solely the financial community
Cost Management is a New Process
Cost Accounting / Management is New to Most of the Army as a formalized process
It provides Financial and Managerial Information, Cuts Across financial and operational organizations, and is Driven by Information Needs of the Operational Army not solely the Financial Community

4. Cost Management
Managing Business Operations Efficiently & Effectively Through the Accurate Measurement & Thorough Understanding of the "Full Cost" of an Organization's Business Processes, Products & Services in Order to Provide the Best Value to Customers.
Efficiently means doing things "right” - e.g. in the best and most economical way, wasting no resources
Effectively means doing the "right" things - e.g. setting targets to achieve an overall goal (the effect) and attaining the goal
Cost management means Managing Business Operations Efficiently & Effectively Through the Accurate Measurement & Thorough Understanding of the "Full Cost" of an Organization's Business Processes, Products & Services in Order to Provide the Best Value to Customers.
Efficiently means doing things "right“, e.g. in the best and most economical way, wasting no resources
Effectively means doing the "right" things, e.g. setting targets to achieve an overall goal (the effect) and attaining the goal
Full Costs are the inclusion of all and only those costs related to generating the output
Best Value is a qualitative measurement to be taken into consideration
Full Costs is the inclusion of all and only those costs related to generating the output
Best Value is a qualitative measurement to be taken into consideration

5. Cost Management Cost Management Process Cost Accounting Cost Planning
Managing Business Operations Efficiently & Effectively Through the Accurate Measurement & Thorough Understanding of the "Full Cost" of an Organization's Business Processes, Products & Services in Order to Provide the Best Value to Customers.
Cost
Accounting
Cost
Management
Process
Cost
Planning
Cost
Analysis
The cost management process consists of four components: Cost accounting, cost analysis, cost controlling, and cost planning.
Cost
Controlling

6. Cost Planning
Cost Planning is the use of a Cost Model for “should-cost” forecasting to make informed decisions
Often performed for:
Budget Requirement Requests
Cost Estimations
Output Quantities
Capacity Management
Risk Analysis
Various Time Frames: Out year / Current year, Quarterly, Monthly
Standard Rates
Defining Targets to Measure Efficiency and Effectiveness
Cost
Accounting
Cost
Planning
Cost
Analysis
Cost
Management
Process
Cost Planning is the use of a Cost Model for “should-cost” forecasting to make informed decisions. It is often performed for:
Budget Requirements Requests
Costs Estimations
Output Quantities
Capacity Management
Risk Analysis
Various Time Frames: Out year / Current year, Quarterly, Monthly
Standard Rates
Defining Targets to Measure Efficiency and Effectiveness
Planning is performed both in terms of dollars, but since we are talking about efficiency and effectiveness, quantity as well.
Cost
Controlling

7. Cost = Converting and Measurement of Work
Cost Center
Asset / Equipment
Project / Program
Internal Order
WBS / Work Order
Organization - Labor, Materials, Supplies
Resources/Inputs
Plant, Property & Equipment
Building Project, Weapon System
Outputs
Services, Events (SSP, Course)
Job (Set of Tasks) – Maint & Repair 7

8. Cost Accounting
Cost Accounting translates the operational value chain into financial values
Cost
Planning
Controlling
Analysis
Accounting
Management
Process
Cost Accounting is the dollar value of the cost measurements resulting from business operations
Cost Measurement has meaning only when considering its purpose
Defining Cost Measurement should be carefully considered and evaluated
Alternative cost methods should be evaluated under operating environment
Cost Accounting translates the operational value chain into financial values.
Cost Accounting is the dollar valuation of the cost measurements resulting from business operations
Cost Measurement has meaning only when considering its purpose
Defining Cost Measurement should be carefully considered and evaluated
Alternative cost methods should be evaluated under operating environment
* Source: The Federal Accounting Standards Advisory Board (FASAB) No. 4. Managerial Cost Accounting Standards

9. Cost Analysis
Cost Analysis is the integration of functional outcome data with cost data to produce valid and verifiable information to conduct various forms of analysis
Cost
Planning
Controlling
Analysis
Accounting
Management
Process
Sample types of analysis include:
Organizational performance
Analysis of alternatives
Variance analysis
Economic analysis
Cost / Risk assessments
Trends
Cost Analysis is the integration of functional outcome data with cost data to produce valid and verifiable information to conduct various forms of analysis
Sample types of analysis include:
Organizational performance
Analysis of alternatives
Variance analysis
Economic analysis
Cost / Risk assessments
Trending

10. Types of Cost Analysis
Forecasting: using prior period information to predict future dollars and quantities
Variance Analysis: comparison analysis of standard vs. actuals, plan vs. actuals, or multiple periods (e.g. Jan vs. Feb)
Trend Analysis: Analysis of cost/qty over multiple consecutive time frames (e.g. Month to Month, Year to Year, etc.)
Economic Analysis: Analysis of economic benefits of multiple options over different periods of time
Some types of cost analysis are: forecasting, variance analysis, trend analysis, and economic analysis.
Forecasting is using prior period information to predict future dollars and quantities
Variance Analysis is comparison analysis of standard vs. Actuals, Plan vs. Actuals, or multiple periods (e.g. Jan vs. Feb)
Trend Analysis is Analysis of cost or quanitity over multiple consecutive time frames (e.g. Monthly to Month, Year to Year, etc.)
Economic Analysis is Analysis of economic benefits of multiple options over different spans of time

11. Types of Cost Analysis
Cost/Benefit Analysis: Analysis of decision to examine costs vs. return
Life Cycle Cost Estimate: Estimate of program or project cost over the full life cycle from concept development to disposal
Cost/Risk Analysis: Assesses cost in reference to probability/risk of potential outcome
Cost Benefit Analysis, Life cycle cost estimates, and cost/risk analysis are other examples of cost analysis.
Cost/Benefit Analysis is the Analysis of Decision to examine costs versus return
A Life Cycle Cost Estimate is an Estimate of program or project cost over the full life cycle from concept development to disposal
Cost/Risk Analysis:is Analysis assessing cost in reference to probability/risk of potential outcome

12. Analysis Supported by Enterprise Resource Planning (ERP) Reporting
The various types of analysis are supported by ERP reporting by providing:
Real-time, accurate data
Drill-down capabilities to generating document (e.g. transparency and audit/integrity)
Standard definitions, business rules, and methods (commonality in what the data means)
Multiple cost assignments and views
The various types of analysis are supported by ERP reporting by providing:
Real-time, accurate data
Drill-down capabilities to generating document (e.g. transparency and audit/integrity)
Standard definitions, business rules, and methods (commonality in what the data means)
Multiple cost assignments and views

13. Cost Controlling
Cost Controlling is taking “Best Value” and/or “Best Practice” actions to realign the organization to achieve the defined objectives
Actions taken based on information provided from Cost Analysis results
Redeployment of resources between outputs
Change outputs (e.g. do more or less)
Update/revision of plan information - e.g. updated Std. Rate
Execution of trade-off decisions - e.g. OT vs. external support
Cost
Planning
Controlling
Analysis
Accounting
Management
Process
Cost Controlling is to take “Best Value” and/or “Best Practice” actions to realign the organization to achieve the defined objectives
It is actions taken based on information provided from Cost Analysis results. For instance:
Redeployment of resources between outputs
Change outputs (e.g. do more or less)
Update/revision of plan information, e.g. updated Std. Rate
Execution of trade-off decisions, e.g. OT versus external support

14. Cost Controlling
It’s where the benefits of Cost Management are realized
The step where leaders and decision-makers use the results of their cost analysis as decision support, and implement the changes and enhancements that ultimately move us to a more efficient Army 14

15. Cost Management Involves..
Capturing and Valuating Data
Accurate, timely and relevant data
Connecting operational output/performance data to financial data
Allocate Overhead
Cost
Planning
Controlling
Analysis
Accounting
Management
Process
Cost Planning
Set Cost Targets and Efficiency Goals
Compute Standard Rates
Cost Analysis
Variances
Depreciation
Trends and forecasting
Product, service or activity cost by element (labor, contract, etc.)
Understanding full costs of organizations, operations, products and services
Cost management involves:
Cost accounting, in which we capture and valuate data that is accurate, timely, and relevant; connect operational output/performance data to financial data; and allocate overhead.
Cost analysis, which includes analysis of variance, depreciation, trends and forecasting, product, service, or activity cost by element, and full costs of organizations, operations, products and services.
Cost controlling, which consists of actions such as changing targets, changing resources, or changing quality.
And Cost planning, which sets cost targets and efficiency goals and computes standard rates.
Cost Controlling
Move to action based on analysis
Change targets
Change resources
Change quality

16. Cost Management Process (Who Is Involved?)RM
Cost
Planning
Controlling
Analysis
Accounting
Management
Process OM
Resource managers typically focus on accumulating the costs and reporting, and are most involved in the cost accounting and cost analysis domains.
Operational managers are focused on efficiency, and are most involved in the cost planning and cost controlling domains.
Resource Managers (RM)
- Operational Managers (OM)

17. Cost Culture
Culture is the shared “Taken-For-Granted” assumptions, beliefs, values, expectations and rules that members of a work unit team or a corporate organization hold
Change management is required to move towards a Cost Culture
Change management impacts the areas of people & other resources, processes, policies and procedures, and technology
Cultural shift to a Cost Culture is a maturation process moving from “What We Spent,” to “What It Actually Costs,” to “What It Should Cost”
In this section, we will present an overview of Cost Culture.
Culture is the Shared “Taken-For-Granted” Assumptions, Beliefs, Values, Expectations & Rules that Members of a Work Unit Team or a Corporate Organization Hold
Change management is required to move towards a Cost Culture
Change management impacts the areas of People & Other Resources, Processes, Policies & Procedures, and Technology
Cultural shift to a Cost Culture is a maturation process moving from “What We Spent”, to “What It Actually Costs”, to “What It Should Costs”

18. What is a Cost Culture?
Comprises the attitudes, experiences, beliefs and values of an organization
A shared behavior by people & groups in an organization
A Cost Culture is the cultural shift from “Accomplish the Mission at Any Cost” to “Accomplish the Mission While Considering Cost”
What is a Cost Culture?
It Comprises the Attitudes, Experiences, Beliefs & Values of an Organization
It is a Shared Behavior by People & Groups in an Organization
Most Experts Agree that it is the Shared “Taken-For-Granted” Assumptions, Beliefs, Values, Expectations & Rules that Members of a Work Unit Team or a Corporate Organization Hold
A Cost Culture is the Cultural Shift from “Accomplish the Mission at Any Cost” to “Accomplish the Mission Considering Cost”
Culture is the combined way an organization operates. Moving to a culture of cost is a big change
It is important to note that a transition to cost culture does not imply that cost trumps everything, simply that it is considered and known

19. Why Focus on Cost Culture?
Deploying Systems, Improving Cost Models, Issuing Policies, Training Staff, Recruiting Experts will not enhance the Army’s ability to manage costs unless Army Soldiers / Civilians understand and value the need to manage costs
Why Focus on Cost Culture?
Deploying Systems, Improving Cost Models, Issuing Policies, Training Staff, Recruiting Experts will not Enhance the Army’s ability to manage costs unless Army Soldiers / Civilians Understand & Value the Need to Manage Costs
Knowing Our Costs & Managing Them To Increase Our Mission Capability Must Become Ingrained in Our Culture
Leaders Must Demand Cost Information & Use It In Decision-making — Otherwise It Provides No Utility To The Army
We Need A Lifestyle Change, Not A Diet!
Knowing our costs and managing them to increase our mission capability must become ingrained in our culture
Leaders must demand cost information and use it in decision-making, otherwise it provides no utility to the Army
We Need A Lifestyle Change, Not A Diet!

20. Moving to a Cost Culture
“A Culture of Entitlement”
“A Culture of Influence”
Budget-focused
Spend rate driven –inputs
Performance objective -99.9% obligated
Free goods have infinite demands
Cost and performance focused
Results driven - output & outcome
Performance objective – resource consumption optimization (efficiency & effectiveness)
Use what is necessary to obtain the objective
Moving to a Cost Culture means transitioning from a culture that: is Budget-focused, is spend rate or inputs driven, where the performance objective is to obligate 99.9% of available resources, and where free goods have an infinite demand, to a culture that is cost and performance focused, is results driven, where the performance objective is resource consumption optimization, and where only the resources necessary to obtain the objective are used.
From Budget to Cost

21. Cost Enablers
Enterprise Resource Planning (ERP) is an enabler to Cost Management “Culture” by providing the necessary technology
The Cost Management Process is an enabler to Cost Management by incorporating cost impact into routine decision-making
In this section, we will present an overview of Cost enablers.
Enterprise Resource Planning, or ERP, is an enabler to Cost Management “Culture” by providing the necessary technology.
The Army Cost Model is being designed into GFEBS which utilizes the SAP ERP application
The ERP application is operational focused generating financial information as an outcome of an operational transaction
The ERP application has a transactional component and an analytical component
The transactional component has real-time integration for the various value streams/function modules