Toby Spanier (Deloitte) - Government Finance Profession

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Output Costing
Toby Spanier
[email protected]
11th November 2010
Spending Review Framework
“The Government will:
• strengthen and re-position the role of the
departmental finance director as an enabler of
informed decision making at Board level,
mandating FD approval of new investments
and consultation on material business
decisions;
• provide an aligned, long term strategy for
financial management across central
government...
• introduce financial performance measures...
• increase the quality, transparency and
accountability of financial information.”
Departmental Input Indicators
What is Output Costing?
Output Costing provides insight into the reasons why costs have been
consumed by specific outputs. This shifts focus from cost recovery to
cost management.
Traditional Product Costing
Consumed by
Resources
Outputs/
Services
Functional areas that drive
cost are identified, but limited
understanding of what areas
do to incur these costs
Output Costing
Resources
Consumed by
Activities
Outputs/
Services
Consumed by
Understanding expenses at
activity levels provides
insight into why these costs
are incurred
Why do Output Costing?
The activity layer provides much better management information
Typical Outcomes
Increased Capabilities
• Unit costs by activity, output and customer
• Transparency
• Expenses traced to the activity level to
identify high-cost activities
• Accountability / management buy-in
• Identification of controllable vs. noncontrollable expenses
• Consistent methodologies and baselines
for evaluation
• User pricing / discounting strategies
• Classification of the fixed vs. variable
portions of expenses
• Detailed progression of expenses from
their entry on the General Ledger to the
outputs and services that consume them
• More accurately allocated shared services
cost
• Capacity planning
• Resource allocation
• Identified cost reduction opportunities
Issues, Benefits and Achievements
Issues
Benefits of Output Costing
• Provides visibility of the costs of what people do
Cost Reduction
Unclear Costs
• Identifies areas of ‘high spend’, facilitates cost
comparison and identifies subsequent targets for
cost reduction
• Provides a baseline against which to manage costs
and measure improvements
• Provides better decision support information around
outputs
Poor Management
Information for
• Can underpin commercial relationships between
business units
decision making
• Provides cost data to support outsourcing decisions
Ineffective planning
• Improves planning and budgeting process by
providing target output costs and associated input
costs
and budgeting
processes
• Provides enhanced understanding of how fixed and
variable costs are over time
Achievements
• Achieved £100m
cost reduction
• Identified &
implementation
underway for
£200m saving
• Benefits tracking
for major cost
reduction project
• Top quartile user
satisfaction for
finance
Management
Information
• 10% year-on-year
saving in IT costs
Output Costing: Guiding Principles
Regardless of the details of a specific Output Costing project, there are similar
guiding principles across all cost modeling efforts:
Guiding Principle
Objective
Accountability
• Expand the accountability for costs beyond direct expenses to include other
types of expenses.
Transparency
• Provide better visibility and understanding of the costs that managers are
accountable for.
Ownership
• Business users take ownership of the data and information and use it to make
key business decisions. The model is not perceived as a finance tool.
Materiality
• Strike the balance between the level of granularity required to make informed
decisions with the requirement to maintain the model over time.
Controllability
• Cost Influence seeks to differentiate between costs that are controllable and
those that are non-controllable.
Simplicity
• Methodology and model design should be as simple as possible in order to
facilitate use by business owners.
Output Costing Projects
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