Hbm solution

Hyperion® Business ModelingRelease 3.0

Solutions Guide

Hyperion Solutions Corporation

P/N: D503530000

© 2000-2002 Hyperion Solutions Corporation. All rights reserved.

Hyperion, Essbase, Hyperion Analyzer, Hyperion Business Modeling and the “H” logo are registered trademarks of Hyperion Solutions Corporation. Hyperion Solutions is a trademark of Hyperion Solutions Corporation.

Economic Value Add (“EVA”) is a registered trademark of Stern Stewart & Co. All other brand and product names are trademarks or registered trademarks of their respective holders.

No portion of this manual may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or information storage and retrieval systems, for any purpose other than the purchaser’s personal use, without the express written permission of Hyperion Solutions Corporation.

Notice: The information contained in this document is subject to change without notice. Hyperion Solutions Corporation shall not be liable for errors contained herein or consequential damages in connection with the furnishing, performance, or use of this material.

Hyperion Solutions Corporation 1344 Crossman Avenue Sunnyvale, CA 94089

Contents

Preface ......................................................................................................................... vii

Who Should Use This Guide .................................................................................... viiDocument Structure ........................................................................................................ viiiConventions ....................................................................................................................... ixRelated Documentation ...................................................................................................... xOnline Help ....................................................................................................................... xi

Viewing the Online Guide ......................................................................................... xiPrinting the Online Guide ....................................................................................... xiii

Additional Support .......................................................................................................... xivDocumentation ......................................................................................................... xivEducation Services .................................................................................................. xivConsulting Services .................................................................................................. xvTechnical Support ..................................................................................................... xv

Chapter 1: Introduction ....................................................................................... 17

What You Gain ................................................................................................................. 17Before You Start ............................................................................................................... 18Using the Case Studies ..................................................................................................... 18

How the Case Studies are Organized........................................................................ 18How to Use the Case Studies .................................................................................... 19

The Case Studies .............................................................................................................. 19

Chapter 2: Your Business Issues ................................................................... 21

Managing Capacities and Constraints .............................................................................. 21Measuring Customer and Product Profitability ................................................................ 22Controlling Costs .............................................................................................................. 22

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Justifying Investment and Re-engineering ....................................................................... 23Planning Process Improvements ...................................................................................... 23Introducing a New Product ............................................................................................... 24Where to Find the Case Studies ....................................................................................... 24

Chapter 3: The Model Approach ..................................................................... 25

Step 1: Defining the Project Scope................................................................................... 26Step 2: Identifying Activities, Resources, and Measures ................................................. 26Step 3: Developing the Schematic.................................................................................... 27Step 4: Collecting Data and Rules .................................................................................... 28Step 5: Building the Model .............................................................................................. 29Step 6: Validating the Results .......................................................................................... 29Step 7: Interpreting the New Activity-Based Information ............................................... 30Step 8: Performing Activity-Based Management ............................................................ 30

Chapter 4: Product Profitability Case Study ............................................ 31

Business Issue ................................................................................................................... 32Marketing Analysis ................................................................................................... 32Cost Analysis ............................................................................................................ 33

Activity Based Management Solution Result .................................................................. 33Activity-based Costing (ABC) Results ..................................................................... 33

How the Solution was Developed .................................................................................... 34Supporting The Model Approach ............................................................................. 34Step 1: Defining the Project Scope ........................................................................... 35Step 2: Identifying Activities, Resources, and Measures ......................................... 35Step 3: Developing the Schematic ............................................................................ 36Interpreting the OK Plastics Schematic .................................................................... 40Step 4: Collecting Data and Rules ............................................................................ 42Step 5: Building the Model ....................................................................................... 51Step 6: Validating the Results ................................................................................... 55

Activity-Based Cost Analysis .......................................................................................... 60Step 7: Interpreting New Information ....................................................................... 60

Activity-Based Management ............................................................................................ 64Step 8: Performing Activity-Based Management ..................................................... 64Finding a Solution to Product Profitability ............................................................... 64

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Calculating the Scenario ........................................................................................... 73Next Steps ................................................................................................................. 73

Chapter 5: Customer Profitability Case Study ........................................ 75

Business Issue .................................................................................................................. 76Market Conditions .................................................................................................... 77Current Costs ............................................................................................................ 77Profit/Loss Projection ............................................................................................... 78

ABM Solution Result ....................................................................................................... 78Activity-based Costing (ABC) Results .................................................................... 79Activity-based Management Strategy ...................................................................... 80

How the Solution was Developed .................................................................................... 80Supporting The Model Approach ............................................................................. 80Step 1: Defining the Project Scope ........................................................................... 81Step 2: Identifying Activities, Resources, and Measures ......................................... 81Step 3: Developing the Schematic ............................................................................ 82Step 4: Collecting Data and Rules ............................................................................ 87Step 5: Building the Model ...................................................................................... 95Step 6: Validating the Results ................................................................................ 101

Activity-Based Cost Analysis ........................................................................................ 105Step 7: Interpreting New Information .................................................................... 105

Activity-Based Management .......................................................................................... 111Step 8: Performing Activity-Based Management................................................... 111Calculating the Scenario ......................................................................................... 117Next Steps ............................................................................................................... 120

Chapter 6: Improving Economic Profit Case Study ........................... 121

Economic Profit Concepts.............................................................................................. 121Business Issue ................................................................................................................ 123Company Profile ............................................................................................................ 124

Product Lines .......................................................................................................... 124Strategy ................................................................................................................... 125

EP Solution Results ........................................................................................................ 126Business Modeling Strategy ................................................................................... 126

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How the Solution was Developed .................................................................................. 128Supporting The Model Approach ........................................................................... 128Step 1: Defining the Project Scope ......................................................................... 128Step 2: Identifying Activities, Resources, and Measures ....................................... 129Step 3: Developing the Schematic .......................................................................... 130Interpreting the OK Plastics’ Schematic ................................................................. 134Step 4: Collecting Data and Rules .......................................................................... 136Step 5: Build the Model .......................................................................................... 146Adding Changes to Model EP ................................................................................ 149Step 6: Validating the Results ................................................................................. 163

Activity-Based Cost Analysis ........................................................................................ 167Step 7: Interpreting New Information ..................................................................... 167

Activity-Based Management .......................................................................................... 172Step 8: Performing Activity-Based Management ................................................... 172Evaluating the Impact of New Process Technology on Economic Profit .............. 174Calculating the Scenario ......................................................................................... 177Next Steps ............................................................................................................... 178

Chapter 7: Next Steps ........................................................................................ 179

Appendix A: Concepts ....................................................................................... 181

Activity-Based Costing and Management ...................................................................... 181The Problem of Indirect Costs ................................................................................ 181Activity-Based Costing ........................................................................................... 182Process Modeling .................................................................................................... 182Activity-Based Management .................................................................................. 183

Solution .......................................................................................................................... 184

Index ............................................................................................................................ 185

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Preface

This guide introduces you to building Hyperion Business Modeling models and using them to solve business issues. It explains the Hyperion Business Modeling features and options and contains case studies that implement the model building method, The Model Approach®.

This preface includes the following topics:

● “Who Should Use This Guide” on page vii

● “Document Structure” on page viii

● “Conventions” on page ix

● “Related Documentation” on page x

● “Online Help” on page xi

● “Additional Support” on page xiv

Who Should Use This GuideThis guide is intended for developers of activity-based management models, activity-based costing project leaders, and managers who are looking for a solution to their business problems.

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Document StructureThis document contains the following information:

● Chapter 1, “Introduction,” provides an overview to the entire guide, including how to use the guide, the benefits of following the case studies, and a brief description of the enclosed case studies.

● Chapter 2, “Your Business Issues,” describes some of the financial and operational problems organizations commonly face in today’s business environment.

● Chapter 3, “The Model Approach,” describes the eight-step methodology for building models using Hyperion Business Modeling to solve common business problems.

● Chapter 4, “Product Profitability Case Study,” is a case study of a manufacturing company and how it uses The Model Approach and Hyperion Business Modeling to address product profitability issues.

● Chapter 5, “Customer Profitability Case Study,” is a case study of a service company and how it uses The Model Approach and Hyperion Business Modeling to address customer profitability issues.

● Chapter 6, “Improving Economic Profit Case Study,” is a case study demonstrating the application of Economic Profit (Economic Value Add or EVA) to evaluate proposed initiatives on the profitability of a manufacturing company.

● Chapter 7, “Next Steps,” directs you to sources of support and information to help you launch your own activity-based management project.

● Appendix A, “Concepts,” describes the underlying principles of the product.

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ConventionsThe following table shows the conventions used in this document:

Item Meaning

➤ Arrows indicate the beginning of a procedure that consists of sequential steps.

Bold Bold text indicates words or characters that you type exactly as they appear on the page. Bold in procedural steps highlights major interface elements.

CAPITAL LETTERS Capital letters denote commands and various IDs. (Example: CLEARBLOCK command)

Ctrl + 0 Keystroke combinations shown with the plus symbol (+) indicate that you should press the first key and hold it while you press the next key. Do not type the + symbol.

Courier italics Courier italic text indicates a variable field in command syntax. Substitute a value in place of the variable shown in Courier italics.

Ellipses (...) Ellipsis points indicate that text has been omitted from an example.

Example text Courier font indicates that the material shown is a code or syntax example.

Italics Document titles are shown in italics.

Mouse orientation This document provides examples and procedures using a right-handed mouse. If you use a left-handed mouse, adjust the procedures accordingly.

Menu options Options in menus are shown in the following format: Menu name > Menu command > Extended menu command

For example: File > Desktop > Accounts

n, x The variable n indicates that you must supply a generic number; the variable x indicates that you must supply a generic letter.

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Related DocumentationHyperion Solutions provides the following related documentation for this product:

● The Hyperion® Business Modeling Installation Checklist provides a high-level list of tasks required to install Hyperion Business Modeling. The checklist also supplies information regarding additional templates that are shipped with Hyperion Business Modeling, and identifies other available product-related tools and documentation.

● The Hyperion® Business Modeling New Features describes the new or enhanced features for this release.

● The Hyperion® Business Modeling Model Builder’s Guide explains the features and options of Hyperion Business Modeling, and contains the concepts, processes, procedures, formats, tasks, and examples that you need to use the software to build a model or enterprise model.

● The Hyperion® Business Modeling Results Analysis and Reports Guide discusses saving and analyzing reports, and contains an explanation of how to access calculated results and project information reports for models and enterprise models.

● The Hyperion® Business Modeling Solutions Guide provides information about building models and using them to solve business issues and maximize profitability. The guide explains the Hyperion Business Modeling features and options, and contains case studies that implement the model building method, The Model Approach®.

● The Hyperion® Business Modeling Hyperion Analyzer Views Guide explains how to view Hyperion® Business Modeling results using Hyperion® Analyzer.

● Hyperion® Business Modeling Database Tables Reference is a reference guide for Database Administrators that describes the Hyperion Business Modeling database schema.

All documentation for the software is available from the Hyperion Business Modeling Information Map. To access the Information Map, select Help > Information Map.

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Online HelpThe Hyperion Business Modeling Solutions Guide is available in an online PDF format, which can be used to view the guide online, or print the document, as outlined in the following procedures:

● “Viewing the Online Guide” on page xi

● “Printing the Online Guide” on page xiii

Viewing the Online GuideThe PDF version of the Hyperion Business Modeling Solutions Guide is available from the Information Map in the application.

➤ To display the online guide:

1. Select Help > Information Map from the main menu of the application.

The Hyperion Business Modeling Information Map is displayed.

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2. Double-click Solutions Guide.

The online PDF version of the Solutions Guide is displayed. The cover of the online manual is displayed in the right frame, and a list of all topics and sub-topics is presented in the Bookmarks tab in the left frame. The PDF version is fully hyperlinked and indexed to make it easy to find and jump to related topics.

3. In the Bookmarks tab, click the topic that you want to view. The first page of the selected section displays in the right frame.

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Printing the Online Guide➤ To print the guide or a range of pages:

1. Select Help > Information Map from the main menu of the application.

The Hyperion Business Modeling Information Map is displayed.

2. Double-click Solutions Guide on the Information Map.

The PDF version of the guide is displayed.

3. Select File > Print.

The Print window displays.

4. Select your requirements for the print job, such as the portion of the document that you want to print, whether you want to print double-sided, and so on.

5. Click OK to submit the print job.

Tip: Screen shots are a low resolution image type. If the printed screen shots are unreadable and you are using a non-PostScript printer, upgrade to an Acrobat 4.0 viewer. If you do not have Adobe Acrobat Reader, you can download the most current version free from Adobe’s Web site at www.adobe.com.

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Additional SupportIn addition to providing the documentation and online help, Hyperion offers the following support for product information.

DocumentationA complete set of documentation is included in PDF or HTML format, or in the form of online help as part of the installed product. For more information on how to order printed documentation, visit our Web site at http://www.hyperion.com, call Customer Service at 877-901-4975, or contact your local support office.

Education ServicesHyperion offers a variety of training options, including instructor-led training, custom training, and eTraining. This education covers all Hyperion applications and technologies and is geared to administrators, end users, and information systems (IS) professionals.

Instructor-led training is delivered in formats and in locations suited to Hyperion’s diverse, global customers. Hyperion Authorized Training Centers are certified to deliver courses developed by Hyperion. Custom Education Services—training on the configured and tailored applications that employees use on the job—is another option to enhance user productivity and to ensure smooth day-to-day operations. eTraining—including computer-based training, Web-based training, and interactive Virtual Classroom training—provides a cost-effective means of giving users a hands-on introduction to product features and functions. Computer-based training (CBT) and Web-based training (WBT) provide high-quality, self-paced training at the user’s convenience, regardless of location.

For more information about training, contact your Regional Education Manager or visit our Web site at http://www.hyperion.com to see a list of all training classes.

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Consulting ServicesHyperion Consulting Services assists customers in maximizing the use of, and the return on investment in, Hyperion products. Experienced Hyperion consultants and Hyperion Alliance Partners assist organizations in tailoring solutions to their particular requirements, such as reporting, analysis, modeling, and planning. Specific services include implementation consulting, custom business solutions, data integration, and technical consulting. Additionally, Hyperion offers a variety of Services Packages and Reviews.

For more information about Consulting Services, Services Packages, and Reviews, as well as the services offered by Alliance Partners, contact your local consulting services representative or visit our Web site at http://www.hyperion.com to see a list of all Hyperion Alliance Partners.

Technical SupportHyperion provides telephone and Web-based support to ensure that clients resolve product issues quickly and accurately. This support is available for all Hyperion products at no additional cost to clients with a current maintenance agreement.

● For Hyperion Solutions Customer Service, call 877-901-4975. A complete list of all local Customer Service numbers is available on the Information Map under Contacts.

● For Web-based support or to see complete information on available support options, visit our Web site at http://www.hyperion.com.

When standard support does not meet specific requirements, a Hyperion support package that meets your needs can usually be designed. For more information, contact your local Customer Service office.

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Chapter

1

Hyperion Business Mod

Introduction

This guide demonstrates how Hyperion® Business Modeling can provide solutions to the challenges facing your business. Realistic case studies illustrate and address contemporary business issues using activity-based management models. Each study gives the vital statistics used to build the model in the case and describes how the model is built using a proven, industry-tested methodology, The Model Approach® (TMA).

The following sections introduce you to the Solutions Guide, describe how to use the guide to its fullest advantage, and what to expect from the case studies inside:

● “What You Gain” on page 17

● “Before You Start” on page 18

● “Using the Case Studies” on page 18

● “The Case Studies” on page 19

What You GainAt the end of a case study, you will understand the following concepts:

● The typical business issues Hyperion Business Modeling can address

● The kinds of solutions Hyperion Business Modeling can provide

● The process of developing a model using Hyperion Business Modeling

● The value of scenario-playing in planning the future of your business

● The ability to apply the concepts of Economic Profit to the models that you create

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Introduction

Before You StartFamiliarity with some common business challenges will help you better understand the problems in the case studies and their solutions.

● Business Issues

Read Chapter 2, “Your Business Issues,” to grasp the kinds of situations that businesses are frequently forced to address, such as operational capacities, profitability, market growth, and cost control, to name a few.

● The Model Approach®

The Model Approach (TMA) is an eight-step methodology for constructing models using Hyperion Business Modeling. It shows you how to build effective models, use results to support decisions, and play scenarios using the program.

For an introduction to TMA, see Chapter 3, “The Model Approach.”

Using the Case StudiesThe case studies represent a subset of Hyperion Business Modeling’s capabilities. We encourage you to take your time to understand the details of the models, but an in-depth study of the data provided is not essential to understand the management value of the software.

You will learn more from the case studies if you understand how the studies are organized.

How the Case Studies are OrganizedEach case study is presented in the following sections:

● Summary: Brief statements of the business issue and solution

● Business Issue: A brief profile of the company and a description of its business challenges

● Business Modeling Solution Result: A description of how activity-based costing located the real problem and how activity-based management found the solution

● How the Solution was Developed: A detailed description of how the solution was found using TMA

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Introduction

1
How to Use the Case Studies
● Highlight the case study that most interests you and follow its story to see how the eight steps outlined by TMA are applied.

● Using the software, play the scenarios described in the case study. It takes about 45 minutes to work through a case study.

● Use the scenario tutorial to evaluate suggested management and operational strategies. Or, test some of your own.

The Case StudiesEach case study contains a company description, an issue, and a management resolution:

Case Study Business Issue Description

Manufacturing:OK Plastics

Product Profitability

Competition for one of OK Plastics’s product lines calls for a review of product and pricing mix.

Service:OK Service Bureau

Customer Profitability

OK Service Bureau management wants to understand the effects of increased demand for its billing services and aggressive competition.

Manufacturing:OK Plastics

Economic Profit Management needs to evaluate the impact that purchasing new process technology will have on the organization.

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Chapter

2


Your Business Issues

Hyperion Business Modeling can help you address important challenges faced by most industries today, such as:

● “Managing Capacities and Constraints” on page 21

● “Measuring Customer and Product Profitability” on page 22

● “Controlling Costs” on page 22

● “Justifying Investment and Re-engineering” on page 23

● “Planning Process Improvements” on page 23

● “Introducing a New Product” on page 24

See “Where to Find the Case Studies” on page 24 to locate where each of the previous business issues are addressed in the case studies.

Managing Capacities and ConstraintsTo respond to increased demand, companies must know where their capacity limits exist, what the limits are, and options for improving capacity. Capacity planning helps managers foresee the need for replacing or improving their human and physical resources. It also helps them plan for outsourcing on a temporary or seasonal basis when internal improvements and expansion are not feasible.

Using Hyperion Business Modeling, you can efficiently maximize revenues, avoid bottlenecks from increased workloads, and plan for demand variations.



Measuring Customer and Product ProfitabilityA large part of business success is knowing your customers and product lines. How profitable are they? Could they be more profitable? Knowing the answers enables you to manage your customers, products, and, as a result, your operations and your profits.

As both a process modeling and costing application, Hyperion Business Modeling can:

● Calculate customer and product revenues, costs, and profits from the activities and resources of your operation.

● Identify process costs and cost drivers on activities that are associated with products and customers.

● Make direct financial comparisons among customers or products, uncovering weak product lines or customers who cost more than they are worth to service.

Hyperion Business Modeling can also model profitability by region, channel, and facility.

Controlling CostsEffective cost control relies on knowing what your true costs are and what part of your business operation will be affected by resource and supply price increases. Modeling your business and testing cost initiatives can reveal savings in unexpected places.

Hyperion Business Modeling lets you model your business and test cost strategies to support your cost control initiatives.



2

Justifying Investment and Re-engineeringManagers must weigh the costs and benefits of increasing capital and staff before making the costly decision to proceed. Modeling the changes can help make that decision.

Similarly, modeling the changes makes Economic Profit (EP) analysis possible. Economic Profit (also known as Economic Value Add or EVA) accounts for the cost of capital for investment and the returns from that investment, thus amortizing the expense over the period of time in which the benefits are reaped. EP is also associated with shareholder wealth. If your business earns a rate of return higher than the cost of capital, the value of the company increases.

You can use Hyperion Business Modeling to take a longer view of an investment, showing bottom-line impacts beyond the investment year. Applying economic profit formulas to existing models enables you to evaluate business decisions in terms of creating or keeping value for the company, based on the capital costs involved in implementing business strategies.

Planning Process ImprovementsActivity-based management can uncover the hidden costs of two kinds of activities:

● Those that do not add value to either the company or its customers

● Those that could be carried out with greater efficiency

Process improvement initiatives, performance innovations, and the introduction of new products and services can make companies more responsive to market demands and create the conditions for long-term growth and profitability.

With Hyperion Business Modeling, you can develop and test multiple scenarios without risk. You can compare potential performance improvements and evaluate the operational and financial impact of various production and management strategies by making changes to:

● The model’s data (for example, costs, revenues, capacities)

● The model itself (for example, adding a resource)



Introducing a New ProductHyperion Business Modeling can predict the ripple effect of introducing new products throughout an organization. A modestly profitable product might strain production capacities and inhibit expanding production of a more profitable product. Or it might, in fact, increase overall profitability by sharing more of the company’s overhead costs.

Where to Find the Case StudiesThe check marks in the following table show which business issues are addressed in each of the case studies in this guide:

Business Issue

Manufacturing:OK PlasticsChapter 4

Service:OK Service BureauChapter 5

Economic Profit:OK PlasticsChapter 6

Managing Capacities and Constraints ✔ ✔ ✔

Measuring Customer and Product Profitability ✔ ✔ ✔

Controlling Costs ✔ ✔Justifying Investment and Re-engineering (Economic Profit)

✔ ✔

Introducing a New Product ✔


Chapter

3


The Model Approach

The Model Approach® (TMA) is an established eight-step process used to implement an activity-based management project. Successful activity-based management projects have been completed in manufacturing, service, finance, health care, and other sectors.

The steps of the process are briefly described in this chapter:

● “Step 1: Defining the Project Scope” on page 26

● “Step 2: Identifying Activities, Resources, and Measures” on page 26

● “Step 3: Developing the Schematic” on page 27

● “Step 4: Collecting Data and Rules” on page 28

● “Step 5: Building the Model” on page 29

● “Step 6: Validating the Results” on page 29

● “Step 7: Interpreting the New Activity-Based Information” on page 30

● “Step 8: Performing Activity-Based Management” on page 30


The Model Approach

Step 1: Defining the Project ScopeDefine the parameters of your project by identifying:

● The area or areas of the organization to be modeled

● The major services or products that this area provides (in other words, the demands)

● The length of time and number of people needed to complete the project

Step 2: Identifying Activities, Resources, and Measures

To find out what processes and resources the organization uses to deliver services or products, this step requires you to conduct interviews and activity analysis to identify:

● The major activities of the area or areas being studied

● The resources needed to perform these activities

● An appropriate unit to measure each activity and resource


The Model Approach

3

Step 3: Developing the SchematicYou create a schematic or graphical representation of the activities and resources identified in Step 2. This schematic depicts and clarifies the relationships among the demands, activities, and resources of the project area.

Schematic SymbolsThe schematic uses eight symbols (boxes and their connectors) to represent the components of the area being studied.

Supply BoxesThese symbols represent supply of a variable resource (for example, raw materials).

Resource BoxesResource boxes represent resources that are consumed in fixed amounts within a time period. They may be resources whose costs are committed for the time period being modeled (such as a machine or a labor pool). Fixed resources have period costs associated with them.

Activity BoxesThese symbols represent activities performed to support the delivery of the area’s product or services (such as order processing, assembling products, supervising employees). Activities do not have costs associated with them.

Route BoxesThese symbols represent a choice of inputs to an activity or final outputs, such as a product or service. For example, you can choose regular or overtime labor hours to support an activity and decide how much of each you use.


The Model Approach

Summary BoxesThese symbols group activities and resources that are always used together.

Inventory BoxesThese symbols are used to carry items (and their costs) forward from one period to the next. For example, finished goods can be assembled in one period and sold in another period.

Demand BoxesThese symbols represent the outputs of the area of study. For example, producing a manufactured product, or providing an internal or external service.

Connectors

Although not modeling symbols, connectors are used to simplify the presentation of the schematic. A connector is used to show where a link (in other words, a relationship) exists between boxes in the schematic.

Step 4: Collecting Data and RulesDuring this step, you gather the relevant operational and financial data. The schematic developed in Step 3 serves as the roadmap to identify the data required.

Required data includes:

● Demand volumes: The amount of output produced for the period of the model

● Factors: For example, the amount of a resource that is required to generate a unit of activity

● Capacities: The maximum units of output actually available from a resource for the time period of the model

● Financial Data: Costs and/or revenues that are associated with a resource


The Model Approach

3

Step 5: Building the ModelUsing the schematic developed in Step 3 and the data collected in Step 4, you create a model that includes the following types of information:

The software confirms that the data used to define the model conforms to the rules of process model building. Once verified, the model can be used to produce operational and financial results.

Step 6: Validating the ResultsAfter the model is verified for logical flow, the model must be validated for accuracy. Operational validation is done before financial validation, because the financial results are based on the operational flow.

● Operational Validation: Operational results generated by the model reflect the historical experience of the project area for the period being modeled.

● Financial Validation: After any operational inconsistencies in the model are corrected, total costs and revenue generated by the model are compared to the actual experience of the project area. Financial validation ensures consistency.

Type of Information Includes

Project Information Model title

Time period

Global Data Units of measure

Variables

Revenue and cost categories

Boxes (graphical symbols) Name and Box ID (identifier)

Unit of measure

Operational and financial data as identified on the schematic


The Model Approach

Step 7: Interpreting the New Activity-Based Information

The validated model provides new information about the project area.

● New Operational Information: The model provides the utilization rates for resources. These rates help identify inefficiencies, bottlenecks, and idle capacity issues.

● New Financial Information: You can use the model to cost products, services, or any activity in the project area. The results can reveal hidden losses and profits.

● Improvement Opportunities: Combining financial and operational data enables you to identify non-value added activities and to prioritize areas for process improvement.

Step 8: Performing Activity-Based ManagementAfter the model is verified and reviewed, you can use it to evaluate what-if scenarios. These scenarios let you evaluate different possibilities within the project area before implementing them.

Typical uses of what-if scenario-playing include:

● Preparing activity-based budgets

● Evaluating opportunities for improving productivity and reducing costs

● Identifying ways to improve customer, product, and channel profitabilities

● Testing potential scenarios and evaluating their consequences


Chapter

4


Product Profitability Case Study

OK Plastics Inc. took operational, financial, and marketing initiatives to reverse the sagging profitability of its three product lines. Using The Model Approach, the firm uncovered cost, revenue, and profit distortions created by its standard accounting system.

OK Plastics introduced activity-based management techniques to target greater efficiencies, plan marketing strategies, and shift and expand existing resources. One scenario suggested a 240% increase in overall profitability, pointing the company to a more promising direction.

The case study is broken down into the following sections:

● “Business Issue” on page 32

● “Activity Based Management Solution Result” on page 33

● “How the Solution was Developed” on page 34

– “Step 1: Defining the Project Scope” on page 35

– “Step 2: Identifying Activities, Resources, and Measures” on page 35

– “Step 3: Developing the Schematic” on page 36

– “Step 4: Collecting Data and Rules” on page 42

– “Step 5: Building the Model” on page 51

– “Step 6: Validating the Results” on page 55

● “Activity-Based Cost Analysis” on page 60

– “Step 7: Interpreting New Information” on page 60

● “Activity-Based Management” on page 64

– “Step 8: Performing Activity-Based Management” on page 64



Business IssueThe OK Plastics company manufactures three lines of products:

● Product A: High volume, simple products produced in large batches

● Product B: Medium volume, more complex products

● Product C: Low volume, small order, highly complex products

OK Plastics has lost total market share. Product analysis reveals that stagnant growth among some products cannot compensate for the market share decline in others.

In response to this problem, OK Plastics has ordered the following business studies for each of its product lines:

● Marketing Analysis

● Cost Analysis

Marketing AnalysisA summary of the Marketing Department’s report on the three product lines appears below:

Product Line A● The market share for Product Line A dropped from 50% to 25% over a

two-year period. A major competitor has consistently priced its comparable products 5% below the Product Line A equivalent.

● Sales volumes for Product Line A will continue to decline unless a lower price can be offered.

● Current product profitability analysis shows that the company cannot afford to drop the price for Product Line A.

Product Line B● OK Plastics maintained a consistent market share of 15% over the past two

years, experiencing only minor fluctuations in a relatively stable economy.

● Not enough product cost data exists to make price changes.



4

Product Line C● A high profit margin in this product line gives OK Plastics room to increase

sales volumes and market share through a 10% price discount.

● One study suggests that the market is so elastic that such a price discount could double sales.

Cost AnalysisUsing standard costing, the Accounting Department prepared a profitability analysis by product line using the current year’s data.

Activity Based Management Solution ResultThe activity-based management solution begins with determining the activity-based costs of OK Plastics and continues with a what-if scenario played in the OK Plastics model. These scenarios point the company in a more profitable direction.

Activity-based Costing (ABC) ResultsThe activity-based management project revealed that Product Line C was undercosted. Costs that should have been charged to Product Line C were, in fact, carried by the other product lines, making them appear less profitable than they really were. So, the pricing strategies suggested by the standard costing method seemed now irrelevant with more accurate costing methods.

Current Year Product Line A Product Line B Product Line C

Volume (000) pieces 1000 500 150

Selling price/piece $2.450 $3.550 $5.900

Total cost/piece $2.269 $3.163 $4.501

Income/piece $0.181 $0.387 $1.399

Total profit ($000) $181 $193 $209



The table below compares standard costs to activity-based costs (ABC) for all product lines:

How the Solution was DevelopedThis section describes the journey taken by the activity-based management team using The Model Approach as its map. You will see how the solution unfolds from defining the project scope in step 1 to revealing new possibilities in step 8.

Supporting The Model ApproachThe management in OK Plastics has given full support to a multi-disciplinary team assigned to develop an activity-based management model using The Model Approach. See Chapter 3, “The Model Approach,” for a description of the eight-step methodology.

Before starting the project, the team secured management’s commitment to providing project resources, including staff time, to the project. Team members also attended The Model Approach workshop to understand the essential concepts of process modeling and acquire practical software training for carrying out the project successfully.

Current Year Product Line A Product Line B Product Line C

Standard ABC Standard ABC Standard ABC

Volume 1000 1000 500 500 150 150

Price/piece $2.450 $2.450 $3.550 $3.550 $5.900 $5.900

Cost/piece $2.269 $1.891 $3.163 $2.854 $4.501 $8.064

Income/piece $0.181 $0.559 $0.387 $0.696 $1.399 $-2.164

Total Profit $181.00 $559.48 $193.00 $348.13 $209.00 -$324.54



4

Step 1: Defining the Project ScopeThe OK Plastics’s activity-based management team performed the following tasks for Step 1 of The Model Approach:

1. Identify the areas of study.

2. Select the model time period.

3. Determine the project demands.

4. Identify the activities required to complete the project.

5. Identify available resources to assist in the project.

6. Establish the time frame to complete the project.

7. Find a reliable reporting mechanism for distributing and analyzing the results.

For this activity-based costing study, the project team decided to focus on the cost and profitability of the products produced by OK Plastics. Therefore, the three product lines became the model’s demands.

The study decided that the model should take a macro view of the organization and include all the operations and resources of the company. The multi-functional team believes it can obtain meaningful results in six weeks.

Step 2: Identifying Activities, Resources, and MeasuresThe team identified the resources, associated activities, and units of measure required to deliver the services or products identified by the project scope.

After interviewing the appropriate representatives from operations, the team identified the following activities, resources, and units of measure:

Activities/Resources Unit of Measure

Operators Operator Hours (OperHrs)

Maintenance Mechanics Mechanic Hours (MechHrs)

Supervision People (#People)

Building (Occupancy Costs) Square Feet (SqFt)

Molding Machines Machine Hours (MchHrs)

Raw Materials (Resin & Additives) Thousand Pieces (Pcs [000])



Step 3: Developing the SchematicAt this stage, the team prepared an operational schematic, a diagram which represents the interrelationships among an organization’s resources, activities, and demands.

The following pages show the operational schematic developed for OK Plastics from the findings of Step 2. For the schematic containing all the model data up through Step 3, see “OK Plastics Schematic 1” on page 39.

A description of how to interpret the model follows the schematic.

Energy Megawatt Hours (MWh)

Machine Supplies Machine Hours (MchHrs)

Molding Process Machine Hours (MchHrs)

Set Ups Setups (#Setups)

Sales and Marketing Calls (#Calls)

Order Processing Orders (#Orders)

Computer Services Orders (#Orders)

Advertising Ads (#Ads)




4

OK Plastics Schematic Box DefinitionsEach box in the schematic is assigned a unique box identifier and name. The following boxes are used in the OK Plastics schematic to represent the demands, activities, and resources identified in Step 2:

Demand Boxes

Box ID Box Name Description

DEMA Demand A Demand for product line A

DEMB Demand B Demand for product line B

DEMC Demand C Demand for product line C

Activity Boxes


MLDPRO Molding Process Process of manufacturing pieces

ORDPRO Order Processing Activities for processing orders

SALMKT Sales & Marketing Activities for sales and marketing

SETUP Setting up Activities to set up machines



Resource Boxes (Fixed)


MAINMCH Maintenance Mechanics

People keeping machines in good repair

MCAP Machinery Capital Charge

Capital charges for machinery

MLDMC Molding Machines Machines for product manufacturing

OCCY Occupancy OK Plastics’s building facility

OPRL Operators People handling the machines

ORDDEPT Order Processing Department

Resources for processing orders

SPVN Supervision All supervisors

Supply Boxes (Variable)


ADVT Advertising Advertising for product lines A, B, and C

COMP Computer Computers used by order processing

ENERGY Energy Energy to run the machines

MTLA Material A Raw materials required for product lines A, B, and C

MTLB Material B

MTLC Material C

OPEROT Operator Overtime Overtime hours performed by operators

SUPL Machine Supplies Consumable supplies for the molding process



4

MLDPRO SLMKT

OPRLOperators

Oper

SUPLMachine

MLDPROMolding

Mch

MchMLD

OCCY

Sq

MLDMCMolding

MachinesMchH

COMP

#Orders

SALMKTSales &

#Call #Orders

ORDPROOrder

ORDPSPVN

Supervision

#Peop

ADVTAdvertising

#Ads

MechHrs

MAINMCH

SETUP SLMKTORDPRO ADVT

ENERGYEnergy

MWh

ENER

SETUP

#SetSET

MTLC

Pcs(000)

PRSCProduction

SASCSales & Admin

DEMC v=

MTLA

Pcs(000)

v=

Pcs(000)

v=

SETUP ORDPROADVT

MLD

SLM

ENER ADV

ENER

MLD

MLDP

PRSAProduction

SASASales & Admin

PRSBProduction

MTLB

ADVTSLMKTORDPROMLDP SET

SASBSales & Admin

MLDP

c=

c=

c=

c=

c=

$

c=

$

$

$

$

$

$

c=

c=

$

$$ $

$

$$

$

$

$

$ $

DEMBDEMA

OK Plastics Schematic 1

SALDEPTSales &

#Call

$ c=

OPEROTOperator

Oper

$ c=

OPERCHOperator Choice

Oper

$ c=ORDDEPT

Order

#Orders

MCAPMachinery

Capital MchH

MCA

c=$



Interpreting the OK Plastics SchematicSince the requirements for activities are demand driven, the operational results of the OK Plastics model will be calculated using a bottom-up approach. The schematic illustrates the relationships among the resources and activities required to support the production of, for example, Product Line A.

At the bottom of the schematic, you find the symbol for Demand A (DEMA) which represents the total of all activities and resources required for the production of Product Line A.

Follow the flow upwards, as detailed on the following table. The logic of the model reflects the logic of OK Plastics’s operations. Activities and resources are involved in the creation of products. As you move up through the schematic, you see how the activities and resources draw from others in the organization.

Follow the Flow Upwards

Box Requires Box ID

Demand A (DEMA) Production Support

Sales & Administration

PRSA

SASA

Production Summary A (PRSA)

Molding Processing

Raw Material: Product Line A

Setting up activities

Machinery Capital Charges

MLDPRO

MTLA

SETUP

MCAP

Sales & Administration (SASA)

Sales & Marketing

Order Processing

Advertising

SALMKT

ORDPRO

ADVT

Molding Process (MLDPRO) Machine Supplies

Molding Machine

Energy

Operator Choice

Maintenance Mechanic

SUPL

MLDMC

ENERGY

OPERCH

MAINMCH

Setting up (SETUP) Maintenance Mechanics

Energy

Molding Machine

MAINMCH

ENERGY

MLDMC

Operators (OPRL) Supervision SPVN



4
The schematic can be used similarly to describe the activities and resources required to support product lines B and C.
Mechanics (MAINMCH) Supervision SPVN

Order Processing (ORDPRO) Order Processing Department ORDDEPT

Molding Machines (MLDMC)

Building space OCCY

Sales & Marketing (SALMKT)

Sales & Marketing Department SALDEPT

Follow the Flow Upwards (cont’d)

Box Requires Box ID



Step 4: Collecting Data and RulesThe team gathered the relevant operational and financial data needed to complete the model.

Through a process of interviews with OK Plastics staff, the team gathered data on the processes and activities. It is summarized in the following statements:

Note: Not all data items in the model are contained in the above tables.

Report Content

OK Plastics Income Statement

An income statement for the current year

Operational and Financial Data

Detailed information about each product line

Costs of Services and Consumables

Costs of internal and external variable supplies

Resource Availability and Utilization

Resource availability and utilization for the current year

Variable Data A description of the variables used in the model

Financial Accounts A list of all revenue and cost categories used in the model.

Fixed Resource Costs Resource financial, volume, and unit data

Occupancy Data Square footage use of building by resource



4


Revenue

Sales of Product Line A $2,450

Sales of Product Line B 1,775

Sales of Product Line C 885

Total Revenue $5110

Cost of Sales

Raw Materials $1,865

Operators 690

Shared Production Costs

Maintenance Mechanics $60

Supervision 90

Machine Depreciation 390

Production Overhead 669

$3764

Gross Margin $1,346

Selling & Administration Expenses

Sales & Marketing $190

Office Salaries 120

Rent & Insurance 270

Advertising 85

Computer Costs 73

Other Expenses 25

Total SG & A $763

Income Before Taxes $583



Operational and Financial DataThese spreadsheets contain detailed operational and financial data gathered by the company for each member of the three product lines. Each product line consists of several different products of varying units and resource requirements. A summary of the data to be used for each of the product lines in the activity-based costing model appears below:

Table 1: Product Analysis Detail for Product A

Product Code

Sales Units (000)

Sales Revenue $(000)

Material Cost $(000)

Operator Hours

Machine Hours Set Ups Orders

A110 500 1181 499 8970 950 5 15

A120 200 498 210 3635 394 4 8

A130 120 304 131 2189 252 3 7

A140 80 204 92 1476 172 4 8

A150 50 129 59 950 115 5 6

A160 50 134 59 881 117 4 6

Total A 1000 2450 1050 18200 2000 25 50

Unit A 2.45 1.05 18.20 2.00 .025 .050

Table 2: Product Analysis Detail for Product B

Product Code

Sales Units (000)



Operator Hours


B201 100 331 112 3033 330 5 16

B202 70 242 79 2174 238 4 12

B203 50 174 57 1560 173 3 10

B204 50 175 58 1565 175 6 8

B205 40 142 46 1256 140 6 6

B206 40 144 46 1264 140 6 7

B207 30 110 35 948 108 7 8



4

B208 30 113 35 959 110 6 6

B209 25 94 30 806 93 6 6

B210 25 96 30 817 93 7 7

B211 20 77 24 699 76 7 7

B212 20 78 24 720 76 7 7

Total B 500 1775 575 15800 1750 70 100

Unit B 3.55 1.15 31.6 3.50 .140 .20

Table 3: Product Analysis Detail for Product C

Product Code

Sales Units (000)



Operator Hours


C301 23 122 35 938 104 5 18

C302 16 86 25 660 74 4 12

C303 12 68 19 501 56 3 15

C304 10 57 16 423 47 4 14

C305 8 47 13 342 38 6 13

C306 7 42 11 302 34 6 15

C307 7 42 11 302 34 5 16

C308 7 43 11 303 34 6 13

C309 6 36 10 259 29 6 14

C310 6 38 10 259 29 5 17

C311 6 38 10 259 29 5 15

C312 5 31 8 219 25 5 11

C313 5 32 8 221 25 4 12

C314 5 32 8 226 25 3 14

Table 2: Product Analysis Detail for Product B (cont’d)

Product Code

Sales Units (000)



Operator Hours




C315 5 32 8 229 25 4 12

C316 4 26 7 183 20 3 11

C317 4 26 7 183 20 6 8

C318 4 26 7 184 21 4 12

C319 3 19 5 138 16 6 10

C320 2 13 4 91 11 7 8

C321 1 6 2 47 5 6 6

C322 1 6 2 47 5 6 10

C323 1 6 2 48 6 7 7

C324 1 6 2 49 6 7 8

C325 1 5 2 49 6 7 9

Total C 150 885 240 6460 720 130 300

Unit C 5.90 1.60 43.07 4.80 0.867 2.0

Table 4: Product Analysis Detail for All Products

Product Code

Sales Units (000)


Material Costs $(000)

Operator Hours


Total 1650 5110 1865 40460 4470 225 450

Table 3: Product Analysis Detail for Product C (cont’d)

Product Code

Sales Units (000)



Operator Hours




4

Costs of Services and ConsumablesThe team also collected the following on internal and external costs:


Occupancy Data

Service Cost

Advertising $8.5 per advertisement

Computers $0.05 per order

Energy $0.0048 per megawatt hour (MWh)

Machine Supplies $0.025 per machine hour

Material C $1.60 per Product Line C piece

Material A $1.05 per Product Line A piece

Material B $1.15 per Product Line B piece

ResourceMax. Availability/Year

Used Last Year Utilization%

Maintenance Mechanics 3200 hours 2876.3 90

Molding Machines 5928 hours 5595.25 94

Occupancy 100,000 sq. ft. 100,000 100

Operators 45,000 hours 40,460 89

Occupancy Square Feet

Molding Machines 60,000

Sales and Marketing 15,000

Order Processing 25,000

Total 100,000



Financial Accounts

Number Name Number Name

10 Revenue from Product A 600 Occupancy Costs

20 Revenue from Product B 610 Rent & Insurance

30 Revenue from Product C 700 Selling/Administration Expense

100 Cost of Sales 710 Order Processing Salaries

101 Raw Materials 720 Sales/Marketing Salaries

102 Operators 725 Office Supplies Costs

500 Shared Production Costs 750 Computer Costs

510 Maintenance Mechanics 760 Advertising

520 Supervision 790 Other Expenses

550 Machine Depreciation

560 Machine Supplies

570 Energy



4

Fixed Resource CostsThe financial value is the user-assigned value, multiplied by the appropriate variable.

Variable DataTo make the model more flexible, some of the data collected is defined in the model as variables. For another operator, you change the variable.

Resource Financial CategoryFinancial Value Variable

Maintenance Mechanics

Maintenance Mechanics Salaries

$30.00 #mnt

Molding Machines Machine Depreciation $130.00 #mch

Occupancy Rent and Insurance $675.00

Operators Operator Salaries $22.30 #opr

Order Processing Computer Costs $50.50

Order Processing Salaries $24.00 #ord

Other Expenses $5.00 #ord

Sales & Marketing Sales & Marketing Salaries $23.75 #sal

Supervision Supervisor Salaries $45.00 #spv

Variable Represents Value

efmc Machine efficiency rate 0.95

#mch Number of machines 3

#mnt Number of maintenance staff 2

#opr Number of operators 30

#ord Number of order processors 5

#sal Number of sales people 8

#sft Number of shifts 1

#spv Number of supervisors 2



MLDPRO SLMKT

OPRLOperators

OperHrs

SUPLMachine

MLDPROMolding Process

MchHr

MchHrMLDMC

OCCYOccupancy

SqFt

MLDMCMolding

Machines

MchHrs

COMPComputer

#Order

SLMKTSales &

Marketing

#Calls

#Orders

ORDPROOrder Processing

ORDPRO

SPVNSupervision

#People

ADVTAdvertising

#Ads

MechHrs


SETUP SLMKTORDPRO

ADVT

ENERGYEnergy

MWh

ENERGY

SETUP Setting up

#SetupsSETUP

MTLCMaterial C

Pcs(000)

PRSCProduction Summary C

SASCSales & Admin

Summary C

DEMCDemand Cv=150 pcs (000)

MTLAMaterial A

Pcs(000)

v=1000 pcs (000)

Pcs(000)

v=500 pcs (000)

SETUPORDPRO

ADVT

MLDM

SLMK

ENERGY

ADVT

ENERGY

MLDMC

MLDPRO

PRSAProduction Summary A

SASASales & Admin

Summary A

PRSBProduction Summary B

MTLBMaterial B

ADVTSLMKTORDPRO

MLDPRO SETUP

SASBSales & Admin

Summary B

MLDPRO

c=

c=f 2080*#mch*#sft*efmc

610 $675

550 $f(130*mch)

DEMBDemand B

DEMADemand A


MCAPMachinery

Capital

MCAP MCAP MCAP

MCAP

MchHrs

SALDEPTSales &

Marketing

#Calls

OPEROTOperator

OperHrs

$ c=


OperHr

ORDDEPTOrder

Processing#Order

cf=60,000702 23.75*#sal

f=.867 f=10 f=2 cf=8

101 $1.6101 $1.15101 $1.05

10 ƒ $2.45 20 ƒ $3.55 30 ƒ $5.9

f=4.8 f=.1

560 $.025

f=5 f=15.75

f=9

f=10f=6.3 f=.14

510 $ƒ(30*#mnt) c=ƒ(1600*#mnt)

c=ƒ(1500*#opr)

102 $ƒ(23*#opr)

cf=ƒ(1*#opr)

570 $.0048

760 $8.5

520 $ƒ(45*#spv)c=ƒ(20*#spv)

720 $ƒ(23.75*#sal) c=ƒ(250*#sal)

cf=15,000c=ƒ(110*#o

750 $50.5710 $ƒ(24*#ord)

790 $ƒ(5*#ord)

750 $.05

cf=



4

Step 5: Building the ModelThe team created a computer-based model using the schematic from Step 3 and the data collected in Step 4. The operational values and financial amounts have been applied to the boxes in Schematic 2, including factors, capacities, financial categories, and so on.

This section reviews some of the components in the pre-calculated OK Plastics model as built by the activity-based management team. The next three TMA steps discuss the model results.

OK Plastics Product Profitability ModelIf you have not done so, install and start the Hyperion Business Modeling software.

➤ To open the OK Plastics Product Profitability Model:

1. Click Project > Open to display the Open Project dialog.

2. Ensure the Local Storage Area folder is selected in the Containers frame, and double-click okplastics. The OK Plastics Product Profitability model opens.

Display Window: Schematic and Detail views

Edit Window

Toolbar

Project Window

WorkspaceTabs



Following is a description of the model details in the workspace areas:

● The Projects & Time tab contains the model name, time period, and any saved scenarios.

The Building Blocks tab in the Project window lists the model’s boxes by type. In the Edit window, details for a selected box are displayed, including:

● Box ID

● Box Type and Name

● Unit of Measure

Depending on the type of box you selected, you can scroll to view some of the following frames that might also be available:

● Capacity

● Financial category data

● Input and output links

● Volume

● Route policy

● Notes

● Tags

The Hyperion Business Modeling Model Builder’s Guide contains information about global data, and model components.

● The Global Data tab in the Project window shows all the Units of Measure, Financial Categories, and Variables used in the model.

● The Display window contains a high-level, or schematic, view of the model and a box level Detail view. A third tab offers the Flow View for a selected box.

● In the Schematic view, you create the model by adding boxes and building links between them.

● The Toolbar contains buttons to calculate the model, save changes, open existing models, and create new ones.

● From the Toolbar, you can select the EP View button or the Regular

View button to toggle between the two views.



4

● On the right side of the Toolbar, you can navigate to report, results and print workspaces:

● The Reports tab opens a workspace of preformatted model and results reports that provide project information and data from selected boxes as well as the entire model.

● The Results tab opens a workspace where you can create model results tables. You can display cost, net cost, net profit, and utilization results by box type and specific boxes.

Note: The Results button is activated only after you have calculated the model.

● The Print tab takes you to a workspace where you can print single and multiple copies of your model data and results.

Reviewing a Resource BoxA resource box shows the kinds of data used to create a model using Hyperion Business Modeling.

➤ To review a resource box:

1. From the Model workspace, select the Detail tab to view individual boxes and the data associated with them.



2. Click the Operators (OPRL) resource box in the Building Blocks tab to view the units, capacities, and financial data attached to operators performing the molding processes for all three product lines.

The following characteristics can be viewed on the Operators resource box:

● The input link from the SPVN box shows that the supervisors manage 30 operators.

● Operators’ hours pass to the Operator Choice (OPERCH).

● Operators’ wages are determined by the Financial Category, 102 Operators. To see the breakdown of the financial total, wages formula, click the Financial Total button. To see the wages formula, click the Formula button in the Financial pane of the Edit window. Wages are calculated by the number of operators (#opr) multiplied by $22.30.

● The Capacity label on the right side of the box shows a total Operators capacity of 45000 hours. When the model is calculated, the value for A= represents the actual number of hours used; the value for U= represents the utilization percentage of the total capacity.



4

Reviewing a Demand Box

➤ To review a demand box:

1. From the Model workspace, select the Detail tab to view individual boxes and the data associated with them.

2. Click DEMA in the Building Blocks tab under demand box types.

The following characteristics can be viewed on this demand box:

● It has two input links (SASA and PRSA), and no output links. (Demand boxes can have more than one input link, but never an output link.)

● The volume of demand (1000) is displayed within the graphic symbol.

● The unit of measure used for this box (Pcs[000]) is displayed beside the volume value.

● The Financial Total ($2.45) is displayed on the left side of the symbol.

Step 6: Validating the ResultsThe activity-based management team took this step to confirm that the operational and financial results produced by the model reflect the actual experience of the business for the period being modeled.



The team knew that operational validation is done first because the financial calculation is derived from the operational flow. They compared the results calculated by the model with the data gathered in Step 4.

Operational ValidationBefore validating the figures, the team verified and calculated the model.

➤ To validate operational data in the OK Plastics model:

1. Ensure okplastics.md is open.

2. On the toolbar, click the Verify button , if your model is unverified.

A dialog tells you that you have successfully verified the model.

3. On the toolbar, click the Calculate button .

The Calculation indicator appears. When it disappears, the model has been successfully calculated.

4. Select the Detail tab for DEMA to see the results available in the Detail view.

The flow from SASA and PRSA is 1,000,000 pieces (displayed as 1,000 Pcs(000)).

5. Click the Results workspace tab.

6. From the Results drop-down list, select % Utilization.

All the utilization levels for the model’s resources with a defined capacity are displayed.

7. Compare the utilization level for Molding Machines calculated by the OK Plastics model and the level from “Resource Availability and Utilization” on page 47. The levels for both are 94%.

Other operational comparisons:



4

– Occupancy is fully utilized

– Maintenance mechanics are both 90% utilized

– Operators are 87% (from report) to 89% (from model results) utilized

Using other reports and results workspace data, the project team compared other operational results generated by the model to the company’s historic results. It found that the model’s results accurately reflected company experience.



Financial ValidationWith full confidence in the operational data generated by Hyperion Business Modeling, the project team compared standard financial data with the data generated by the model.

The team looked at the model’s financial reports and compared their results to the standard costing figures.

➤ To generate a profit and loss financial report:

1. From the toolbar, select the Reports workspace tab in either the Results or Model workspace.

The Reports workspace is displayed.

2. From the first drop-down list, choose Calculated Results.

3. From the Type drop-down list, choose Model Report.

4. From the Report drop-down list, choose Flows and Financials - by category.



4

5. Click the Generate Report toolbar button .

In the Display window, the report shows costs and revenues by financial category and overall net income.



6. Compare the financial results from the model to the data collected in Step 4.

– The total revenue of the three product lines is $5,110,000.

– The cost for raw materials is $1,865,000 and operators is $690,000.

– The total net profit for OK Plastics is $583,060.

The model’s results match the financial experience as shown in the income statement. For further information, see “OK Plastics Income Statement” on page 43.

7. Select the Model workspace tab to return to the Model workspace.

Activity-Based Cost AnalysisWhen the project team validated the operational and financial results of the OK Plastics model with the standard costing results, they could confidently interpret the new information.

Step 7: Interpreting New InformationIn this step, the team used Hyperion Business Modeling to obtain a better understanding of the organization’s operational and financial performance.

The project team decided to look at the company’s least profitable product line first.

Note: Before you follow the team’s procedures, make sure that you have the OK Plastics model open and calculated, as outlined in “OK Plastics Product Profitability Model” on page 51.

➤ To examine cost and operational requirements for Product Line A:

1. From the Model workspace, select the Building Blocks tab in the Project window.

2. Scroll to the Demand boxes and click DEMA Demand A.



4

3. Select the Detail tab in the Display window.

The Detail view presents new information summarizing cost and operational requirements for the support of Product A. From this view, the OK Plastics team discovered that:

– The total cost to produce 1000 (000) pieces of Product A this year was $1,890,522.

– Machine and material costs accounted for about $1,822,869 of the total.

– Sales and administration costs accounted for about $67,652 of the total.

– The average cost to produce one Product Line A piece was $1.89.

The team was surprised by the average cost of Product Line A. The standard per unit cost was much higher at $2.269. (See “Cost Analysis” on page 33.)

The $0.37 difference per piece signalled to the team that with operational and financial results properly validated between the standard costing reports and activity-based costing model, there must be other significant differences in costs, revenues, and net profits among all three product lines.

➤ To examine the costs, revenues, and net profits for all product lines:

1. Select any Demand box.



2. Click the Results workspace tab.

The Results workspace opens.

The Flow - Net Profit result is pre-selected, and a chart displays, showing the ID, Name, Flow, Units and Net Profit for each Demand type.

Again, the net profit of each of the product lines is noticeably different from the company’s standard calculations. (See “Cost Analysis” on page 33.)

The project team observed the following:

● Product Line C was seen as the Division’s most profitable family of products ($209,000), but activity-based costing shows that it, in fact, generates a loss of $324,540.

● Product Line A was perceived as the least profitable ($181,000), but Hyperion Business Modeling revealed it is a profit leader at $559,480.

● Product Line B was always considered profitable at $193,000, but it contributes $348,130 to OK Plastics’s bottom line—much more than previously thought.



4

Other Situations to AnalyzeTry analyzing the model yourself. As you go, you will delve more deeply into the OK Plastics model. Answers to the questions below informed the project team’s activity-based management decisions.

● In the Results workspace, view the following results:

– Results: Flow - Costs

– Type: Demand

– Box: All

What do you notice about per unit costs for each of the Product Lines? How do they compare to the standard costing? (See “Cost Analysis” on page 33.)

● The per unit cost of the Molding Process or Setup activities are calculated by dividing the total cost of the activity ($1,670.70) by the total outflow ($4,470.00) to calculate the per unit cost of $0.37. This figure is the same for Summary boxes PRSA, PRSB, and PRSC, as shown in the Detail view of these boxes.

If the per unit cost of the activities Molding Process and Setup are the same, why are the per unit costs of the demands so different? What elements in the model account for such differences?

● Generate the following report of Calculated Results:

– Type: Box Report

– Report: Flows and Financials - by Resource

– Type: Demand

– Boxes: All

How much, for example, does Operator time cost for each unit of Product Lines A, B, and C? (Product Line Operator Cost / Volume = Operator Cost Per Unit.)



Activity-Based ManagementThe final step in The Model Approach is where you begin to manage the success of your organization by testing business strategies.

Step 8: Performing Activity-Based ManagementThe project team used Hyperion Business Modeling to evaluate the financial and operational impact that a proposed change has on the organization.

Finding a Solution to Product ProfitabilityThe Model Approach leads naturally to finding management solutions to OK Plastics’s product profitability issues. Because Hyperion Business Modeling examines how the entire organization is involved with creating products/services or serving customers and channels, the OK Plastics activity-based management team has a wide scope for introducing improvements to OK Plastics.

The project team has taken initiatives in the following areas:

● Marketing

● Operations

● Purchasing

You must first create a new scenario, as described in the following procedure.

Note: The scenario-playing exercise below assumes that you are running Hyperion Business Modeling with the okplastics.md model open.



4

➤ To create a new scenario:

1. From the Projects & Time tab in the Model workspace, click Scenarios.

2. In the Edit window, click New.

The New Scenario dialog opens.

3. Type Scenario 2 in the Scenario Title text box.

4. Ensure the Annual check box is selected in the Periods text box.

5. Click Create.

Scenario 2 is created and loaded.



MarketingMany of OK Plastics’s problems could be traced to marketing. So, the team took the following direction from the Marketing Department to revive the three product lines:

● Product Line A: Sales volumes could double with a lower price of $2.25. To support the lower price, marketing increased the number of advertisements.

● Product Line B: Sales volumes could increase from 500,000 to 575,000 pieces with a ten cent per piece price decrease to $3.45. Marketing decided to support the price decrease with more advertising.

● Product Line C: The money-losing price of $5.90 per piece could rise to $6.50 to cause a relatively small drop in sales volumes to 125,000. Marketing then could shift advertising priorities to Product Lines A and B.

➤ To implement volume and price changes to the product lines:

1. In the Project window of the Model workspace, click the Building Blocks tab and click demand box, DEMA.

2. In the Edit window, click in the Volume text box and type 2000.

3. In the Financial pane, click the expand pane button to see the financial categories associated with the box.

4. Click in the Value field and type 2.25 for Category 10.

5. Click Update.

6. Repeat Steps 1 to 5, making the following changes to Product Lines B (DEMB) and C (DEMC):

● Product Line B: Volume: 575; Financial Data: 3.45 for Category 20

● Product Line C: Volume 125; Financial Data: 6.50 for Category 30



4

➤ To implement the new advertising strategy:

1. In the Project window of the Model workspace, select the Building Blocks tab and click Summary Box, SASA Sales & Administration Summary A.

2. In the Input Links pane, click the expand pane button to see the input links for SASA.

The input links and their data are displayed.

3. Select the table row for the ADVT link, then click the Factor text box.

4. Replace the current factor value of 1.0 with 5.

5. Click Update.

6. Repeat Steps 1 to 5 to change the Advertising Input Link factor for each of the following Summary Boxes:

● In SASB, change ADVT Input Link to 3.

● In SASC, change ADVT Input Link to 2.

7. Verify the scenario.

8. To calculate the model, click the Calculate button .

Note the following broken constraints:



They tell you that the higher production volumes of the three product lines cause parts of the operation to exceed their capacities.

9. Go to the next section to make the necessary operations changes for the new volumes of Product Lines A, B, and C.

OperationsRethinking the processes by which OK Plastics creates its products resulted in the following operational improvements:

● Run another shift on Molding Machines.

● Add another shift of operators: 10 operators required.

● Add supervision for the increased operator requirement.

● Halve machine setups for Product A from 0.025 to 0.0125.

● Improve setup processes so that:

– Molding Machines hours are reduced from 5 to 4 per setup.

– Maintenance Mechanics spend 8 hours rather than 10 per setup.



4

➤ To run another shift using one of the three Molding Machines:

1. In the Project window of the Model workspace, select the Global Data tab.

2. Click to expand the Global Data items.

3. Expand the Variables list and click #sft Number of shifts.

4. In the Edit window, replace 1 with 1.33 in the Values sub-pane to show that one of the three machines will run an extra shift.

5. Click Update.

➤ To add another operator shift:

1. While you are still in the Variables list of the Global Data tab, click #opr Number of operators.

2. In the Values sub-pane of the Edit window, change the 30 to 40 to represent an additional shift.

3. Click Update.

➤ To add supervision for increased operator requirement:

1. Click the EP View button to display the EP View of the scenario.

Note: This step is required for this example only because the formulas contain EP components that cannot be modified in Regular View. For additional information on Economic Profit, see Chapter 6 in this guide. If you are creating your own model in regular view, you can skip this step and continue with step 5.



2. In the Building Blocks tab of the Project window, click resource box, SPVN Supervision.

3. Click the expand pane button in the Financial pane of the Edit window.

The Financial categories list is displayed.

4. In the Building Blocks tab of the Project window, click resource box, SPVN Supervision.

5. In the Financial pane, click the Formula button for category 520, then select Edit.

The Edit Formula dialog is displayed.

6. In the Formula text box, change 45.0 to 60.0.

7. Click Update to close the Edit Formula dialog.

8. Click Update in the Edit pane.

9. Click the Regular View button on the toolbar to return to the Regular View of the scenario.

Supervisors manage 20 employees each. However, the 40 operators and the 2 maintenance mechanics mean that supervisors will need to supervise another employee.

➤ To increase supervision capacity:

1. While you are still in SPVN Supervision, click the Formula button in the Capacity pane of the Edit window.

2. Click Edit.

The Edit Formula dialog displays.

3. In the Edit Formula dialog, change the 20.0 to 21.0.

4. Click Update to update the formula.

5. Click Update to accept all the changes for SPVN Supervision.

Next, you will make setup improvements.



4

➤ To reduce setups on Production Summary A:

1. In the Building Blocks tab in the Project window, click Summary Box PRSA Production Summary A.

2. In the Input Links pane, click the expand pane button to see the input links for PRSA.

3. Click Factor for the SETUP Setting Up link from 0.025 to .0125.

4. Click Update.

➤ To improve setup processes for Maintenance Mechanics and Molding Machines:

1. In the Building Blocks tab of the Project window, click the Activity Box SETUP Setting up.

2. In the Input Links pane, click the expand pane button to see the input links.

3. Click the Factor text box in the table row for the MAINMCH link.

4. Replace the current factor value of 10.0 with 8.0.

5. Click Update.



6. In the Input Links pane, replace the current MLDMC factor value of 5.0 with 4.0.

7. Click Update.

Purchasing The Purchasing Department negotiated a volume discount for raw materials for Product Line A based on the higher volume. The new price reduces Material A to $1.00.

➤ To change the per unit price of Material A:

1. In the Building Blocks tab in the Project window, click Supply Box MTLA Material A.

2. In the Edit window, click the expand pane button of the Financial pane to see the financial categories associated with MTLA.

3. In the Value text box of the 101 Raw Material sub-pane, change the value to 1.00.

4. Click Update.



4

Calculating the ScenarioAfter the team introduces changes to the model data to reflect operational, marketing, and purchasing initiatives, they can see the effects on the model and, by extension, their own division.

➤ To calculate the scenario, click the Calculate button to see the results of the changes.

Note the following new figures:

The new net profit of $1,391,740 is significantly higher than the activity-based costing result of the current operations.

Even if the organization did not adopt all the changes recommended by the activity-based management team, it does point OK Plastics in a more profitable direction.

Note: This scenario has already been built and saved under the name Marketing Projections. To double-check your results, open and compare Marketing Projections to Scenario 2.

Next StepsTry your own activity-based management scenarios. What improvements could you make to the OK Plastics model to make the division a more efficient and profitable organization?


Chapter

5


Customer Profitability Case Study

As a result of rising internal costs and increased competition, OK Service Bureau reevaluated costing methods and pricing for billing services. A key priority was to respond to the competition’s uniform pricing strategy.

The resulting activity-based management study showed that a profitable account type was—according to activity-based costing—serviced at a loss while another generated a higher profit than had been thought. This led to other discoveries about the future of OK Service Bureau in a more competitive market and found areas for cost efficiencies and, finally, higher profits.



● “ABM Solution Result” on page 78






– “Step 5: Building the Model” on page 95








Business IssueOK Service Bureau provides clients with customer account inquiry services and bill printing from a central facility. Accounts are classified according to the following customer types:

● Residential: a high volume of accounts currently at 120,000; residential accounts require simple bills with one pricing plan.

● Commercial: a low volume of accounts currently at 20,000; commercial accounts require complex bills with multiple pricing plans.

Within each customer type, only minor differences are found among the administrative procedures that serve clients. The company invoices all accounts monthly, distributing the invoicing cycle evenly throughout the month.

Larger competitors set their sights on OK Service Bureau’s core business: providing billing services to local companies. The competition’s main strategy is to use aggressive pricing to gain entry into the existing market and to capitalize on future opportunities.

In response to the competitive challenge, management launched three analyses:

● Market Conditions

● Current Costs

● Profit/Loss Projection

The Profit/Loss Projection is based on the data provided by the Marketing Department and Current Cost analysis.



5

Market ConditionsAfter a careful study, Marketing reported OK Service Bureau’s prospects for new business and warned of potential market threats. In summary, the report stated the following:

● Through an acquisition, a current customer has acquired an additional 53,000 residential customers and 2,000 commercial accounts. By next month, OK Service Bureau will be billing the following numbers overall:

– Residential Accounts: 173,000

– Commercial Accounts: 22,000

● The increased business will be accompanied by the following competitive environment:

Rivals are offering similar services for $4.20 regardless of the type of account. This pricing strategy aims to draw away existing customers and attract new commercial accounts when they appear. Currently, OK Service Bureau sets its billing rates by account type:

– Residential: $3.98 per account

– Commercial: $6.75 per account

Current CostsOK Service Bureau needs to calculate its current cost per account to anticipate the impact of the new business and more competitive environment.

The current accounting system allocates costs for the residential and commercial accounts based on the number of account inquiries. Because 78.26% of inquiries were from residential customers, they received that proportion of the costs.

The equation below shows how the cost of each residential account is calculated by standard costing:

Commercial accounts are calculated in the same manner:

Total Cost 583,730 X Account Inquiry Percentage 0.7826 = 456827 = $3.807 per 120000#ofaccts residential acct

Total Cost 583,730 X Account Inquiry Percentage 0.2174 = 126902 = $6.345 per 20000#ofaccts commercial acct



Last month, OK Service Bureau earned a profit of $28,870:

Profit/Loss ProjectionMarketing then projected the next month’s profit and loss based on the competition’s rates and the new accounts. The projection showed a profit that would decrease by $8,071.00 if the company adopted the competitor’s one price approach.

ABM Solution ResultThe activity-based management solution begins with determining the activity-based costs of the company and continues with a what-if scenario played in the OK Service Bureau model. These scenarios point the division in a more profitable direction.

Residential Accounts

Commercial Accounts Total

#Accounts 120,000 20,000 140,000

Revenue/Account $3.980 $6.750

Standard Cost/Account $3.807 $6.345

Profit/Account $0.173 $0.415

Total Profit $20,768 $8,102 $28,870

Residential Accounts

Commercial Accounts Totals

#Accounts 173,000 22,000 195,000

Proposed Revenue/Account

Total Proposed Revenue

$4.20

$726,000

$4.20

$92,400 $819,000

Standard Cost/Account

Total Standard Cost

$3.807

$658,611

$6.345

$139,590 $798,201

Profit (Loss) $67,989 $(47,190) $20,799



5

Activity-based Costing (ABC) ResultsTwo discoveries upset previously held beliefs:

● a residential account costs less to service.

● a commercial account costs much more to service.

The differences become clear in the following table:

The company believes that the activity-based costs reflected the real costs of running their business better than the standard costs did. The company cited the following reasons:

● As noted under Current Costs, the current accounting system distributes costs on a rough basis: by percentage of inquiries.

● Activity-based costing allocates costs more precisely: by the activities required to serve the two account types and the quantity of supplies and resources those activities consume.

This will have implications for the marketing conditions faced by OK Service Bureau.

Current Month Residential Account Commercial Account

Standard ABC Standard ABC

Account Volume 120,000 120,000 20,000 20,000

Revenue per account

Total Revenue

$3.980

$477,600

$3.980

$477,600

$6.750

$135,000

$6.750

$135,000

Cost per account

Total Cost

$3.807

$456,832

$2.380

$285,600

$6.345

$126,900

$14.9051

$298,100

Total Profit $20,768 $192,000 $8,102 ($163,100)



Activity-based Management StrategyThrough activity-based management, OK Service Bureau gained at least two new insights:

● The new market environment creates a profitable opportunity: the per account increase to $4.20 and the large increase in the number of accounts bolster the company’s profitability even as commercial accounts continue to lose money.

● Management needs to introduce process improvements to commercial account processes: bill inquiries and verification.

By playing what-if scenarios, management can introduce measures to make the company more profitable.

How the Solution was DevelopedOK Service Bureau management gave full support to a multi-disciplinary team assigned to develop an activity-based management model using The Model Approach. See Chapter 3, “The Model Approach,” for a description of the eight-step methodology.

Supporting The Model ApproachBefore starting the project, the team secured management’s commitment to provide project resources, including staff time, to the project. Team members also attended The Model Approach workshop to understand the essential concepts of process modeling and acquire practical software training for carrying out the project successfully.



5

Step 1: Defining the Project ScopeThe OK Service Bureau’s activity-based management team performed the following tasks for Step 1 of The Model Approach:








For this activity-based costing study, the project team decided to focus on the cost and profitability of the types of accounts the company services for its clients. Therefore, Residential and Commercial accounts became the model’s demands.

The project team decided that the model should take a macro view of the organization and include all the operations and resources of the company.

The multi-functional team believes it can obtain meaningful results in six weeks.


After interviewing the appropriate representatives of OK Service Bureau’s operations, the multi-functional team created the following table.




The following pages show the boxes for the operational schematic developed for OK Service Bureau from the findings of Step 2. (For the schematic containing all the model data, see the OK Service Bureau Schematic 2.)

Units of Measure and Associated Resources and Activities

Activities/ Resources Unit of Measure


Managing Hours

Account Inquiry Team Hours

Billing Team Hours

Correspondence Letters (#Letters)

Bill Printing Pages (#Pages)

Bill Verification Bills (Commercial) (#Bills)

Account Inquiries Inquiries (#Inquiries)

Paper Cases (#Cases)

Variable Telecom Minutes (#Minutes)

Computer Charges Transactions (#Transactions)

Maintenance/Cleaning Square Feet (SqFt)

Printers Pages (#Pages)

Bill Printing Pages (#Pages)

Bill Reprinting Reprints (#Reprints)



5

OK Service Bureau Schematic Box DefinitionsEach box in the schematic is assigned a unique box identifier and name. The following boxes are used in the OK Service Bureau schematic to represent the demands, activities, supplies, resources and routes identified in Step 2:

Demand Boxes


RESDEM Residential Demand Residential account billings

COMDEM Commercial Demand Commercial account billings

Activity Boxes


CORRES Correspondence Prepare written responses to inquiries

BILPRT Bill Printing Prepare hardcopy bill statements

BILRPT Billing Reprinting Reprint bills with corrections after verification

BILVER Bill Verification Verify accuracy of commercial bills

RESINQ Residential Inquiries Answer questions about residential accounts

COMINQ Commercial Inquiries Answer questions about commercial accounts

Resource Boxes (Fixed)


OCCY Occupancy OK Service Bureau’s building facility

ACTINT Account Inquiry Team People who respond to customer inquiries

MANAGE Managers People who supervise the staff



BILLTM Billing Team People who prepare the bills

PRNTRS Printers Equipment to prepare statements

Supply Boxes (Variable)


MNTCLN Maintenance Build cleaning

VARTEL Variable Telecom Telecommunications

COMCHG Computer Charges Computer resources

PAPER Paper Paper used in billing

ACIOT Account Inquiry Overtime

Overtime hours used to respond to inquiries

Route Box


AITR Account Inquiry Team Routing

Proportion of regular and overtime hours for Account Inquiry Team

Resource Boxes (Fixed) (cont’)




5

RESDEMResidentialDemand

$ V=

#Accounts

#Inquiries #Bills

RESDEM Residential

Summary

RESINGResidential

ACTINS CORRES

RPRTSMResidential

Print Summary

BILPRT

COMDEMCommercial

Demand

COMDEMSMCommercial Summary

$ V=

#Accounts

#Inquiries #Bills #Reprints

COMINQCommercial

CPRTSMCommercial

PrintSummary

BILRPTBilling Reprints

ACTINS CORRES BILPRT BILVER BILPRT BILVER

BILVERBill Verification

#Bills

BILVER

COMCHG

Hours

BILLTIMBilling Team

$$

c=

MANAGE

OCCYVARTEL

BILPRTBill Printing

PAPER COMCHG

PRINTERSPrinters

#Pages

$$

MANAGE

Hours

MANAGE

Managers

$c=

VARTEL OCCY

OCCY

OCCYOccupancy

$ c=

MNTCLNMaintenance

SqFt

$

PAPERPaperSupplies

#Cases

PAPER

$COMCHGComputerCharges

#Transactions

COMCHG

VARTELVariable

Telecom#Minutes

VARTEL

$$

OCCY

ACTINTAccount

Inquiry Team

$

$

ACIOTAccount Inquiry

Overtime

HoursHours

AITR

Account InquiryTeam Routing

$c=

CORRESCorrespondence

#Letter

CORRES

MANAGE PAPER COMCHG

VARTEL

Hours

OCCY

SqFt

ACTINSAccount Inquiry

SummaryHours

MANAGE

#Pages

BILPRT

OK Service Bureau Schematic 1



Interpreting the OK Service Bureau SchematicBecause the requirements for activities are demand driven, the operational results of the OK Service Bureau model are calculated using a bottom-up approach. A review of the relationships among the resources and activities required to support Residential Demand illustrates how activity-based costing works.

At the bottom of the schematic, you will find the symbol for Residential Demand (RESDEM). The Residential Summary (RESDEMSM) box represents a summary of all activities and resources required for billing residential utility customers.

Follow the flow upwards, as detailed on the following table. The logic of the model reflects the logic of OK Service Bureau’s operations. As you move up through the schematic, you see how its activities and resources draw from others in the organization.

This Activity or Resource RequiresRequirement Boxes

Residential Summary (RESDEMSM) Residential Inquiries

Residential Print Summary

RESINQ

RPRTSM

Residential Inquiries

(RESINQ)

Account Inquiry Summary

Correspondence

ACTINS

CORRES

Residential Print Summary (RPRTSM) Bill Printing BILPRT

Written responses (CORRES) Management

Paper Supplies

Account Inquiry Summary

Computer Charges

MANAGE

PAPER

ACTINS

COMCHG

Account Inquiry Summary (ACTINS) Management

Computer Charges

Account Inquiry Team

Account Inquiry Team Overtime

Variable Telcom

MANAGE

COMCHG

ACTINT

ACIOT

VARTEL

Account Inquiry Team (ACTINT) Occupancy OCCY

Bill Printing (BILPRT) Paper Supplies

Printers

Computer Charges

Billing Team

PAPER

PRNTRS

COMCHG

BILLTM

Printers (PRNTRS) Occupancy OCCY



5


Through a process of interviews with OK Service Bureau staff, the team collected data on the company processes and activities. It is summarized in the following statements.


Report Content

Income Statement: Current Month ($000)

An income statement for the current month

Customer Cost Analysis Detailed information about current costs by customer type




Capacities of resources and percentages of capacities used for the current month


Financial Accounts A list of all revenue and cost categories used in the model

Fixed Resource Costs Financial categories associated with resources, variables used to calculate costs, and units in category

Activity, Resource, and Supply Analysis

A list of all activities, fixed resources, and various supplies by account type

Management Time Expenditures

The number of management hours for billing team, account inquiry team, and correspondence

Occupancy Data Square footage usage by management and staffing resources



Income Statement: Current Month ($000)

Customer Cost Analysis

Revenue

Residential Acct Revenue $477,600

Commercial Acct Revenue 135,000

Total Revenue $612,600

Cost of Service

Management Wages

& Benefits

Salaries $28,000

Benefits 5,600

$33,600

Non-management

Wages & Benefits

Account Inquiry Team 93,610

Account Inquiry Overtime 2,590

Billing Team 55,000

Benefits 34,700

$185,900

Computer & Communication Charges

Variable Telecom Charges 59,899

Data Processing Charges 179,800

$239,699

Equipment, Material & Supplies

Printer & Data Processing 50,000

Printer Maintenance 5,000

Paper 7,531

$62,531

Occupancy Rent & Real Estate 40,000

Advertising 22,000

$62,000

Total Cost $583,730

Net Income $28,870



5

The project team was given the latest cost analysis. This analysis was used later to compare activity-based costs and standard costs.

The team also collected the following data on internal and external costs.


OK Service BureauReport: Cost Analysis (using current standard costs)Month: Last Month

Residential Commercial Total

Volume (# of customers) 120,000 20,000 140,000

# Account Inquiries 18,000 5,000 23,000

% Account Inquiries 78.26% 21.74%

Total Standard Cost $456,832 $126,898 $583,730

Cost/Customer Type $3.807 $6.345

Service Cost

Telecommunications $0.30 per minute

Computers $0.03 per transaction

Paper $92 per case (2500 sheets per case)

Cleaning $7,000 per month




Variable DataTo make the model more flexible, some of the data collected is defined in the model as variables. For example, if you added another person to the billing team, you only need to change the variable:

Resource Max. Availability/Month Used Last Year Utilization%


4070 hours 3,704 91

Printers 336,000 hours 204,960 61

Billing Team 2,750 hours 2,244 81.6

Supervisors 770 hours 741 96.24

Variable Represents Value

#blt Billing Team 25

#int Account Inquiry Team 37

#mgr Managers 7

mins Minutes to hour conversion 0.0166667



5

Financial AccountsThe following cost and revenue categories are used in the model.

# Name # Name

10 Residential Account Revenues 500 Equipment, Material, & Supplies

20 Commercial Account Revenues

510 Printer Depreciation

200 Total Labor Costs 520 Printer Maintenance

210 Account Inquiry Labor 530 Paper

215 Account Inquiry Overtime 600 Occupancy

220 Billing Wages 610 Rent & Real Estate

230 Manager Salaries 620 Building Maintenance

250 Benefits

300 Mgmt Services Charges

310 Variable Telecom Costs

320 Computer Charges



Fixed Resource Costs

Activity, Resource, and Supply Analysis


Occupancy Rent and Insurance $40000

Building Maintenance $7000

Account Inquiry Team Account Inquiry Wages $2530 #int

Account Inquiry Overtime $600 #int

Managers Manager Salaries $4000 #mgr

Manager Benefits $800 #mgr

Printers Printer Depreciation $50000

Printer Maintenance $5000

Billing Team Billing Wages $2200 #blt

Benefits $500 #blt

Account Type Activities Fixed Resources Variable Supplies

Commercial Commercial Inquiries1

Bill Printing

Billing Reprints

Bill Verification

Correspondence

1 Bolded items are unique to account type.

Billing Team

Printers

Managers

Occupancy


Paper Supplies

Variable Telecom

Computer Charges

Maintenance

Account Inquiry Overtime

Residential Residential Inquiries

Bill Printing

Correspondence

Billing Team

Printers

Managers

Occupancy


Paper Supplies

Variable Telecom

Computer Charges

Maintenance

Account Inquiry Overtime



5

Management Time Expenditures

Occupancy Data

Team Hours Activity

Billing Team 228 Supervising billing staff

Correspondence 140 Signing letters

Account Inquiry Team 377 Supervising account inquiry staff


Managers 1,000

Account Inquiry Team 8,000

Billing Team 4,000

Printers 7,000

Total 20,000



Summary

RESDEMResidential

Demand

#Accounts

#Inquiries #Bills

RESDEM Residential

Summary

RESINQResidential

ACTINS CORRES

RPRTSMResidential

Print Summary

BILPRT

COMDEMCommercial

Demand

COMDEMSMCommercial

Summary#Accounts

#Inquiries #Bills #Reprints

COMINQCommercial

CPRTSMCommercial

PrintSummary

BILRPTBilling Reprints

ACTINS CORRES BILPRT BILVER BILPRT BILVER

BILVERBill Verification

#BillsBILVER

COMCHG

Hours

BILLTIMBilling Team

MANAGEOCCY

VARTEL

BILPRTBill Printing

PAPERCOMCGH

PRINTERSPrinters

#Pages

OCC MANAGEHours

MANAGEManagers

VARTEL OCCY

OCCY

OCCYOccupancy

c=

MNTCLNMaintenance

SqF

PAPERPaperSupplies

#Case

PAPER

COMCHGComputer

Charges#Transactions

COMCHG

VARTELVariableTelecom

#Minute

VARTEL

OCCY

ACTINTAccount

Inquiry Team

ACIOTAccount Inquiry

OvertimeHours

Hours

AITRAccount Inquiry

Team Routing

c=

CORRESCorrespondence

#Letters

CORRES

MANAGE PAPER COMCHG

MANAGE VARTELHours

310 $0.3 320 $0.03 530 $92 620 $0.75

610 $40,000

620 $7,000

20000

210 f(2530*int)250 f(600*int)

cf=8,000

f(100*int)

530 $34.38SqF

c=f(11*int) tf=4470 cf-1000

230 $f(4000*#mgr)250 $f(500*#blt) c=f(110*#mgr)

0.02

0.98

Policy=Ratio

c=336,000510 $50,000520 $5,000

cf=7000

ACTINS

tf=140 f=6f=0.0004

10 $3.98 V=120,000

f=0.15

20 $6.75 V=20,000# Accounts

f=0.25 f=0.02

f=0.1f=f(6*mins)

f=4f=4f=f(18*mins) f=0.2

f=9tf=2040f=0.0004 f=25 tf=242

c=f(100*#blt)220 $f(2200*#blt)250$f(500*#blt)

tf=228 tf=6847cf=4000

tf=377 f=200 tf=188,371

BILPRT

Account Inquiry

#Pages

# Accounts

tf=f(10*mins)

OK Service Bureau Schematic 2



5

Step 5: Building the ModelThe team created a computer-based model using the schematic from Step 3 and the data collected in Step 4.

In this section, we will review some of the components in the pre-calculated OK Service Bureau model as built by the activity-based management team. The next three TMA steps will discuss the model results.

OK Service Bureau Customer Profitability ModelIf you have not done so, install and start the Hyperion Business Modeling software.

➤ To open the OK Service Bureau Customer Profitability Model:

1. From the Model workspace, select Project > Open.

The Open Project dialog appears.

2. Ensure the Local Storage Area folder is selected in the Containers pane and double-click okservicebureau.md.

The OK Service Bureau Customer Profitability model opens.

Edit Window

Toolbar

Display Window

Project Window

Workspa




● The Building Blocks tab in the Project window lists the model’s boxes by type. In the Edit window, the following details for the selected box are displayed:

● Box ID


● Unit of Measure.

● Depending on the type of box you select, the following panes might also be available:

● Capacity



● Volume

● Route policy

● Notes

● Tags

Note: You might need to scroll to view all elements.


● The Display window contains a high-level, or Schematic, view of the model and a box level, Detail view. A third tab offers the Flow View for a selected box.





5

● On the right side of the Toolbar, you can navigate to report, results, and print workspaces:

● Select the Reports tab to open a workspace of preformatted model and results reports that provide project information and data from selected boxes as well as the entire model.

● Select the Results tab to open a workspace where you can create model results tables. You can display cost, net profit, and utilization results by box type and specific boxes.

● Select the Print tab to open a workspace where you can print single and multiple copies of your model data and results.

Reviewing a Resource BoxThe resource box below shows how the collected data is used to build a model.

➤ To review a resource box:

1. From the Model workspace, select the Detail tab in the Schematic window to view individual boxes and the data associated with them.



2. Select the Account Inquiry Team (ACTINT) resource box from the Building Blocks tab to view the units, capacities, and financial data attached to the account inquiry team.

The following is a list of the characteristics of the Account Inquiry Team resource box:

● This resource has one input link (OCCY) that shows it uses another resource: Occupancy. According to the constant factor on the resource box OCCY, the Account Inquiry Team occupies 8000 square feet of floor space.

● The unit of measure of this box (Hours) is displayed at the bottom of the box.

● The Capacity label on the right side of the box shows a total Account Inquiry Team capacity of 4070 hours. When the model is calculated, the value for A= represents the actual number of hours that will be used; the value for U= represents the utilization percentage of the total capacity (Actual/Total Capacity).



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● The monthly capacity of the account inquiry team is 4070 hours. To view the capacity formula, click the Formula button in the Capacity pane, and select Edit. The Formula dialog shows that the total capacity has been calculated by multiplying the number of account inquiry team members (37) by the number of hours worked by each team member (110).

● The costs of the Account Inquiry Team are derived from employees’ wages and benefits. Click the Financial Totals button to display the financial categories 250 Benefits and 210 Acct Inquiry Wages (displayed on the left side of the box), the average benefit or wage per employee is multiplied by the number of account inquiry staff members (37).

For example, click in the Financial pane to view the financial categories. View the formula for financial category 210 Account Inquiry Wages: each employee earns $2,530 monthly, so the total salaries of the Account Inquiry Team is $93,610 per month.

● ACTINT is one of the links into the route box AITR, Account Inquiry Team Routing. A route box must have at least two links: the other link to AITR is Account Inquiry Overtime.




➤ To review a demand box in the model:

1. In the Project window of the Model workspace, click RESDEM in the Building Blocks tab under demand box types.

2. Ensure that the Detail tab is selected.

The Detail view for the RESDEM box is displayed.

Note the characteristics of this demand box:

● It has an input link (RESDEM) and no output links. (Demand boxes can have more than one input link.)

● The volume of demand (120,000) is displayed within the graphic symbol.

● The unit of measure used for this box (#Accounts) is displayed beside the volume value.

● The revenue per account ($3.98) and Financial Category (10 Residential Account Revenue) are displayed on the right side of the symbol.



5

Step 6: Validating the ResultsThe activity-based management team took this step to confirm that the operational and financial results produced by the model reflect the actual experience of the business for the period being modelled.

The team knew that operational validation is done first because the financial calculation is derived from the operational flow. They compared the results calculated by the model with the data gathered in Step 4.


To follow the steps taken by the team, make sure that okservicebureau.md is open.

➤ To validate operational data in the OK Service Bureau model:

1. On the Model workspace toolbar, click the Verify button , if the model is unverified.


2. On the Model workspace toolbar, click the Calculate button .

The Calculation indicator appears. When it disappears, the model has been successfully calculated.



3. Select the Detail tab for RESDEM to see the results available in the Detail view.

Note the following operational results available:

– Flow from summary box RESDEMSM is 120,000 accounts.

4. Select the Results workspace tab.


All the utilization levels for model’s resources with a defined capacity are displayed.

6. Compare the utilization level for Printers calculated by the OK Service Bureau model and the level from “Resource Availability and Utilization” on page 90.Both are about 60%.


– The occupancy is fully utilized.



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– The manager utilization is almost exact.

– The Billing Team utilizations are very close: 81.6% and 83%.

– The Account Inquiry Team utilizations are the same.


Financial ValidationWith full confidence in the operational data generated by the Hyperion Business Modeling model, the project team compared standard financial data with the data generated by the model.

The team looked at the model’s financial reports and compared their results with the standard costing figures.


1. From the Model workspace, select the Reports workspace tab.

The Reports workspace opens.








6. Compare the financial results from the model to the data collected in Step 4. For more information, see “Income Statement: Current Month ($000)” on page 88.

– The total revenue is $612,600 in both the Hyperion Business Modeling report and the standard income statement.

– The total cost is $583,745: a close match.

– The cost of management and staff is $219,500 in both statements.



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– The total net profit in the current month is $28,855 in Hyperion Business Modeling and $28,870 on the income statement.

The model’s results closely follow the financial experience as shown in the income statement.

To return to the Model workspace, select the Model workspace tab.

Activity-Based Cost AnalysisWhen the project team validated the operational and financial results of the OK Service Bureau model with the standard costing results, they could confidentially interpret the new information.


The project management team decided to compare the profitabilities of the two account types first. Before you follow the team’s procedures, make sure that you have the OK Service Bureau model open and calculated. See “To open the OK Service Bureau Customer Profitability Model:” on page 95.

➤ To examine cost and operational requirements for Residential Demand:

1. In the Project window of the Model workspace, select the Building Blocks tab.

2. Scroll to the demand boxes and click RESDEM.



3. In the Display window, select the Detail tab.

The Detail view presents new information summarizing cost and operational requirements for the support of Residential Demand. From this screen, the activity-based management team discovered that:

– The total cost to service Residential Accounts last month was $285,643.

– Each Residential Account costs $2.38 to service.

The team was surprised by the average cost of Residential Accounts. The standard costing per unit cost was much higher at $3.807. For more information, see “Current Costs” on page 77.

The $1.42 difference per account signalled to the team that with operational and financial results properly validated between the standard costing and activity-based costing model, there must be other significant differences in costs and net profit in the Commercial Account customer type.



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➤ To examine cost and operational requirements for Commercial Demand:


2. Scroll down the Project window and select COMDEM Commercial Demand.

The Commercial Demand box appears in the Display window. Note the following:

– The total cost to service Commercial Accounts last month was $298,101.94.

– Each Commercial Account costs $14.91 to service.

Standard costing calculated that each Commercial Account costs $6.75 to service, a much lower rate.



➤ To examine costs, revenues, and net profits of all account types:

1. From the Project window in the Model workspace, select any Demand box.

2. Select the Results workspace tab.

The Results workspace opens. The Flow - Net Profit result is pre-selected, and a chart displays, showing the ID, Name, Flow, Units and Net Profit for each Demand type.

Again, the net profit of each of the account types is noticeably different from the company’s standard calculations. (For more information, see “Customer Cost Analysis” on page 88.)


● Using standard costing, commercial accounts earned a profit of $8,102. In fact, on a per account basis, commercial accounts were the most profitable at $0.415. However, the activity-based costing model has revealed a loss of $163,101.90! The detail view of COMDEM shows a per account loss of $8.15.

● Standard costing shows residential accounts per unit earnings at $0.173. The model now shows residential account net profit of $191,956.62. The detail view of RESDEM shows a per unit earning of $1.59—far higher than calculated by standard costing.

The project team analyzed the model’s results for causes of the commercial account losses.



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Other Situations to AnalyzeTry analyzing the model yourself. As you go, you delve more deeply into the OK Service Bureau model. Answers to the questions below provided the foundation for the project team’s activity-based management decisions.

● In the Results workspace, view the following results:

– Results: Flow - Costs

– Type: Resource

– Box: All

What do you notice about unit total costs for the two types of account inquiries represented by RESINQ and COMINQ?

Note: Commercial accounts are far more expensive than residential ones in fielding inquiries. The standard income statement only counts staffing costs. It does not distinguish between the two types of inquiries, nor does it include all the costs for inquiries such as correspondence, management, and paper. For more information, see “Income Statement: Current Month ($000)” on page 88.

● Using the same Results, note the per unit cost for BILVER, Bill Verification. OK Service Bureau spends $4.3715 for verification of each commercial account bill. Residential bills are not verified. Under standard costing, however, residential accounts also carry the burden of bill verification even though they did not require this activity.

● To look at the implications of the Commercial and Residential inquiry activities, generate the following report of Calculated Results:

– Type: Box Report

– Report: Activities

– Boxes: Type: Activity

– Box: RESINQ and COMINQ



The following report is displayed.

Ten percent of residential inquiries require a written response, but 20% of commercial inquiries require a written response. So, Commercial account inquiries run up the highest costs.



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Step 8: Performing Activity-Based ManagementThe project team used the Hyperion Business Modeling to evaluate the financial and operational impact that a proposed change has on the organization.

Finding a Solution to Customer ProfitabilityThe project team faces three issues:

● The pricing consequences of new competition

● The prospect of increased account volumes

● Unexpected residential and commercial account profitabilities

The team explored the issues by running a scenario based on competitive pricing and account volumes first. After gauging the impact of these changes, the team aimed to improve customer profitabilities with process improvements.

The OK Service Bureau scenario addressed two areas of the business:

● Marketing

● Operations

The scenario-playing exercise below assumes that you are running Hyperion Business Modeling with okservicebureau.md model open.

You must first create a new scenario.



➤ To create a new scenario:

1. In the Projects & Time tab in the Model workspace, click Scenarios.



3. Type Scenario 1 in the Scenario Title text box.

4. Ensure the Monthly check box is selected in the Periods text box.

5. Click Create.

The new scenario is created.



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Marketing

The first scenario showed the implications of more business and common pricing based on the competition’s strategy:

● Residential Accounts: Volume 173,000 accounts; Price $4.20 per account

● Commercial Accounts: Volume 22,000 accounts; Price $4.20 per account

➤ To implement volume and price changes to the customer account types:

1. In the Project window of the Model workspace, select the Building Blocks tab and click demand box, RESDEM.

2. In the Edit window, click in the Volume text box, and type 173,000.

3. Click Update.

4. In the Financial pane, click the expand pane button to see the financial categories associated with the box.

5. Click in the Value text box, and type 4.20 for Category 10.

6. Click Update.

7. Using Steps 1 to 6, make the following changes to COMDEM:

● Volume: 22,000

● Financial Data: 4.20

8. Click the Calculate button and the Per Unit Values button.

Note the following broken constraints:

The higher account volumes require more management and account inquiry staff.

9. Go to the next section to make the necessary operations changes for the new volumes of Residential and Commercial accounts.



Operations

Rethinking the processes by which OK Service Bureau serves its accounts resulted in the following resource changes:

● Add another manager.

● Add inquiry team staff.

● Add ten hours of overtime to managers’ monthly schedule.

● Add overtime hours to managers’ salaries.

➤ To add another manager:

1. In the Project window in the Model workspace, select the Global Data tab.

2. Select the Global Data Variables.

3. Click to expand the Variables list and select #mgr Manager Headcount.

4. In the Edit window, replace 7.0 with 8.0 in the Values text box.

5. Click Update.



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➤ To add inquiry staff:


2. Select the Global Data Variables.

1. Click #INT Inquiry Team Headcount.

2. In the Values text box of the Edit window, change the 37 to 45 to represent the addition of Inquiry Team employees.

3. Click Update.

➤ To add overtime to managers’ schedules:


2. Click the resource box, MANAGE Managers.

3. Click the Formula button in the Capacity pane of the Edit window.

4. Click Edit.

The Formula dialog displays.

5. In the Formula text box, change the 110 to 120.

6. Click Update.

Next, you add the ten overtime hours per month to the managers’ salaries.



➤ To increase the salaries expense:

1. While you are still in MANAGE Managers, click the expand pane button in the Financial Pane of the Edit window.

The Financial categories are displayed.

2. In the sub-pane, 230 Manager Salaries, click Formula > Edit.

The Edit Formula dialog is displayed.

3. In the Formula text box, change 4000 to 4400.

4. Click Update.

5. Select Project > Save to save the changes.



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Calculating the ScenarioThe team calculated the OK Service Bureau scenario to show the effects of the new marketing conditions. The results of the scenario and the actions proposed to reduce the commercial account costs are examined in the following sections:

● “Interpreting the Marketing Challenge” on page 117

● “Examining Costs” on page 118

● “Reducing Costs/Increasing Profits” on page 118

Interpreting the Marketing ChallengeNow that the project team has introduced changes to the model data to reflect upcoming marketing challenges, they can see the effects on the model and, by extension, on their own company.

➤ To see the results of the changes, click the Calculate button and the Per Unit Values button to see the results of the changes.


The new net profit of $129,037 is significantly higher than the activity-based costing result of the current operations.

OK Service Bureau has much to be optimistic about: the largest number of accounts will gross more dollars per account with the lowest costs.

CAUTION: We strongly encourage you to change all totals to per unit values, and save your results.



Examining Costs

The cost of servicing commercial accounts is still too high. Revenue per unit has dropped from $6.35 per account to $4.20. Although costs per unit fell to $13.84 from $14.90, the drop could not offset the drop in revenue.

As the Commercial Demand detail view of net income shows, the loss of $8.15 per commercial account has now jumped to $9.64.

The project team will propose commercial account savings in a second scenario.

Reducing Costs/Increasing ProfitsTo reduce commercial costs, the project team targeted account inquiry costs. By adding another page of billing information, the team estimates that inquiries will drop by 40%.

First create Scenario 2. For this example, name the new scenario, Scenario 2, ensuring that the time period check box is selected for Monthly and the starting conditions are based on Scenario 1.

➤ To increase the number of pages per bill:

1. In the Project window of the Model workspace, select the Building Blocks tab and click summary box, COMDEMSM Commercial Summary.

2. In the Input Links pane, click the expand pane button to see the three input links for COMDEMSM.

3. Click the Factor text box in the COMINQ Commercial Inquiries sub-pane.

4. Replace the current factor of .25 with .15.

5. Click the Factor text box in the CPRTSM Commercial Print Summary sub-pane.

6. Replace the current factor of 1.0 with 5.0.

7. Click the Factor text box in the BILRPT Billing Reprints sub-pane.



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8. Replace the current factor of 0.02 with 5.0.

9. Click Update.

10. To calculate the model, click the Calculate button and the Per Unit Values button.

You have a new net profit of $127,873.

The reduction of commercial inquiries did not compensate for the increased printing costs.

Look at the utilizations for ACTINT Account Inquiry Team and MANAGE Managers. The process change reduced the utilizations for both.

➤ To reduce utilization and check the results:

1. Eliminate managers’ overtime by resetting the MANAGE Managers capacity to 110.0*#MGR.

2. Eliminate the managers’ overtime expense: that is, reset 230 Manager Salaries to 4000*#MGR.

3. Return the number of billing team staff (#BLT) to 37.

4. Recalculate the model using per unit values.

The model calculates with no broken constraints and almost full capacity. Note the following:

– Total costs have fallen to $663,233 as the result of the process improvements.

– Commercial Demand is still losing $8.58 per account, but that is closer to the original model’s calculation.

– The proposed increase in billing team staff is now unnecessary.

– Another manager is still necessary, but the need for managers overtime is now eliminated.



Next StepsMuch more work needs to be done to deal with the commercial account losses. Try the scenarios below.

First create Scenario 2. For this example, name the new scenario, Scenario 2, ensuring that the time period check box is selected for Monthly and the starting conditions are based on Scenario 1.

● To meet management requirements, eliminate the need for 1 manager and reinstate the 10 hours per month of overtime to the 7 original managers.

● How do the costs, revenues, and net profit compare to the last scenario?


Chapter

6


Improving Economic Profit Case Study

OK Plastics is developing its strategic plan and needs to evaluate several key initiatives. The decision to implement any strategic initiative is to be made based primarily on its impact on the economic profit of the division.

Economic Profit ConceptsEconomic Profit, which is also known as Economic Value Added (EVA), is defined as net operating profit after taxes, less a charge for the capital used. Economic profit, or EP, tracks both earnings and the capital aspects of a business. Mathematically, EP is defined by the following equation:

Figure 1: Formula for Calculating Economic Profit

The cost of capital percentage is a weighted average of both interest-bearing debt and equity.

To maximize Economic Profitability, a company must aim to improve net operating profit after tax by reducing production costs and raising capital efficiency. In addition, the capital structure needs to be optimized. The company should aim to grow profitability as long as returns are adequate, and manage the company’s assets, including the release of capital when there are inadequate returns.

Economic = Net Operating ProfitProfit

After Tax(NOPAT)

- (Weighted Average of the Cost ofCapital Percentage X Capital)



The following case study shows you how to apply economic profit variables to formulas in your existing model to evaluate the impact of strategic initiatives on the profitability of the company.



● “EP Solution Results” on page 126






– “Step 5: Build the Model” on page 146








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Business IssueOK Company recently adopted a value-based management system using economic profit (EP) as its key financial performance measure and criteria for decision making. Further, corporate-level resource allocation decisions will be guided in large measure by the economic profit of the divisions.

Divisions with a history of negative economic profit will be subject to closure or substantial reductions in investment. As a result, the company has charged each of its four divisions to use EP as a strategic planning tool.

The OK Plastics division is developing its strategic plan and needs to evaluate several key initiatives. The decision to implement any strategic initiative is to be made based primarily on its impact on the division’s profitability. The division has already implemented activity-based costing, and has a process model of operations.

What is needed is a methodology that will enable management to fully integrate economic profit into the planning process. Specifically, the method should enable division management to determine overall division economic profitability, and to allocate the capital charges down to individual product lines and activities. By unbundling the capital charges, the division will be able to easily isolate and evaluate profitable or unprofitable products and activities. After this is done, the impact of initiatives on division and product-line EP can be determined.



Company ProfileOK Company has four divisions. OK Plastics Division was the only one that failed to generate positive EP during the last reporting period. The OK Plastics Division’s profitability has been declining steadily for three years due to intense competitive pressures.

Product LinesOK Plastic’s overall strategy has been cost leadership. In the past, strategic initiatives have focused on cost control and asset management. OK Plastics Division produces three major lines of plastic products within its single plan.

Product Line AProduct Line A consists of high-volume, simple products, such as cellphone casings, that are produced in large batches.

A cost leadership strategy has traditionally been employed for Product Line A. Recently, stiff competition from a major competitor (who has used a focus strategy based on cost and quality for cellular phones) has seriously eroded OK Plastic’s market share and profitability.

Product Line BProduct Line B consists of medium-volume, more complex products, such as regular phone casings.

A cost leadership strategy has been used for the B-line. The market for regular phone casings is stable and management believes that its pricing is competitive, and that its market share should not change.

Product Line CProduct Line C consists of low-volume, small-order, highly complex products, such as business phone casings.

A differentiation strategy has been employed for C-line products based on service and price. Its pricing has been consistently below that of all competitors, resulting in growing market share.



6

StrategyDifferent strategic initiatives to increase economic profitability are:

● Growing operating profits without tying up more capital

● Investing in new projects that earn more than the full cost of capital

● Divesting from activities that do not cover the cost of capital

For example, one initiative sponsored by production involves an investment in new process technology, coupled with price decreases in Product Line A and price increases in Product Line C.

The improved technology will reduce processing times and improve product quality. Reduced processing time frees up capacity that can be used to produce more of Product Line A. In addition, the need for labor to operate machines will decline, resulting in more cost savings. Demand for Product Line A should increase due to both lower prices and higher quality. By increasing prices for Product Line C, demand will decline and so will related required resources. The divesting strategy will be automatically implemented.

To evaluate this strategic initiative in terms of its probable impact on the division and Product Line A, the OK Plastics model can be modified to incorporate the economic profit in its formulas.



EP Solution ResultsOne of the key advantages of Hyperion Business Modeling is its capability to unbundle financial information down to the product level. This enables the strategic planning team to identify products that are generating positive EP, as well as products that are destroying value for the owners.

Using a process model that was modified to yield EP results, division management was able to calculate that the division EP of -$171,550 was negative during the current year.

In the following example, there is a large positive EP of $381,160 for Product Line A, but Product Line C has a large negative EP of $735,320.

Business Modeling StrategyThe EP process model results led to the strategic division to invest more capital in Product Line A and to divest capital in Product Line C.

A strategic initiative to invest in new process technology to support growth for Product Line A was evaluated. Based on the EP View scenario results shown below, the division’s overall economic profitability would increase dramatically to $525,140. This strategic initiative will be approved as part of the division’s overall strategic plan.

EP Unbundled (000’s)

Division Product Line A Product Line B Product Line C

Net Operating Profit Before Taxes

$583.06 $559.48 $348.13 ($324.54)

EP ($171.55) $381.16 $182.61 ($735.32)



6

EP View Scenario Strategy Results

How did the division chart a more profitable course using economic profitability as a value-based management framework? Read on to see how OK Plastics Division used The Model Approach and Hyperion Business Modeling to implement EP.

EP Unbundled ($000)

Division Product Line A Product Line B Product Line C

Net Operating Profit Before Taxes

$1,393.16 $893.54 $602.49 ($102.87)

EP View $525.14 $543.36 $388.58 ($406.79)

Utilization Analysis:

Operator Labor 69%

Machine Utilization 68%



How the Solution was DevelopedOK Plastics’ Division management gave full support to a multi-disciplinary team assigned to develop an economic profit model using The Model Approach. See Chapter 3, “The Model Approach,” for a description of the eight-step methodology.

Supporting The Model ApproachBefore starting, the team secured management’s commitment to provide project resources, including staff time, to the project. Team members also attended The Model Approach workshop to understand the essential concepts of process modeling and acquire practical software training for carrying out the project successfully.

Step 1: Defining the Project ScopeThe OK Plastics’ business modeling management team performed the following tasks for Step 1 of The Model Approach:








For this economic profit study, the project team decided to focus on the cost and profitability of the products produced by OK Plastics. Therefore, the three product lines became the model’s demands.

The project team decided that the model should take a macro view of the organization and include all the operations and resources of the company. The multi-functional team believes it can obtain meaningful results in six weeks.



6


After interviewing the appropriate representatives from operations, the team identified the following activities, resources, and units of measure:


Operators Operator Hours (OperHrs)

Maintenance Mechanics Mechanic Hours (MechHrs)

Supervision People (#People)


Molding Machines Machine Hours (MchHrs)

Raw Materials (Resin & Additives) Thousand Pieces (Pcs [000])

Energy Megawatt Hours (Mwh)

Machine Supplies Machine Hours (MchHrs)

Molding Process Machine Hours (MchHrs)

Set Ups Setups (#Setups)

Sales and Marketing Calls (#Calls)

Order Processing Orders (#Orders)

Computer Services Orders (#Orders)

Advertising Ads (#Ads)




To model EP, four types of changes are required to convert an HBM model from an accrual-based view to an EP-based view, as follows:

● Apply the tax rate to all revenues and expenses using new tr variable, as outlined in “Adding the Tax Rate” on page 149.

● Allocate capital charges to all resources that are associated with working capital and fixed assets using the new variable for Capital Charges (cc), as outlined in “Allocating Capital Charges” on page 153.

● Add a new box, MCAP, to incorporate the capital charge into the model as outlined in “To create the new MCAP Machinery Capital Charge resource box:” on page 156.

● Make adjustments, known as equity equivalents or EEs, to convert some accrual accounting amounts to an EP basis, as outlined in the following section.

Creating Equity Equivalents (EEs)Equity equivalents, or EEs, are adjustments that are made to convert some accrual accounting amounts to an economic profitability basis. These adjustments to GAAP working capital and non-current assets are intended to provide a truer measure of cash. Although as many as 164 EEs can be created, most companies use only 5 to 20.

EEs can impact both operating profit and capital. For example, research and development costs are typically expensed as incurred for financial reporting purposes. The Economic Profit model assumes that most research and development costs have future benefit, and should be considered part of capital. As a result, accumulated Research and Development expense is added back to capital, and the annual expense is added back to operating income.

For the purpose of this case study, assume that all required EEs for the division have been incorporated into the operating data provided.



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OK Plastics Schematic Box DefinitionsEach box in the schematic is assigned a unique box identifier and name. The following boxes are used in the OK Plastics schematic to represent the demands, activities, and resources identified in Step 2:

Table 7: Resource Boxes (Fixed)

Table 5: Demand Boxes


DEMA Demand A Demand for product line A

DEMB Demand B Demand for product line B

DEMC Demand C Demand for product line C

Table 6: Activity Boxes


MLDPRO Molding Process Process of manufacturing pieces

SETUP Setting up Activities to set up machines


OCCY Occupancy OK Plastics’ building facility

MLDMC Molding Machines Machines for product manufacturing

ORDPRO Order Processing Resources and activities for processing orders

SPVN Supervision All supervisors

OPRL Operators People handling the machines


People keeping machines in good repair

MCAP Machinery Capital Charge

Capital charges for machinery



Table 8: Supply Boxes (Variable)

The following pages show the operational schematic developed for OK Plastics from the findings of Step 2. (For the schematic containing all the model data up through Step 3, see “OK Plastics Schematic 1” on page 133.)

A description of how to interpret the model follows the schematic.


MTLA Material A Raw materials required for product lines A, B, and C

MTLB Material B

MTLC Material C

ENERGY Energy Energy to run the machines

ADVT Advertising Advertising for product lines A, B, and C

COMP Computer Computers used by order processing

SUPL Machine Supplies Consumable supplies for the molding process



6

MLDPRO

SLMKT

OPRLOperators

OperHrs

SUPLMachine Supplies


MchHr

MchHrMLDMC

OCCYOccupancy

SqFt

MLDMCMolding

Machines

MchHrs

COMPComputer

#Orders

SLMKTSales &

Marketing

#Calls #Orders


ORDPROSPVN

Supervision

#People

ADVTAdvertising

#Ads

MechHrs


SETUP SLMKTORDPRO

ADVT

ENERGYEnergy

MWh

ENERGY

SETUP Setting up

#SetupSETUP

MTLCMaterial C

Pcs(000)


SASCSales & Admin

Summary C

DEMCDemand C

v=

MTLAMaterial A

Pcs(000)

v=

Pcs(000)

v=

SETUP ORDPRO ADVT

MLDMC

SLMKT

ENERGY ADVT

ENERGY

MLDMC

MLDPRO


SASASales & Admin

Summary A


MTLBMaterial B

ADVTSLMKTORDPRO

MLDPRO SETUP

SASBSales & Admin

Summary B

MLDPRO

c=

c=

c=

c=

c=

$

c=

$

$

$

$

$

$

c=

c=

$

$$ $

$

$$

$

$

$

$ $

DEMBDemand B

DEMADemand A


MCAP MCAP MCAP

SALDEPTSales &

Marketing

#Calls

$ c=

OPEROTOperator Overtime

OperHrs

$ c=


OperHr

$ c=ORDDEPT

Order Processing

#Orders

MCAPMachinery

Capital

MchHrs

MCAP

c=$



Interpreting the OK Plastics’ SchematicSince the requirements for activities are demand driven, the operational results of the OK Plastics’ model will be calculated using a bottom-up approach. The schematic illustrates the relationships among the resources and activities required to support the production of, for example, Product Line A.

At the bottom of the schematic, you will find the symbol for Demand A (DEMA). The Total Summary A (SUMA) box represents a summary of all activities and resources required for the production of Product Line A.

The following table continues this upward direction. The logic of the model reflects the logic of OK Plastics’ operations. Activities and resources are involved in the creation of products. As you move up through the schematic, you will see how the activities and resources draw from others in the organization.

Boxes RequiresRequirement Boxes

Demand A (DEMA) Machinery Capital Charges

Production Support

Sales & Administration

MCAP

PRSA

SASA

Production Summary A (PRSA)

Molding Processing

Raw Material: Product Line A

Setting up activities

Machinery Capital Charges

MLDPRO

MTLA

SETUP

MCAP

Sales & Administration (SASA)

Sales & Marketing

Order Processing

Advertising

SALMKT

ORDPRO

ADVT

Molding Process (MLDPRO) Machine Supplies

Molding Machine

Energy

Operator Choice

Maintenance Mechanic

SUPL

MLDMC

ENERGY

OPERCH

MAINMCH

Setting up (SETUP) Maintenance Mechanics

Energy

Molding Machine

MAINMCH

ENERGY

MLDMC



6

The schematic can be used similarly to describe the activities and resources required to support product lines B and C.

Operators (OPRL) Supervision SPVN

Mechanics (MAINMCH) Supervision SPVN

Order Processing (ORDPRO) Order Processing Department ORDDEPT

Molding Machines (MLDMC)

Building space OCCY

Sales & Marketing (SALMKT)

Sales & Marketing Department SALDEPT

Boxes RequiresRequirement Boxes




Through a process of interviews with OK Plastics’ staff, the team collected data on the company processes and activities. It is summarized in the following statements:


Report Content


An income statement for the current year

Operational and Financial Data

Detailed information about each product line




Resource availability and utilization for the current year


Financial Accounts A list of all revenue and cost categories used in the model

Fixed Resource Costs Resource financial, volume, and unit data

Occupancy Data Square footage use of building by resource



6


REVENUE

Sales of Product Line A $2,450

Sales of Product Line B 1,775

Sales of Product Line C 885

Total Revenue $5110

COSTS

Sales

Raw Materials $1,865

Operators 690

Shared Production

Maintenance Mechanics $60

Supervision 90

Machine Depreciation 390

Production Overhead 669

$3764

Gross Margin $1,346

Selling & Admin. Expenses

Sales & Marketing $190

Order Processing Salaries 120

Rent & Insurance 270

Advertising 85

Computer Costs 73

Other Expenses 25

Total SG & A $763

TOTAL INCOME BEFORE TAXES

$583



Operational and Financial DataThese spreadsheets contain detailed operational and financial data gathered by the company for each member of the three product lines. Note that each product line consists of several different products of varying units and resource requirements. A summary of the data to be used for each of the product lines in the activity-based costing model is displayed below:

Table 9: Product Analysis Detail for Product A

Product Code

Sales Units (000)



Operator Hours


A110 500 1181 499 8970 950 5 15

A120 200 498 210 3635 394 4 8

A130 120 304 131 2189 252 3 7

A140 80 204 92 1476 172 4 8

A150 50 129 59 950 115 5 6

A160 50 134 59 881 117 4 6

Total A 1000 2450 1050 18200 2000 25 50

Unit A 2.45 1.05 18.20 2.00 .025 .050

Table 10: Product Analysis Detail for Product B

Product Code

Sales Units (000)



Operator Hours


B201 100 331 112 3033 330 5 16

B202 70 242 79 2174 238 4 12

B203 50 174 57 1560 173 3 10

B204 50 175 58 1565 175 6 8

B205 40 142 46 1256 140 6 6

B206 40 144 46 1264 140 6 7

B207 30 110 35 948 108 7 8



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B208 30 113 35 959 110 6 6

B209 25 94 30 806 93 6 6

B210 25 96 30 817 93 7 7

B211 20 77 24 699 76 7 7

B212 20 78 24 720 76 7 7

Total B 500 1775 575 15800 1750 70 100

Unit B 3.55 1.15 31.6 3.50 .140 .20

Table 11: Product Analysis Detail for Product C

Product Code

Sales Units (000)



Operator Hours


C301 23 122 35 938 104 5 18

C302 16 86 25 660 74 4 12

C303 12 68 19 501 56 3 15

C304 10 57 16 423 47 4 14

C305 8 47 13 342 38 6 13

C306 7 42 11 302 34 6 15

C307 7 42 11 302 34 5 16

C308 7 43 11 303 34 6 13

C309 6 36 10 259 29 6 14

C310 6 38 10 259 29 5 17

C311 6 38 10 259 29 5 15

C312 5 31 8 219 25 5 11

C313 5 32 8 221 25 4 12

C314 5 32 8 226 25 3 14

Table 10: Product Analysis Detail for Product B (Continued)

Product Code

Sales Units (000)



Operator Hours




C315 5 32 8 229 25 4 12

C316 4 26 7 183 20 3 11

C317 4 26 7 183 20 6 8

C318 4 26 7 184 21 4 12

C319 3 19 5 138 16 6 10

C320 2 13 4 91 11 7 8

C321 1 6 2 47 5 6 6

C322 1 6 2 47 5 6 10

C323 1 6 2 48 6 7 7

C324 1 6 2 49 6 7 8

C325 1 5 2 49 6 7 9

Total C 150 885 240 6460 720 130 300

Unit C 5.90 1.60 43.07 4.80 0.867 2.0

Table 12: Product Analysis Detail for All Products

Product Code

Sales Units (000)


Material Costs $(000)

Operator Hours


Total 1650 5110 1865 40460 4470 225 450

Table 11: Product Analysis Detail for Product C (Continued)

Product Code

Sales Units (000)



Operator Hours




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Costs of Services and ConsumablesThe team also collected the following on internal and external costs:


Occupancy Data

Service Cost

Advertising $8.5 per advertisement

Computers $0.05 per order

Energy $0.0048 per megawatt hour (MWh)

Machine Supplies $0.03 per machine hour

Material A $1.05 per Product Line A piece

Material B $1.15 per Product Line B piece

Material C $1.60 per Product Line C piece

ResourceMax. Availability/Year

Used Last Year Utilization%

Maintenance Mechanics 3200 hours 2876.3 90

Molding Machines 5928 hours 5595.25 94

Occupancy 100,000 sq. ft. 100,000 100

Operators 45,000 hours 39,023 87


Molding Machines 60,000

Sales and Marketing 15,000

Order Processing 25,000

Total 100,000



Financial AccountsThe following table shows the financial accounts. Entries in bold represent cost totalers.

Number Name Number Name

10 Revenue from Product A 700 Selling/Administration Expense

20 Revenue from Product B 710 Order Processing Salaries

30 Revenue from Product C 720 Sales/Marketing Salaries

725 Office Supplies Costs

100 Cost of Sales 750 Computer Costs

101 Raw Materials 760 Advertising

102 Operators 790 Other Expenses

500 Shared Production Costs 900 Capital Charges

510 Maintenance Mechanics 901 Cash and other Fixed Assets

520 Supervision 911 Accounts Receivable

550 Machine Depreciation 921 Trade Payables - Material A

560 Machine Supplies 922 Trade Payables - Material B

570 Energy 923 Trade Payables - Material C

600 Occupancy Costs 930 Property and Plant

610 Rent and Insurance 940 Machinery



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Fixed Resource Costs

Variable DataTo make the model more flexible, some of the data collected is defined in the model as variables.


Maintenance Mechanics

Maintenance Mechanics Salaries

$30.00 #mnt

Molding Machines Machine Depreciation $130.00 #mch

Occupancy Rent and Insurance $675.00

Operators Operator Salaries $22.30 #opr

Order Processing Computer Costs $50.50

Office Supplies $24.00 #ord

Other Expenses $5.00 #ord

Sales & Marketing Sales & Marketing Salaries

$23.75 #sal

Supervision Supervisor Salaries $45.00 #spv

Variable Description Value

cc Cost of Capital .10

efmc Machine efficiency rate 0.95

#mch # of machines 3

#mnt # of maintenance staff 2

#opr # of operators 30

#ord # of order processors 5

#sal # of sales people 8

#sft # of shifts 1

#spv # of supervisors 2

tr Tax Rate .15



Assigning Capital ChargesCapital charges must be assigned to the appropriate boxes. To do this, the accrual-based balance sheet must be analyzed. Associate each working capital component and each long-term asset with the related resource in the existing model, as outlined in the following analysis:

Note: Not all data items in the model are contained in the above table.

Table 13: EP Analysis of Working Capital and Fixed Asset Accounts

Year-End Balance ($000’s) Related HBM Resource

Working Capital Accounts

Cash $20 Sales and Marketing Department

Accounts Receivable $300 Order Processing

Accounts Payable ($120) Purchased Materials

Fixed Asset Accounts

Property and Plant $2,200 Occupancy

Equipment $1,800 Machinery Capital Charge

Other $940 Sales and Marketing



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MLDPRO SLMKT

OPRLOperators

OperHrs

SUPLMachine


MchHr

MchHrsMLDMC

OCCYOccupancy

SqFt

MLDMCMolding

Machines

MchHrs

COMPComputer

#Order

SLMKTSales &

Marketing

#Calls

#Order


ORDPRO

SPVNSupervision

#People

ADVTAdvertising

#Ads

MechHrs


SETUP SLMKTORDPRO

ADVT

ENERGYEnergy

MWh

ENERGY

SETUP Setting up

#SetupsSETUP

MTLCMaterial C

Pcs(000)


SASCSales & Admin

Summary C

DEMCDemand C v=150 pcs

(000)

MTLAMaterial A

Pcs(000)

v=1000 pcs

Pcs(000)

v=500 pcs

SETUP ORDPRO ADVT

MLDM

SLMKT

ENERGY

ADVT

ENERGY

MLDMC

MLDPRO


SASASales & Admin

Summary A


MTLBMaterial B

ADVTSLMKTORDPRO

MLDPRO SETUP

SASBSales & Admin

Summary B

MLDPRO

c=100,000

c=f 2080*#mch*#sft*efmc

610 $f675*(1-tr)

550 $f(130*#mch)*(1-tr)

DEMBDemand B

DEMADemand A


940 $f(3300*cc)

MCAPMachinery

Capital

MCAP MCAP MCAP

MCAP

MchHrs

SALDEPTSales &

Marketing

#Calls

OPEROTOperator

OperHrs

$ c=9.00


OperHr

ORDDEPTOrder

Processing

#Orders

930 f 2200*cc

cf=60,000702 23.75*#sal*(1-tr)

f=.867 f=10 f=2 cf=8

101 $1.6101 $1.15101 $1.05

10 ƒ $2.45*(1-tr) 20 ƒ $3.55*(1-tr) 30 ƒ $5.9*(1-tr)

f=4.8 f=.1

923 ƒ(-0.10295*cc)922 ƒ(-0.074*cc)

921 ƒ(-0.06756*cc)

560 $.025*(1-tr)

f=5 f=15.75

f=9

f=10f=6.3 f=.14

510 $ƒ(30*#mnt) c=ƒ(1600*#mnt)

c=ƒ(1500*#opr)

102 $ƒ(22.3*#opr)*(1-tr)

cf=ƒ(1*#opr)

570 $.0048*(1-tr)

760 $8.5*(1-tr)

520 $ƒ(45*#spv)c=ƒ(20*#spv)

901 f (960*cc)

720 $ƒ(23.75*#sal) c=ƒ(250*#sal)

cf=15,000c=ƒ(110*#ord)

750 $50.5*(1-tr)710 $ƒ(24*#ord) 790 $ƒ(5*#ord)911 $ƒ(300*cc)

750 $.05*(1-tr)

cf=25,000c=250*#sal



Step 5: Build the ModelThe team created a computer-based model using the schematic from Step 3 and the data collected in Step 4.

The next step is to build the activity-based model for the division. After this model has been created, the EP variables have to be added to convert the existing activity-based model from an accrual-based view to an EP-based view.

OK Plastics Activity-Based ModelIf you have not done so, install and start the Hyperion Business Modeling software.

➤ To open the OK Plastics Economic Profitability Model:

1. From the Model Workspace, select Project > Open.

The Open Project dialog is displayed.



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2. Ensure the Local Storage Area folder is selected in the Containers frame, and double-click okplastics.

The OK Plastics Product Profitability model opens.

The following is a list of the model details in the workspace areas:


● The Building Blocks tab in the Project window lists the model’s boxes by type. In the Edit window, the following details for a selected box are displayed:

● Box ID


● Unit of Measure.

Depending on the type of box you have selected, the following panes might also be available:

● Capacity



Workspaces

Display Window: Schematic and Detail views

Edit Window

Toolbar

Project Window

Workspaces tabs



● Volume

● Route policy

● Notes

● Tags

Note: You might need to scroll to view all elements.


● The Display window contains a high-level, or Schematic, view of the model and a box level, Detail, view. A third tab offers the Flow View for a selected box.



● From the Toolbar, you can select the EP View button or the Regular View button to toggle between the two views.

● On the right side of the Toolbar, you can navigate to report, results and print workspaces:

● Select the Reports tab to open a workspace of preformatted model and results reports that provide project information and data from selected boxes as well as the entire model.

● Select the Results tab to open a workspace where you can create model results tables. You can display cost, net cost, net profit, and utilization results by box type and specific boxes. Please note, the Results button is activated only after you have calculated the model.

● Select the Print tab to open a workspace where you can print single and multiple copies of your model data and results.

For additional information about any of the model details listed above, refer to the Hyperion Business Modeling User’s Guide.



6

Adding Changes to Model EPUsing the activity-based model you created, you must apply the changes to calculate economic profit. To model EP, the following elements must be added to convert the activity-based model from an accrual-based view to an EP-based view:

● Apply the tax rate to all revenues and expenses using new tr variable, as outlined in “To apply the tax rate to the existing model:” on page 151.

● Allocate capital charges to all resources that are associated with working capital and fixed assets using the new variable for Capital Charges (cc), as outlined in “Allocating Capital Charges” on page 153.

● Add a new box, MCAP, to incorporate the capital charge into the model as outlined in “To create the new MCAP Machinery Capital Charge resource box:” on page 156.

Note: Equity equivalent adjustments (or EE’s) to convert some accrual accounting amounts to an EP basis are also required, but for the purposes of this case study, you can assume that this has already been done. For more information, refer to “Creating Equity Equivalents (EEs)” on page 130.

Adding the Tax RateThe appropriate tax rate must be applied to all revenues and expenses. A new variable called Tax Rate (tr) is defined to represent the effective tax rate. This variable is added to the formula for each revenue or expense that is taxable or tax deductible to allocate the correct portion of the overall tax to the particular activity.

The tax rate is usually added to existing formulas using the following format:

Before Tax Expense*(1 - tr)

When constructing the formula is it crucial to add the EP factors to the equation in such a way that, when calculating the same formula in Regular View, the EP portion is zeroed out.

In the following example, the formula works in Regular View because the EP variables equal zero, but in EP View, the actual values are applied and the calculation will be correct.

a*(1-tr)



➤ To add the tax rate variable to Global Data:

1. In the Project window in the Model workspace, select Global Data.

2. From the Model workspace toolbar, click the EP View button to change to EP View.

3. Select Variables.

The Variable pane is displayed in the Edit window.

4. Enter tr in the ID text box.

5. Enter Tax Rate in the Name text box.

6. Set the value of the variable for the current period in the Values text box to .15.

7. Click Add.

The new EP variable is added to the Variables list.



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➤ To apply the tax rate to the existing model:

1. In the Project window in the Model workspace, select the Building Blocks tab.

2. Select MCDMC Molding Machines from the list of Resource boxes or on the schematic.

3. In the Financial pane of the Edit window, select Category 550 Machine Depreciation.

4. Click the Formula button , then select Edit to edit the existing formula


5. Append the tax rate portion of the formula to the existing formula, then select Update in the Edit Formula dialog.

6. In the Edit window, select Update.



7. Repeat Steps 2 to 6 to update the appropriate formula for each revenue and expense listed in the following table:

8. Save the model when all formulas are updated.

Box ID Category Formula

Expenses ADVT 760 8.5*(1-tr)

COMP 750 0.05*(1-tr)

ENERGY 570 0.0048*(1-tr)

MAINMCH 510 30*#mnt*(1-tr)

MLDMC 550 (130*#mch*(1-tr))

MTLA 101 1.05*(1-tr)

MTLB 101 1.15*(1-tr)

MTLC 101 1.06*(1-tr)

OCCY 610 (675*(1-tr))

OPEROT 012 0.0174

OPRL 102 22.3*#opr*(1-tr)

ORDDEPT 710 24.0*#ord*(1-tr)

750 (50.5*(1-tr))

790 5*#ord*(1-tr)

SALDEPT 720 (23.75*#sal*(1-tr))

SPVN 520 45.0*#spv*(1-tr)

SUPL 560 0.025*(1-tr)

Revenue DEMA 10 2.45*(1-tr)

DEMB 20 3.55*(1-tr)

DEMC 30 5.9*(1-tr)



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Allocating Capital ChargesAn additional cost called a capital charge must be added to model resources that are associated with working capital and fixed assets.Capital in this instance equals working capital (meaning current assets less current liabilities), plus long-term assets. The cost of capital percentage is a weighted average of both interest-bearing debt and equity.

These charges represent the cost of the related capital used in the business. The charge represents interest on debt and a return to shareholders. A capital credit results from savings due to current liabilities, including assets, such as material inventory, that are funded by suppliers without interest.

A Cost Category of 900 is reserved in the EP Preferences dialog for the Capital Charges totaler. A Cost of Capital category is created for each working capital item and fixed asset item on the balance sheet, and assigned a category between 901 and 999. Multiply this balance sheet item amount times the variable cc to calculate the capital charge for this resource.

Complete the following steps to allocate capital charges to the existing model:

● Define a new variable called Cost of Capital (cc) that represents the dollar total for the cost of all capital.

● Create a Cost Category for each working capital item and fixed asset on the balance sheet.

● Create a new resource box called MCAP Machinery Capital Charges to proportionately allocate the cost of the new equipment to the three product lines.

● Apply the cost of capital to each working capital or fixed asset item on the balance sheet.



➤ To add the Cost of Capital variable to Global Data:

1. In the Project window in the Model workspace, select Global Data.

2. Select Variables.

The Variable pane is displayed in the Edit window.

3. Enter cc in the ID text box.

4. Enter Cost of Capital in the Name text box.

5. Set the value of the variable for the current period in the Values text box to .10.

6. Click Add.

The Cost of Capital variable is added to the Variables list.



6

➤ To create the new Cost Categories:


2. Select Categories.

The category pane is displayed in the Edit window.

3. Enter 901 in the ID text box.

4. Enter Cash and other Fixed Assets in the Name text box.

5. Click Add.

6. Repeat steps 2 to 5 to add the remaining EP categories to the model:

EP Cost Category Box ID

900 Capital Charges Totaler

901 Cash and Other Fixed Assets

911 Accounts Receivable

921 Trade Payables - Material A

922 Trade Payables - Material B

923 Trade Payables - Material C

930 Property and Plant

940 Machinery



➤ To create the new MCAP Machinery Capital Charge resource box:


2. Select Resource.

The resource box data panes are displayed in the Edit window.

3. In the Edit window, enter the following information:

– in the ID text box, enter MCAP

– in the Name text box, enter Machinery Capital Charge

– in the Unit text box, enter MchHrs

4. Click Add.

The box is displayed in the upper left corner of the Display window.

5. Drag the box to a logical position on the schematic.

Note: This box has no input links, and has output links to PRSA, PRSB, and PRSC.

➤ To apply the cost of capital to the existing model:


2. Select MCAP Machinery Capital Charges from the list of Resource boxes or on the schematic.

3. In the Financial pane of the Edit window, select 940 Machinery from the drop-down list.



6

4. Click the Formula button , then select Edit to edit the existing formula


5. Enter the formula where the proportionate cost of the machinery is multiplied by the cost of capital for the purchase (3300*cc).

6. In the Edit Formula dialog, click Update.

7. In the Edit window, click Update.



8. Repeat Steps 2 to 7 to add the appropriate formula to each item of working capital and fixed assets, as shown below:

Reviewing a Resource BoxA resource box shows the kinds of data used to create a Hyperion Business Modeling model.

➤ To review a resource box with Tax Rate applied:

1. From the Display window in the Model workspace, select the Detail tab to view individual boxes and the data associated with them.

EP Cost Category Box ID Formula

901 SALDEPT $960*cc

911 ORDDEPT $300*cc

921 MTLA $-0.06786*cc

922 MTLB $-0.074*cc

923 MTLC $-0.10295*cc

930 OCCY $2200*cc

940 MCAP $3300*cc



6

2. Click the MLDMC (Molding Machines) resource box from the Building Blocks tab to view the units, capacities, and financial data attached to operators performing the molding processes for all three product lines.

Note the following characteristics of the Molding Machines resource box:

– The constant factor is set at 60,000.00 square feet.

– 1,125 hours are passed to SETUP.

– 4,470 hours are passed to MLDPRO.



– The total depreciation allocated to Cost Category 550 is $390.00 in Regular View. If the tax rate of .15 is applied, the depreciation is actually $331.50.

– The Capacity is 5,928 machine hours, based on the formula 2080*#mch*#sft*efmc, where:

● #mch is the number of machines

● #sft is the number of shifts

● efmc is the machine efficiency rate

➤ To review a resource box with Cost of Capital applied:




6

2. Click the OCCY (Occupancy) resource box from the Building Blocks tab to view the units, capacities, and financial data attached to operators performing the molding processes for all three product lines.

Note the following characteristics of the Occupancy resource box:

– The capacity is set to 100,000.00 square feet.

– 25,000 square feet are allocated to ORDDEPT.

– 60,000 square feet are allocated to MLDMC.

– The allocation of the cost of capital for OCCY is $220,000, based on the formula for EP Category 930 Property and Plant.




➤ To review a demand box:


2. Click DEMA in the Building Blocks tab under demand box types.

Note the characteristics of this demand box:

– It has two input links (SASA and PRSA) and no output links. (Demand boxes can have more than one input link but never an output link.)

– The volume of demand (1000) is displayed within the graphic symbol.

– The unit of measure used for this box (Pcs[000]) is displayed beside the volume value.

– The revenue per piece ($2.08) and Financial Category (10 Revenue from Product A) are displayed on the right side of the symbol.



6

Step 6: Validating the ResultsThe activity-based management team took this step to confirm that the operational and financial results produced by the model reflect the actual experience of the business for the period being modeled.

The team knew that operational validation is done first because the financial calculation is derived from the operational flow. They compared the results calculated by the model with the data gathered in Step 4. Refer to the Balance Sheets, Income Statement, Operational Resource Availability and Utilization reports to compare the results.


Ensure okplastics.md is open.

➤ To validate operational data in the OK Plastics model:

1. On the toolbar, click the Verify button , if your model is unverified.


2. On the toolbar, click the Calculate button .

The Calculation indicator is displayed. When it is displayed, the model has been successfully calculated.

3. Select the Detail tab for DEMA to see the results available in the Detail view.

Note the following operational result:

– The flow from the Summary Boxes SASA and PRSA is 1,000,000 pieces (displayed as 1,000 Pcs(000)).

4. From the Model workspace toolbar, select the Results workspace.




All the utilization levels for the model’s resources with a defined capacity are displayed.

6. Compare the utilization level for OCCY calculated by the OK Plastics model and the level from “Resource Availability and Utilization” on page 141. Both are 100%.


– Maintenance mechanics are 89.88% utilized.

– Sales and Marketing is 90% utilized.


Financial ValidationWith full confidence in the operational data generated by the Hyperion Business Modeling model, the project team compared standard financial data with the data generated by the model.

The team looked at the model’s financial reports and compared their results to the standard costing figures.



6


1. Select the Reports workspace in either the Results or Model workspace.

The Reports workspace opens.








6

Compare the financial results from the model to the data collected in Step 4. For further information, see “OK Plastics Income Statement” on page 137.

– The total revenue of the three product lines after tax is $4,515,050.

– The capital charges are $664,000.

– The EP categories 921, 922 and 923 all represent negative values.

– The total economic profit for OK Plastics is negative $171,550.

The model’s results match the financial experience as shown in the income statement.

➤ To return to the Model workspace, select the Model workspace tab.

Activity-Based Cost AnalysisWhen the project team validated the operational and financial results of the OK Plastics model with the standard costing results, they could confidently interpret the new information.


The project team decided to look at the company’s least profitable product line first. Before you follow the team’s procedures, make sure that you have the OK Plastics model open and calculated. For more information, see “OK Plastics Activity-Based Model” on page 146.

➤ To examine cost and operational requirements for Product Line A:

1. From the Project window in the Model workspace, select the Building Blocks tab.

2. Scroll to the Demand boxes and click DEMA Demand A.



3. In the Display window, select the Detail tab.

The Detail view presents new information summarizing cost and operational requirements for the support of Product A. From this screen, the OK Plastics team discovered that:

– The total cost to produce 1000 (000) pieces of Product A this year was $1,701,340.

– Machine and material costs accounted for $1,627,220 of the total.

– Sales and administration costs accounted for negative $74,120 of the total.

– The average cost to produce one Product Line A piece was $1.70.

The team was surprised by the average cost of Product Line A. The standard per unit cost was only $1.89.

The difference per piece signalled to the team that with operational and financial results properly validated between the standard costing reports and activity-based costing model, there must be other significant differences in costs, revenues, and economic profit among all three product lines.



6

➤ To examine the costs, revenues, and economic profit for all product lines:

1. In the Display window of the Model workspace, select any Demand box.

2. From the Model workspace, select the Results workspace tab.

The Results workspace opens.

The Flow - Net Profit result is pre-selected, and a chart displays, showing the ID, Name, Flow, Units and Economic Profit for each Demand type.

Again, the net profit of each of the product lines is noticeably different from the company’s standard calculations.



ic

----

----

50)

Based on calculations provided in this chapter, the following table shows the profit for each product line, based on the type of costing applied to the project:


● Using traditional methods, Product Line A was perceived as the least profitable line at negative $181,000, but Hyperion Business Modeling revealed it is a profit leader at $559,480.

● Product Line B was always considered profitable at $193,000, but it contributes $348,130 to OK Plastics’s bottom line—much more than previously thought.

● Using traditional methods, Product Line C appeared to generate a profit of $88,500. With activity-based costing, it becomes evident that Product Line C actually produced a loss of $324,540. When using EP to calculate the cost of capital and taxes into the equation, it demonstrates that this loss is actually $735,320, more than double the amount anticipated.

Table 14: Profit for each Product Line with Original Model

Model/ Scenario

Costing Type

Product Line A

Product Line B

Product Line C Net Profit

EconomProfit

Traditional Model

Traditional ($181,000) $193,000 $88,500 ----

Original NP Model

Activity-Based $559,480 $348,130 ($324,540) $583,060

EP $381,160 $182,610 ($735,320) ---- ($171,5



6

Other Situations to AnalyzeTry analyzing the model yourself. As you go, you will be digging more deeply into the OK Plastics model.

● Determine the accrual-based operating income before tax by setting the variables tr and cc to zero. The operating income before tax should be $583,000.

This points out the value of variables in Hyperion Business Modeling. This model can be easily changed to reflect accrual income before tax, accrual income after tax and economic profitability.

● Change the cost of capital to 25%, then change the marginal tax rate to 35%.

Note that economic profitability is much more sensitive to changes in the assumed cost of capital than to changes in the assumed marginal tax rates. Over the relevant range of cost of capital, economic profitability for the model can vary by as much as $1,000,000. The economic profitability only varies by about $240,000 over the same range of tax rates.

The implication for management is to carefully estimate the cost of capital for the division. For a cost of capital greater than approximately 15%, the new process technology’s impact on division economic profitability will be negative, suggesting that it be rejected as a viable strategic initiative.




Step 8: Performing Activity-Based ManagementThe project team used Hyperion Business Modeling to evaluate the financial and operational impact that the proposed strategic objective has on the organization.

Management needs to know the impact of purchasing new process technology. In the past, the division production operation has been very labor intensive with 30 machine operators.

The new technology involves upgrading the three molding machines. The expected results are faster processing speeds, coupled with higher quality. Faster processing should reduce the consumption of operator labor as the division changes its production system to be more capital intensive. Higher quality will have a beneficial impact on demand for all three product lines.

If this new technology is not adopted, it is believed that competitors will do so, resulting in a further erosion of market share for Product Line A.

The proposed new process technology strategic initiative is part of a comprehensive, three year strategic plan. This initiative will be implemented during the first year of the three year planning period. Other components of the strategic plan will be implemented during years two and three.

Scenario Assumptions● The cost of machine upgrade is $500,000 per machine

● The depreciation of upgrade additions is $50,000 per year, per machine

● The expected life of machines (with or without the upgrade) is 10 years

● The processing times for all products are expected to be reduced to 50% of previous levels

● The capital charge allocations will be changed to a ratio of 4:1:5 for Product Lines A, B and C respectively, to reflect the fact that the new process technology investment is being made primarily to support Product Line A.

Whether or not the new technology is implemented, the price of Product Line A will be reduced.



6

Proposed InitiativesThe initiatives described in the following table are proposed to evaluate the impact of purchasing the new equipment on the profitability of the company. The changes are added to the Hyperion Business Modeling model and saved as Scenario 1. For complete instructions, refer to “To evaluate the purchase of new processing equipment:” on page 174.

After the scenario is modeled, and the results are calculated, evaluate the operational results, and check the utilization levels for resources.

Proposed Initiative Expected Result HBM Model Change

Purchase new processing equipment

Improved processing times and quality

Add depreciation to machinery resource

Increased demand for Product Line A

Add purchase price of new processing equipment to Machinery Capital Charges box (MCAP)

Increased demand for Product Lines B and C, but magnitude of increase is not as great as for Line A

Reduce factors on production summary boxes

Modify complexity output measure on Machinery Capital Charge box to reflect higher allocation to Product Line A

Increase demand for Line B to 600,000

Decrease pricing for Product Line A

Increase demand for Line A

Demand for Line A is 1,700,000 (reflecting both the improved quality and decreased price)

Price for Line A is reduced to $2.20 per unit

Divest in Product Line C by significant increases in price

Decreased demand for Line C

Increase price of Line C to $7.75 per unit

Decrease demand for Line C to 100,000. The reduction in demand is mitigated by improved quality.



Evaluating the Impact of New Process Technology on Economic Profit

To evaluate the potential of these initiatives, you must first create a new scenario. The scenario-playing exercise below assumes that you are running Hyperion Business Modeling with okplastics.md model open.

Economic Profit - Scenario 1

➤ To evaluate the purchase of new processing equipment:

1. Open the model in the Model workspace.

2. On the Model workspace toolbar, click the EP View button to change to the correct view.

3. In the Projects & Time tab, click Scenarios



5. Type Economic Profit in the Scenario Title text box.

6. Ensure the Annual check box is selected in the Periods text box, then click Create.

7. In the Project window, select the Building Blocks tab.



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8. Modify the formula for the MLDMC Resource box as follows:

a. Click the MLDMC Molding Machine in the Resource box list.

b. In the Edit window, select Financial, then select Category 550, Machine Depreciation from the drop-down list.

c. Click the formula button, then select New.

The Formula dialog is displayed.

d. Enter the following formula to calculate the expected depreciation on the new equipment using the appropriate tax rate, as shown below:

180.0*#mch*(1 - tr)

e. Click Add.

f. In the Edit window, click Update to save the new formula.

9. Repeat the procedure in Step 7 to modify each of the following formulas for the specified Building Blocks:

10. From the Building Blocks tab in the Project window, select the Summary Box PRSA.

Building BlockFinancial Category Modified Formula

DEMA Category 10 2.20*(1-tr)

DEMC Category 30 7.7500*(1-tr)



11. From the Input Links pane in the Edit window, select MLDPRO and change the factor to 1.

12. From the Input Links pane in the Edit window, select MCAP and change the factor to 4.0, then select Constant as the factor type.

13. Repeat the procedure in Steps 9 to 11 to modify the factors for each of the following input links:

14. From the Volume pane in the Edit window, modify the volumes for each demand as specified in the following table:

15. In the Project window, select OPERCH Operator Choice Route Box.

16. In the Policy pane in the Edit window, enter the following values:

17. From the Global Data tab in the Project window, select Variables.

18. Select #opr and change the value in the Edit window to 26.0 for the Number of Operators.

The changes for the new scenario are now complete.

Building Block Input Link Modified Factor

PRSB MLDPRO 1.750

PRSC MLDPRO 2.400

MCAP 5.00, Constant

Building Block Modified Volume

DEMA 1700.00

DEMB 600.00

DEMC 100.00

Building Block Modified Policy Value

OPEROT 0.00

OPRL 1.00



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Calculating the ScenarioAfter the team introduced changes to the model data to reflect operational, marketing, and purchasing initiatives, they can see the effects on the model and, by extension, their own division.

➤ To see the results of the changes, click the Calculate button .


The new economic profit of $525,140 is significantly higher than the economic profit costing result of the current operations.

Even if the organization did not adopt all the changes recommended by the activity-based management team, it does point OK Plastics in a more profitable direction.

Table 15: Profit for each Product Line with Scenario Changes

Note: This scenario has already been built and saved under the name Economic Profit Increase. To double-check your results, open and compare Economic Profit to your scenario.

Model/ Scenario

Costing Type

Product Line A

Product Line B

Product Line C Net Profit

Economic Profit

Traditional Traditional ($181,000) $193,000 $88,500 ---- ----

Original NP Activity-Based

$559,480 $348,130 ($324,540) $583,060 ----

EP $381,160 $182,610 ($735,320) ---- ($171,550)

Scenario NP Activity-Based

$893,540 $602,490 ($102,870) $1,393,160 ----

Scenario EP EP $543,360 $388,580 ($406,790) ---- $525,140



Next StepsDetermine the accrual-based operating income before tax by setting the variables tr and cc to zero, or by switching to Regular View and recalculating, if necessary. Operating income before tax should be $583,000. This points out the value of variables in Hyperion Business Modeling. This model can easily be changed to reflect accrual income before tax, accrual income after tax and economic profit.

Sensitivity AnalysisManagement is concerned about the accuracy level of the cost of capital percentage used and the marginal tax rate. The cost of capital may be substantially higher than the 10% used. Also, the marginal tax rate may be higher than 15%.

To assess the sensitivity of EP results to these parameters, change the cost of capital percentage to 25%. Change the marginal tax rate to 35%. Note that EP is much more sensitive to changes in the assumed cost of capital than changes in the assumed marginal tax rates. Over the relevant range of cost of capital, EP can vary by as much as $1,000,000, whereas EP only varies by about $240,000 over the relevant range of tax rates.

The implication for management is to carefully estimate the cost of capital for the division. For a cost of capital greater than approximately 15%, the impact of the new process technology on division economic profit will be negative, suggesting that it be rejected as a viable strategic initiative.


Chapter

7


Next Steps

If you are interested in learning more about Hyperion Business Modeling and The Model Approach, Hyperion Solutions and its partners offer courses in the eight-step methodology.

The Model Approach is internationally recognized as the most effective implementation strategy for activity-based costing and management. This two-day workshop is designed especially for busy professionals, drawing from years of implementation experience and using the case study approach.

During the workshop, you will receive hands-on experience as well as a solid conceptual foundation for building your process models, generating results, and using those results in activity-based management scenarios. Our instructors are seasoned professionals who have years of field experience with activity-based management projects.


Next Steps


Appendix

A


Concepts

Hyperion Business Modeling incorporates the concepts of activity-based management, activity-based costing, and process modeling. By understanding these concepts, you will gain a better understanding of how The Model Approach and the software help you solve the issues facing your business.

This appendix is divided into the following sections:

● “Activity-Based Costing and Management” on page 181

● “Solution” on page 184

Activity-Based Costing and ManagementThe two essential concepts behind Hyperion Business Modeling are Activity-Based Costing and Activity-Based Management.

The advantages to activity-based costing will become more apparent if you understand the limitations of traditional costing first.

The Problem of Indirect CostsOrganizations have struggled to understand costs that do not directly contribute to the production of goods or provision of services. The traditional method involves determining a basis for allocation and distributing the indirect costs on that basis.

For example, labor hours have been a common basis for allocating costs. Indirect (or overhead) costs are pooled and allocated based on the number of hours used to generate a product or service.


Concepts

Activity-Based CostingThe following definition of activity-based costing was developed by the Consortium for Advanced Manufacturing International (CAM-I), a group of organizations engaged in joint research into new management techniques.

Activity-based costing is a cost management system that:

● Measures the cost and performance of activities, resources, and cost objects

● Assigns appropriate resources to activities and activities to cost objects

● Recognizes the causal relationships of cost drivers to activities

A cost object is any customer, product, service, contract, project, or other work unit for which a separate measurement of cost is desired. In activity-based costing, activities and resources are traced to cost objects through cost drivers—the units by which activities are measured. When an activity’s cost driver—such as machine hours, number of orders, billing hours, number of pounds produced, and so on—changes, the costs of resources and supplies feeding that activity also change.

Those costs are reflected in the cost of supporting the creation of a volume of products, provision of a service, or serving a customer.

Process ModelingProcess models begin with creating a schematic of an organization. In a general sense, a schematic is a visual representation of two aspects the organization:

● a comprehensive understanding of all the processes and activities of the business and

● how they relate to one another.

Process modeling traces costs from resources to activities, to other activities, and finally to the products or services or other cost objects based on how they are consumed. These resources are then costed, showing the financial results of the model’s activities. Because this approach can show more than two levels of drivers, process models can accurately reflect complex processes.


Concepts

A

Activity-Based ManagementActivity-based management (ABM) tests the impact of operational and financial changes on an organization through the use of “what-if” scenarios in process models. These models help decision makers identify and manage the activities that drive costs. Managers can examine areas of the business that contribute to the production of products, the servicing of clients, or the distribution of products through channels.

ABM gives managers a better understanding of the processes that bring goods and services to market. Activities generate costs, so managers can target activities for improvements, efficiencies, and cost reductions.

Experience shows that companies have used ABM for much more than activity cost analysis and process improvements. Companies have used activity-based management for:

● Profitability

– product

– service

– channel

– market segment

● Pricing

● Process Improvement (including Economic Profit, also called Economic Value Add or EVA)

● Cost Analysis

– target costing

– evaluation of outsourcing

– cost driver analysis

– inventory evaluation

● Budgeting

● Operational Analysis

– what-if analysis

– capacity management

– constraint analysis


Concepts

The real power of Hyperion Business Modeling emerges when managers can test strategies in their business models to introduce marketing, financial, and operational innovations in “what-if” scenarios.

SolutionHyperion Business Modeling uses process modeling with activity-based costing to calculate revenues, profits, and costs, play business scenarios, and produce operational information.

Using the process modeling features of Hyperion Business Modeling, you can perform the following kinds of analysis:

● costing for activities, processes, products, services, and customers

● utilization level and constraint analysis of equipment and other resources

● projection of future demands on resource needs and costs

● evaluation of process improvement opportunities

● preparation of budgets

● profitability and margins

● cost information for various stages of an operation

With its scenario-playing powers, you can make changes to the financial and operational data of a business model to explore the impact of changes on your business. Because Hyperion Business Modeling can model constraints, you can check whether any of the constraints will be broken in a specific scenario.


Index

Ind

ex

AActivity Based Costing, defined, 182Activity Based Management, defined, 183Activity box, 27, 28Adobe Acrobat Reader, xiii

BBoxes

schematic symbols, 27, 28Building the model

economic profit, 146Business issue, case study

Economic Profit, 123OK Plastics, 32OK Service Bureau, 76

Business issuescase studies, 24costs, controlling, 22customer profitability, 22, 76economic profit, 123investment and reengineering, 23managing capacities and constraints, 21new product, introducing, 24process improvements, 23product profitability, 32

CCapacities and constraints, managing, 21Case studies

manufacturing, 31OK Plastics, 31organization, 18

Hyperion Business Modeling Solutions Guide

overview, 19product profitability, 31using, 18, 19

Collect data and rulesEconomic Profit, 136

Connectorschematic symbol, 28

Constraints, managing, 21Consulting services, xvCosts, controlling, 22Customer profitability

case study, 75measuring, 22

DDemand box

schematic symbol, 28Documentation

printing online guide, xiiiHyperion Business Modeling, x

EEconomic Profit

case study, 121justifying investment, 23reengineering, 23

Economic Profit case study, 121activity based management, 172build the model, 146business issue, 123collect data and rules, 136define the project scope, 128develop the schematic, 130

■ 185

Index

identify activities, resources and measures, 129interpret new information, 167schematic box definitions, 131solution result, 126solution results, 126The Model Approach steps, 128 to ??, 128 to 178validate the results, 163

Economic Value Add (EVA)SeeEconomic Profit, 23

HHelp

PDF, printing, xiiiHyperion Business Modeling

consulting services, xvdocumentation, xtechnical support, xvtraining, xiv

IImproving

capacity, 21process, 23

Inventory boxschematic symbol, 28

Investmenteconomic profit, 23

Investment, justifying, 23

LLinks

schematic symbol, 28

MManaging capacities and constraints, 21Manufacturing case study, 31

activity based management, 64build the model, 51business issue, 32collect data and rules, 42cost analysis, 33define the project scope, 35develop the schematic, 36

186 ■

identify activities, resources and units of measure, 35

interpret new information, 60marketing analysis, 32solution result, 33The Model Approach steps, 34 to 73validate the results, 55

Model ApproachSeeThe Model Approach

OOK Plastics

case study. See Case Study for Economic Profit, 121

case study. See Manufacturing case study, 31schematic box definitions, 37economic profit case study, 131

OK Service Bureaucase study. See Service case study, 75schematic box definitions, 83

PPreface, viiPrinting

online guides, xiiiuser guide, xiii

Process improvements, planning, 23Process modeling, 182Product

introducing new, 24profitability

case study, 31measuring, 22

Profitabilitycustomer

case study, 75, 121measuring, 22

productcase study, 31measuring, 22

Project scopeeconomic profit, 128


Index

RReengineering

economic profit, 23justifying, 23

Resource boxschematic symbol, 27, 28

Resultseconomic profit case study, 163

Route boxschematic symbol, 27, 28

Sschematic symbol, 27, 28

activity box, 27connectors, 28demand box, 28illustrated, 27, 28inventory box, 28resource box, 27route box, 27summary box, 28supply box, 27

scopeeconomic profit case study, 128

sensitivity analysis, 178Service case study, 75

build the model, 95business issue, 76collect data and rules, 87cost analysis, 77define the project scope, 81develop the schematic, 82identify activities, resources and measures, 81interpret new information, 105marketing analysis, 77perform activity-based management, 111solution result, 78The Model Approach steps, 80 to 119, ?? to 177validate the results, 101

Servicesconsulting, xvservice packages, xvtechnical support, xvtraining, xiv


Solution resultseconomic profit, 126

Summary boxschematic symbol, 28

Supply boxschematic symbol, 27, 28

TTechnical support, xvThe Model Approach

build the model, 29collect data and rules, 28define the project scope, 26identify activities, resources, and measures, 26interpret the new activity-based information, 30overview, 25perform activity-based management, 30validate the results, 29

Training, xiv

VValidating results

economic profit, 163

■ 187

Index

188 ■

Hbm solution

Business

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