196 PART ONE MANAGEMENT ACCOUNTING, INFORMATION AND DECISONS

P E R S P E CT I V E S O N

D E CI S I O N - M A K I N G

Outsourcing

Most organ ization s are n ow realizin g • sh arin g of risks an d rewards associ- th at to su cceed th ey m u st focu s on a few

ated with th e ou tsou rcin g. core com peten cies, th in gs th ey u n iqu ely

Th e ou tsou rcin g m arket m ove towards do very w ell. For exam ple, Com paq

h igh ly strategic partn erin g arran gem en ts defin es itself as a “platform in tegrator”

addresses su ch broad processes as: fin an - developin g an d m arketin g produ cts

cial tran saction processin g; h u m an wh ose com pon en ts are largely m an u fac-

resou rce adm in istration ; su pply ch ain tu red by oth ers. Su ch organ ization s real-

m an agem en t; docu m en t an d prin t m an - ize th at th ey sh ou ld n ot seek to do

agem en t; an d cu stom er service. activities for wh ich th ey do n ot h ave

Several of th e m ost progressive global com petitive advan tage.

organ ization s will seek ou tsou rcin g part- Tradition ally, ou tsou rcin g started with

n ersh ips th at focu s on en h an cin g sh are- n arrow, low-risk activities su ch as payroll

h older valu e an d en ablin g organ ization s processin g, data cen tre m an agem en t, an d

to be m ore focu sed an d flexible. caterin g. Now m u ch m ore strategic activities are startin g to be ou tsou rced, in clu d-

Glo bal re se arch fin d in gs

in g fin an cial m an agem en t, h u m an Pricew aterh ou seCoopers com m is- resou rce m an agem en t, su pply ch ain

sion ed a stu dy of ou tsou rcin g tren ds m an agem en t an d even cu stom er m an -

am on gst 300 of th e largest global com - agem en t processes. Also, th e scope of th e

pan ies, in clu din g 26 large Can adian ou tsou rcin g relation sh ips is m u ch

organ ization s. Th e research , con du cted broader; for exam ple, ou tsou rcin g of

by an in depen den t m arket research accou n tin g u sed to con sist prim arily of

organ ization , h igh ligh ted som e in terest- accou n ts receivable collection an d pay-

in g issu es an d tren ds am on gst th e roll. Now, organ ization s are ou tsou rcin g

Can adian participan ts. th eir en tire fin an cial tran saction process-

• Seventy-three percent of the organi- in g, recogn izin g th at th eir own com pe-

zations have outsourced at least one ten cies are in th e u se of fin an cial

activity or process. The main rea- in form ation , n ot its creation .

sons for outsourcing are: to enable a An im portan t ch an ge in th e ou tsou rc-

focus on core competencies; enhance in g en viron m en t is th e rapid em ergen ce

profitability and share-holder value; of e-bu sin ess, wh ich is m akin g it far m ore

and avoid the investment in technol- possible, an d n ecessary, for organ ization s

ogy required to enhance efficiency. to im plem en t n ew bu sin ess m odels, with

• Th e m ost com m on ly ou tsou rced exten sive ou tsou rcin g of processes to

activities an d th ose m ost likely to be th ird parties. Organ ization s su ch as Cisco

ou tsou rced in th e n ear fu tu re are: h ave dem on strated th at th ey can dom i-

ben efits adm in istration payroll pro n ate th e valu e ch ain wh ile ou tsou rcin g

cessin g; logistics; real estate m an m an y processes, in clu din g m an u factu r-

agem en t, an d in tern al au dits. in g, to oth er organ ization s.

• Abou t h alf of th e respon den ts believe ou tsou rcin g to be m ore

Fu t u re o u t lo o k

im portan t to th eir organ ization s Th e ou tsou rcin g m arket will ch an ge

th en was th e case th ree years ago, qu ite dram atically over th e n ext few

n in ety-five percen t were som ewh at years towards a n ew relation sh ip ch arac-

or very satisfied with th eir ou tsou rc terized by th e followin g factors:

in g to date, wh ile sixty th ree percen t • a broaden in g of th e scope of ou t-

ach ieved at least th e cost savin gs sou rcin g relation sh ips;

expected from ou tsou rcin g. • sign ifican t in vestm en t by th e service provider, particu larly in in form ation

Source: Joh n Sim ke, “Em ergin g Tren ds tech n ology in frastru ctu re to su pport

in Ou tsou rcin g”, CMA Management , service delivery;

Febru ary 2000, pp. 26–27. • u se of e-bu sin ess to im plem en t n ew an d h igh ly in n ovative ou tsou rcin g relation sh ips; an d

Chapter 5 Cost Allocation and Activity-Based Costing Systems

Cost-driver activity is m easu red by th e n u m ber of tran saction s in volved in th e activity. For exam ple, in th is case, en gin eerin g costs are cau sed by ch an ge orders (a docu m en t detailin g a produ ction ch an ge th at requ ires th e atten tion of th e en gin eerin g departm en t). Th erefore, en gin eerin g costs are assign ed to prod- u cts in proportion to th e n u m ber of en gin eerin g ch an ge orders issu ed for each produ ct. If th e produ ction of m icrowave oven s cau sed 18 percen t of th e en gi- n eerin g ch an ge orders, th en th e oven s sh ou ld bear 18 percen t of th e costs of en gin eerin g. Becau se tran saction s are often u sed for assign in g costs of activities

Transaction-Based

to cost objects, activity-based costin g is also called tran sactio n -base d acco u n t-

Accounting (Transaction

in g or tran sactio n co stin g.

Costing) . See Activity-

Based Costing.

Con sider th e Belm on t m an u factu rin g plan t of a m ajor applian ce produ cer. Exh ibit 5-6 con trasts th e tradition al costin g system with an ABC system . In th e tradition al cost system , th e portion of total overh ead allocated to a produ ct depen ds on th e proportion of total direct labou r h ou rs con su m ed in m akin g th e produ ct. In th e ABC system , sign ifican t overh ead activities (m ach in in g, assem bly, qu ality in spection , etc.) an d related resou rces are separately iden ti- fied an d traced to produ cts u sin g cost drivers—m ach in e h ou rs, n u m ber of parts, n u m ber of in spection s, etc. In th e ABC system , th e am ou n t of overh ead costs allocated to a produ ct depen ds on th e proportion of total m ach in e h ou rs, total parts, total in spection s, etc. con su m ed in m akin g th e produ ct. On e large overh ead cost pool h as been broken in to several pools, each associated w ith a key activity. We n ow con sider a m ore in -depth illu stration of th e design of an ABC system .

EX H I B I T 5 - 6

Traditional and Activity- Based Cost Systems

= Cost driver Traditional Cost System

= Activity centre

Activity-Based Cost System Overhead Costs

Assembly Quality materials

Direct Direct

activity inspection costs

costs activity

(Cost Driver A)

(Cost Driver B)

costs

(Cost Driver C)

Direct Direct

Number of Number of trace

parts inspections

(Cost Driver D)

(Cost Driver E) (Cost Driver F)

Products

196 PART ONE MANAGEMENT ACCOUNTING, INFORMATION AND DECISONS