Assignment Task

Introduction

Activity Based Costing is one of the tools and techniques that was covered in the CMA program, and I will demonstrate that it is very useful in providing decision-oriented information to senior management in my organisation that will ultimately enhance its corporate value. The company that is the focus of my study is the EDUC Electric Distribution Utility Company, which serves around 25 percent of the Indian population.

Activity-Based Investment decision Analysis Framework

Phase I. Project Analysis Method Investment decisions are anchored on net present value (NPV) method, internal rate of return (IRR) method and others. The net present value criterion is the most widely accepted decision rule in academia (Sick, 1997). In the project analysis method, the NPV and IRR methods will be used in the formulation of investment decisions. ABC data will be used in the cash flow variables such as initial investment and operating and maintenance expenses.

Phase II. Project Prioritisation Method The project prioritisation method in Fig. 2, is a tool for systematic selection among various alternatives with several criteria. It consists of three basic selection methods: cost impact; performance impact; and quadrant analysis. This presents the application of the analytic hierarchy process as a tool.

The attributes are represented by a twotiered cost impact model and a three-tiered performance impact model. Table I presents the methodology. Analytic Hierarchy Process (AHP) was developed to structure complex, multi-attribute problems. It creates a hierarchical structure based on goals, criteria, sub-criteria and alternatives (Angelis & Lee, 1996; Saaty, 1982). Formulating the problem (Fig. 3) is the first step.

The top level is the objective. Subsequent levels are constructed so that elements within a level are the same order of magnitude, as they are compared to each other in relation to elements of the next higher order. The levels below the overall objective are referred to as attributes and sub-attributes and consist of the decision criteria. The first level of attributes is the strategic goals. Below are activities as the subattributes.

At the lowest level are the decision alternatives (Angelis & Lee, 1996; Zahedi, 1986). The decision maker determines the importance of each element in a level. This is done by pairwise comparisons of the elements at a given level relative to each of the criteria at the next higher level. Then, calculate the overall rating of each alternative by multiplying the weights along each path of the hierarchy leading to an alternative, and then adding these products for each decision alternative.

Methodology

The ABC&M office of the company initiated the Activity-Based Management project with focus on ABC information. One such application is strategic investment planning decisions. Thus, the capital investment decision was developed based on the principles of capital budgeting and capital rationing.

A. Project Simulation Methodology

The concept was simulated in a pilot application. Project teams were formed to help in the “proof of concept” stage. There was a meeting after the concept presentation to the steering committee with the heads of the following offices: Planning; Substation; Distribution and Subtransmission. The electric capital projects were classified into: substation; sub-transmission line; and distribution line projects. For the project analysis method, the steering committee members agreed to analyse two projects for each category. The mandate was to determine: the activities of the initial investment cash out flow variable; the activities of the operations and maintenance cash outflow variable; the financial viability of each project. For the project prioritisation method, the steering committee agreed to subject 23 projects for implementation to undergo the new method and compare the results with the existing method. They agreed to use the proposed method with modifications subject to the availability of data. The modifications were: the non-inclusion of the activities; and cost savings will be derived from the benefits of the projects.

B. Project Analysis Method

A workshop was held. Sample projects similar to Tables II, III, & IV, were made available to the participants and they were guided on how to use ABC data. Aside from direct costs, ABC resources also include non-electric asset costs and shared services costs. Asset costs are incurred in the use of company assets, to perform the activities. They come in the form of depreciation, property taxes, insurance, interest expenses and amortisation on debt expenses. Shared services costs are incurred and passed on by another internal organisation in providing support to other organisations. The reassignment is from the performing organisation to the benefiting organisation, then to the benefiting organisation’s activities. Cash flow variables were identified as investment cost; operation and maintenance expense and overhead expense variables. The ABC data in this method does not include depreciation expenses of asset costs...

C. Project Prioritisation Method

The steering committee agreed to subject all 23 projects to the new method and compare them with the existing method. They divided the projects into: Substation; Subtransmission; and Distribution Lines. They agreed that the main criteria for the analytic hierarchy process (AHP) should be tied up to the goals of the Company. The AHP main criteria are: Adequacy refers to the capacity to accommodate new loads; System Reliability and Flexibility refers to the ability to minimise power interruptions; Public Safety refers to the reduction of hazards; System Loss refers to the ability to reduce technical system loss; and Power Quality refers to the improvement in the supply of electric power to sensitive customers...