10.8 – Cost Gathering Techniques
ProcessModel and Activity-based Costing
ProcessModel’s primary costing approach is Activity-based costing (ABC), a method of tracking operating costs directly associated with processing entities. Operating costs are generally categorized as one of two types: variable and fixed. Variable costs are directly proportional to the number and type of entities processed, e.g. the number of customers serviced or the number of products manufactured. Fixed or overhead costs remain constant from period to period, regardless of the amount and type of entities processed, e.g., rent, utilities, salaries, etc. The total operating cost for a period is the sum of all variable and fixed costs for that period.
The two most commonly used methods of tracking operating costs today are traditional (volume-based) and ABC. Both methods treat variable costs in the same way; each entity processed increases variable costs by the unit cost associated with that entity.
Traditional costing and ABC treat fixed costs differently. Traditional costing allocates fixed costs to each entity according to some basis such as the direct labor costs associated with a particular entity. For example, two entity types, A and B, are processed through a system with a fixed cost of $10,000 per week. If entity A consumes 60% of the direct labor costs and entity B consumes 40%, then $6,000 in overhead would be allocated or charged to entity A and $4,000 to entity B.
With ABC we track the activities and resources used by the entities. Continuing with our example, we know that entity A accounts for 30% and entity B for 70% of the fixed costs when we consider the activities and resources used by the entities. So we are more accurate to say that the overhead cost for entity A is $3,000 and $7,000 for entity B.
The key to ABC is identifying and quantifying cost drivers such as the cost of using a resource to perform a particular activity. ProcessModel can track time-based and eventbased cost drivers, including labor costs, resource usage, activity costs, storage costs and material costs. Additional costs may be assigned in any Action logic. This gives you the capability to track any operating costs by entity type.
To evaluate the potential of a system, costs can be entered as a negative (i.e. Worker – $25/hr.), while revenue sources can be entered as a positive (i.e. completed Part $5). The output summary will provide the equivalent of a net revenue for the duration of the run.
If overhead costs are desirable to include, a resource should be defined with a per hour cost of the overhead. This resource should not be attached to any entity. At the end of the simulation the cost of “overhead” will be spread out over the length of the simulation. The decision to make the overhead number positive or negative should be determined by your other cost numbers. If other costs were negative then the overhead will also be negative.