Organize your Business for Cost and Value Management
Many methods have been put forth for cost accounting and control and value management. The main cost accounting methods charge costs to center and activity. Financial accounting charges some costs as expenditures to objects. Value management methods used today do not manage actual business value creation, but provide arbitrary methods to calculate numbers called value.
Cost accounting and value management are prevented by the organization of today’s enterprise
Conventional cost management is restricted by problems with “intangible assets”, “unknown costs”, and confusion over where to charge costs. We also want to manage value, but we have no viable method for value management. We need a method to get rid of intangible assets and unknown costs and to charge our costs to the meaningful things. We also need a method to manage value as part of our business.
Result-performance Management provides the answer by organizing the business for 21st Century Management
Result-performance Management (R-pM) is a breakthrough for actual business cost and value management. Result-performance Management (R-pM) is available today to organize and manage the business by all tangible and intangible capital utilized as solutions in performance to incur performance costs to produce economic output value in results over planned time periods. Complete costs must be charged against the value created through performance. Performance costs can only be charged against result produced to give total performance costs by result. The total performance costs are deducted from result value, to provide a manageable result value-added along a result value-quality chain. Current cost and value management problems and the use of R-pM for cost and value management are explained in this article.
The enterprise today can only manage known costs against contrived entities
Known costs charged to centers, activities, or objects today have no real management meaning. Cost management is limited today; by “intangible assets” that really are unmanaged capital. Every corporation invests money to develop intangible assets, so the assets have a worth. Intangible assets are capital solutions that were never managed in development to manage development costs and are not managed in operation to manage capital worth, return on the investment, or performance costs incurred in utilizing the capital. So corporations can only manage known costs of tangible assets and neglect the even more important unknown costs of intangible assets.
Since, costs are incurred through the utilization of capital in performance, the corporation should cost capital utilized. But the today’s corporation does not define capital utilized as one set for cost management. Capital is randomly described in various entities like fixed assets, employees, supplies, hardware equipment, software business applications, intangible assets, etc.
The enterprise faces several cost accounting and control problems
When there is an attempt at actual cost control and management, today’s corporation faces several cost management problems, since the corporation does not:
- Know where charge the costs captured
- Know the specific capital solutions it has
- Know how capital is utilized in performance
- Have a way to organize capital for the purposes of utilizing the capital
- Have a way to manage capital in development and operation to manage costs
- Have a way to understand the true costs associated with each item of capital utilized
- Have a way to capture actual costs incurred in utilizing capital in performance
Let us take these cost management problems on at a time.
1. Where are costs captured charged? When we utilize capital in performance; we incur costs. We do not perform for the sake of performing an activity or because we are assigned to a center; we perform to produce value in results. Therefore, we should charge our performance costs to the value of results we produce. The many conventional methods of cost accounting cost processes, activities, stations, products, centers, and other entities. Product costing is the closest, since products are one example of a result. The others are contrived entities that are not part of the business. But, even costing products captures only known costs that are associated with an eventual product, instead of capturing all performance costs for each result produced along the result chain that produces the product.
2. How are specific capital solutions identified? Capital is anything utilized in performance that helps produce a result. Capital includes space and equipment, supplies consumed, processes, management plans and guidance, human capabilities and knowledge, and information accessed. Capital must be analyzed and itemized as specific solutions in a set of solutions that can be utilized in performance.
3. How is capital used in performance? Capital is utilized in performance to produce a result. A result is the desired or undesired output from performance that is definable and can be counted. Once we define results produced, we must think of capital as specific solutions that can be utilized to produce a defined result in a set of results.
4. How is capital organized for utilization? We utilize capital to produce results. In order to produce results, we have to organize the readiness capital that must be in place before we can produce the first result. Once we begin to produce results, we need the production capital that is only utilized or consumed when we are actually producing the result. We also need information capital to guide us in producing the result and we need to produce information to document the result produced.
5. How is capital managed to manage costs? Capital is managed by producing capital results. The primary capital solution that determines whether we produce a good result or a defective result is the human capability solution deployed to produce the result. Therefore, in order to properly manage capital and control costs, we must organize capital for support by the human capabilities required to manage and support the capital. This organizes business capital to produce a specific result, human capital, facility capital in traditional tangible assets, and management capital to plan and guide results. A performance manager is responsible for the deployment of qualified solutions to be utilized to incur managed performance costs to produce each result.
6. How are the true costs associated with each capital solution defined and managed? Capital must be defined as a specific solution to be utilized and incur costs. Today’s corporation records and manages fixed asset solutions as assets. Costs incurred for every capital solution must be managed over the full life-cycle similar to a fixed asset. The costs of acquisition, development, improvement, should be captured to understand the investment in a solution. Operation and support costs are captured to understand on-going costs. Once we capture true costs against a solution, we have flexibility in how we actually manage costs of utilizing the solution and derive meaning from the universe of known costs.
7. How are the costs of utilizing capital captured in performance? Capital must be deployed as a specific solution to produce a specific result in performance. Cost management rules must be set up for each solution or category of capital to define how to manage solution costs. Specific rules or exceptions to established rules may be set up when a solution is deployed to manage solution costs generated in performance to produce a specific volume or count of the result. A result manager is responsible for proper utilization of solutions to manage the value-added to the result.
Result-performance Management manages all costs incurred against the value created
R-pM provides cost and value management in the utilization of solutions in performance to charge all costs against the value of the result produced. With R-pM costs are an attribute of the solution utilized be it a business process, human personnel, facility equipment or supplies, facility records, management tactics guidance, human knowledge, etc. Costing performance solutions is up to the management policy tactics solution. Performance costs could be development amortization, operation support, a standard utilization charge, etc.
R-pM provides the means to define performance solutions properly and measure the costs of developing, operating, supporting, and utilizing solutions, to manage all costs. Cost management manages the actual costs incurred in the utilization of every solution in producing managed results. All costs are managed against specific result value to provide value management in result value-added in each result produced across the business. Result value-added can be managed along a result value chain to manage the value of the result that must satisfy a customer, who is willing to pay the value.
Result-performance Management provides cost management to manage all costs against result value, and value management to manage result value-added across the business. We need to organize all capital as solutions to be utilized in performance to charge all performance costs to the results produced. This is one of many reasons to use R-pM to organize and mange your corporate business as “investments in capital as solutions of worth utilized for cost-effectiveness performance to produce value and quality in results”.
R-pM is the breakthrough needed for complete cost and value management
Result-performance Management is a breakthrough for cost management to manage performance costs for all capital utilized and value management to manage result value and value-added across a business. Once the business is organized and managed with R-pM cost control and value management becomes part of the business routine. To learn more about R-pM, visit result-performance-management.com.
