Applying an Activity-based Costing System in a Volunteer-based Social Enterprise

Transcription

1 Applying an Activity-based Costing System in a Volunteer-based Social Enterprise A case study of AIESEC Aarhus Erla Hrönn Harðardóttir May 2015 Supervisor: Morten Jakobsen Department of Economics and Business Characters:

2 Executive Summary I had the pleasure of working as the Local Financial Officer of AIESEC Aarhus last year. During this time I managed the finances for the entity and had the opportunity to get to know the organization. During my term I conducted various analyses on both the current and past financial realities and performances of the entity. I encountered several problems when attempting to analyze the productivity and profitability of various processes as well as the products. These problems were due to the large amount of indirect costs, which in the past have not been efficiently allocated to specific products. After discussing the issues with other financial officers within the organization, it came clear that there was a definite need for a better costing system in order to evaluate activities and processes to accurately assess the productivity and profitability of the entities. I read upon activity-based costing systems and the implementation of such systems in various types of organizations. I thought an activity-based costing system might offer a solution to the problems I had encountered, yet I found it difficult to find information on how such a system should by applied in a volunteer based social enterprise and thus I decided I would examine this closer, using AIESEC Aarhus as a case study. In this case study, numerous publications and books on the topic of activity-based costing are used in order to grasp an understanding of activity-based costing; the history, application and the benefits and implications its implementation can lead to. The construction of such systems is examined step-by-step, as well as the managerial issues the information can help solve. When examining AIESEC Aarhus, triangulation is used in order to enhance the validity of the information obtained. With the organizational information being based on interviews with the management of the entity; job descriptions, as well as the organization s website and accounting system is used for triangulation. Using triangulation has led to the obtainment of detailed information on how all processes and procedures work, as well as a close look into what problems the organization is dealing with. After an examination of the topic of activity-based costing as well as the organization, the activity-based costing system is constructed. Allocating costs to activities in a volunteer-based organization providing services proves to be complicated in this particular case, not only due to lack of variable expenses, salary costs or working hours, which often account for a large scope in these systems, but also due to the lack of information management and tracking of measurable data within the entity. Furthermore I have come to learn that the theory of activity-based costing has its limitations and in some cases, is not applicable to all costs within an organization. Even though the system is not without flaws, seeing that information on activities and performance is limited within the organization, I believe that the system does offer useful information to the organization and that it can serve a purpose when it comes to managerial decision making regarding the products, processes and performance. However, the system can also be used as a ground for implementation of tracking systems and performance measures within the entity. Doing so should enable the management to implement a more accurate activity-based costing system that provides more detailed information. I do believe my findings indicate that activity-based costing systems

3 can be implemented in volunteer-based social enterprises and used for evaluation of processes and for making managerial decision. Although, it requires detailed information and data on performances, operations or other measurable aspects of the organization that these organizations might not record.

4 Contents 1. Introduction Background Purpose Problem statement Delimitation Methodology Activity-based costing systems Traditional costing systems compared to activity-based costing systems The historical development of the activity-based costing system Activity-based costing systems in service companies Activity-based costing systems in other sectors Activity-based costing systems step by step The first step: Identification of activities What is an activity? Identifying the activities The second step: Cost assignment and allocation Reconstructing general ledgers Defining the resource drivers Determining Attributes The third step: Assigning costs to cost objects Summary of the steps Activity-based management Benefits of using an activity-based costing system Implications of using activity-based costing systems in real life Analysis of AIESEC Aarhus Introduction to AIESEC... 15

5 5.1.1 AIESEC Denmark AIESEC Aarhus The Local Entity Structure The Products The departments and processes The financial situation and cost structure Problem Identification Constructing the activity-based costing system Method Creation of the model step by step The objective Activities identified Assigning costs to activities Activity costs assigned to cost objects Applying the activity-based costing system Re-construction and assignment of costs Activity drivers and output measures Results Discussion Literature review Information and benefits Implications Recommendations Conclusion Bibliography... i 10. Appendices... iv Appendix 1: Financial Performance analysis, AIESEC Aarhus iv

6 Appendix 2: Local Financial Officer s job description... vii Appendix 3: Local Marketing Officer s job description... viii Appendix 4: Incoming Exchange department s job descriptions... x Appendix 5: Local Committee President s job description... xiv Appendix 6: Local Officer of Outgoing Exchange s job description... xvi Appendix 7: Local Talent Management Officer s job description... xviii Appendix 8: Interview guidelines... xix Appendix 9: Open-coded output from interviews with the executive board... xxvii Appendix 10: Profit and Loss transactions in the accounting system Exact... xxxiii Appendix 11: Extracted transactions from the profit and loss... xxxiv Appendix 12: All profit and loss transactions allocated to reconstructed cost system... lv Appendix 13: Balance sheet transactions... lxiv Appendix 14: Activity cost pools... lxv Appendix 15: Costs per transaction... lxvi Appendix 16: Reconstructed cost system... lxvii Appendix 17: Annual Report, AIESEC Aarhus lxviii

7 Table of Figures Figure 1: Cost assignment and resource drivers (Glad & Becker, 1996) Figure 2: Summary of the steps of activity-based costing (own production) Figure 3: The structure of AIESEC Aarhus (own production) Figure 4: Global Talent Processes (own production) Figure 5: HR Solutions Processes (own production) Figure 6: AIESEC Aarhus s GL accounts and cost centers (Appendix 18) Figure 7: Activity table for Global Leader recruitment Figure 8: Activity table for educating and developing Global Leaders Figure 9: Activity table for managing the Global Talent program Figure 10: Activity table for managing the HR Solutions program Figure 11: Activity table for financial operations Figure 12: Activity table for external relations & brand awareness Figure 13: General ledger accounts reconstructed (Appendix 16) Figure 14: Cost Centers reconstructed (Appendix 16) Figure 15: Activity attributes Figure 16: Reconstructed cost information (Appendix 12) Figure 17: Cost centers assigned to activity cost pools (Appendix 12) Figure 18: Global Leader activity costs (Appendix 14) Figure 19: Global Talent activty costs (Appendix 14) Figure 20: HR Solutions activity costs (Appendix 14) Figure 21: Cost object profits/losses (Appendix 14)... 41

8 1. Introduction Management accounting is a process that can provide both managers and employees of organizations with important financial and nonfinancial information for decision making. The information obtained from management accounting can for instance be used in the following decisions processes: resource allocation, monitoring, evaluating and rewarding performance. Management accounting can furthermore be used to obtain information to evaluate the costs of producing different products and delivering services and to evaluate if they are profitable or not. (Atkinson, et al., 2012) One of the many tools used in management accounting is activity-based costing. Activity-based costing systems are used in order to allocate indirect costs and support resources efficiently to products by modelling what each product and production run demand from the organizations resources. Using these systems, managers can identify costly and inefficient processes and learn about profitable and unprofitable products. Furthermore, the information can be used to make better decisions regarding pricing, product mixes and process improvements that can make unprofitable products and inefficient processes profitable and efficient. Thus, the information obtained from the activity-based costing systems can be used to improve profitability and efficiency within the whole organization. (Atkinson, et al., 2012) A social enterprise is a revenue-generating business that aims not only to earn revenue, but to achieve social, cultural, community economic and environmental outcomes. In social enterprises their mission is the main purpose of the business, with revenue generation as an important supporting activity. ( 2015) Social enterprises perform various activities that demand indirect support costs that can be difficult to assign directly to their products, making an activitybased costing system a tempting option to simplify the complexity of the costing structure in order to make more efficient and profitable decisions in regards to processes. 1.1 Background AIESEC Aarhus is a local entity of the international student-run organization AIESEC. It is an independent branch, which operates under the social enterprise AIESEC Denmark. AIESEC Aarhus offers three different types of products that are aimed to provide Danish youth with leadership skills, as well as personal and professional development; and to help Danish companies get access to international talents. ( 2015) AIESEC Aarhus consists of five functional departments and an executive board which leads the entity. All members of the organization work as volunteers, but are also treated as customers. (Dubikate, 2015; Appendix 9) The products offered by the entity are all service-based experiences and have low direct costs. This makes evaluating the costs of specific products or processes difficult and thus AIESEC Aarhus is a suited candidate for an activity-based costing system. The entity has 1

9 recently experienced issues in regards to performance and financial sustainability, and has struggled with making managerial decisions in order to solve these problems. (Donose, 2015; Appendix 9) 1.2 Purpose The purpose of the project is to examine whether an activity-based costing system can be applied in a volunteer based social enterprise in order to obtain information on the efficiency and profitability of the processes needed to deliver its products. In order to examine this I will conduct a case study on AIESEC Aarhus, a local entity of a student-run, volunteer based social enterprise in Denmark. I aim to identify the main management accounting problems within the organization and develop and activity-based costing system in order to examine whether such a system can benefit the organization in order to evaluate and then improve their processes and the efficiency of their operations Problem statement Can an activity-based costing system be applied in the volunteer-based social enterprise AIESEC Aarhus in order to obtain information on the efficiency and profitability of the processes needed to deliver its products? In order to fulfil the purpose the following research questions will be examined. - How can an activity-based costing system be implemented in a volunteer based social enterprise such as AIESEC Aarhus? - How can the main issues in the current management accounting system of AIESEC Aarhus be dealt with using the activity-based costing system? - Which benefits and issues might the implementation of an activity-based costing system in AIESEC Aarhus lead to? 1.3 Delimitation AIESEC Aarhus is a local entity in the social enterprise AIESEC Denmark. AIESEC Denmark currently has five local entities within the organization, all offering the same products, using similar structures and processes. (Hjermind & Townsend, 2008) I have decided to focus on only one of the local entities within the organization since obtaining qualitative data from all entities could be time-consuming. This will allow me to look deeper into the information obtained and examine a larger time period than would be possible if I examined all five entities and the national board. Furthermore, seeing that the operations and realities of the entities differ, using one entity as a research focus should be the most efficient way. Meaning, that the same activity-based accounting system might not be applicable in all local entities. I choose to use 2

10 AIESEC Aarhus due to the fact that it is one of the biggest entities in AIESEC Denmark, and has operated consistently in the past years. In order to analyze the current and historical financial reality and costing structure of the entity I will use financial data and activity registries from the past two financial years. Although, it would be optimal to look further back in time the lack of information management within the entity prohibits me to go any further back. Since I am a former Local Financial Officer of AIESEC Aarhus, I have obtained a lot of inside information during my term. I have decided to use triangulation in order to avoid being subjective and instead of using information based on my experience I will collect information from various sources, such as the organization s website and job descriptions. Additionally, I will obtain information from the current management of the entity using semi-structured interviews with open-ended questions. (Denzin & Lincoln, 2003) Only four out of six executive board members were willing to be interviewed, as a compromise, I obtained the missing information from the president of the organization. 2. Methodology I have chosen to examine my topic by conducting an intrinsic case study of AIESEC Aarhus. Meaning that my aim is to optimize the understanding of the case and what can be learned from it, rather than generalizing beyond the topic of the case. (Denzin & Lincoln, 2003) In order to answer the research questions, various analyses need to be conducted. Firstly, to understand activity-based costing systems and the need for them in different industries and organizations, the history and development has to be examined. When discussing the history and development, I will firstly examine where the need of these systems is derived from by looking into traditional costing systems, their limitations and how they differ from the activity-based costing systems. Following, I will look into the historical development of the activity-based costing systems, the limitations and issues that have been encountered during the development and the entry of these systems into different types of organizations. With the aim of examining these things I will use publications by various authors, including Atkinson, et al. (2012) and Horngren, et al. (2011) and published articles on the subject. Once the history and development has been examined I will move into the construction of the system step by step. In order to examine these processes I will use Kaplan and Cooper (1998), seeing that Kaplan is often referred to as the founding father of activity-based costing. ( 2009) However, since the concept of activity-based costing has developed through time I will use Turney (2005) in order to obtain the more recent and practical methods of implementing the system. Additionally, to look deeper into each element of the system I will use Glad & Becker (1997) as well as Brimson & Antos (1995). To examine the possible managerial actions after building the system I will discuss activity-based management options, using Kaplan & Atkinson (1998). After doing so, I will touch upon the possible benefits and implications of implementing an activity-based costing systems, using more recent sources, such as Atkinson, et al., (2012) and Horngren, et al., (2011). In order to get a perspective of real-life benefits and problems 3

11 encountered I will use published journals and research that has been conducted. The findings from this research will then be used to conduct the case study on AIESEC Aarhus. Following, the history of AIESEC will be briefly examined, using online sources provided by the organizations. Furthermore, I will analyze the structure of AIESEC Denmark and AIESEC Aarhus as suggested by Turney (2005). In order to obtain information on the structure of the organization, its products and processes I will use triangulation to examine the topics from different sides and to gain a deep understanding of all processes and possible issues. Using triangulation, I also aim to increase the validity of the information obtained and avoid the method bias. (Ghauri & Grønhaug, 2006) As my main source I will use semi-structured interviews with the executive board of AIESEC Aarhus. I have chosen to use semi-structure interviews to gather the information due to various reasons: The information needed is qualitative and focused on a small sample in order to examine specific topics and obtain a more detailed overview of information that is already accessible. The aim of these interviews is also to gain insight into problems that might not be detectable from other sources. Therefore I believe that semistructured interviews are the most suitable. I have chosen the executive board as the respondents seeing that he members of the executive board have all been a part of the organization for more than half a year and have experience in the organizations, both as leaders and as members. Furthermore, the executive board members are responsible for planning and developing the strategies of the organization and thus have a great overview of the direction of the organization. Seeing that the members of the executive board are responsible for their own functional areas and oversee all activities within their area as well, I believe they have an overview of the operations that other members do not possess. Taking these aspects into consideration as well as the time it takes to conduct semi-structured interviews, I feel that they are the most appropriate respondents. (Laforest, et al., 2009) The interviews with the management will be conducted individually with each member of the executive board, so that they will not be bias based on the answers from others. Furthermore, they will be conducted at their office, in order to aim for the most natural environment for them. The interviews will be semi-structured, using open-ended questions in order to give the control of information to the interviewee and not limit the information obtained to the expectations of the interviewer. The interviews will be recorded and transcribed. After transcribing, I will use open-coding to analyze the data. I will write down the main themes and structure the information based on the topics discussed and identify the main ideas and problems expressed by the respondents. (Ghauri & Grønhaug, 2006) To validate the information given in the interviews I will use different sources about the organization including websites and job descriptions. Based on the analyses made on the organization, the appropriate methods for constructing and implementing the activity-based costing system will be selected. The construction of the activity-based costing system will be based on the previous analyses made on activity-based costing systems and AIESEC Aarhus. In addition, I will use annual reports and the organization s accounting and bookkeeping systems in order to choose the 4

12 appropriate methods. This information will also be used to test the system, examine the information provided and the results generated. Based on the findings, I will discuss the possible benefits obtained from the implementation of the system as well as possible issues and implications encountered during the construction. Finally, I will provide recommendations regarding actions that can be taken based on the information obtained and possible future steps for the organization. 3. Activity-based costing systems The main benefits of the activity-based costing system lie in the fact that it is able to accurately produce not only cost information but nonfinancial information as well. In addition, it gives an overview of the relationship between the two. The abilities of the system can be showcased in a two-dimensional model, carefully portraying information on both sides. This two-dimensional system was created on the bases of an older, one-dimensional activity-based costing system. The development has enabled activity-based costing systems; which in the past were mainly used in manufacturing companies, to extend their reach to service organizations, government organization and administrative processes. (Turney, 2005) 3.1 Traditional costing systems compared to activity-based costing systems It has proven to be difficult to identify exactly when the use of traditional costing systems began. No concrete proof of accurate costing systems has been found until 1830, when Charles Babbage presented a paper addressing the need of accurate cost accounting. (Glad & Becker, 1996) Traditional costing systems allocate direct production costs, or value of inventory to the products, leaving out all other overhead costs. Indirect costs such as service overhead costs are thus allocated to either departments or services, in order to distribute the overhead costs to create financial statements. The indirect costs and allocations are thus often deemed as unimportant. Traditional costing systems often allocate all indirect costs in a single pool, using labor hours or labor cost as a cost-allocation base. This might work fine for small production companies with few products where most costs account for direct costs of production. (Horngren, et al., 2011; Brimson & Antos, 1994) When identifying the differences between a traditional costing system and an activity-based costing system, one of the most important aspect is the scope of cost allocation across the value chain. In a traditional system, production costs are usually the only costs assigned to the products, while the activity-based costing system brings the focus to costs that are important to decision makers. They allow management to allocate the costs of all processes that do not contribute as directly to the product. This makes the activity-based costing system more complex, yet provides management and other stakeholders with more accurate information that can be used when making decisions. It provides managers with a clearer picture of all processes within the organization and provides a more accurate picture of the organization s operations in a whole. (Horngren, et al., 2011) 5

13 3.2 The historical development of the activity-based costing system The original activity-based costing method was introduced in the 1980 s by R. Cooper and R. S. Kaplan. The method used a two-stage estimation approach where employees were firstly asked to identify all main activities performed and the percentage of their working time spent on each activity. These percentages were used to allocate the cost of employees to the activities. Secondly, the activity costs were assigned to products based on estimations of the quantity of each activity used in the production of each product. (Atkinson, et al., 2012) Initially the activity-based costing systems were aimed to provide manufacturing companies with information to be used for strategic product costing, although most companies wound up using the system for other purposes. This included: profitability analyses of customers, markets and distribution channels; as well as internal improvements such as: activity management, waste identification, prioritizing cost-reduction opportunities, and simulating the costs of alternative product designs. This development led to some implications due to the fact that the system was designed to provide information for product costing, not internal improvements. Thus, making it difficult to apply the system in service or governmental organizations. (Turney, 2005) The main limitations of the original systems lies in dealing with overhead costs. Essentially, overhead costs are spread into broad cost pools which are made for groups of activities consumed by products in a similar way. Meaning, that the activities are not defined individually. Using this method means that costs cannot be directly traced to each activity, making it impossible for the system to offer accurate data on performance of each activity. (Turney, 2005) Due to these limitations managers found it difficult to add new activities or updating the existing ones. It turned out to be both costly and time consuming to perform and thus, the systems were not updated as frequently as needed, making them inaccurate. Managers also doubted the precision of the subjective estimates made by the employees, and felt they might be biased. (Atkinson, et al., 2012) The original activity-based costing system was thus unable to provide managers with information on operational issues such as, the time it takes to preform different activities, what quality is associated to these activities, and what factors increase the efficiency and profitability of the activities. (Turney, 2005) The limitations and the need for operational information regarding activities led to the development of process-based activity-based costing systems which are designed not only for external improvements, but internal as well. These systems display both an assignment view as well as a process view, where the assignment view focuses on the assignment of costs to activities and cost objects while the process view focuses on information regarding the activity drivers and performance measures. Using nonfinancial information, cost drivers and performance measures are computed and provide the managers with information that contributes to improvements of activities, processes and performance. This new approach thus explains why an activity is performed, how it is performed, and moreover, the relationship between different activities. (Turney, 2005) 6

14 3.2.1 Activity-based costing systems in service companies Although activity-based costing systems were initially introduced to manufacturing companies, many service companies benefit from using almost identical systems today. One of the main benefits of using activity-based costing systems in manufacturing is that it addresses the resources that support and serve the manufacturing process such as: purchasing, customer service, product-inspections, marketing and ordering processes. Thus, the activity-based costing system is ideal for service companies, where most costs are support costs that are indirect and fixed. Most service companies have little or no direct material costs, which is the main source of short-term variable costs. Most resources are supplied continuously and are independent of the demand of products, thus there are very little fluctuations in short-term spending and variable costs. To add on, the rapid developments in technology, and thus demands from customers towards speed and efficiency when it comes to service, means that service-based organizations need to constantly develop themselves and their processes. Due to these conditions, decisions regarding products and processes should not be based on short-term variable costs that are directly traceable to each product. (Atkinson, et al., 2012; Brimson & Antos, 1994) According to Kaplan & Cooper (1998, p. 234) the demand of activity-based costing information in service companies can be derived from three different managerial decision aspects: Managing products and customers, configuring the customer service delivery chain, and budgeting the organization s supply of resources Activity-based costing systems in other sectors Once the activity-based costing systems had become popular amongst organizations and companies in the public sector, government agencies started evaluating whether the concept could benefit them as well. (Brimson & Antos, 1994) To a certain extent, public sector organizations were in the same situation as the private sector, the older costing systems did not fit their needs with the changing environment and they required systems that fit their processes. Following, there were a number of examples of public sector organizations adopting activity-based costing systems. It has been concluded that there is a relevant need for activity-based costing information for managers to make decisions in organizations, no matter whether they are private, public or not for profit. However, this information might be used differently across sectors, while private companies may use it to discontinue unprofitable products or for pricing decisions, not-for-profit managers might use the information in order to improve their processes and identify needs for additional resources. (Euske, 2003) 7

15 4. Activity-based costing systems step by step When conducted accurately, activity-based costing systems can provide organizations with useful information on activities within the organization. According to Kaplan & Cooper (1998) an activity-based costing system can be seen as an economic map of expenses and profitability based on activities, which addresses the following questions: what activities are being performed by the organization s resources and what does it cost to perform those activities and business processes? And why do these activities and business processes need to be performed and how much of each activity is actually required by the products, customers and services? Before diving into the implementation of an activity-based costing system there are things that need to be taken into consideration. Firstly, the reasons for implementing the system need to be defined clearly in order to know how to construct it and to ensure that it will be used. In addition; the organization, its value chain, processes and the strategy of the organization all need to be analyzed before constructing the system. Only once these aspects have been analyzed and understood can the process of implementation start. This information is important in order to ensure that the system is relevant and accurate and is vital when it comes to identifying activities and drivers. (Glad & Becker, 1996) 4.1 The first step: Identification of activities Organizations perform various activities that require indirect and support resources that cost money. An activity-based costing system is not only a tool used to allocate these costs, but they also help identifying why the costs are occurring. When developing an activity-based costing system, the first step is to identify the activities being performed in the organization and which indirect and support resources are contributing to these activities. (Kaplan & Cooper, 1998) These activities can be categorized into two categories. Firstly, there are the core activities, which are directly related to the products or services the organization offers to customers. Secondly, there are the enabling activities, which support the core activities. Core activities can vary a lot between industries and companies while the enabling activities are often more similar. (Turney, 2005) What is an activity? In order to identify the activities of an organization, one most first clearly define what constitutes as an activity. An activity describes what an organization does, it describes how time is spent and the outputs of the processes conducted in order to achieve organizational objectives. The main function of an activity is converting resources into outputs. An activity is a combination of technology, costs, people, supplies, methods and other elements that produce a service. An activity can be many things, such as invoicing a customer, handling a customer complaint, paying salaries or transporting an object. (Brimson & Antos, 8

16 1994) In order to spot the activities, the organizational structure must be examined. Most organizations are organized functionally; yet, the scope of activities performed by the functions is often broader than the functional unit that is responsible for it. Organizations also run different business processes, which are networks of related activities that are interdependent and linked by the outputs they exchange. These activities are connected due to the chain effect, meaning that one event initiates the first activity, which then leads to the next and so on. The activities performed are made up by combinations of tasks that make up the activities. These tasks can be very detailed and minimal. Using functions to organize costing systems would not provide accurate information on activities and processes due to the interdependence of activities, yet tasks can be too detailed and small to be relevant and allocating costs to small tasks is both be time consuming and costly, therefore using activities is the optimal way to define what the organization does. (Brimson & Antos, 1994) Identifying the activities The increased usage of the activity-based costing systems and the experience of using them has enabled companies and consultancies to develop standard dictionaries in order to guide different types of organizations through the selection of appropriate activities. However, some organizations have found that using bottom-up processes to define the dictionary engages the whole organization in the modelling of the system and ensures more confidence that the model showcases the reality of the organization. Although it can prove to be costly and time consuming, it can increase the commitment to the system and enable the employees to feel a sense of ownership towards it. (Kaplan & Cooper, 1998) In order to build an accurate activity-based costing model, the activities need to be identified in the correct way. According to Turney (2005) there are four rules for identifying activities: Rule 1: Match the detail to the purpose of the model Rule 2: Use macro activities to balance conflicting objects Rule 3: Combine insignificant items Rule 4: Describe activities clearly and consistently The identification of the activities should be based on the purpose of the model, whether it is a strategic or process related purpose. Process related purposes generally require more detailed information in order to obtain information on underlying processes of broader activities. When information is gathered on activities within an organization, it might be received in more detail than needed, and therefore the respective activities have to be evaluated and determined on the basis of the purpose. This means that a number of smaller activities that do not require large amounts of resources and do not serve a significant purpose can be reduced to one main activity in order to fit the purpose of the model. However, using too few activities can reduce the accuracy of the model. An alternative approach would be to use 9

17 macro activities. Using macro activities can be useful when the model has both strategic and process related purposes. Macro activities can be used when a number of activities are at the same level, use the same activity driver and have a common purpose. The activities can thus be grouped together into a macro activity that has two tiers, the lower one containing information on each activity and the higher one ignoring the details and grouping them together in one. In order to build an effective model that can be communicated easily, the activities need to be clearly defined and explained. Thus, each activity should be clearly labelled with a short and understandable description. (Turney, 2005) 4.2 The second step: Cost assignment and allocation After the activities have been determined, resources or costs must be traced to them to calculate the activity cost. An activity cost is therefore the sum of all traceable cost elements needed in order to perform the activity. (Brimson & Antos, 1994) According to Glad & Becker (1996) there are two ways to determine activity costs. Firstly, every transaction can be processed and allocated into activities in a database. This requires a lot of work but should provide accurate results. The other method is to start by reconstructing the organization s general ledger Reconstructing general ledgers Although a general ledger is a useful summary of all financial information about the company that can be used to construct and activity-based costing system, it can also be difficult to obtain accurate information from it. General ledgers are usually structured around the type of expenditure rather than activities, they often contain specific details that may not be useful for activity-based costing and are categorized into functions and departments. Most general ledgers are designed for financial statements, and thus in order to use them for activity-based costing systems they should be reconstructed. (Turney, 2005) Since general ledgers can often be detailed in a way that might not be useful for the activity-based costing system, the first step should be to combine related accounts. Accounts that have a common purpose and are assigned to activities in the same way should thus be combined into one. Doing so, reduces the level of complexity when it comes to building the final model. The next step depends largely on how the general ledger is constructed. If the general ledger does not include a division amongst functions or departments, the next step is to take the activity accounts that have been constructed and subdivide them to calculate departmental costs. In order to be able to use the activity-based costing system on a regular basis the next natural step would be to build an activity-based general ledger by assigning costs to activities in the general ledger. (Turney, 2005) 10

18 4.2.2 Defining the resource drivers When it comes to assigning costs to activities, resource drivers need to be defined. The resource drivers define the amount of resources or costs used by different activities and are ultimately used to allocate costs step by step until they reach the appropriate activity. There are four rules that need to be followed when defining the resource drivers. These rules include assigning costs of enabling activities and tracing costs when it is possible, using common sense whilst assigning costs and to separate costs associated with people from other costs. Organizations perform various enabling activities that require costs that cannot be traced directly to the cost objects, but on the other hand contribute directly to core activities. In that case, the costs of these enabling activities should be assigned to the core activities using resource drivers. There are different types of resource drivers, used under different circumstances. The different circumstances can be explained by using tracing and allocation. When costs can be traced to an activity based on specific data or reports, the costs can be assigned using a resource driver based on a definite number of hours or other units. Allocation, however is an indirect assignment of costs that happens when costs of enabling activities need to be allocated to different core activities based on the effort devoted, without using concrete data. Thus, costs should be traced when possible and allocation should only be used when tracing is not possible. (Turney, 2005) Figure 1: Cost assignment and resource drivers (Glad & Becker, 1996) Salaries Health care Pension Overtime Building rental Building insurance Wages Building hours spent on activity square meters used Activity 1 Activity 2 Activity 3 There are different methods that can be used when it comes to identifying possible resource drivers when there is no concrete data available. Interviewing or sending out questionnaires to the employees involved in the activities can be done to collect information on when resources are needed and what causes the workload. Alternatively, physical observations may be used in order to get a more thorough information on how the activities and the resources are used, or an analysis of historical or current information available at the organization that might contain the relevant information. (Glad & Becker, 1996) 11

19 4.2.3 Determining Attributes Attributes are labels that are associated with each activity that can help group activities easily for reporting of activity costs. They enable the activity cost information to be aggregated on a higher level when needed for reports on specific expenses based on functions, business processes or cost hierarchy. (Kaplan & Cooper, 1998) The simplest way of attributing activities is by functions or departments. Still, there might be a need for other ways to attribute similar activities that range across departments and functions. In that case, using attributes to create activity centers on demands would be the solution. (Turney, 2005) Attributes are often used by manufacturing companies to classify activities along a cost hierarchy dimension. Using this method allows the system to structure costs based on units, batches, and product-, customer- and facility-sustaining. Using the hierarchy thus enables the system to display what triggers the activities and the volume of it and which level needs to be examined in order to avoid or control them. (Kaplan & Cooper, 1998) 4.3 The third step: Assigning costs to cost objects After all activities have been defined and all costs have been assigned to the specific activities, the activities need to be assigned to cost objects: products, services and customers; using appropriate activity drivers. Activity drivers ultimately explain how the cost objects consume the activities. (Glad & Becker, 1996) An activity driver should always match the type of activity it is assigned to, in order to clearly determine that, using the activity hierarchy can be useful. Meaning that a unit related activity should be measured in units and a batch activity should be measure in batches. An activity driver should also correlate with the effort of performing the activity. Choosing the activity driver therefore depends on the circumstances, for instance, if a batch activity can take different amounts of hours to perform depending on the cost object, it should be measure in hours rather in number of occurrences. When building an activity-based costing model with a process based purpose, it is important that the activity drivers that encourage performance improvement. It is also important not to choose activity drivers that cost too much to measure or require new measurement methods. (Turney, 2005) When activity drivers have been chosen for all activities, a cost driver rate is used to calculate how much should be assigned to each cost object. The cost driver rate is found by dividing the total activity cost with the quantity of what it can provide. Thus, a cost driver rate = expense/cost driver. Using this equation you can easily divide the total cost of an activity between the different cost objects that consume it. (Kaplan & Cooper, 1998) When finding the total cost of a cost object one must take the cost driver rate of each activity used by the cost object and multiply it with the number of drivers (amount used) by the cost object. After doing so for all activities separately, the costs can be summed together with the direct costs. (Atkinson, et al., 2012) 12

20 4.4 Summary of the steps The summary of the steps is presented in the picture below. Figure 2: Summary of the steps of activity-based costing (own production) Identifying activities Defining activities Identifying core activities and enabling activities Assigning costs to activities Structuring the financial information Defining resource drivers Assigning costs to activities, step by step Defining attributes Assigning activity costs to cost objects Identifying activity drivers Identifying cost driver rates Assigning the activity costs to cost objects 4.5 Activity-based management As mentioned before, activity-based costing systems can provide managers with information on various aspects of the organization that can then be used to make managerial decisions. Once the activity-based costing system has been constructed, managers can evaluate the profitability of both products and customers. After this information has been obtained, managers can take action in order to increase the profitability or efficiency. These actions are referred to as activity-based management and include decisions such as: re-pricing, substituting or redesigning products, improving processes and operation strategies, making technological investments, outsourcing activities or eliminating products. If actions are taken and implemented successfully they can lead to reduction of resources needed for production and customer services. However, in order for the company to benefit from these actions, the costs of these resources must be eliminated. The actions may often lead to unused capacity and thus the unused capacity must be eliminated by either reducing costs or using it in alternative ways. In order to truly benefit from the implementation of an activity-based costing system, activity-based management needs to be applied as well. (Kaplan & Atkinson, 1998) 13

21 4.6 Benefits of using an activity-based costing system Activity-based costing systems are being adopted by many companies in various industries for a variety of reasons. The system can provide managers with detailed information on the profitability of all their products, helping them make better decisions regarding product mixes and to estimate profit margins for new products. Additionally, organizations that have a complex operation environment, often offer a variety of services and products sharing the same resources in various ways. The activity-based costing system provides a solution in how to assign the costs of those resources. Indirect costs are becoming more important with the technological advances in various industries during the previous years, and in some cases they make up more than 50% of the costs in organizations. The activity-based costing system assigns these costs and provides information on the consumption of those costs. Recent development in computerized technological systems has made the structuring of activity-based costing models both cheaper and easier than before. (Horngren, et al., 2011) 4.7 Implications of using activity-based costing systems in real life Although Activity-based costing systems are aimed to provide managers and employees of organizations with important information regarding costs of activities, products, customers, processes and services, the systems do not always succeed to contribute to an increase in profitability or efficiency. (Atkinson, et al., 2012) One of the most common problems occurring when an activity-based costing system is implemented in an organization is the lack of purpose behind it. When it is introduced to the company as a more accurate tool to track and assess costs, employees and managers often do not see the purpose for looking at it or using it. To ensure that the system is beneficial and will be used by the organization it is important to identify the purpose and subsequently introduce it to the company. While communicating the purpose, it is also important to explain what the system is capable of doing and how the information can be used. (Atkinson, et al., 2012) Another issue is a resistance to change. The resistance to change can happen for different reasons. In some cases employees feel threatened by the fact that their performance is being measured and feel uncomfortable being observed. They might also fear that they will lose their jobs if they are deemed to produce unnecessary costs (Atkinson, et al., 2012; Malmi, 1997) Managers also experience pressure if their area of responsibilities is not performing or is unprofitable, and they may result to hiding costs or assigning them to other areas in order to look better. (Atkinson, et al., 2012; Malmi, 1997) Lastly, some organizations have found that the system is too complex and expensive to implement (Malmi, 1997) 14

22 5. Analysis of AIESEC Aarhus In order to construct an activity-based costing system, various analysis need to be performed on the organization. In this chapter I will look into the strategy and the structure of the organization, their products and services, as well as their processes and financial structure. Based on this information I will identify their main problems and current needs in regards to management accounting. This analysis will also be used as grounds to build the activity-based costing system. 5.1 Introduction to AIESEC AIESEC is the largest student-run organization in the world. Currently, the organization is active in 126 countries all around the world and it is represented in over universities. It has more than active members and over alumni. ( 2015) AIESEC was founded in 1948 after the end of World War II. The organization was established with the mission to expand the understanding of a nation by expanding the understanding of the individuals, changing the world one person at a time. ( 2015) Denmark is one of the five founding countries of the organization, and Danish students were involved with defining its purpose: AIESEC is an independent, non-political, and international organization which has as its purpose to establish and promote the friendly relations between the members. ( 2015) AIESEC provides and international platform of leadership opportunities and international internships in order to offer young people the chance to develop their leadership skills for a positive impact on society. (Hjermind & Townsend, 2008) AIESEC Denmark In Denmark, AIESEC is registered as a social enterprise and operates as a not-for-profit organization. All members of the organization are volunteers, except for the member committee, which is a team of five managers that leads AIESEC Denmark nationally. These 5 people receive a compensation for living costs during their term which lasts one year. ( 2015; Hjermind & Townsend, 2008) AIESEC Denmark has existed as long as AIESEC International, since It has five local committees and one official extension. All entities are run independently with their own CPR number. The local committees are located in Aalborg (AIESEC AAU), Aarhus (AIESEC Aarhus), Odense (AIESEC SDU) and Copenhagen (AIESEC CBS & AIESEC UNIC). The official extension is located in Horsens (AIESEC VIA). All entities have a similar structure and offer the same products at their local markets. (Hjermind & Townsend, 2008) 15

23 5.2 AIESEC Aarhus AIESEC Aarhus is one of the largest local committees of AIESEC Denmark. Currently, Vidmante Dubikate leads the entity as Local Committee President. The members of the executive board are: Laura Donose (Local financial officer), Vibeke Holmquist (Local officer of incoming exchange), Emese Polyak (Local officer of outgoing exchange), Marian Jarzek (Local marketing officer) and Simonas Burokas (Local talent management officer). They will lead the entity until March (Appendix 9) The Local Entity Structure AIESEC Aarhus currently has five functional area departments. All departments have local officers leading them, and together these local officers form the executive board, which is led by the local committee president. (Dubikate, 2015; Appendix 9) The Local Financial Officer operates as the Local Committee President s left hand and together they share the decision power and the legal responsibilities. (Dubikate, 2015; Donose, 2015; Appendix 9) The functional area departments can be divided into two categories: front office and back office. The front office includes the Incoming Exchange and Outgoing Exchange departments, which interact with the customers directly and are responsible for operations related to the products offered by AIESEC Aarhus. The back office includes Finance, Marketing and Talent Management which support the front office departments in their operations. (Appendix 9) Figure 3: The structure of AIESEC Aarhus (own production) Local Comittee President Local Financial Officer Finance Department Local Officer of Outgoing Exchange Local Officer of Incoming Exchange Local Marketing Officer Local Talent Management Officer Outgoing Exchange Department Incoming Exchange Department Marketing Department Marketing Department 16

24 5.2.2 The Products AIESEC Aarhus currently offers three different types of products and services. These products are all aimed at different types of customers and target markets and all have different processes. Global Talent Global Talent is a paid professional internship program, aimed for students in the ages that are either currently enrolled in a study program or have graduated within the past two years. The Global Talent internships have a duration of 6-18 months, and provide the students with professional development in a cross-cultural environment with professional companies around the world. The countries offering internships for Danish students vary based on the demand amongst the students, the supply and relevance for the Danish society. The Global Talent customers are referred to as Exchange Participants ( 2015) Figure 4: Global Talent Processes (own production) Attraction Raising Matching Realizing market research promotion sign-up evaluation payments applying for opportunities EP manager assigned trainigs offered EP finds an internship the company approves preperation for departure EP starts his internsip EP is re-intergrated The process of the Global Talent program starts with attracting customers. In order to do that, the marketing department conducts a market analysis. (Dubikate, 2015; Appendix 9) Based on the analysis, the outgoing exchange team starts their promotion. The promotion includes classroom presentations, distribution of promotional materials that have been supplied by the national level and social media promotion. Later on, information meetings are held in order to educate potential customers about the program. These information meetings are hosted by the local entity. After the attractions stage comes what AIESEC refers to as raising. Raising happens when customers sign up to enter the opportunity portal to get access to internship opportunities. At this stage, outgoing exchange members contact the applicants that have signed up and meet them to evaluate them. If an applicant passes the evaluation, he is invoiced for the application fee. After he has paid, he has full access to the internship opportunities and can start to apply for internships. At this stage, the customer is referred to as an Exchange Participant or EP. Once an applicant becomes an EP, the outgoing exchange department assigns an EP manager to him. The EP manager is responsible for introducing the EP to the system and assisting him with his applications. During the time EP s are applying for internships they are offered various trainings in relation 17

25 to resume building, job interview skills and other relevant skills. Once an EP has found an internship and has been approved by the company, he is matched. At this stage, the EP manager helps the EP getting in contact with the local committee that provides the internship opportunity. Before the EP s leave for their internship, they are offered to attend an outgoing preparation seminar where they get relevant information on the countries they are moving to and how to adjust to the culture. Once the EP has left for his internship and started working, he is realized. During his stay, the EP manager tracks his experience on a regular basis to ensure the quality of the experience. After EP s return, they are offered to attend a re-integration seminar where they share their experience and provide feedback. At this point they are also offered to join the organization as members. The EP has two months from his internship end-date to hand in a report on his experience and provide the entity with videos or pictures from his stay. If he chooses to do so, he will be refunded a part of the fee that he paid. (Dubikate, 2015; Polyak, 2015; Appendix 9; Appendix 3; Appendix 6; ) The price for the Global Talent program in Denmark is 2500 DKK. The income is divided in the following way: 500 DKK is refundable if the customers provides AIESEC Aarhus with a report and pictures from his internship after returning to Denmark. A fee of 500 DKK is charged for the evaluation of the customer s preparedness to apply for an internship and is recognized as income by the local entity. The remaining 1500 DKK is book kept as a reserve until the Exchange Participant is matched and then is recognized as income. The 1500 DKK income is divided by the local entity and the national board equally. If the customer applies for an appropriate amount of internships in the period of 6 months and does not find a suitable place, 2000 DKK is refunded. (Donose, 2015; Appendix 9; Appendix 18) HR Solutions HR Solutions provides companies with a customized solution to increase the company s competitiveness by offering a platform with Global Talents with a wide range of backgrounds and skills from all over the world. Companies can request interns for periods of 3-18 months with start and end dates that suit the company. Included in the service provided by AIESEC Aarhus is filtrations of applicants, selection, visa processing as well as the intern s cultural integration and reception. ( 2015) The HR Solutions customers are referred to as Trainee Nominees. 18

26 Figure 5: HR Solutions Processes (own production) Attraction Raising Matching Realizing market analysis conducted prodpect lists created cold calling to companies networking sales meetings contracts signed profile created on the opportunity portal job description created and promoted candidates evaluated candidates interviewed choosing of the best candidate employment contract signed Intern starts his internship with the company The process of HR Solutions starts with finding the target customers. In order to do that, the marketing department conducts a market analysis and helps the incoming exchange department creating a list of prospective companies. Once the list has been made, the members of the sales team in the incoming exchange department start cold calling the companies in order to book sales meetings. In addition, the members of the sales team attend various networking events in order create an awareness of the organization and book meetings. The sales team members attend meetings with the companies, where they inform them about the service provided by the organization and if successful they make a contract with the companies. When a company signs a contract, they are raised and pay a raising fee to be set up in the opportunity portal. At this stage, the process & delivery team takes over, they create a profile for the companies on the opportunity portal and set up the job description. They promote the job description to partner entities and receive applications from candidates. The process & delivery team evaluates the candidates and interview the ones that meet the requirements of the job. They choose the top candidates and hand over a list to the company. The company then interviews the top candidates themselves and chooses the best one. Once an intern has been chosen and signed a contract with the company, they are matched. At this stage the matching fee is invoiced. Once the company has matched with an intern, the process & delivery team assists the intern with his arrival; by assisting with VISA applications, finding accommodation and planning the arrival. When the intern arrives, he is greeted by the process and delivery team, that help him find his accommodation, get settled and ensure all legalities are in order, such as CPR number and tax card. Once the intern is settled and starts working for the company, the experience is realized. After realization, the company is invoiced for each month the intern works for them. During the intern s stay, the process & delivery team offers the intern to attend various learning activities, such as conferences, trainings and meetings. In addition, they track the intern s performance at the company. (Dubikate, 2015; Holmquist, 2015, Appendix 9; companies/how-it-works/, 2015) The price for registering for HR Solutions is 1500 DKK. Once an appropriate candidate has been found for the internship a fee of 3000 DKK is charged for matching the intern to the position. Once the intern arrives and starts working, the company pays the intern his salary. 19

27 In addition to the salary, the companies are charged 1900 DKK per month for having the intern. Out of the 1900 DKK, 600 DKK is reserved for intern learning activities, organized by the local entity and the remaining 1300 DKK is recognized as income and divided equally by the Local entity and the National Board. (Donose, 2015, Appendix 9, Appendix 18) Global Leader Global Leader is the name of the team member program offered by AIESEC. All volunteers working as members in the local entities of AIESEC Denmark are a part of the Global Leader program. The program is aimed to provide students with a platform to acquire practical skills that could not be obtained in their student life. They get access to a large global network and are offered various opportunities to develop their leadership skills and other soft skills. In addition, members have the opportunity to attend various trainings and workshops every month, as well as the opportunity to attend both national and international conferences. ( 2015) Delivering the Global Leader product is a consistent, ongoing process. Recruitment of new members happens twice a year, the process begins in January and then again in August. The process of recruiting Global Leaders starts with an internal analysis of the local committee. The talent management team helps the executive board evaluating its current state: how many members they have, how many of them are still active and evaluate how many they need in order to reach their goals the next half a year. Once the number of people needed to be recruited has been decided, a marketing analysis is conducted in order to examine where the appropriate students can be reached and how. Once the marketing analysis has been conducted, promotion starts. The promotion includes social media promotion, distribution of promotional materials on university campuses, classroom presentations and information stands on university campuses. Students interested in becoming members sign up on AIESEC s webpage. Applicants are interviewed and evaluated based on specific criteria, set by the executive board. The executive board selects the members they want to recruit and they are invited to attend a local training seminar. The local training seminar is a full weekend of education and induction into the organization, where new members are divided into their new teams and roles and learn all about the organization and are trained. The members pay their membership fee during this weekend. After the induction weekend, the members start working in their perspective teams as members of the organization. Once they have become members, the Global Leader program offers them various opportunities to attend trainings, national and international conferences and coaching sessions. They also have the opportunity to apply for leadership opportunities and become team leaders or members of the executive board. (Dubikate, 2015; Appendix 9, Appendix 7) The membership fee for the Global Leader program is 200 DKK per year. The fee is divided between the national board and the local entity. (Donose, 2015; Appendix 9; Appendix 18) 20

28 5.2.3 The departments and processes The Outgoing Exchange department deals with the Global Talent customers directly. The department is responsible for customer relationship management and operations related to the Global Talent product. The department is divided up by three different processes. (Dubikate, 2015; Polyak, 2015; Appendix 9) The main activities of the outgoing exchange department includes: - Contacting potential Exchange Participants that sign-up - Meeting with the possible Exchange Participants and evaluating them - Making contracts with the potential Exchange Participants that pass the evaluation - Assisting the Exchange Participants with making their profiles on the opportunity portal and making sure their CV is relevant - Assisting the Exchange Participants with their internship search - Training the Exchange Participants in skills such as CV writing and job interview skills - Assisting the Exchange Participants with the needed documents for moving - Setting expectations before departure - Contacting the Exchange Participants during their internship and follow up on the experience - Re-integrate the Exchange Participants when they return - Collecting materials from Exchange Participants that could be used to showcase their experience (Polyak, 2015; Appendix 9; Appendix 6) The Incoming Exchange department deals directly with HR Solutions customers. The department is responsible for customer relationship management and all operations related to the HR Solutions product. The department is divided into two teams, which are led by team leaders. The teams are called Sales and Process & Delivery. The sales team is responsible for finding prospective companies, reaching out to them and selling the HR Solutions product. The process & delivery team is responsible for delivering the product and services. (Holmquist, 2015; Appendix 9) The activities of the sales team are: - Producing and maintaining a list of prospective companies - Tracking and contacting leads - Attending networking events to promote AIESEC Aarhus - Account management - Calling prospective companies and setting up meetings - Going to sales meetings & selling the HR Solution product - Signing contracts with clients 21

29 The activities of the process & delivery team are: - Managing company profiles and job descriptions on the opportunity portal - Promoting the job descriptions - Evaluating candidates - Organizing and conducting interviews with candidates - Creating a shortlist of candidates for the companies - Assisting incoming interns with VISA application and finding accommodation - Welcoming interns upon arrival - Assisting interns with legalities, such as CPR number, tax card, NemID and bank account - Organizing intern learning activities - Tracking the interns engagement and performance (Holmquist, 2015; Appendix 9, Appendix 4) The Finance department is responsible for financial management and legal governance. Their responsibility is to ensure the legal health and financial sustainability of the entity and to budget and track all income and expenses. Excluding the local financial officer, the department has three members, each responsible for the daily operational activities in their area, one for outgoing exchange related activities, another for incoming exchange related activities and the last one is responsible for all member related activities. (Donose, 2015; Appendix 9) The finance department s activities are: - Budgeting and tracking the LC income and expenses (yearly, quarterly, monthly) - Tracking expenses and performance of each department - Reporting annually and quarterly - Invoicing customers and members - Refunding members for expenses - Updating financial trackers - Paying bills - Managing receivables and payables - Assisting members with activity budgeting (Donose, 2015; Appendix 9; Appendix 2) 22

30 The Marketing department is responsible for doing market research and promoting the entity and its products: Global Talent, Global Leader and HR Solutions. (Dubikate, 2015) The responsibilities also include brand management and the enhancement of the AIESEC brand. The department also ensures and administers internal, as well as external communication. (Appendix 3) The main activities of the marketing department are: - Conducting market research for all products - Developing marketing strategies for all products - Printing out marketing materials provided by the national level - Collecting testimonials for promotional purposes - Representing AIESEC in networking events and at the university campuses - Promoting AIESEC s products - Social media marketing - Conducting local branding audits (Dubikate, 2015; Appendix 9; Appendix 3) The Talent Management department is responsible for human resource management within the entity. This entails the implementation of all talent management processes and overseeing the development of the talent management programs. (Appendix 7) The department evaluates the human resource needs for each department, the recruitment and evaluation of possible members, and offers training and coaching. The department is responsible for obtaining organizational health and making sure all members are educated and motivated. (Dubikate, 2015) The main activities of the department include: - Evaluating the need for human resources - Interviewing possible Global Leaders - Selecting the new members and allocating them - Planning and hosting a local training seminar to induct new members - Evaluating the need for trainings - Planning and hosting trainings and meetings for members - Coaching and tracking member - Assist members with tracking their goals and their performance - Tracking all member activities and experience information (Dubikate, 2015, Appendix 9; Appendix 7) 23

31 5.2.4 The financial situation and cost structure The historic financial analysis of AIESEC Aarhus indicates that the largest costs in the past five years are conferences and meetings, conference fees and transportation. Following are costs for office management, food and beverages, marketing expenses and financial fees and memberships. These costs account for around half the total costs occurring each year and therefore we can assume there are various indirect costs that influence the profit or loss that need to be allocated. When looking at the main source of income during the past five years, we can identify that there has been a change in trends. In the period the largest source of income has been obtained from the Global Talent program. In 2013 this trend shifted and since then the HR Solutions have brought in the largest share of income. (Appendix 1) According to Donose (Appendix 9) the financial situation in AIESEC Aarhus is bad at the moment, due to a lack of income in the past months. The current cost structure AIESEC Aarhus follows can be found in their annual and quarterly reports. Cost and Revenues are allocated into General Ledger accounts and then into cost centers. The following overview of AIESEC Arhus s General Ledger expense accounts and cost centers is extracted from their accounting system. Figure 6: AIESEC Aarhus s GL accounts and cost centers (Appendix 18) GL ACCOUNTS AUDIT DONATIONS & GIFTS TAXI AIESEC CONFERENCE FEES FOOD & BEVERAGES FLIGHT TICKETS FINANCIAL FEES COMMERCIAL LOSSES CAR RENTAL, PARKING & PETROL MEMBERSHIPS PRINT & COPY SERVICES OFFICE & KITCHEN SUPPLIES SUBSCRIPTIONS PUBLIC TRANSPORT POSTAGE & COURIER MARKETING COST CENTERS Altius EB Meetings Fortius Functional Meetings & Trainings Incoming Exchange International Conferences LC Meetings Office Management Outgoing Exchange Recruitment Relay Citius Expros External Relations Meetings Half Year Members Fee International Conferences LC Visits MC Service & AI Fee National Presidents Meeting Office Management Other expenses Other International Conferences Recruitment ReLoad Leadership Developm Seminar Training Meetings Reward 24

32 The balance of these cost centers and general ledger accounts is compared to the budgeted amounts, both quarterly and annually. Financial evaluations are then based on this information and are used to make managerial decisions regarding the upcoming periods. (Appendix 18) 5.3 Problem Identification According to Donose (Appendix 9) the financial situation of AIESEC Aarhus is not looking good due to a lack of income and that the entity is forced to perform at a higher level with fewer resources. The entity is looking into alternative ways of income generation though funding. Although, AIESEC Aarhus has gone through some financial difficulties in the past years and received external funding, without being able to make that work in a longer run. (Appendix 1) The performance of the front office is measured on a cash in, cash out basis and when a department is not performing; meaning it does not generate enough income, its expenses are cut, limiting the access to financial resources. When a department is generating a lot of income on the other hand, the entity invests more in that department. (Donose, 2015; Appendix 9) According to Dubikate (Appendix 9) this method is used since the entity is lacking tools to track performance more accurately. In terms of Information management there are several problems. Although the entity keeps a spreadsheet of information regarding payables and receivables in accordance to the exchange processes; according to Dubikate (Appendix 9) information management and knowledge sharing is lacking within the entity, stating that the information is superficial and does not provide the executive board with the specific information that is needed in order to make managerial decisions. In the incoming exchange department, knowledge is shared using booklets with practical guidelines on how to conduct the processes. However the guidelines for realizations are missing and operations are not being tracked on a detailed level. (Holmquist, 2015; Appendix 9) In the outgoing exchange department, the only information management tool being used at the moment is the spreadsheet they share with the finance department. There are no trackers that track the work being done, which means that evaluating performance and member engagement is difficult. (Polyak, 2015; Appendix 9) Although, detailed information on performance is lacking, there are issues that can easily be identified. Seeing that the entity has had trouble generating income in the past month, there is an issue when it comes to making sales. According to Dubikate (Appendix 9) human resources are not missing, yet the performance is not happening. The issue lies within the front office, where sign-ups and business meetings are not being converted into sales. The executive board members have different ideas on what is the source of this problem. Donose (Appendix 9) suggests that the issue lies externally, with the newly introduced student reform limiting the number of students doing an internship along their studies and with the company s reluctance to hire international employees. Dubikate (Appendix 9) however brings up the issue of low member retention rate and weak leadership pipeline. Meaning that resources are wasted on members that do not stay in the organization 25

33 and the leaders of the entity are often no educated enough for their roles. Furthermore, she mentions that the bottom-up culture is missing and that the members of the organizations should be provided with more responsibilities and tasks. She also mentions that the brand awareness is missing and that the weak presence in the market is hurting the sales. Holmquist (Appendix 9) also addresses a marketing issue, stating that market research done on companies is not good enough, that the awareness of trends is lacking and the wrong customers are being contacted. 6. Constructing the activity-based costing system After analyzing the state of AIESEC Aarhus and the problems they entity is dealing with, it can be identified that there is a need for more specific information when it comes to costs and performance. As mentioned before, the entity mainly looks at the income generated by each department to make managerial decisions regarding investments and purchase decisions. However, now that the departments are not performing at an adequate level, it raises a concern in regards to these methods. Although the management has cut down on expenses related to the exchange departments, the entity deals with large amounts of indirect costs that are not directly linked to the exchange products. (Appendix 18) Implementing an activity-based costing system can provide the management with useful information on costs of activities and processes that they can use to evaluate their operations and make better managerial decisions. 6.1 Method In order to construct an appropriate activity-based costing system for AIESEC Aarhus, I will use the analyses conducted before. I will use the information provided by the job descriptions and the managers in order to identify the activities based on the methods discussed before. I will follow the recommendations made by Turney (2005) in order to reconstruct their current cost system and look into transactions in order to better fit the available information into the new system. Furthermore, I will use the interviews in order to find appropriate drivers to allocate the costs that cannot be traced. To conclude I will use cost information from the past two financial years in order to demonstrate the system in practice and make recommendations on how the results and information can be used for evaluations and making managerial decisions. Additionally, I will make suggestions regarding information tools that can be implemented in order to produce information to improve the activity-based costing system. 26

34 6.2 Creation of the model step by step The objective Based on the analysis and the problem identification of AIESEC Aarhus there is a need for operational information regarding processes and activities. In addition, seeing that the prices and products offered are decided by the national level and not within the entity itself, the activity-based costing system should have a process-based focus. The objective is to produce information on the specific activities and processes needed in order to deliver the products and services, and identify which activities and products are consuming the most resources and why Activities identified Seeing that the activity-based costing system should have a process based purpose, the activities chosen should be specific. When identifying the activities I used the analysis of the products and the processes. Firstly the functional responsibilities are listed, then business processes are identified, which leads to the specific activities and then the tasks for each activity are listed. Core activities, that directly contribute to the products: Figure 7: Activity table for Global Leader recruitment Business Process: Global Leader recruitment Activities: Promotion of the Global Leader program Tasks: Online promotion, distribution of promotional materials, classroom presentations, promotional stands at university campuses Recruitment of Global Leaders Creating application forms, reviewing application forms, interviewing candidates, evaluating candidates, accepting candidates, hosting a Local Training Seminar for new members, invoicing the new members, setting the new members up in the accounting system 27

35 Figure 8: Activity table for educating and developing Global Leaders Business Process: Educating and developing Global Leaders Activities: Member education Sending members to conferences Tasks: Identifying the needs of training, planning trainings, hosting local committee meetings, contacting external trainers, hosting the trainings, paying the trainers, providing beverages and snacks Planning transportation, paying for transportation, paying conference fees, invoicing for conference fees, hosting a conference preparation seminar Figure 9: Activity table for managing the Global Talent program Business Process: Managing the Global Talent program Activities: Tasks: Global Talent promotion Doing market research, online promotion, distributing promotional material, doing promotional stands at university campuses, attending career fairs, hosting information events Raising Exchange Participants Matching Exchange Participants Realizing Exchange Participants Managing the information system, evaluating applications, interviewing possible candidates, educating selected candidates, invoicing candidates for the participation fee Assisting candidates with internship selection, tracking their process, contacting partner LC s, hosting trainings for relevant skills for candidates, recognizing income Printing out contracts, hosting an outgoing preparation seminar, tracking the candidates experience, integrating the interns when they return, collecting their reports and materials, refunding for the reports and materials 28

36 Figure 10: Activity table for managing the HR Solutions program Business Process: Managing the HR Solutions program Activities: Promoting the HR Solutions Raising Trainee Nominees Matching Trainee Nominees Tasks: Market research, constructing call lists, cold calling, company meetings, attending company fairs, networking, paying for network memberships Printing out contracts, negotiating meetings, setting the Trainee Nominee up in the CRM system, evaluating their needs, invoicing the raising fee Screening candidates, interviewing candidates, presenting candidates to Trainee Nominees, selecting the appropriate candidate, invoicing for the matching fee Realizing the Trainee Nominees Assisting the intern with Visa applications, finding accommodation, integrating the intern, tracking the intern s experience, planning intern learning activities monthly, invoicing the realization fees, invoicing for the training activities fund Enabling activities that contribute to the core activities: Figure 11: Activity table for financial operations Business Process : Financial operations Activities: Maintaining membership criteria Financial operations Tasks: Conducting annual reports, conducting quarterly reports, conducting consolidated reports, filling in SONA reports, bookkeeping, reconciliation, tax reporting, paying MC service fees, paying AIESEC International fees, paying for an audit Invoicing members, customers and externals. Refunding members for their purchases. Bookkeeping and accounting each transaction. Figure 12: Activity table for external relations & brand awareness Business Process : External relations & brand awareness Activities: General promotion of the organization Tasks: Designing and buying branded materials such as t-shirts, fliers, pens and folders. Hosting events and meetings with externals, attending fairs and networking events 29

37 6.2.3 Assigning costs to activities Seeing that AIESEC Aarhus uses both a general ledger and cost centers that are focused on departments, to structure their costs, a reconstruction of the general ledger might not seem necessary. Instead most of the costs could be assigned to activities using the cost centers and the rest by looking into specific transactions. However, some of the accounts are too detailed and can be merged into more general accounts to ease the cost assignment, and thus, I have reconstructed the general accounts and cost centers that could be merged. Figure 13: General ledger accounts reconstructed (Appendix 16) NEW G/L ACCOUNTS MERGED FROM DESCRIPTION Financial operations Audit + Financial Fees External Audit Fees, fees for late tax reporting, bank fees, transaction fees Transportation Public Transportation + Taxi + Flight Tickets + Car Rental, Parking & Petrol All transportation related costs Office Costs Print & Copy Services + Office & Kitchen Supplies + Postage & Courier All office related costs The following general ledger accounts will remain the same: AIESEC Conference Fees, Donations & gifts, Food & Beverages, Commercial Losses, Memberships, Subscriptions and Marketing 30

38 Figure 14: Cost Centers reconstructed (Appendix 16) NEW COST CENTER MERGED FROM DESCRIPTION National Conferences Altius + Fortius + Citius + Relay + Reload All costs traced to attending national conferences International Conferences International Conferences + Other International Conferences + Expros + Leadership Development Seminar All costs traced to attending international conferences Trainings & Meetings EB Meetings + Functional Meetings & Trainings + LC Meetings + Training Meetings + National Presidents Meeting All costs traced to hosting and attending meetings & trainings for members External relations and brand awareness ER meetings + LC visits + marketing expenses for general brand awareness All costs that are directly traceable to brand awareness and external relations The remaining cost centers will stay the same: Incoming Exchange, Outgoing Exchange, Recruitment, Office Management, Half Year Member s Fee, MC Service & AI Fee, Other Expenses and Reward When reviewing annual reports and looking into the transactions, the assignment of costs into the general ledgers and cost centers differs a lot. (Appendix 17) Meaning that specific costs are accounted for in different general accounts and even different cost centers between years. This raises a concern on how accurately costs are accounted within the organization and can imply that either, the members of the financial department are not educated on how to book-keep specific costs, or that there might be a need for reconstruction. In order to ensure the accuracy of the costing information and avoid problems, I will start the cost assignment by correctly allocating each transaction to the correct general ledger accounts and cost centers before assigning costs to activities. Once the costs are accurately assigned into the general ledger accounts and cost centers, the next step is tracing all possible costs that can be directly traced to the activity cost pools. 31

39 Cost centers that can be traced directly to activity cost pools: National Conferences => Sending members to conferences International Conferences => Sending members to conferences Trainings & Meetings => Educating members Rewards => Educating members Half Year Member s Fee => Recruiting Global Leaders Office Management => Financial Operations MC Service Fee & AI Fee => Maintaining membership criteria ER & Brand awareness => General Promotion Cost center / GL Accounts transactions that can be traced directly to activity cost pools: Outgoing Exchange + Marketing => Promotion of Global Talent Incoming Exchange + Marketing => Promotion of HR Solutions Recruitment + Marketing => Promotion of Global Leaders The rest of the costs from recruitment need to be assigned based on each transaction to either the Global Leader promotion or the Global Leader recruitment activity cost pool. The rest of the costs for outgoing exchange need to be assigned based on each transaction to Global Talent promotion and Global Talent raising, matching or realizing. The rest of the costs for incoming exchange need to be assigned based on each transaction to either HR Solutions promotion or HR Solutions raising, matching or realizing. After the reconstruction of the general ledger and looking into specific transactions, the costs of the enabling activities need to be allocated to the core activities using a resource driver. The enabling activity financial operations is the responsibility of the finance department and the cost pool includes all office related costs which contribute to the finance team s work at the office. As mentioned by both Donose and Dubikate (Appendix 9) the main operational tasks performed by the financial departments are invoicing and refunding. Thus, these costs can be allocated to the activities using a resource driver called transactions, meaning the number of invoices and refunds made for each activity. Seeing that the costs of maintaining the membership criteria cannot be traced to each activity, but to the products directly, those costs will be allocated later on. Allocation of the costs used for external relations and general brand awareness is also complicated. Seeing that the marketing department is responsible for these activities as well as supporting the front office departments and the talent management department, the effort provided to each department should be measured in some way to allocate these costs. However, due to the lack of information on performance in the entity and the reach and effect of these general promotion activities including the low costs they entail, I have decided to leave them out of my model. 32

40 In order to structure the final activities and provide the management with more detailed information on each activity, they should all be assigned attributes. Attributes enable the management to easily group activities together into activity cost centers when constructing reports or when looking into specific areas of the organization. The following attributes have been assigned to the activity cost pools: Figure 15: Activity attributes Activity Department Process Significance Promotion of the Global Leader program Marketing Sales Core Integration of Global Leaders Talent Management Sales Core Member education Talent Management Delivery Core Sending members to conferences Talent Management Delivery Core Global Talent promotion Marketing Sales Core Raising Exchange Participants Outgoing Exchange Sales Core Matching Exchange Participants Outgoing Exchange Delivery Core Realizing Exchange Participants Outgoing Exchange Delivery Core Promoting the HR Solutions Marketing Sales Core Raising Trainee Nominees Incoming Exchange Sales Core Matching Trainee Nominees Incoming Exchange Delivery Core Realizing Trainee Nominees Incoming Exchange Delivery Core Maintaining membership criteria Finance Support Enabling Financial operations Finance Support Enabling External relations & brand awareness Marketing Support Enabling The attributes are categorized by department, process and significance. The department label defines which department is mainly responsible for the activity. The process label explains whether the activity contributes to the selling of the product, to delivering the services or to supporting the sales and delivery activities. The significance indicates whether the activity is a core activity that contributes directly to the product or and enabling activity that contributes to the other activities. 33

41 6.2.4 Activity costs assigned to cost objects Once the costs of the activities have been defined and allocated to the correct activity cost pools, they can be allocated to the cost objects. AIESEC Aarhus s cost objects are their three products: Global Leader, Global Talent and HR Solutions. The costs of Global Leader should thus be made up by the Global Leader promotion costs, Global Leader recruitment costs, the costs of trainings and meetings and the costs of conferences. The output measures for the Global Leader promotion and Global Leader recruitment should be the number of members recruited. The Global Leader costs for education and conferences should be measured by the number of members active within the entity. Using these output measures, enables the managers of the entity to evaluate the costs and profitability of newly recruited members as well as old ones. The costs of the Global Talent should be made up by the costs of promoting the Global Talent program as well as raising, matching and realizing. The activity driver for these costs should be based on the amount of interns that are realized, seeing that once realized, the sale is complete. However, the system can also include output measures based on the amount sign-ups, raised and matched in order to compare. The costs of HR Solutions should be made up by the promotion of the program as well as the raising, matching and realizing. The activity cost should be based on the amount of customers. However, the system can also include output measures based on the amount of raises, matches and realizations in order to compare. The membership criteria cost pool includes costs that are necessary for the entity to be able to operate and offer its products. It proves to be rather difficult to measure how much of this resource is consumed by each product. However, since all products are dependent on it, I believe it should be allocated equally between all products. 34

42 6.3 Applying the activity-based costing system In order to summarize the construction of the system and generate results and information, I will apply the system, step-by-step using actual cost information and non-financial information from the past two financial years of AIESEC Aarhus; 1. July June 2013 and 1. July June Re-construction and assignment of costs To start off, all transactions from each financial year are extracted from the profit and loss statements (Appendix 10) and allocated into the correct accounts according to the re-constructed general ledger. (Appendix 11; Appendix 12) Figure 16: Reconstructed cost information (Appendix 12) After the reconstruction, the cost assignment is conducted in four steps. Starting with the assignment of directly traceable cost center accounts to the appropriate activity cost pools. Following, the combined cost center/gl Account transactions that can be directly traced to activity cost pools are assigned. 35

43 Figure 17: Cost centers assigned to activity cost pools (Appendix 12) The third steps requires a deeper look into each transaction within the remaining cost centers. The remaining costs in the recruitment cost center include (Appendix 12): Remaining costs Sweets for recruitment promotion (119 DKK) Snacks for LTS (159 DKK) Sweets for Global Leader promotion (48 DKK) Bus ticket for an external trainer (280 DKK) LTS related costs (4426 DKK) Activity cost pools Global Leader promotion = 119 DKK Recruiting Global Leaders = 159 DKK Global Leader promotion = 48 DKK Recruiting Global Leaders = 4426 DKK Educating members = 280 DKK 36

44 The sweets used for promotion are allocated into the Global Leader promotion activity cost pool. The LTS related costs are allocated to the recruitment of Global Leaders, seeing that LTS is an abbreviation for Local Training seminar, which is an induction weekend for new members. The external trainer costs are allocated to education of members. The remaining costs in the incoming exchange cost center include (Appendix 12): Remaining costs Boligportal subscription (375 DKK) Winning prize for killer weeks (320 DKK) Transportation for ICX sales trainer (74 DKK) Transport to a sales meetings + trainings (812 DKK) Skype credit (92 DKK) Intern social time (224 DKK) Boligportal subscription (375 DKK) Activity cost pools Realizing Trainee Nominees = 375 DKK Raising Trainee Nominees = 394 DKK Raising Trainee Nominees = 904 DKK Realizing Trainee Nominees = 599 DKK All sales related costs, such as sales training, sales meetings and Skype costs are traced to raising Trainee Nominees. The Killer weeks is an initiative aimed to increase raises, therefore it is allocated to raising as well. Boligportal subscriptions and costs for social time are assigned to realizing seeing that finding accommodation and integrating the interns are services provided in order to realize Trainee Nominees. The remaining costs in the outgoing exchange cost center include (Appendix 12): Remaining costs Snacks for the student review board (349 DKK) Snacks for OGX promotion (419 DKK) Transportation for an OGX sales trainer (776 DKK) Global village costs (2623 DKK) Sweets for promotion stands (194 DKK) Transportation for promotional materials (100) Activity cost pools Raising Exchange Participants = 349 DKK Global Talent promotion = 1195 DKK Global Talent promotion = 2917 DKK 37

45 A student review board determines whether applicants are qualified to be raised or not and thus the costs of the review board should be allocated to the raising of Exchange Participants. The expenses for snacks for promotion and sales training should be allocated to Global Talent promotion. This differs from the HR Solutions products due to the fact that sales of Global Talent creates sign-ups, not raises. Global Village was a large event, hosted in order to promote the Global Talent program and thus, all transactions for Global Village should be assigned to Global Talent promotion. Once all costs have been assigned to activity cost pools (Appendix 14) costs of the enabling activities has to be allocated to the core activities. In order to assign the financial operations costs, the number of all transactions made for the activities has to be summed up and the total cost of financial operations divided by that number to compute the cost per transaction. Then the number of transactions for each activity should be found in order to allocate the costs accordingly. The Transactions have to be extracted from the balance sheet. (Appendix 13) The trainee activity fund transactions are all traceable to the realization of Trainee Nominees seeing that the account is used for money to educate and entertain interns. The report refundable transactions are directly traced to realizations of Exchange Participants, seeing that they get the report fee refunded once they share documents from their stay. The student refundable transactions are directly traceable to matching Exchange Participants, seeing that the participation fee is recognized as income once the Exchange Participant is matched. The transactions for members can vary and thus have to be looked into individually and assigned to the appropriate activity. (Appendix 13) The total number of transactions made in order to perform the activities amounted to a total of 421 in the financial year , making each transaction account for DK. The total number of transactions was 771 in the financial year , making each transaction account for (Appendix 15) 38

46 6.3.2 Activity drivers and output measures Once cost assignment to activities is complete, the total costs can be calculated and activity drivers and output measures selected. Figure 18: Global Leader activity costs (Appendix 14) The Global Leader promotion and recruitment should be measured by the number of members that are recruited, or new members. The term new members, refers to members that have not stayed for more than one year and were recruited in the perspective financial year, seeing that the membership fee is collected annually. Old members are thus the ones that have been in the organization longer. The costs of education and conferences applies to all members and should be measured based on total amount of members. Figure 19: Global Talent activty costs (Appendix 14) A realized Exchange Participant is the complete product, meaning that once realized, the services have been provided and the sale is complete. Thus, the most appropriate activity driver for Global Talent 39

47 activities is the amount of Exchange Participants realized. However, in order to get more information for evaluations of the activities, I have chosen to display the output per sign-ups, raises and matches as well. Figure 20: HR Solutions activity costs (Appendix 14) The HR Solutions product differs from the others due to the fact that income is generated at three different stages; raising, matching, realizing. Seeing that income is generated from the same customer at different times, I have chosen the number of customers as the activity driver. However, in order to get more information for evaluations of the activities, I have chosen to display the output per raises and matches and realizations as well. 40

48 6.3.3 Results Finally, the process ends with assigning the activity costs to the cost objects in order to evaluate how profitable each product is. Figure 21: Cost object profits/losses (Appendix 14) The results of the activity based costing system show that the Global Leader program is not profitable, it is actually very costly. However, the Global Leader customers are members as well and the organization cannot operate without them. The costs of the Global Leader program might therefore be treated as staff costs and allocated to the other activities accordingly using appropriate performance measures. The HR Solutions is not only the most profitable product the organization offers, but the least costly as well. The Global Talent product was profitable in although in the profitability decreased, and when taking membership criteria costs into account, they operated at a loss. Not only due to the increase in promotion expenses, but also a relative decrease in sales revenue. 41