A Guide to Activity Based Costing

Transcription

1 A Guide to Activity Based Costing The Crown Prosecution Service The Activity Based Costing Team within Operations Directorate

2 CONTENTS (Please click the relevant page number to jump to the relevant section) The Guide Page 3 What is Activity Based Costing? Page 4 Why do we use ABC? Page 5 What does ABC cover and how is it used? Page 6 Caseload finalisations are important Page 8 Preparing for a costing Page 9 How does ABC measure work elements? Page 10 How does ABC measure considerative work? Page 11 Frequencies of occurrence Page 12 What is Relaxation Allowance? Page 13 What is Indirect Work? Page 14 What is the Absence Factor? Page 15 Management allowance Page 17 The costing calculation Page 18 CPS ABC costing process Page 20 To sum up Page 21 FURTHER INFORMATION / CONTACTS Page 22 2

3 The Guide This guide is intended to answer the most common questions about ABC as practised within the CPS. It should enable you to develop an understanding of the CPS Activity Based Costing system and how it can be used to assess indicative case costs and cost the impacts of change. Whilst the content of this guide should enable you to subsequently undertake basic costing exercises the guide is not intended as a detailed explanation of the theory behind Activity Based Costing or Activity Based Management. Many publications from the academic and business worlds cover these subjects in great depth. The Guide focuses on how ABC timings are developed and their contribution to informing CPS costs. The timings are just one of several key inputs into a completed costing. When undertaking a costing it is important to appreciate that both staff costs and non staff costs need to be considered. ABC within the CPS focuses on staff costs and therefore this guide concentrates primarily on those costs. 3

4 What is Activity Based Costing? Activity Based Costing (ABC) is exactly what it says it is, namely costing based on activity, be that of a person, team or an organisation. It is an internationally recognised system in which staff timings and costs are produced by breaking down each activity into its constituent parts to determine the work effort involved. This enables staff costs to be attributed to all activities within an organisation and provides a measurement of the amount of resource used to undertake specific elements of work. This invaluable data can be used to support any planning, monitoring and control systems, enabling managers to make better and more informed business decisions. If you cannot measure a task, you cannot manage it or, more importantly, improve it. The broad concept of activity costs within CPS is that the number of files handled, multiplied by staff time and staff salary costs, is equal to the total cost of staff time spent on the CPS prosecution process. The system is built purely on staff time and excludes accommodation and other ancillary costs, e.g. Capital expenditure or payments to third parties such as Counsel. ABC analysis for CPS is undertaken by a team of 2.62 staff from the Operations Directorate who develop and maintain a series of timings covering the core business of processing Area casework. The ABC team have trained and attained qualifications in work study/work measurement techniques and are accredited by the Institute of Management Services. Data used within the ABC model is regularly gathered and updated timings are produced each year in September. Timings submitted by the ABC Team in September are one of the factors taken into account by Financial Planning and Budgeting when they decide on appropriate resource allocations for the following financial year. The integrity of the data is the key element in retaining the accuracy of ABC timings and their value as a management tool which is why all timings are continuously reviewed and updated as appropriate to reflect changes in procedures and working practices. 4

5 Why do we use ABC? Knowing the cost of the work you do. Unless an organisation measures the work it undertakes it will not know the indicative cost of that work or the individual times/costs of specific tasks/actions. The CPS, along with other public sector bodies, must have tight control of running costs at a time when resources provided by central government are limited. This is unimpeachable economic sense and is an absolute requirement of any responsible public body. The CPS, and other public sector bodies, spend taxpayer money. It is therefore vital that we are able to demonstrate that we spend it wisely. Costing change. Costing changes to work processes provides an organisation with essential data to ensure organisational efficiency. Introducing change without costing its implications can lead to poor operational performance, resulting in additional pressure for staff, stress and low morale. Change is constant within the CJS workplace and all change, however slight, has cost implications. All managers need to be aware of the costs of change, particularly when embarking on new projects with other CJS partners. Change does not always result in a cost reduction and therefore it is important for a service such as the CPS to be able to demonstrate to central government that whilst caseloads may be falling case complexity has increased over recent years meaning that costs have not fallen to the same extent as caseload. With every change it is important to assess the potential costs and benefits of the proposal as early as possible in the planning stage. To enable this it is important to know the costs of an activity prior to any change being implemented known as the baseline costs. Without this it is impossible to judge whether a change has delivered the benefits that had been anticipated in the planning stage or business case. Even things that have not yet occurred can be costed. Costing of future proposals or options is regularly required by government and is sometimes called speculative costing. Helping managers to manage. You cannot cut costs unless you know what your costs are. Equally, the good manager needs to know the cost of what is being managed. 5

6 What does ABC cover and how is it used? ABC measurement was initially introduced within the CPS primarily to address the need for a fair and equitable allocation of running cost budgets to Areas. Use of ABC data offered the opportunity to distribute funds within the CPS based on need related to workload. ABC, within the CPS, is still used (amongst other things) to help inform the resource distribution exercise. However it is now also used for a wide range of other purposes i.e. benefits realisation estimates, costing of change, provision of indicative case outcome costs, the informing of court cost claims as well as a wide variety of other uses. ABC costing has now been in place in the CPS for approximately 15 years. ABC in the CPS currently focus on the core prosecution process work undertaken in CPS Areas by both legal and administrative staff in levels A to D, excluding work undertaken by those staff not directly involved in the casework process i.e. staff within Area Operations Centres (AOCs). This is where the majority of operational staff are based, and where casework is more predictable and averages can be more readily applied. Higher Court Advocacy is excluded as this is funded via other means at present. ABC timings do not cover work in National HQs, Business Support Centres, or CPS Direct. They also do not cover cases within the Casework Divisions dealing with aspects such as Counter Terrorism, Special and Organised Crime etc. Separate timings are not produced by the ABC Team for Complex Casework Unit (CCU) cases as they deal with cases of widely variable duration, and complexity. Cases of this sort do not lend themselves to the application of averages and therefore specific case timings are not viable. Alternative measurement techniques are being explored by the service which may, in time, capture times and costs applicable to such work. ABC models produced by Financial Planning and Budgeting (FPB) deal only with payroll costs and do not encompass prosecution costs i.e. counsel fees, other general administrative costs or capital expenditure. ABC models do not cover what is called non baseline funding provided for specific purposes or projects from other CJS sources. For example, the introduction of Statutory Charging was funded via ring fenced funding for several years, until deemed to be business as usual. ABC modelling (as undertaken by FPB) produces a profile of the staff generated, by level, for each Area. This information can be used by the Finance Directorate as one of the considerations to assist them in deciding appropriate budget allocations. 6

7 As well as its internal applications ABC data is used by departments such as the Ministry of Justice to inform cross CJS models. Such models can be used to inform the Home Secretary and Government in general, of the estimated impact of legislative changes on the cost of the criminal justice system, as well as to measure the impact and benefits of key CJS change initiatives. ABC provides support to many initiatives within and beyond the bounds of CPS, particularly in terms of business cases and benefits realisation for many change projects e.g. the Digital Business Programme and Cross CJS Efficiency. Members of the team also work from time to time with Policy colleagues in assessing impacts of new procedures arising from policy change. 7

8 Caseload Finalisations are important Sometimes ABC timings/costs may be used to enable the service to assess the cost of particular activities within a case or specific case outcome costs. However, if we wish to know the total overall cost generated over a period of time for an activity or case outcome type we also need to know how many times the particular activity or case outcome occurs within that time period. These are known as the volume counts. Within the CPS defendants finalised is primarily the volume count used. In order for the service to be able to assess the indicative overall cost of the work it undertakes (as well as the individual cost to each Area) it is vital that accurate finalisation numbers are available. HOW CAN WE ENSURE THAT WE CORRECTLY RECORD OUR CASELOAD? Make all staff aware of the importance of recording case finalisations to ensure that the service can effectively cost the work it undertakes. Ensure that staff responsible for recording case finalisations are appropriately trained; Ensure that training needs are monitored with regard to case finalisations, especially when new procedures/policies mean that changes may occur; Regularly review your Area s system for ensuring that cases are finalised to reduce the risk of cases being overlooked; Complete regular dip sample checks to ensure that bad practice and incorrect interpretation does not creep in; Keep caseload finalisations under review identify trends or anomalies at an early stage, investigate and question SOME COMMON PROBLEM AREAS RELATING TO FINALISATIONS Pre Charge Decisions and Consultations Specified offences Other proceedings Guilty pleas as opposed to Guilty verdicts Late finalisation of Crown Court cases Guilty pleas not marked as on day of trial where required 8

9 Preparing for a costing It is possible to calculate a basic costing without any technical work measurement or ABC expertise. By applying a cost per minute to the time required, an overall cost can quickly be established. If the costing need is more complex further information will be required to calculate accurate costs. This comprises of information such as: Staff costs by grade A clearly defined set of process steps (guidance on this can be found in the ABC Process Mapping Guide, available at: ages/index.aspx (and also on the CPS external website), How often each task in the process is undertaken (known as frequency of occurrence) How long each task takes to complete (this should be in decimal minutes i.e. 3 minutes and 15 seconds would be classed as 3.25 minutes) How many work days is each F.T.E. member of staff available for work each year (to calculate what is referred to as a Conversion factor in CPS terms). An activity cost is simply a measure of the amount of resource used to undertake a specific element of work. The first thing to clearly define is exactly what process you are attempting to cost. Once you have defined what you are seeking to cost the next step is to map out the process to give you a visual representation of what work steps are required to complete the process and who/what grade of staff undertakes them. You also need to identify any decision points where variations in the actions required may occur. For example if you were assessing an item for quality you may follow one set of work steps if the item met the required quality standards or another set of work steps if it did not. As previously referred to the ABC Process Mapping Guide, available at: ex.aspx (and also on the CPS external website) provides guidance on mapping your process. Once you have defined the process to be costed and the grades of staff who undertake each part of the process the next step is to identify how long on average each work step takes. 9

10 How does ABC measure work elements? The timing of work steps can be undertaken in various ways: Direct Observation Timings can be obtained by directly observing suitably experienced and proficient staff fully trained in the tasks being observed. It is often useful to time batches of work being completed by a member of staff as a more reliable average timing can be established, for example, a batch of cases being updated after court. Self record You can ask staff undertaking tasks to record how long it takes them to carry out each occurrence, or possibly each batch of the task you require a timing for. Where the latter is done it is important that they also record the number of tasks completed so that an average time per occurrence can be calculated. When undertaking self record exercises it is vital that you define exactly what you require recording and how. It is also vital to ensure that you have confidence that staff will record their time honestly. Analytical Estimates These are simply estimates provided by experienced staff with some perception of the effort involved. On occasions this may be the only option open to you for example where a costing is required at very short notice. On such occasions there is nothing wrong whatsoever with estimates informed by real experience. Comparative Estimates These can be used where the work steps to be measured are deemed comparable to a similar task where timings are already known. Simulation This is simply the act of yourself or a suitably skilled colleague recreating or completing the task under examination and timing it. Ideally a number of occurrences should be timed to gain a fair average. Existing data sources On occasions the timings data required may be available from existing sources. For example the CPS ABC Team utilise Crown Court hearing duration data collected by HMCTS (Her Majesty s Courts and Tribunal Service) within their costings. There are also certain aspects of prosecution work that cannot be anticipated, such as interruptions or telephone calls, but which are legitimate and necessary parts of the process. These are dealt with by additional allowances added to the basic times. Details of these allowances are covered later in the guide. 10

11 How does ABC Measure Considerative work? Considerative work i.e. review and reading time represents the highest proportion of time spent by prosecutors and working on CPS case files. There are a number of ways to estimate average considerative time, although no method guarantees observed measured exactness: a) Estimation by an experienced prosecutor An experienced lawyer examines completed cases and estimates the consideration time for each element of the case over the range of case types, based on their personal approaches ( I would need 30 minutes to deal with this aspect, and so on). b) Estimation by focus groups A group of experienced lawyers examine completed cases and agree an estimate of the consideration time required for each element of the case over the range of case types, based on their personal experience and approaches. c) Self record logs A self record log is attached to each file or held electronically and prosecutors enter timings appropriate to each considerative action undertaken. d) Combination of all above approaches Combine the above approaches to determine an effective average timing per case type. Predominantly within CPS ABC we use methods a) and c) as these are the approaches which result in minimal disruption to the normal day to day running of the service. 11

12 Frequencies of occurrence Once you know how long each work step takes you also need to know how often, on average, each work step occurs in the process being measured. This enables you to apply the time for a work step in a manner that represents the work steps frequency of occurrence. For example, we may establish the time required to issue a single letter but it is also useful to know how many letters on average are dispatched for each type of case. Many work steps may occur just once in the process giving them an occurrence of 100% but other work steps may be required more than once or less than once on average. ABC timings within the CPS identify frequencies of occurrence from a continuous and rolling sample of finalised cases analysed across CPS Areas. With approximately 730 thousand CPS defendants per year finalised through the courts, investigating data from the whole sample is often impossible. However, where possible analysis is informed by national data within CMS/MIS. Where data in relation to the whole of the national caseload is not available from management information systems sampling methods are used, and conclusions drawn from the sample to populate the Activity Based Costing timings system which is currently housed within Excel spreadsheets. The benefits of sampling, particularly when using case management IT systems, include quicker results, the ability to collect larger and more widespread samples and lower collection costs. The overall time required to complete all necessary actions on a case will depend on the levels of occurrence of many different activities. By sampling case files we can establish what percentage of cases have a particular action on them and how often it occurs. The ABC Team regularly update data on key or what we refer to as sensitive frequencies, i.e. those which have the greatest impact on the overall time per case e.g. the number of court hearings for each type of case. 12

13 What is Relaxation Allowance? Timing individual tasks, and knowing how many of those tasks occur, is not sufficient to ensure that those timings can estimate the required number of staff to undertake all instances of a particular task, or indeed to apply a cost to the total required occurrences of the process measured. To enable such an assessment to be made a number of allowances are added to timings to reflect working in a live ( real world ) office environment. One key element in the welfare of staff at all levels within the workplace (CPS or wherever) is that performance must be accompanied by regular periods of rest, recovery and refreshment. This is to allow appropriate recovery from work effort and adequate rest to ensure good performance after the rest period. If these are not taken, performance often suffers. Only machines work all the time and those that work all the time often break down. To take into account these periods of rest, recovery and refreshment any times generated within ABC are uplifted by a defined percentage. In the case of CPS ABC this is 5%. Therefore an activity that may be timed at 20 minutes would be assumed to take 21 minutes once allowance was included for rest, recovery and refreshment. Rest Allowance rates can vary from organisation to organisation, and this is often dependent on the type of work being measured and how physically and mentally debilitating it can be. The rate may also be dependent upon the predominant method of measurement where timings based on looser methods such as self record or estimating will use a lower rest allowance rate than other timings where the measurement methods such as pre determined timing data or observer based recording are tighter 13

14 What is Indirect Work? As well as uplifting times to generate additional time for rest, recovery and relaxation we also need to take into account that during our working day we often face interruptions which prevent us completing the task at hand. The situation is a familiar one. It's lunchtime, the office is deserted and a phone rings. It s not your phone but you stop what you are doing and answer it. You answer the query. After a 5 minute chat that sorts the whole situation out, you put the phone down, scribble a note for the absent colleague and return to your desk to carry on with what you were doing before you were interrupted. Although this is a simple sequence of events the interruption adds to the time taken to do your own job. This additional time is called Indirect Work and these activities are legitimate work related tasks which support the core process but which occur only occasionally or which are difficult to anticipate or plan. There are numerous examples of Indirect Work every day within CPS, at all levels telephone calls, e mails, case related discussion, meetings, personal development reporting activity, giving and receiving advice to each other. All are working activities that cannot generally be anticipated or placed precisely within a process chart. A distinction should be made between indirect work and personal telephone calls or non work related discussions. Personal telephone calls and non work related discussions should be classed as personal time and therefore any calculation to identify an appropriate indirect work uplift to be applied to timings should exclude such activity. To calculate an appropriate uplift percentage for indirect work you divide the time spent on interruptions by the time spent on those activities included within the process being modelled. For example if for each hour worked you assessed that an individual spent 45 minutes on work included in your captured timings and 15 minutes on interruptions (indirect work) your required uplift would be 15/45 which equals 33%. Therefore any times recorded (assuming they do not already include interruptions) would need to be uplifted by 33%. Within ABC the indirect work uplift is applied to the activity time on top of the previously mentioned 5%. 14

15 What is the Absence Factor? If we wish to assess how many F.T.E employees are required to undertake the work assessed by our measurements, or if we wish to calculate the true cost of such work we need to take into account within the timings/costs we generate the fact that employees are not available every day of the year. In simple terms, if we know that 4 people are needed to do a particular job, the combined impacts of annual leave, sickness and training courses can reduce attendance and mean that in order to produce the equivalent of 4 full staff on an ongoing basis 5 people are actually needed to cover that specific workload. Within any costing system provision therefore has to be made for inevitable absences from the workplace. To calculate this within ABC timings we use a costing conversion formula which converts any total minutes of work assessed to required staff years/staff posts. Expressing the calculation in staff years is more meaningful as it can be readily converted to a cost by applying average annual salary costs, for each staff grade. If we were to initially assume that of the 365 days of the year (ignoring leap years) a member of staff could potentially work 261 days when weekends were excluded (this figure can of course vary as some years may have 105 weekend days).as well as the average F.T.E. member of staff being unavailable for weekends we may also know that they are likely to be absent for the following days each year: Annual leave (perhaps an average of 30 days), Sickness (perhaps an average of 10 days) Training (perhaps an average of 5 days). Public holidays and privilege days (perhaps 9 days) In total we can therefore calculate that the average member of staff would actually be available for 207 days each year. If we assume that the average working day were 7 hours and 24 minutes (444 minutes) as per standard CPS Areas we would know that we would require 1 member of staff for every 91,908 minutes (207 days at 444 minutes) of work generated within our calculations. 15

16 By dividing 1 by 91,908 we can produce what ABC refers to as a conversion factor. In this case This conversion factor can be applied to any number of minutes generated to tell you how many F.T.E. staff would be required to undertake the work required. By way of a demonstration if we had 919,080 minutes of work generated (ten lots of 207 days lasting 444 minutes) and multiplied 919,080 by we would get an answer of 10 meaning we would need 10 F.T.E. staff to undertake the required work. 16

17 Management allowance The activity assessed by the techniques covered in the previous sections of this paper calculated the number of staff required to undertake the work assessed. When undertaking an ABC costing within the CPS we also generate management posts to represent those staff not otherwise generated within our timings but who are nevertheless required to supervise and support those staff undertaking the activities assessed. This is referred to as Management Allowance within CPS ABC. Management allowance in the CPS model is used to generate Level D lawyers, as the key management level for prosecutors within the ABC system, and Level B2 and B1 managers of administrative and casework staff. Within the ABC models management time and posts are earned via a straightforward multiplier based on the number of staff under supervision. For example we may determine that for every 12 level C lawyers generated through the ABC timings, a Level D lawyer manager should be generated in the models. Similar multipliers can be applied for generating B2 management staff based on the number of B1caseworkers generated, and at B1managers based on the number of Level A staff generated. 17

18 The costing calculation In basic terms to achieve a costing answer we apply the following calculations: Volume of process x Time (inc. allowances) x Costing Conversion factor = Staff Years Staff years x Average salary = Cost For example, if the activity to be costed was "Issue witness form", where staff on average salaries of 22,000 issue 25,000 forms, each form requiring 5 minutes of staff effort and each F.T.E. member of staff were available for 207 days each year the calculation would be: 25,000 forms x 5 minutes x = 1.36 staff years staff years x 22,000 = 29,920 As mentioned earlier in this guide you must always ensure that all timings are in decimal minutes. Do not use days, half days or hours because when you use the costing conversion factor, your answer will be incorrect. Non staff costs In addition to the staff cost calculations covered in this paper it may on occasions be appropriate to also take into account non staff costs within any costing exercise. These can cover things such as: Postage costs I.T. costs Stationery Telephony costs Accommodation costs Travel and subsistence costs Training costs Validation of a costing Before presenting a costing, it is useful to ask the following questions: 18

19 Have all necessary work steps been included and at the correct grade? Are work steps and procedures logical, efficient and do they accord with best practice? Are the volumes/frequencies correct or the best possible estimates? Has the most up to date information been taken into account within the costing? Are all sources of information quoted? Are there other sources of information that might be useful in order to further refine your costing? Will the change have an impact on other areas of work, either within the Unit/District/Area or externally, besides the one considered in the costing? If estimates have been used, have reasons been offered for the use of the estimates and is the reasoning sound? Has the correct costing formula been used and are the timings correct? Will the change have a permanent impact on the level of resources or is it work which will need extra one off funding? If required, are all appropriate non staff costs included and correctly calculated? It is a fact of life that no one is perfect and everyone is capable of making mistakes, particularly where figures are concerned. It is therefore good practice to show your costing to as many interested parties as possible, and get someone else to rigorously check your calculations before they are published or used in a business case or resource bid. The flowchart on the following page illustrates in more detail the steps undertaken by the ABC Team to produce their own costings. 19

20 How Does ABC Measure Work? Define the process to be measured Fix start and finish points Determine appropriate volume count(s) (For CPS equals number of defendants finalised) Flowchart the process as simply and clearly as possible Break the work down into small elements or tasks Allocate each element or task to a specific staff grade/level Time each element or task Analyse samples of completed case files Analyse any available management records or statistical data Analyse any IT based case file information Total up task time Apply frequencies Apply allowances Show timings for each staff level (D,C,B2 AP, B2, B1, A2) This chart outlines the steps in building an ABC Timing and Cost By: OBSERVATION OF PROCESSES PROCEDURE MANUALS i.e. SOPs BEST PRACTICE HANDBOOKS DISCUSSION WITH COMPETENT STAFF GUIDES/BULLETINS/POLICY DOCS By: OBSERVATION SELF RECORD LOGS ANALYTICAL ESTIMATES COMPARATIVE ESTIMATES ACTIVITY SAMPLING Frequencies of key actions e.g. number of court hearings, occurrence of conferences, bail applications, items of correspondence, number of defendants etc. REST ALLOWANCE A standard 5% added to task times INDIRECT WORK ALLOWANCE A variable, grade specific % allowance to cover interruptions and occasional activity which is work related but difficult to anticipate or schedule MANAGEMENT ALLOWANCE A variable % allowance allocated to level D prosecutors, B2 and B1 managers based on the numbers of staff they oversee Produces an ACTIVITY TIME Apply appropriate VOLUME COUNTS to the final ABC times (i.e. number of defendant finalisations for different case outcomes) to calculate total minutes required for caseload Apply ABSENCE FACTOR USE PERFORMANCE INDICATOR DATA Allow for: ANNUAL LEAVE SICK LEAVE TRAINING PUBLIC AND PRIVILEGE HOLIDAYS Apply AVERAGE PAYROLL COSTS By staff level (D, C,B2 AP, B2, B1, A2) The final product ACTIVITY COSTS 20

21 To sum up... ABC provides CPS with a number of benefits. The ability to use ABC data as part of the resource allocation exercise to help ensure a more equitable distribution of running cost resources/budgets to the 13 CPS Areas, based on their relative caseload and case type. Meaningful performance management information for managers at all levels within the organisation, and beyond. Operational costing information on all aspects of CPS casework performance, and costing support for any what if scenarios, or policy changes. Contributes to assurances to government and other bodies on CPS cost efficiency. Costing of new proposals for CPS and support for business cases / benefits realisation work on all major change initiative projects and programmes. Identification and advice on the avoidance of inefficiencies within the CPS prosecution process. Essential information to other agencies (ABC is a leading contributor to CJS planning models) about the cost of common areas of concern important in the Criminal Justice System where performance is often dependent upon other Agencies 21

22 Further information If you have any other questions regarding Activity Based Costing techniques and Timings, the ABC team can be contacted on the following numbers/e mail addresses: Leanna Lane Leanna Shaun Morris The ABC team is happy to deal at any time with queries on any aspect of timings, workflows, allowances and absence factor. Further information on measurement methods and techniques used can also be provided. Enquiries on Resource models and ABC modelling should be made to our colleagues in Financial Planning and Budgeting by ing: If your question concerns the distribution/allocation of resources to Areas, please direct your query to the above address ABC Team October