| GISdevelopment.net ---> Policy ---> International |
Enhancing cost implications of Mapping by activity based costing (ABC) -
Case study for National Mapping Agency in Thailand
W.T. de Vries
International Institute for Geoinformation Science and Earth Observation (ITC),
P.O.Box 6, 7500 AA, Enschede, Netherlands,
tel.:31-53-4874475,
fax.:31-53-4874335,
Email : devries@itc.nl
M. Pholbud
Satellite Positioning Development Section, Bureau of Mapping Technology,
Department of Lands, Pakret, Nonthaburi, 11120 Thailand.
Tel. 66-2-5033367;
Fax. 66-2-5033430 Bangkok, Thailand,
Email : talk2yin@thai.com
W.T. de Vries
International Institute for Geoinformation Science and Earth Observation (ITC),
P.O.Box 6, 7500 AA, Enschede, Netherlands,
tel.:31-53-4874475,
fax.:31-53-4874335,
Email : devries@itc.nl
M. Pholbud
Satellite Positioning Development Section, Bureau of Mapping Technology,
Department of Lands, Pakret, Nonthaburi, 11120 Thailand.
Tel. 66-2-5033367;
Fax. 66-2-5033430 Bangkok, Thailand,
Email : talk2yin@thai.com
Introduction
Many public sector organisations worldwide are under stress to implement business improvement programmes that create (more) value and recover production costs. In these circumstances, it is not surprising that governments have looked to the private sector, used to coping with market pressures, for techniques to produce greater management efficiencies (Williams, 1999). The increased use of information technologies, and the effects of globalization have created a more competitive environment in which a low cost structure often becomes a critical success factor. More so, global pressures for economic competitiveness have been reshaping the attitudes of government towards the public service worldwide. The focus on the cost accounts of government, combined with the reality of ceilings on revenue and the expectations of citizens, have led to rigorous review of the funding of public services and the efficiency with which they are performed. This environment has created a greater need for improved cost measurement and management techniques. In addition to these developments, governmental organizations are also beginning to recognize that geographic information is one of the most critical elements underpinning decision making for economic and the need to assign resources to establish an effective information infrastructure, as confirmed by The World Bank (2001). To remain competitive and keep budgets in balance, “geographic information organisations” need to streamline operations, eliminate waste, reduce cycle time, reduce costs, adopt a commitment to total quality, and judiciously incorporate advanced technologies such as scanning of documents, electronic data interchange, and paperless offices. Managers seeking to succeed in this environment are turning to their management accounting systems for new types of information. The role of cost accounting has been transformed. This means that cost accounting must provide appropriate types of information that have not been provided under traditional cost accounting systems (Blocher et al, 1999). Traditional approaches have proved inadequate for today’s global and technological environment (Cooper and Kaplan, 1991). As a result, the Activity Based Costing (ABC) technique has emerged in recent years to provide managers with more accurate cost information.
ABC has highlighted that true understanding of what it costs to provide products/services is at the same time a tool for better management. It helps to better understand and serve as guides in any business process improvement initiatives, and to subject resources to its efficient usage. In a nutshell, it helps to make more effective business process improvement at more transparent cost. This research verified whether ABC could be an appropriate technique to measure and manage the cost for a geo-information production organisation. The definition of cost management as given by Brimson and Antos (1994) is the management and control of activities to determine an accurate service cost, improve business processes, eliminate waste (non-value added activities), identify cost drivers, plan operations, and set enterprise strategies. ABC has been a suitable technique in manufacturing and service organisations in determining more accurate product or service cost, and in improving the understanding of the economics of production, and activities performed by an organisation.
Public sector organisations in Thailand are undergoing wide-ranging changes caused by many factors, such as globalisation, advances in technology, the creation of Thailand’s constitution in 1997, and Asian economic crisis among others. Issues of efficiency, effectiveness, accountability, and transparency dominate the agenda of the current government and have resulted in advocating of transparent financial management system in all governmental organisations. Due to above factors, the Department of Lands (DOL) as a National Mapping Authority (NMA) has had to deal with consequences resulting from the political reforms of the government and other issues mentioned. Generally, NMAs are now considered as service organisations. Kaplan and Cooper (1997) state that ideally service organisations are good candidate for implementing ABC even more than manufacturing companies.
This research studied the existing cost accounting system of Bureau of Mapping Technology (BMT) under DOL. The mapsheet provision was chosen as a case study because it is considered as a core business process of BMT and fundamental product for issuing land title. Never has the government tightened its financial policies than the aftermath of the Asian economic crisis. It brought with it a trend towards transparent financial management. More so, it emerged during the research that the true cost of mapsheet production has never been determined accurately or vaguely. Also, just as in any BPR projects in which BMT finds itself, the management is now becoming conscious of its performance in terms of costs, quality, processes, time, etc.
ABC and Geo-information Production Organisations
Although the research on ABC has so far primarily focused on service and manufacturing organisations, it is presumed in this article that ABC could also be useful in Geo-Information (GI) production organisation. According to Karioki (1999), GI production is an expensive venture and so are the processes involved in its production. To run a GI production therefore requires heavy capital investments and would require prudent measures in order to perform optimally or yield a good return on investment. This therefore calls for a good system of financial management to support the realisation of the above.
Typically, GI production processes are characterised by complex procedures, some of which are designed in fulfilment with laws and mandates that may not reflect the present day requirements. Onchaga (2000) notes that in many GI processes there exist non-value-adding tasks that increase complexity of the production process as a whole. Ideally if possible, these should be eliminated and the rest rationalised for maximal optimisation. It is however emphasized that not all non-value added activities might be eliminated. Some may be for legal reasons, mandate even a bait to win and retain customers among others. ABC can be used to reveal such non-value-added procedures and also help quantify their cost to the organisation. It may therefore help to streamline, if not eliminate, such non-value-added activities that may be inherent in the various organisational processes. Still on non-value added activities, GI organisations have traditionally set high standards of quality in their processes that are usually more than what most customers really need. To attain such set high standards of quality, various activities are added to the processes of production. These in natural fact, from the customer perspective, are a non-value added activities. ABC technique can streamline through such quality standards to reflect customers’ needs driven by their requirements.
Onchaga (2000) notes that in GI production processes consist of sets of activities that are basically performed in a certain sequence. For each product, it is possible to define the set of activities and resources required for its production. In production environments resources are always limited and the strategy will always be to try to optimise their use. This orientation of having processes organised a set of activities makes it a good candidate of ABC which is also based on activities and that the framework for ABC implementation already exist in GI processes.
Traditionally National Mapping Authorities (NMAs) have been the major providers of GI products and services, operating in very stable environments and assured of government funding. In growing competition, which is largely due to increasing access to GI technology by a larger group of producers, NMAs are increasingly coming under pressure to redefine their processes in order to meet the needs of their customers while fulfilling their national mandates. As a result, the need for change in GI organisations is progressively taking shape. Any change is bound to impose great financial demands on the organisations, many of which already operate on very tight budgets. Nonetheless, it should be possible to achieve an optimum allocation of resources, which could potentially be obtained by ABC. Not only could it highlight the drivers of large overhead cost, but it would allow NMAs to get a better grip on their operational costs. Since the benefit of ABC lies in more transparent financial management, business process improvement, etc., it does not mean that ABC needs to replace the financial system in the organisation, although it could make it more effective if integrated with internal management.
Case Study: Bureau of Mapping Technology (BMT), Thailand
DOL is a long established department under the Ministry of Interior, responsible for many aspects of land administration within the government, particularly cadastral surveying, mapping and registration of rights in lands. The department has been carrying out its cadastral surveying and mapping functions since 1903. It is decentralised with provincial land offices, provincial land office branches together with district and sub-district land offices in 75 provinces throughout the country. The Department has its headquarters in Bangkok. As of January 2001, there were 12,591 staff (MOI, 2001). This figure does not include a large number of temporary field staff hired as required. The administration of the department is structured into two levels: central and regional administrations. To improve the quality of work, the re-organisation process of DOL has been launched since the year 2000. The purpose of DOL’s re-organisation is to expedite the processes and reduce the cost of the activities.
As part of the re-organisation programme, the Bureau of Mapping Technology (BMT) has been established to support cadastral and land registration including adjudication processes under the Land Titling Project (LTP). BMT is one of the organisations under central administrations, which comprises 3 divisions, namely: Survey and Mapping Division, Photogrammetry Division, and Map Transformation Division. BMT plays a supportive role by providing the geo-information products and services such as the map control network and ground map production, as well as map control using aerial photomaps, aerial photos, map transformations, and map control maintenance.
BMT itself has not clearly defined the new organisation’s structure and relations between divisions. BMT is still adjusting and settling into these 3 divisions. The process of re-organisation is still ongoing, which was one of the key reasons why even the Surveyor General showed key interest in this ABC research. In particular, the activity chosen for this case study, which is mapsheet provision by surveying and mapping division, being one of the key activities of the organisations.
During the financial data collection, data from the fiscal year 2001 (FY2001: October 2000-September 2001) were used, following the suggestions in literature (DoD, 1995) that the best time frame to look for an appropriate and sufficient amount of data is the full fiscal year. Furthermore, references such as O’Guin (1991), Brimson and Antos (1994), Kaplan and Cooper (1997) suggest that implementing of ABC should start by one part of organisation as a pilot project. A pilot project should cover only a segment of the organisation or one business product line. BMT under the department of lands in Thailand has no clear data about the actual cost of their product. Therefore, it was one of the best candidates to zoom in to the activities necessary for mapsheet production, which is their core business product. Moreover, it is considered to be the fundamental product for issuing land title.
Since Thailand encountered the Asian economic crisis, budget allocation has been cut down about 60% for DOL. The financial constraint has put strain on all activities carried out by BMT. The organisation has to make a justifiable decision in distributing limited financial resources efficiently. It needs not only to distribute the funds, but also to monitor the cost of each activity within the organisation. Cost of activities must be managed and controlled to eliminate the inefficient activities, and to improve the processes. Currently, the BMT does not charge for their products and services. Because it is a governmental organisation, it is not concerned with making profit. However, it still has to find an efficient way to distribute funds and other recourses among various offices and activities. To make matters worse, because BMT is not concerned with making profits, it has no good idea what the true costs of their products are. Therefore, the need for techniques and tools for cost management and performance measurement of the activities carried out by BMT have arisen. This is also aggravated by promotion of transparency of financial dealings of governmental organisations in promoting good governance.
The benefit was hoped to be reflected in identify the true cost of activities based in the amount resources they consumed while being realised. The study should, otherwise, provided various systematic ideas to be the frame for selection of cost calculation approach. The product cost information also could be useful for BMT as base information in order to have an idea of product cost for their business improvement for example if it were to launch a pricing policy which is likely in the near future. The World Bank and Prime Minister’s Office recommended DOL to be a model agency in developing the guidelines with respect to the cost recovery and pricing mechanisms for products and services (World Bank, 2000). DOL considered this suggestion and included in their Master Plan Volume 5 (2002-2006) and there are plans to hire an international consultant to assist in developing such guidelines.
Methodology of collecting data on activities and cost
There are many techniques available for the collection of data on cost and time performance needed for ABC. Data was collected from interviews, time registration sheets, and documentation reviews. This is because firstly, it normally turns out that no one method could provide complete and accurate information. Even if it were, there should be a means to validate it through other sources. Another reason was the current accounting system was not consistent. Most cost records were held manually and paper based. Therefore, it was difficult and time-consuming to collect these. It was found that, for example, cost of material and equipment were aggregated in one amount and the financial section could not prescribe the history of detail for which item they had spent. For that reason, the organisation should improve in more efficient terms on cost accounting system in order to provide a transparent financial management. Lastly, there were some demonstrated deficiencies in the knowledge base of some of the internally trained accounting staff. BMT has been largely based on GI related technical jobs, with most of officers being surveyors and survey engineers. Therefore, they could not yet have very good working knowledge of the traditional accounting system, let alone knowledge in Activity Based Costing and Management. However, these data collections are needed to develop because of the complexities in getting approval to involve the entire staff. Even if it were possible, it is by no means deemed a job for a single person to undertake. Time for data collection was only about three weeks making it virtually impossible to cover everything. Extra time would have been needed to accomplish this limitation.
There are numerous methodologies of how to conduct interviews described in Kumar (1996, p.115). As also noted in Kumar (1996), the advantages of this method are more appropriate approach for studying complex and sensitive areas and useful for collecting in-depth information, which can provide the best understanding of the job. Interviews were however necessary because of the complex organisational situation in this case study. Generally, the relevant pieces of information on activities were acquired through interviews in the absence of the relevant documents from which such information could be extracted.
From the experience gained during fieldwork duration, before the interviewing took place, background information was gathered in order to answer some of the questions, for example, memory intensive questions and the trivial ones. Brimson and Antos (1994) suggest that the process should interview as few people as possible and always begin with the department manager or as higher position as possible because of experience and technical skills. Moreover, it is politically important to gain his or her support with guidance and suggestions. Aside guidance and suggestions, it also lends a psychological support to the interviewing process when it comes to dealing with the subordinates. Therefore, the fieldwork started by interviewing the surveyor general.
Each interviewing process started by explaining the purpose, and briefed the interviewee about ABC and its benefits. The logic behind is that if a person being interviewed does not know why they are being interviewed, they will often assume the worst. Therefore, explaining the objective of interviewing is very helpful in gaining their trust. This method has been used for this research in order to gain knowledge of accounting system and budget allocation within BMT, the conditions and criteria that have been used to manage the budget. The information from fiscal year 2001 (FY2001) was collected with regards to activities, resources, and all relevant data for ABC analysis. The following were interviewed: surveyor general, director of surveying and mapping division, chiefs of sub-divisions, supervisors, and the officers of supply & human resource, and financial sections. This method was applied to establish the time spent for each activity in order to get the activity model by interviewing head of every operational element. Retrospectively, perhaps a better method could have been by using time registration sheet, because it turned out that by interviewing the data obtained was largely by the intuitive guesses over years of experience. The fieldwork report has been signed by surveyor general in order to approve the correctness and accuracy of the data and information.
Time registration method was used to collect the time spent for each particular activity from a sample representative set i.e. director of division, chiefs of sub-divisions, supervisors, survey engineers, surveyors, administrators, employees, etc. It was used to calculate the time spent to manage and support the operational elements. The experience found that managers and support staffs were not likely to be enthusiastic about filling in time registration sheet on daily basis. Some even looked upon those sheets as being instructive. Some of them did not fill in properly because of lack of attention or suspicion of its purpose. It came as no surprise as Turney (1996) has already stated as being some of the reprisals.
Using data collected and the knowledge learnt from literature review, the analysis of existing situation of BMT was generated. The analysis of products, activities, resources, and their costing was made (and indicated in Appendices). The current cost accounting at BMT and ABC approach was made for comparisons. The ABC model’s behaviour has been tested under various conditions in spreadsheets since the application of spreadsheets was found useful for the ABC calculations. One main advantage of using spreadsheet software is that it allows the chaining and referencing of the calculated results to serve as inputs for consequent calculations while maintaining the referential links to the original values. This reduces the amount of rework that may be necessary when a value is changed and also makes it more appropriate to support “what if” analysis. Such “what if” analysis could aid decision-making process by providing a picture of what the effect of particular actions may have on the activity costs. It is sufficient to say that this activity model prepared will not be the last but the first of perhaps the many to be modelled. It may only last for a period and the ever-changing conditions may require it to be readjusted if not modelled completely. The activity model would obviously require considerable input and rework in order to be useful in planning and decision-making tool in the future for the whole organisation. This model can be a good start to enhance the input, and speed up the process.
ABC model developed for BMT
Before implementing the ABC steps, it was acknowledged that identification of any activities depends on the objectives of ABC. The Institute of Management Accountants (IMA, 1993) and Cokins (1996) describe that activities can be broadly defined when the primary need is to accurately assign costs to cost objects. If, on the other hand, the intent is to improve operations, it is useful to eliminate non-value-added processes and to define the activities more narrowly. O’Guin (1991) suggests that an ABC system only needs to identify the important activities to avoid adding unnecessary details creating more complex ABC calculations and more expensive design and maintenance. The prime interest in this research was therefore narrowed to the identification of the true costs of map sheet production at BMT.
The process of making map sheets was decomposed and evaluated by interviews, resulting in the identification of key activities. These activities serve as a base input for quantitative analysis. ABC analysis requires a review of how the activities “consume” the costs of the organisational structure, whereby the organisational structure can be categorised into one of three functions; managerial, support, or operations. Assignment or reassignment of costs depends on which category is selected. Using these categories, distribution rules can be applied and costs can be reassigned to areas where they will ultimately be allocated in the activity model.
Having gathered the cost data, one can allocate cost to each organisation element. DoD (1995) suggests that it is not necessary to differentiate the organisations that have similar missions. This is because the functions performed are more important than the organisational components. But in this research, all organisational elements are made as distinct elements in order to see the efficiency of each operational organisational element. Simplicity was the key as O’Guin (1991) said: “it is better to be approximately right than precisely wrong”. Cokins (1996) also notes that in an ideal case, all resource costs could be directly charged or assigned from a people or equipment resource to a specific product or service customer. But in practice, there is so much complexity and technology, that most resource costs are initially incurred in the form of indirect overhead.
The process of assigning costs followed the Step Allocation Method (Tummanon, 2001), following a similar procedure as de Vries (2001) describes for a hypothetical national mapping agency. The allocation of managerial elements to operational elements was based on the measured (by time registration) managerial time spent on fieldwork. With these allocations to operational elements, assignment of costs to activities was performed using an activity model that was derived from interviews focused on the time effort estimates in fieldwork. The last step was the assignment of activity costs to various products, after which unit cost could be calculated and compared. These unit costs in BMT were determined by operational organisational elements and considered only fieldwork expenses disregarding any other resources.
Although one of the main functions of BMT is to publish the mapsheets, it is still important to note that the unit cost in BMT is calculated for the geodetic control network and control traversing only. This anomaly was already acknowledged when concerns were raised on this issue, according to a report on Land Titling Project (LTP) committee meeting on 27th December 1999. In a comment by the Deputy Permanent Secretary of Interior Ministry, it was suggested that DOL should improve the method of calculation in order to be more reliable and closer to reality. There is however little evidence of any change since then, in particular because currently BMT still accounts in the same way, although there are signs that this may be changing in the future. As a result, comparison or generation of alternative production methods is therefore difficult, because one may in fact be comparing different kinds of output units. Yet, the following still aims at making this link.
The comparisons of unit costs accounted by current BMT accounting methods and the alternative ABC approach have been made based for the fiscal year 2001, as shown in table 1. The activities and their amount of products used in this comparison were based on the activities as registered in the current BMT accounts and performance reports. N/A in the table indicates that this information is not available at BMT. Current cost accounting practices at BMT only consider fieldwork-surveyors expenses whereas ABC includes all resources consumed. This was achieved through detailed cost tracing to all activities levels running in the organisation. As a result, field survey turned out to be the most expensive activity cost making up more than 50% of the total cost. Obviously, salaries were a major driver but then high cost were incurred as a result of high investment for equipments, materials, and expenses in temporary wages to fulfil their functions, and also, most equipment being in their prime estimated useful lifetime. The current cost accounting system did not reveal the true costs of the activities as a number of cost elements were unaccounted for.
Table 1 Comparison of Unit Cost by BMT accounting and ABC
The big differences are evident in the unit costs of establishing geodetic permanent marks, and satellite positioning and adjustment. The main reason is because of the way BMT accounted for their unit costs that ignored any other resources beyond the fieldwork expenses only. ABC accounts for all resources consumed by an activity. The sharp difference in the unit cost of the establishment of geodetic permanent mark activity of about a factor 8 is because by ABC included cost for subcontractors. These costs were surprisingly not reflected in the current BMT cost accounting system. Furthermore, the unit cost of the satellite positioning and adjustment activity by ABC is approximately twice that of accounting by BMT. This difference is mainly a result of depreciated cost of GPS receivers, depreciated cost of cars, and office supplies. Such distortions could lead to a false impression that the outsourced establish geodetic permanent mark activity is cheaper than the internally produced establish GPS mark activity.
It was found through the interviews that both of outputs “geodetic permanent mark” and “GPS mark” had the same order geodetic control network of comparable accuracy. But the difference of these marks is the durability of the mark. BMT believed that the geodetic permanent marks, which were established by contractor would have longer service life, they estimate its useful life of 10 years. Because of the size and design are different from GPS marks, which are done by BMT surveyors. Based on the ABC results serious questions could be raised as to whether improving the quality of establish GPS mark would not compare favourably with establish geodetic permanent mark without such big difference in costs. It was also found (through interviews and checking in database) that the total of GPS mark was about 12,546 by the end of FY2001. By that number, about 346 or 2.76% marks have been lost or damaged whereas there has not been reported any such case for geodetic permanent marks. The reason above is, however, not definitive because establish geodetic permanent mark has run for only two years. However, the results from ABC can help the organisation to re-consider whether to continue or eliminate activities. It is worthy to acknowledge for further study to compare, and verify cost-benefit of these two outputs.
Even though for some results, it could be realised that the costs comparison turned out to be almost the same, for both accounting systems, it does not necessarily mean that BMT’s current approach of cost accounting is correct and also transparent. The perceived advantage of ABC was that ABC gave costs in more detail traced to all activity levels running in the organisation.
Behaviour of ABC model at BMT
Once an organisation has an ABC system, it can use ABC information in its budgeting process. Kaplan and Cooper (1997) describe activity Based Budgeting (ABB) as “ABC in reverse”. The need for ABB is motivated by the observation that the traditional budgeting process in organisations is a negotiation between managers and executives relative to last year’s budget. Therefore, the ABC results from this study could be used to help BMT to allocate their budget. ABC approach can help to improve the process of budgeting. Because each sub-division within the organisation knows the activities in which they are involved and also, knowing the unit cost of each activity with the possibility to determine the number of occurrences, then they could fairly calculate the yearly costs of their activities. This yearly cost of activities of organisational sub-divisions could serve as a guideline in the budget allocation. It was also discovered that, given the way costs can be traced, using ABC provides a system that will allow BMT to follow the government policy to have a transparent financial management with relative ease. The reason being that the costs could be traced down to the activity level making it explainable to those who want to know how limited resources are utilised in BMT.
From the existing cost analysis found that the major cost of the organisation concerns salaries, which add up to about 65% of overall expenses. The level of salary has potential impact on decisions within the organisation. Therefore, it would be necessary to find out how a change in salary would affect the ABC results. The impact to salary was investigated by increasing fixed salary, decreasing fieldwork expenditures (temporary wages and fieldwork allowance). The results showed that increasing fixed salary affected those activities where the activity driver was mainly human resources. Decreasing fieldwork expenditures impact activities involved field survey and those activities carried in the offices to complete a field survey task. These tests led to a strategy to motivate staff by increasing fixed salary and decreasing fieldwork expenditures as shown in figure 1. This is motivated by the fact that at BMT, staff involved in fieldwork operations seems to be much more stimulated than the staff that only do office jobs. Since the staff involved in the fieldwork operations receives extra incentives in the form of remunerations compared to just fixed salary by the others. To at least pop up the morale of those not involved in field operations without incurring extra cost, ABC is used to trace the impact on activity costs of adjusting the fieldwork expenses downwardly and the fixed salary upwardly by an equal percentage. This is because their costs are approximately the same. Therefore, a percent cut in fieldwork expenses could be used to create equally adjustment in fixed salary. Interestingly the staff directly involved in fieldwork is less than 50% of the total workforce. The results showed that there is a slight decrease in fieldwork related activity costs with a maximum decrease of –1.22%. On the other hand, those not involved the fieldwork related activities saw a relatively sharp rise in their activity costs. This is because their activity costs are largely driven by the fixed salary. From this, cost tracing, looking at the resultant slight decrease in fieldwork related costs, it could be concluded that any strategy that could yield cuts in fieldwork related activities. No matter how small, it could go a long way to perhaps increase in fixed salary to boost the morale of the non-fieldwork related staff.
Figure 1 Impact of Increasing Salary and Decreasing Fieldwork Expenses on Activity Costs
However, it should be noted that the ABC model could not be directly related to motivation impact, and also the ABC model did not cover the performance impact when increasing salary or decreasing fieldwork expenditure.
ABC adapted to fit in BMT
Budgetary accounting is now practicing in most of public sectors in Thailand including BMT. The major concern is to ensure that the total expenditure do not exceed the total budget allocated. The main objective is to fully use the resources assigned rather than enhance productivity or to reduce expenses. The traditional cost accounting at BMT is used to define unit costs of their products does not provide any mechanism, which leads to the determination of the actual costs of the output. Its accounting tracked the amount of money spent on salaries, equipment, capital investments, and professional service contracts, but did not break down any of those costs by individual activities. As a direct result, employees neither knew nor cared about their costs of doing business. After implementation of ABC, employees would be expected to have more willing and able to make cost-effective decisions. ABC provides an alternative approach to costing but requires understanding of all the activities performed by entire staff within the organisation.
ABC has the ability to gather cost information from the system and use that information to improve management. ABC provides detailed cost information of resources consumed in organisational activities and processes. Once, the actual cost information is known, it can support budget proposals, by supporting organisations to justify the resources needed for their future activities. ABC also provides cost information with additional accuracy of product costs, budget allocation, increased cost awareness, improved efficiency and effectiveness and continuous business improvement. Resources are assigned to activities to allow them to be conducted, performing the activity results in a cost that can be priced. The organisation can begin to see actual costs against individual activities and find opportunities to streamline or reduce the costs, or eliminate activity.
Although the results from this research showed that the cost accounting in BMT led to distortion, it could be hard to convince the organisation with a long history in relying on traditional costing (Hammer et al, 1994). To solve this problem, the solution could be to continue with the traditional system and implement ABC separately in BMT as a management tool. McGrath (1997), in financial planning and control in New Zealand, writes that in the drive for efficiency and effectiveness within the public sector realised that it is not simply a case of using one tool to accomplish the financial reform, but the number of tools covering both the financial and human resources aspects of administration. Kaplan and Cooper (1998) state that cost system is needed to perform the estimation of the costs of activities, products, services, and customer, or providing economic feedback to managers and operators about process efficiency. Therefore, ABC can be used alongside with budgetary accounting in BMT. The benefit from that could be that business processes can be better coordinated, managers become aware of other managers’ plans, staff may become cost conscious, and may aim to conserve resources, managers work according the organisational plan and make changes where necessary, and managers foster a vision of the organisation’s future that they might not have needed to develop.
Given the structural changes currently taking place in BMT, this would be an opportune time to introduce ABC technique into the organisation by helping the managers to better trace cost and thereby know the actual cost of a product or service. Using ABC information could offer managers in BMT better insight into decision making and planning within BMT itself whereas traditional system may be used for external report until such a time that full changes could be effected. At least for that BMT could be one of transparently managed organisations under DOL. Or if DOL sees the value of implementing ABC, it can be gradually implement, but it might prove a challenging project that would need time, resources, commitment, and etc. to accomplish since DOL is quite a big organisation with more than 12,000 of staff. Meanwhile, it is recommended that the excess staff with good programming skills could be used to develop modest homegrown time registration software.
However, difficulties may arise in introducing ABC because of the knowledge base of staff. This largely because of the fact that they are not trained specialists of such fields like accounting. The officers are largely surveyors who have learnt accounting on the job hence any new concept could be met with some form of reservation and resistance. Changing the environment or to introduce something new to the staffs is one of the most difficult thing. To be able to introduce such a new concept, an educational plan and their commitment are required before any such introduction can successful.
It is worthy to note that any accounting system must serve the objective of organisations. There is no universal accounting model that works well in all circumstances. The cultural aspect is one among that needs to be considered. The research conducted by Morakul and Wu (2001) on ABC implementation in Thailand examined the effects of cultural differences on the resistance against the ABC system in the Electricity Industries through interviews and questionnaires. The research concluded that the ABC system needed to be modified before implement in the Thai environment.
Conclusions
This research was motivated by the fact that the Royal Thai Government has been advocating for transparent financial management system of its agencies as included in its policies for the year 2001. The recent Asian economic crisis has had a negative impact on the financial strength of the government, which has resulted in general reduction of budgets to its agencies. Therefore, the research objective were set to test whether Activity Based Costing (ABC) could improve cost management in BMT as it is one of the Thailand governmental organisation. Since ABC has been proven successfully implement in industries and services organisations.
It was discovered that ABC could bring the visibility through the accounting system of the organisation. Needless to say, the cost information of BMT has to improve in order to have quicker access and easier information management. Given the way costs can be traced, using ABC provides a system that will allow BMT to follow the government policy to have a transparent financial management with relative ease. The reason being that the costs could be traced down to the activity level making it explainable to those who want to know how limited resources are utilised in BMT. The organisation can also justify their resources requirement through activities clearly and reasonably by ABC information, which could be use to support budget proposal drafting and budget allocation.
Since ABC brings visibility to the accounting system by way of clearly understanding and reacting to the costs and its causes, which cannot be provided by TCA, it is a mirror reflection of the organisation’s costs of business process. It is therefore recommended that its implementation would make BMT one of governmental organisations, which is able to demonstrate a transparent financial management system, and also, better cost management and quality of data.
The constraints and conditions for implementation of ABC at BMT were given implicitly throughout this paper. Firstly, implementation of ABC needs a broad based project team approach. Secondly, the data related to time are needed in terms of time registration sheets in this case. An alternative could be time registration software, but the impact of Asian Economic Crisis on budget of BMT and also with the excess staff with some having good knowledge in programming, it is suggested that time registration sheets could be appropriate at this moment. Knowledge should be made available to the entire staff and more importantly; activities have to be clearly defined and understandable for them. Giving knowledge can reduce some forms of resistance from the staff by introducing to them the benefits and its limitations. Nonetheless, some form of resistance is still expected since any type of change however beneficial, will be met with some resistance because of the human tendency to maintain the status quo.
The cost awareness in NMA’s requires not only a good understanding of the significant cost drivers in the organization, but also a realistic figure of how effective non-direct cost, such as indirect cost, support cost, administration, overhead, etc. is incorporated in the actual cost figures of business products. Typical for most NMA’s and cadastres is for example that the ICT cost are an increasingly important part of the total costs of the organization. ICT is however of variable importance throughout the organization. An evenly distribution of these cost would therefore not reflect the true distribution of the actual amount and differences in ICT services throughout the organization. A similar argument could be build up for administration and management costs. A change of business process as a result of technological development often implies also a change of how the process is managed. If this change of management is not reflected in the cost accounting procedures, the management information derived from this may not be accurate enough to take any business decision. It is therefore expected that incorporating ABC may effect the management of cost in NMA’s.
References
Many public sector organisations worldwide are under stress to implement business improvement programmes that create (more) value and recover production costs. In these circumstances, it is not surprising that governments have looked to the private sector, used to coping with market pressures, for techniques to produce greater management efficiencies (Williams, 1999). The increased use of information technologies, and the effects of globalization have created a more competitive environment in which a low cost structure often becomes a critical success factor. More so, global pressures for economic competitiveness have been reshaping the attitudes of government towards the public service worldwide. The focus on the cost accounts of government, combined with the reality of ceilings on revenue and the expectations of citizens, have led to rigorous review of the funding of public services and the efficiency with which they are performed. This environment has created a greater need for improved cost measurement and management techniques. In addition to these developments, governmental organizations are also beginning to recognize that geographic information is one of the most critical elements underpinning decision making for economic and the need to assign resources to establish an effective information infrastructure, as confirmed by The World Bank (2001). To remain competitive and keep budgets in balance, “geographic information organisations” need to streamline operations, eliminate waste, reduce cycle time, reduce costs, adopt a commitment to total quality, and judiciously incorporate advanced technologies such as scanning of documents, electronic data interchange, and paperless offices. Managers seeking to succeed in this environment are turning to their management accounting systems for new types of information. The role of cost accounting has been transformed. This means that cost accounting must provide appropriate types of information that have not been provided under traditional cost accounting systems (Blocher et al, 1999). Traditional approaches have proved inadequate for today’s global and technological environment (Cooper and Kaplan, 1991). As a result, the Activity Based Costing (ABC) technique has emerged in recent years to provide managers with more accurate cost information.
ABC has highlighted that true understanding of what it costs to provide products/services is at the same time a tool for better management. It helps to better understand and serve as guides in any business process improvement initiatives, and to subject resources to its efficient usage. In a nutshell, it helps to make more effective business process improvement at more transparent cost. This research verified whether ABC could be an appropriate technique to measure and manage the cost for a geo-information production organisation. The definition of cost management as given by Brimson and Antos (1994) is the management and control of activities to determine an accurate service cost, improve business processes, eliminate waste (non-value added activities), identify cost drivers, plan operations, and set enterprise strategies. ABC has been a suitable technique in manufacturing and service organisations in determining more accurate product or service cost, and in improving the understanding of the economics of production, and activities performed by an organisation.
Public sector organisations in Thailand are undergoing wide-ranging changes caused by many factors, such as globalisation, advances in technology, the creation of Thailand’s constitution in 1997, and Asian economic crisis among others. Issues of efficiency, effectiveness, accountability, and transparency dominate the agenda of the current government and have resulted in advocating of transparent financial management system in all governmental organisations. Due to above factors, the Department of Lands (DOL) as a National Mapping Authority (NMA) has had to deal with consequences resulting from the political reforms of the government and other issues mentioned. Generally, NMAs are now considered as service organisations. Kaplan and Cooper (1997) state that ideally service organisations are good candidate for implementing ABC even more than manufacturing companies.
This research studied the existing cost accounting system of Bureau of Mapping Technology (BMT) under DOL. The mapsheet provision was chosen as a case study because it is considered as a core business process of BMT and fundamental product for issuing land title. Never has the government tightened its financial policies than the aftermath of the Asian economic crisis. It brought with it a trend towards transparent financial management. More so, it emerged during the research that the true cost of mapsheet production has never been determined accurately or vaguely. Also, just as in any BPR projects in which BMT finds itself, the management is now becoming conscious of its performance in terms of costs, quality, processes, time, etc.
ABC and Geo-information Production Organisations
Although the research on ABC has so far primarily focused on service and manufacturing organisations, it is presumed in this article that ABC could also be useful in Geo-Information (GI) production organisation. According to Karioki (1999), GI production is an expensive venture and so are the processes involved in its production. To run a GI production therefore requires heavy capital investments and would require prudent measures in order to perform optimally or yield a good return on investment. This therefore calls for a good system of financial management to support the realisation of the above.
Typically, GI production processes are characterised by complex procedures, some of which are designed in fulfilment with laws and mandates that may not reflect the present day requirements. Onchaga (2000) notes that in many GI processes there exist non-value-adding tasks that increase complexity of the production process as a whole. Ideally if possible, these should be eliminated and the rest rationalised for maximal optimisation. It is however emphasized that not all non-value added activities might be eliminated. Some may be for legal reasons, mandate even a bait to win and retain customers among others. ABC can be used to reveal such non-value-added procedures and also help quantify their cost to the organisation. It may therefore help to streamline, if not eliminate, such non-value-added activities that may be inherent in the various organisational processes. Still on non-value added activities, GI organisations have traditionally set high standards of quality in their processes that are usually more than what most customers really need. To attain such set high standards of quality, various activities are added to the processes of production. These in natural fact, from the customer perspective, are a non-value added activities. ABC technique can streamline through such quality standards to reflect customers’ needs driven by their requirements.
Onchaga (2000) notes that in GI production processes consist of sets of activities that are basically performed in a certain sequence. For each product, it is possible to define the set of activities and resources required for its production. In production environments resources are always limited and the strategy will always be to try to optimise their use. This orientation of having processes organised a set of activities makes it a good candidate of ABC which is also based on activities and that the framework for ABC implementation already exist in GI processes.
Traditionally National Mapping Authorities (NMAs) have been the major providers of GI products and services, operating in very stable environments and assured of government funding. In growing competition, which is largely due to increasing access to GI technology by a larger group of producers, NMAs are increasingly coming under pressure to redefine their processes in order to meet the needs of their customers while fulfilling their national mandates. As a result, the need for change in GI organisations is progressively taking shape. Any change is bound to impose great financial demands on the organisations, many of which already operate on very tight budgets. Nonetheless, it should be possible to achieve an optimum allocation of resources, which could potentially be obtained by ABC. Not only could it highlight the drivers of large overhead cost, but it would allow NMAs to get a better grip on their operational costs. Since the benefit of ABC lies in more transparent financial management, business process improvement, etc., it does not mean that ABC needs to replace the financial system in the organisation, although it could make it more effective if integrated with internal management.
Case Study: Bureau of Mapping Technology (BMT), Thailand
DOL is a long established department under the Ministry of Interior, responsible for many aspects of land administration within the government, particularly cadastral surveying, mapping and registration of rights in lands. The department has been carrying out its cadastral surveying and mapping functions since 1903. It is decentralised with provincial land offices, provincial land office branches together with district and sub-district land offices in 75 provinces throughout the country. The Department has its headquarters in Bangkok. As of January 2001, there were 12,591 staff (MOI, 2001). This figure does not include a large number of temporary field staff hired as required. The administration of the department is structured into two levels: central and regional administrations. To improve the quality of work, the re-organisation process of DOL has been launched since the year 2000. The purpose of DOL’s re-organisation is to expedite the processes and reduce the cost of the activities.
As part of the re-organisation programme, the Bureau of Mapping Technology (BMT) has been established to support cadastral and land registration including adjudication processes under the Land Titling Project (LTP). BMT is one of the organisations under central administrations, which comprises 3 divisions, namely: Survey and Mapping Division, Photogrammetry Division, and Map Transformation Division. BMT plays a supportive role by providing the geo-information products and services such as the map control network and ground map production, as well as map control using aerial photomaps, aerial photos, map transformations, and map control maintenance.
BMT itself has not clearly defined the new organisation’s structure and relations between divisions. BMT is still adjusting and settling into these 3 divisions. The process of re-organisation is still ongoing, which was one of the key reasons why even the Surveyor General showed key interest in this ABC research. In particular, the activity chosen for this case study, which is mapsheet provision by surveying and mapping division, being one of the key activities of the organisations.
During the financial data collection, data from the fiscal year 2001 (FY2001: October 2000-September 2001) were used, following the suggestions in literature (DoD, 1995) that the best time frame to look for an appropriate and sufficient amount of data is the full fiscal year. Furthermore, references such as O’Guin (1991), Brimson and Antos (1994), Kaplan and Cooper (1997) suggest that implementing of ABC should start by one part of organisation as a pilot project. A pilot project should cover only a segment of the organisation or one business product line. BMT under the department of lands in Thailand has no clear data about the actual cost of their product. Therefore, it was one of the best candidates to zoom in to the activities necessary for mapsheet production, which is their core business product. Moreover, it is considered to be the fundamental product for issuing land title.
Since Thailand encountered the Asian economic crisis, budget allocation has been cut down about 60% for DOL. The financial constraint has put strain on all activities carried out by BMT. The organisation has to make a justifiable decision in distributing limited financial resources efficiently. It needs not only to distribute the funds, but also to monitor the cost of each activity within the organisation. Cost of activities must be managed and controlled to eliminate the inefficient activities, and to improve the processes. Currently, the BMT does not charge for their products and services. Because it is a governmental organisation, it is not concerned with making profit. However, it still has to find an efficient way to distribute funds and other recourses among various offices and activities. To make matters worse, because BMT is not concerned with making profits, it has no good idea what the true costs of their products are. Therefore, the need for techniques and tools for cost management and performance measurement of the activities carried out by BMT have arisen. This is also aggravated by promotion of transparency of financial dealings of governmental organisations in promoting good governance.
The benefit was hoped to be reflected in identify the true cost of activities based in the amount resources they consumed while being realised. The study should, otherwise, provided various systematic ideas to be the frame for selection of cost calculation approach. The product cost information also could be useful for BMT as base information in order to have an idea of product cost for their business improvement for example if it were to launch a pricing policy which is likely in the near future. The World Bank and Prime Minister’s Office recommended DOL to be a model agency in developing the guidelines with respect to the cost recovery and pricing mechanisms for products and services (World Bank, 2000). DOL considered this suggestion and included in their Master Plan Volume 5 (2002-2006) and there are plans to hire an international consultant to assist in developing such guidelines.
Methodology of collecting data on activities and cost
There are many techniques available for the collection of data on cost and time performance needed for ABC. Data was collected from interviews, time registration sheets, and documentation reviews. This is because firstly, it normally turns out that no one method could provide complete and accurate information. Even if it were, there should be a means to validate it through other sources. Another reason was the current accounting system was not consistent. Most cost records were held manually and paper based. Therefore, it was difficult and time-consuming to collect these. It was found that, for example, cost of material and equipment were aggregated in one amount and the financial section could not prescribe the history of detail for which item they had spent. For that reason, the organisation should improve in more efficient terms on cost accounting system in order to provide a transparent financial management. Lastly, there were some demonstrated deficiencies in the knowledge base of some of the internally trained accounting staff. BMT has been largely based on GI related technical jobs, with most of officers being surveyors and survey engineers. Therefore, they could not yet have very good working knowledge of the traditional accounting system, let alone knowledge in Activity Based Costing and Management. However, these data collections are needed to develop because of the complexities in getting approval to involve the entire staff. Even if it were possible, it is by no means deemed a job for a single person to undertake. Time for data collection was only about three weeks making it virtually impossible to cover everything. Extra time would have been needed to accomplish this limitation.
There are numerous methodologies of how to conduct interviews described in Kumar (1996, p.115). As also noted in Kumar (1996), the advantages of this method are more appropriate approach for studying complex and sensitive areas and useful for collecting in-depth information, which can provide the best understanding of the job. Interviews were however necessary because of the complex organisational situation in this case study. Generally, the relevant pieces of information on activities were acquired through interviews in the absence of the relevant documents from which such information could be extracted.
From the experience gained during fieldwork duration, before the interviewing took place, background information was gathered in order to answer some of the questions, for example, memory intensive questions and the trivial ones. Brimson and Antos (1994) suggest that the process should interview as few people as possible and always begin with the department manager or as higher position as possible because of experience and technical skills. Moreover, it is politically important to gain his or her support with guidance and suggestions. Aside guidance and suggestions, it also lends a psychological support to the interviewing process when it comes to dealing with the subordinates. Therefore, the fieldwork started by interviewing the surveyor general.
Each interviewing process started by explaining the purpose, and briefed the interviewee about ABC and its benefits. The logic behind is that if a person being interviewed does not know why they are being interviewed, they will often assume the worst. Therefore, explaining the objective of interviewing is very helpful in gaining their trust. This method has been used for this research in order to gain knowledge of accounting system and budget allocation within BMT, the conditions and criteria that have been used to manage the budget. The information from fiscal year 2001 (FY2001) was collected with regards to activities, resources, and all relevant data for ABC analysis. The following were interviewed: surveyor general, director of surveying and mapping division, chiefs of sub-divisions, supervisors, and the officers of supply & human resource, and financial sections. This method was applied to establish the time spent for each activity in order to get the activity model by interviewing head of every operational element. Retrospectively, perhaps a better method could have been by using time registration sheet, because it turned out that by interviewing the data obtained was largely by the intuitive guesses over years of experience. The fieldwork report has been signed by surveyor general in order to approve the correctness and accuracy of the data and information.
Time registration method was used to collect the time spent for each particular activity from a sample representative set i.e. director of division, chiefs of sub-divisions, supervisors, survey engineers, surveyors, administrators, employees, etc. It was used to calculate the time spent to manage and support the operational elements. The experience found that managers and support staffs were not likely to be enthusiastic about filling in time registration sheet on daily basis. Some even looked upon those sheets as being instructive. Some of them did not fill in properly because of lack of attention or suspicion of its purpose. It came as no surprise as Turney (1996) has already stated as being some of the reprisals.
Using data collected and the knowledge learnt from literature review, the analysis of existing situation of BMT was generated. The analysis of products, activities, resources, and their costing was made (and indicated in Appendices). The current cost accounting at BMT and ABC approach was made for comparisons. The ABC model’s behaviour has been tested under various conditions in spreadsheets since the application of spreadsheets was found useful for the ABC calculations. One main advantage of using spreadsheet software is that it allows the chaining and referencing of the calculated results to serve as inputs for consequent calculations while maintaining the referential links to the original values. This reduces the amount of rework that may be necessary when a value is changed and also makes it more appropriate to support “what if” analysis. Such “what if” analysis could aid decision-making process by providing a picture of what the effect of particular actions may have on the activity costs. It is sufficient to say that this activity model prepared will not be the last but the first of perhaps the many to be modelled. It may only last for a period and the ever-changing conditions may require it to be readjusted if not modelled completely. The activity model would obviously require considerable input and rework in order to be useful in planning and decision-making tool in the future for the whole organisation. This model can be a good start to enhance the input, and speed up the process.
ABC model developed for BMT
Before implementing the ABC steps, it was acknowledged that identification of any activities depends on the objectives of ABC. The Institute of Management Accountants (IMA, 1993) and Cokins (1996) describe that activities can be broadly defined when the primary need is to accurately assign costs to cost objects. If, on the other hand, the intent is to improve operations, it is useful to eliminate non-value-added processes and to define the activities more narrowly. O’Guin (1991) suggests that an ABC system only needs to identify the important activities to avoid adding unnecessary details creating more complex ABC calculations and more expensive design and maintenance. The prime interest in this research was therefore narrowed to the identification of the true costs of map sheet production at BMT.
The process of making map sheets was decomposed and evaluated by interviews, resulting in the identification of key activities. These activities serve as a base input for quantitative analysis. ABC analysis requires a review of how the activities “consume” the costs of the organisational structure, whereby the organisational structure can be categorised into one of three functions; managerial, support, or operations. Assignment or reassignment of costs depends on which category is selected. Using these categories, distribution rules can be applied and costs can be reassigned to areas where they will ultimately be allocated in the activity model.
Having gathered the cost data, one can allocate cost to each organisation element. DoD (1995) suggests that it is not necessary to differentiate the organisations that have similar missions. This is because the functions performed are more important than the organisational components. But in this research, all organisational elements are made as distinct elements in order to see the efficiency of each operational organisational element. Simplicity was the key as O’Guin (1991) said: “it is better to be approximately right than precisely wrong”. Cokins (1996) also notes that in an ideal case, all resource costs could be directly charged or assigned from a people or equipment resource to a specific product or service customer. But in practice, there is so much complexity and technology, that most resource costs are initially incurred in the form of indirect overhead.
The process of assigning costs followed the Step Allocation Method (Tummanon, 2001), following a similar procedure as de Vries (2001) describes for a hypothetical national mapping agency. The allocation of managerial elements to operational elements was based on the measured (by time registration) managerial time spent on fieldwork. With these allocations to operational elements, assignment of costs to activities was performed using an activity model that was derived from interviews focused on the time effort estimates in fieldwork. The last step was the assignment of activity costs to various products, after which unit cost could be calculated and compared. These unit costs in BMT were determined by operational organisational elements and considered only fieldwork expenses disregarding any other resources.
Although one of the main functions of BMT is to publish the mapsheets, it is still important to note that the unit cost in BMT is calculated for the geodetic control network and control traversing only. This anomaly was already acknowledged when concerns were raised on this issue, according to a report on Land Titling Project (LTP) committee meeting on 27th December 1999. In a comment by the Deputy Permanent Secretary of Interior Ministry, it was suggested that DOL should improve the method of calculation in order to be more reliable and closer to reality. There is however little evidence of any change since then, in particular because currently BMT still accounts in the same way, although there are signs that this may be changing in the future. As a result, comparison or generation of alternative production methods is therefore difficult, because one may in fact be comparing different kinds of output units. Yet, the following still aims at making this link.
The comparisons of unit costs accounted by current BMT accounting methods and the alternative ABC approach have been made based for the fiscal year 2001, as shown in table 1. The activities and their amount of products used in this comparison were based on the activities as registered in the current BMT accounts and performance reports. N/A in the table indicates that this information is not available at BMT. Current cost accounting practices at BMT only consider fieldwork-surveyors expenses whereas ABC includes all resources consumed. This was achieved through detailed cost tracing to all activities levels running in the organisation. As a result, field survey turned out to be the most expensive activity cost making up more than 50% of the total cost. Obviously, salaries were a major driver but then high cost were incurred as a result of high investment for equipments, materials, and expenses in temporary wages to fulfil their functions, and also, most equipment being in their prime estimated useful lifetime. The current cost accounting system did not reveal the true costs of the activities as a number of cost elements were unaccounted for.
| Activity | Unit | Amount | By BMT accounting | By ABC | ||
| Fieldwork Expense | Unit Cost(baht) | Cost | Unit Cost(baht) | |||
| Establish geodetic permanent mark | Pts. | 1,418 | 1,314,549 | 927 | 10,769,225 | 7,595 |
| Establish GPS mark | Pts. | 2,399 | 5,770,792 | 2,405 | 6,240,137 | 2,601 |
| Satellite Positioning and Adjustment | Pts. | 2,493 | 5,222,490 | 2,095 | 11,022,735 | 4,421 |
| Control Traversing | Pts. | 50,561 | 17,509,730 | 346 | 18,456,140 | 365 |
| Kms. | 8,862 | 1,976 | 2,083 | |||
| Compute Traverse and Checking | Pts. | 94,852 | 0 | N/A | 8,448,014 | 89 |
| Mapsheet Publication | Mapsheets | 709 | 0 | N/A | 2,495,715 | 2,428 |
The big differences are evident in the unit costs of establishing geodetic permanent marks, and satellite positioning and adjustment. The main reason is because of the way BMT accounted for their unit costs that ignored any other resources beyond the fieldwork expenses only. ABC accounts for all resources consumed by an activity. The sharp difference in the unit cost of the establishment of geodetic permanent mark activity of about a factor 8 is because by ABC included cost for subcontractors. These costs were surprisingly not reflected in the current BMT cost accounting system. Furthermore, the unit cost of the satellite positioning and adjustment activity by ABC is approximately twice that of accounting by BMT. This difference is mainly a result of depreciated cost of GPS receivers, depreciated cost of cars, and office supplies. Such distortions could lead to a false impression that the outsourced establish geodetic permanent mark activity is cheaper than the internally produced establish GPS mark activity.
It was found through the interviews that both of outputs “geodetic permanent mark” and “GPS mark” had the same order geodetic control network of comparable accuracy. But the difference of these marks is the durability of the mark. BMT believed that the geodetic permanent marks, which were established by contractor would have longer service life, they estimate its useful life of 10 years. Because of the size and design are different from GPS marks, which are done by BMT surveyors. Based on the ABC results serious questions could be raised as to whether improving the quality of establish GPS mark would not compare favourably with establish geodetic permanent mark without such big difference in costs. It was also found (through interviews and checking in database) that the total of GPS mark was about 12,546 by the end of FY2001. By that number, about 346 or 2.76% marks have been lost or damaged whereas there has not been reported any such case for geodetic permanent marks. The reason above is, however, not definitive because establish geodetic permanent mark has run for only two years. However, the results from ABC can help the organisation to re-consider whether to continue or eliminate activities. It is worthy to acknowledge for further study to compare, and verify cost-benefit of these two outputs.
Even though for some results, it could be realised that the costs comparison turned out to be almost the same, for both accounting systems, it does not necessarily mean that BMT’s current approach of cost accounting is correct and also transparent. The perceived advantage of ABC was that ABC gave costs in more detail traced to all activity levels running in the organisation.
Behaviour of ABC model at BMT
Once an organisation has an ABC system, it can use ABC information in its budgeting process. Kaplan and Cooper (1997) describe activity Based Budgeting (ABB) as “ABC in reverse”. The need for ABB is motivated by the observation that the traditional budgeting process in organisations is a negotiation between managers and executives relative to last year’s budget. Therefore, the ABC results from this study could be used to help BMT to allocate their budget. ABC approach can help to improve the process of budgeting. Because each sub-division within the organisation knows the activities in which they are involved and also, knowing the unit cost of each activity with the possibility to determine the number of occurrences, then they could fairly calculate the yearly costs of their activities. This yearly cost of activities of organisational sub-divisions could serve as a guideline in the budget allocation. It was also discovered that, given the way costs can be traced, using ABC provides a system that will allow BMT to follow the government policy to have a transparent financial management with relative ease. The reason being that the costs could be traced down to the activity level making it explainable to those who want to know how limited resources are utilised in BMT.
From the existing cost analysis found that the major cost of the organisation concerns salaries, which add up to about 65% of overall expenses. The level of salary has potential impact on decisions within the organisation. Therefore, it would be necessary to find out how a change in salary would affect the ABC results. The impact to salary was investigated by increasing fixed salary, decreasing fieldwork expenditures (temporary wages and fieldwork allowance). The results showed that increasing fixed salary affected those activities where the activity driver was mainly human resources. Decreasing fieldwork expenditures impact activities involved field survey and those activities carried in the offices to complete a field survey task. These tests led to a strategy to motivate staff by increasing fixed salary and decreasing fieldwork expenditures as shown in figure 1. This is motivated by the fact that at BMT, staff involved in fieldwork operations seems to be much more stimulated than the staff that only do office jobs. Since the staff involved in the fieldwork operations receives extra incentives in the form of remunerations compared to just fixed salary by the others. To at least pop up the morale of those not involved in field operations without incurring extra cost, ABC is used to trace the impact on activity costs of adjusting the fieldwork expenses downwardly and the fixed salary upwardly by an equal percentage. This is because their costs are approximately the same. Therefore, a percent cut in fieldwork expenses could be used to create equally adjustment in fixed salary. Interestingly the staff directly involved in fieldwork is less than 50% of the total workforce. The results showed that there is a slight decrease in fieldwork related activity costs with a maximum decrease of –1.22%. On the other hand, those not involved the fieldwork related activities saw a relatively sharp rise in their activity costs. This is because their activity costs are largely driven by the fixed salary. From this, cost tracing, looking at the resultant slight decrease in fieldwork related costs, it could be concluded that any strategy that could yield cuts in fieldwork related activities. No matter how small, it could go a long way to perhaps increase in fixed salary to boost the morale of the non-fieldwork related staff.
Figure 1 Impact of Increasing Salary and Decreasing Fieldwork Expenses on Activity Costs
However, it should be noted that the ABC model could not be directly related to motivation impact, and also the ABC model did not cover the performance impact when increasing salary or decreasing fieldwork expenditure.
ABC adapted to fit in BMT
Budgetary accounting is now practicing in most of public sectors in Thailand including BMT. The major concern is to ensure that the total expenditure do not exceed the total budget allocated. The main objective is to fully use the resources assigned rather than enhance productivity or to reduce expenses. The traditional cost accounting at BMT is used to define unit costs of their products does not provide any mechanism, which leads to the determination of the actual costs of the output. Its accounting tracked the amount of money spent on salaries, equipment, capital investments, and professional service contracts, but did not break down any of those costs by individual activities. As a direct result, employees neither knew nor cared about their costs of doing business. After implementation of ABC, employees would be expected to have more willing and able to make cost-effective decisions. ABC provides an alternative approach to costing but requires understanding of all the activities performed by entire staff within the organisation.
ABC has the ability to gather cost information from the system and use that information to improve management. ABC provides detailed cost information of resources consumed in organisational activities and processes. Once, the actual cost information is known, it can support budget proposals, by supporting organisations to justify the resources needed for their future activities. ABC also provides cost information with additional accuracy of product costs, budget allocation, increased cost awareness, improved efficiency and effectiveness and continuous business improvement. Resources are assigned to activities to allow them to be conducted, performing the activity results in a cost that can be priced. The organisation can begin to see actual costs against individual activities and find opportunities to streamline or reduce the costs, or eliminate activity.
Although the results from this research showed that the cost accounting in BMT led to distortion, it could be hard to convince the organisation with a long history in relying on traditional costing (Hammer et al, 1994). To solve this problem, the solution could be to continue with the traditional system and implement ABC separately in BMT as a management tool. McGrath (1997), in financial planning and control in New Zealand, writes that in the drive for efficiency and effectiveness within the public sector realised that it is not simply a case of using one tool to accomplish the financial reform, but the number of tools covering both the financial and human resources aspects of administration. Kaplan and Cooper (1998) state that cost system is needed to perform the estimation of the costs of activities, products, services, and customer, or providing economic feedback to managers and operators about process efficiency. Therefore, ABC can be used alongside with budgetary accounting in BMT. The benefit from that could be that business processes can be better coordinated, managers become aware of other managers’ plans, staff may become cost conscious, and may aim to conserve resources, managers work according the organisational plan and make changes where necessary, and managers foster a vision of the organisation’s future that they might not have needed to develop.
Given the structural changes currently taking place in BMT, this would be an opportune time to introduce ABC technique into the organisation by helping the managers to better trace cost and thereby know the actual cost of a product or service. Using ABC information could offer managers in BMT better insight into decision making and planning within BMT itself whereas traditional system may be used for external report until such a time that full changes could be effected. At least for that BMT could be one of transparently managed organisations under DOL. Or if DOL sees the value of implementing ABC, it can be gradually implement, but it might prove a challenging project that would need time, resources, commitment, and etc. to accomplish since DOL is quite a big organisation with more than 12,000 of staff. Meanwhile, it is recommended that the excess staff with good programming skills could be used to develop modest homegrown time registration software.
However, difficulties may arise in introducing ABC because of the knowledge base of staff. This largely because of the fact that they are not trained specialists of such fields like accounting. The officers are largely surveyors who have learnt accounting on the job hence any new concept could be met with some form of reservation and resistance. Changing the environment or to introduce something new to the staffs is one of the most difficult thing. To be able to introduce such a new concept, an educational plan and their commitment are required before any such introduction can successful.
It is worthy to note that any accounting system must serve the objective of organisations. There is no universal accounting model that works well in all circumstances. The cultural aspect is one among that needs to be considered. The research conducted by Morakul and Wu (2001) on ABC implementation in Thailand examined the effects of cultural differences on the resistance against the ABC system in the Electricity Industries through interviews and questionnaires. The research concluded that the ABC system needed to be modified before implement in the Thai environment.
Conclusions
This research was motivated by the fact that the Royal Thai Government has been advocating for transparent financial management system of its agencies as included in its policies for the year 2001. The recent Asian economic crisis has had a negative impact on the financial strength of the government, which has resulted in general reduction of budgets to its agencies. Therefore, the research objective were set to test whether Activity Based Costing (ABC) could improve cost management in BMT as it is one of the Thailand governmental organisation. Since ABC has been proven successfully implement in industries and services organisations.
It was discovered that ABC could bring the visibility through the accounting system of the organisation. Needless to say, the cost information of BMT has to improve in order to have quicker access and easier information management. Given the way costs can be traced, using ABC provides a system that will allow BMT to follow the government policy to have a transparent financial management with relative ease. The reason being that the costs could be traced down to the activity level making it explainable to those who want to know how limited resources are utilised in BMT. The organisation can also justify their resources requirement through activities clearly and reasonably by ABC information, which could be use to support budget proposal drafting and budget allocation.
Since ABC brings visibility to the accounting system by way of clearly understanding and reacting to the costs and its causes, which cannot be provided by TCA, it is a mirror reflection of the organisation’s costs of business process. It is therefore recommended that its implementation would make BMT one of governmental organisations, which is able to demonstrate a transparent financial management system, and also, better cost management and quality of data.
The constraints and conditions for implementation of ABC at BMT were given implicitly throughout this paper. Firstly, implementation of ABC needs a broad based project team approach. Secondly, the data related to time are needed in terms of time registration sheets in this case. An alternative could be time registration software, but the impact of Asian Economic Crisis on budget of BMT and also with the excess staff with some having good knowledge in programming, it is suggested that time registration sheets could be appropriate at this moment. Knowledge should be made available to the entire staff and more importantly; activities have to be clearly defined and understandable for them. Giving knowledge can reduce some forms of resistance from the staff by introducing to them the benefits and its limitations. Nonetheless, some form of resistance is still expected since any type of change however beneficial, will be met with some resistance because of the human tendency to maintain the status quo.
The cost awareness in NMA’s requires not only a good understanding of the significant cost drivers in the organization, but also a realistic figure of how effective non-direct cost, such as indirect cost, support cost, administration, overhead, etc. is incorporated in the actual cost figures of business products. Typical for most NMA’s and cadastres is for example that the ICT cost are an increasingly important part of the total costs of the organization. ICT is however of variable importance throughout the organization. An evenly distribution of these cost would therefore not reflect the true distribution of the actual amount and differences in ICT services throughout the organization. A similar argument could be build up for administration and management costs. A change of business process as a result of technological development often implies also a change of how the process is managed. If this change of management is not reflected in the cost accounting procedures, the management information derived from this may not be accurate enough to take any business decision. It is therefore expected that incorporating ABC may effect the management of cost in NMA’s.
References
- Blocher E J, Chen K H, Lin T W. 1999. Cost Management: a strategic emphasis. McGraw-Hill. ISBN 0-07-005916-0
- Brimson J A, Antos J. 1994, Activity-based management for service organizations, government entities, and nonprofits organizations. John Wiley & Sons. ISBN 0-471-33158-9
- Cokins G. 1996. Activity-based cost management: making it work: a manager’s guide to implementing and sustaining an effective ABC system. McGraw-Hill. ISBN 1-7863-0740-4
- Cooper R, Kaplan R S. 1991. The Design of Cost Management Systems: text, cases, and readings. New Jersey: Prentice Hall. ISBN 0-13-204121-3
- de Vries W T. 2001. Basics of Activity Based Costing (ABC)-applied for Geoinformation production organizations. Lecture notes, International Institute for Aerospace Survey and Earth Sciences (ITC): Enschede: The Netherlands.
- Hammer L H, Carter W K, Usry M F. 1994. Cost Accounting. Ohio: South-Western Publishing Co. ISBN 0-538-82807-2
- Kaplan R S, Cooper R. 1998. Cost and effect: using integrated cost systems to drive profitability and performance. Boston: Harvard Business School Press. ISBN 0-87584-788-9
- Karioki J S. 1999. A Structured Methodology and Implementation Strategy for Business Process Reengineering in Geo-information Production. M.Sc. Thesis: International Institute for Aerospace Survey and Earth Sciences (ITC): Enschede: The Netherlands
- Kumar R. 1996. Research Methodology: A step-by-step guide for beginners. Malaysia: Sage Publications Ltd. ISBN 0-7619-6213-1
- McGrath R. 1997. Financial Planning and Control Systems. Public administration and development 17(1): 49-54.
- MOI. 2001. Thailand Land Titling Project. Department of Lands: Ministry of Interior: March 2001.
- Moralkul S, Wu F H. 2001. Cultural Influences on the ABC Implementation in Thailand’s Environment. Journal of Managerial Psychology. 16 (2): 142-158.
- MPV5. 2001. Master Plan Volume 5 (2002-2006). Planning Division: Department of Lands: Thailand: March 2001.
- O’Guin M C. 1991. The Complete Guide to Activity-Based Costing. New Jersey: Prentice Hall. ISBN 0-13-853318-0
- Onchaga M R. 2000. Performance Modelling of Geo-information Production Processes. M.Sc. Thesis: International Institute for Aerospace Survey and Earth Sciences (ITC): Enschede: The Netherlands
- Tummanon V. 2001. Activity Based Costing:ABC. Bangkok: Ionic. ISBN 974-8231-42-9
- Turney P B B. 1996. Activity Based Costing: the performance breakthrough. London: Kogan Page Limited. ISBN 0-7494-1881-8
- van Dijk M P. 1999. Globalisation and Economic Restructuring; Competitiveness at the regional, country, city and enterprise level. In Strategic Issues at the Dawn of a new Millennium, El-Namaki S S, Samson R, Aidis R, Moharir V (eds). Maastricht School of Business: the Netherlands: 243-260.
- World Bank. 2000. Aide memoire in Thailand- Third Land Titling Project (LTPIII). World Bank supervision mission: April 2000.
- World Bank. 2001. World Bank Economics of EIS. World Bank: Norplan AS: January 2001
- DoD. 1995. Department of Defense. ABC Guidebook-Guidebook for Using and Understanding Activity-Based Costing http://www.c3i.osd.mil/bpr/bprcd/0201.htm (last accessed 07-01-2002)
- DOL. 2000. Department of Lands: Ministry of Interior: Thailand http://www.dol.go.th (last accessed 12/02/2002)
- RTG. 2001. Government Policies: Royal Thai Government. http://www.thaigov.go.th/index_eng.htm (last accessed 03-12-2001)
- Williams H. 1999. The Future of Public Sector Management- The Public Interest. www.psmpc.gov.au/media/williamsspeech20aug.htm (last accessed 08-04-2002)
- Hansen D R, Mowen M M. 1994. Cost Management: accounting and control. South-Western College. ISBN 0-538-83227-4
- Hart J, Wilson C. 1996. Management Accounting: principles and applications. Prentice Hall. ISBN 0-7248-0210-X
- Hicks D T. 1999. Activity-based costing: making it work for small and mid-sized companies. John Wiley & Sons. ISBN 0-471-24959-90
- Horngren C T, Foster G, Datar S M. 1999. Cost accounting: a managerial emphasis. Prentice Hall. ISBN 0-13-085177-9