Functional cost analysis is Concept, definition, assessment of real value and application with examples

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:54

In order to realistically assess the costs of the company directed to the production of products or the provision of services, a special methodology is applied. Functional cost analysis is a special technology with which you can estimate the cost without reference to the organizational structure of the company. This tool allows managers to better understand production relationships and processes. Features of this method, its main features and recommendations for use will be discussed below.

Purpose and features of the technique

Functional cost analysis (FSA) is a method that allows you to determine not only the cost, but also other product characteristics. It is based on the use of company resources and functions (actions performed at each stage of the production cycle),which are involved in the processes of manufacturing goods and providing services.

This is an alternative to traditional approaches. FSA differs from them in the following qualities:

• Information is presented in a form that is understandable to staff. Employees involved in the business process have access to data that is presented in an understandable way.
• Overhead costs are distributed according to the principle of accurate calculation of the use of company resources. At the same time, information is disclosed in detail about the processes during which certain goods were received or services were provided. This allows you to evaluate the impact on the cost of certain costs.

Functional cost analysis is a convenient technique that reveals information about a company's expenses. With its help, a wide range of work is carried out. Moreover, the general principles of the methodology can be applied both in the current and in the strategic management of the organization.

Application of analysis results

Considering the goals and objectives of the functional cost analysis, it should be noted that with its help many types of work are performed:

• Real information about the effectiveness of responsibility centers at the object under study is collected and presented in an accessible form.
• The directions are determined and a general analysis of the cost of various business processes is carried out. For example, product manufacturing, marketing, sales, service, quality monitoring, etc. can be researched.
• In progresscomparative analysis and substantiates the choice of the most cost-effective business process, as well as the technology for its implementation.
• Conducting analytical activities aimed at establishing and substantiating the functions of the structural units of the object of study. This improves the quality of the organization's finished products.
• The main, additional, and unnecessary costs in the course of the core activity are identified and examined.
• We develop and compare ways to reduce manufacturing, marketing and management costs. This becomes possible due to the streamlining of the functions of workshops, production sites and other structural units.
• Analysis of proposed improvements integrated into the company's activities.

Goals and objectives of the method

The methodology involves the development and practical application of special models. Considering the goals and objectives of the functional cost analysis, it can be noted that it is needed to improve the work of the organization. Moreover, when using the methodology, efficiency is increased in different directions. Thus, indicators of labor intensity, cost, productivity are improved. When building models, it is possible to obtain a large amount of information important for decision making. Moreover, the results of such studies can be quite unexpected for managers.

The purpose of the functional cost analysis is to obtain the required information about the efficiency of the centersorganization's responsibility. This becomes possible thanks to the construction of a system of indicators of cost and time, as well as during the analysis of labor costs, labor intensity, and a number of other relative indicators.

In the course of operational management, the methodology allows you to generate recommendations on actions that will increase profits, as well as improve the efficiency of the company. When conducting strategic management, you can get important information for making decisions about reorganization, changing the range, launching new products, diversifying, etc.

The purpose of cost analysis is to provide data on how to correctly reallocate company resources in order to get the maximum benefit. For this, the possibilities of factors that have the greatest influence on the final result are determined. For example, this can be quality, cost reduction, service, labor intensity optimization, etc. Based on the research, decisions are made on financing the most appropriate areas.

BCA models are used to reduce production costs, increase productivity, reduce time and improve the technology for manufacturing finished products.

Technique algorithm

There are several main stages of functional cost analysis. This allows you to get a reliable result of the study.

The first step determines which functions are performed sequentially during productionfinished products. Having compiled a list of processes that raw materials go through in the process of their transformation into the final product, they are divided into two groups. The first category includes features that affect the value of the product, and the second includes those that do not. After that, the process is optimized. It is necessary to reduce or completely eliminate (if possible) all steps that do not affect the value of the product. This way you can cut costs.

At the second stage of the functional cost analysis for each individual process, the costs for the entire reporting period are determined. It also counts the number of working hours spent on a similar function.

The third stage involves the calculation of the number of costs incurred by the enterprise in the production process and the completion of each process. So, for example, the operation of the machine is characterized by direct and overhead costs, which in total leave 250 thousand rubles. in year. During this time, the equipment will produce 25 thousand units of products. The approximate cost of the cost source is 10 rubles. for one product. The machine produces 6 products per hour, so an alternative unit of measure can be a cost indicator of 60 rubles. at one o'clock. Both equivalents can be used in the cost quantity calculation process.

Considering the basics of functional cost analysis, it can be noted that in the course of performing such work, two types of cost sources can be used:

1. By functions (activity drivers). It shows how the cost object affects the granularity of the process.
2. By resources (resourcedrivers). Reflects how functional activity levels affect costs.

At the fourth stage, after determining the source of costs, for each stage of the production cycle, the final calculation of the costs that arise in the manufacture of a particular product is carried out.

In each case, the stages of production are considered on a different scale. It is chosen in accordance with the objectives of the study. If the model is too detailed, the calculation of the FCA can become more complicated. Even before the start of the study, the degree of complexity of this process is determined. It depends on the costs that the organization allocates for the study.

How to apply the research result

Functional cost analysis is an effective system that allows you to resolve a number of issues. They are related to the level of profitability that the manufacturer has planned. With the help of the FSA, you can answer the following questions:

• Does the market set the price level, or can the manufacturer choose the best price for selling finished products?
• Is it obligatory to increase expenses, the allowance of which was calculated according to the FSA method?
• Should costs be increased proportionately if there is a justified need for it, or should funding only certain areas?
• How do FSA indicators compare with the level of the final price of products?

It can be said that cost analysis is a technique that allows you to assess the level of profit that can beget organization in the manufacture of certain products.

If the costs are correctly estimated, then the income before taxes will be equal to the difference between the selling price and the costs, which were calculated using the FSA method. At the same time, it will be possible to determine at the planning stage which products will be unprofitable. The selling price in this case will be less than the total costs. Appropriate changes can be made in a timely manner to prevent negative consequences.

Increasing the efficiency of business processes

Carrying out a functional cost analysis allows you to increase production efficiency. This procedure is carried out in three stages:

1. Analysis of production processes, which allows you to identify opportunities for improving the procedure for their implementation.
2. Identify the causes that explain the occurrence of unproductive expenses, and also find ways to eliminate them.
3. Monitoring is being carried out and relevant technologies are being introduced into the production process.

It is possible to redesign the company's activities to reduce the time, cost, labor expended with the help of functional cost analysis. FSA allows you to reduce them by improving the production technology. To do this, a series of actions are carried out:

• A list of processes is compiled and ranked by cost, time spent and labor intensity.
• Select the functions that will cost the most.
• Time requiredfor carrying out certain production processes, is reduced.
• Unnecessary production steps are eliminated.
• Combination of all required functions is organized.
• Resources are reallocated, freeing up capital as technology improves.

Such actions can improve production, improve the quality of the result of the organization's activities. At the same time, different stages of the manufacturing process are compared, and rational technologies are selected. They are funded. Unprofitable, unreasonably costly processes are improved or eliminated completely.

Information obtained during the FSA is used by various analytical methods, for example, strategic, cost, time analysis. A functional cost analysis of personnel can also be carried out, the data of which are used in the course of studying labor intensity indicators. The issues of determining the target cost of finished products and the price that follows from the life cycle of products are also being resolved.

A system of budgets is formed on the basis of the FSA methodology at the enterprise. First, the volume and price of work, as well as the amount of resources, are determined. If this direction is profitable, a budget is created to complete the production task. Decisions in this case are purposeful and conscious. Resources are distributed according to the optimal scheme. Based on this, a reasonable system of budgets is being formed.

FSA Benefits

The technology of functional cost analysis has both a number of advantages and disadvantages. The positive qualities of the technique include:

• The analyst gets accurate information about what components make up the cost of the finished product. This allows you to make informed decisions in the strategic planning of the organization's activities in terms of determining prices for finished products, the correct ratio of products. Managers can make the right decision about whether to make their own certain products or purchase them for further processing.
• Based on the research you have done, you can determine whether you need to fund R&D in the industry, automate production processes, promote products or services, etc.
• Clarifying the performance of production functions. This allows the organization to focus more on costly manufacturing processes, their efficiency, and reduce non-value-adding activities.

Disadvantages of the methodology

Functional cost analysis of costs has some disadvantages:

• If the detailing of the process is not correct, the calculation can be difficult, as the model becomes overloaded with details. It's getting too complicated.
• Managers often underestimate the importance of collecting data on cost sources by function.
• In order to qualitatively implement the technique, you need special software.
• Due to organizational changes, the model quickly becomes obsolete.
• The implementation process is not always taken seriously enough by management, may not be taken into account when making decisions.

FCA application example

To better understand the features of the functional cost analysis of the system of production functions, you need to consider its application with an example. Almost any company can set product prices incorrectly, especially if it manufactures and sells a large number of products. To understand why such errors occur, consider the operation of two factories.

Manufacturers make regular writing pens. So, at the first plant, 1 million blue ballpoint pens are produced per year, and at the second - 100 thousand pieces. In order to maximize production capacity, in addition to blue pens, the second plant produces 65,000 black pens, 15,000 red pens, 13,000 purple pens, and a number of other varieties. In general, the second plant produces up to 1000 types of different pens per year. The volume of production here ranges from 500 to 1 million pieces. in year. Thus, it happens that the number of products of the first and second factories is the same, reaching a million units per year.

It can be assumed that in this case both industries need the same number of jobs, spend the same number of hours, materials, etc. But there are significant differences in the organization of production processes. The second plant has more staff. The staff includes specialists who are engaged inquestions:

• setting and controlling units, machines, lines, etc.;
• Checking equipment after setup;
• receiving and checking raw materials, materials and parts that are used in the production process;
• moving materials, finished products, shipping to distribution points;
• recycle marriage;
• design, implementation of design changes;
• deals with suppliers;
• planning the supply of parts and raw materials;
• modernization and programming of a more extensive software system than the first factory.

The second plant has higher downtime, more overtime. Warehouses are reloaded, more improvements and waste. These and many other questions lead to a discrepancy between prices and market realities.

To increase profits, the second plant should reduce the production of plain blue pens, which are in sufficient quantity on the market, and produce colored varieties. These items sell for more than blue pens (although their production cost is almost the same as blue pens). The FSA will help to determine what products, how much to produce, how to cut costs.

Development of the FSA method

In the course of the development of the presented method, a functional cost analysis of management appeared. It allows you to more accurately attribute the costs of production processes and finished products. The use of these two methods allows not only to identify costs, but also to manage them.

Functional cost analysis of production processes allows you to evaluate the following areas of the company:

• Main, auxiliary and control processes in business.
• Loading of structural divisions, managers, efficiency of distribution of functions between external and internal processes.
• The main production activity of the company, which is being studied in order to obtain reliable information for management in the current and future period.
• The cost of finished products, taking into account the work of responsibility centers.