CASE 1 - Activity Based M

Group 4 - Team 2/8/24 North Island College

1. Calculate the UOC per barrel for SG. Is a barrel of oil the cost driver for all the activities
that go on within RDS? Comment on why RDS chooses to monitor costs per barrel.
1.1. Calculate the UOC per barrel for SG
UOC per barrel for SG is the total operating cost (OPEX) excluding exploration, depreciation
and depletion divided by barrels produced and is calculated as follows.
Total OperatingCost −(exploration+deprciation+ depletion)
Unit Operating Cost =
Barrels produced∈a that period

$ 140,640,200
UOC= =$ 3.21
(120,000∗365)
1.2 Is a barrel of oil the cost driver for all the activities that go on within RDS?
The barrel of oil is not the cost driver of all the activities that go on within RDS. The UOC
rate is synonymous with traditional absorption rate hence, it suffers from the same
setbacks. RDS believes that oil exploration and production units are the cost centers which
are responsible for the unit operating cost per barrel (UOC). This has been proven
otherwise when the number of barrels produced had decreased without corresponding
reduction in operating cost.
The barrel of oil is not the direct cause of all cost and its effect in RDS, because it does not
take into account the activities that has caused the cost to take place. The barrel of oil is a
volume based and not all cost are caused by it, from this point of view that using it as a cost
driver for all the activities is inherently arbitrary and counter productive. For example, not
all activities that took place in the Office of the President, Business Management and
Community Relations are caused by barrel of oil. There is need to analyze the cost of an
activity in relation to the value added by the activity, with the goal of operational and
strategic improvement. ABM could be a better approach in this case, which can be achieved
by analyzing and evaluating a company’s business activities through activity-based costing
and value-chain analysis.
At this juncture, to charge activities for their use of resources (resource drivers), each cost
item must be either charged directly to an activity or allocated to it. Cost directly traced to
an activity do not require allocation.
One of the major shortcomings of using the barrel as a cost driver of all the activities, is the
failure of SG to contain the cost dismally and created negative relationships among the
departments by viewing each other as stumbling block for progress and compete instead of
working as a team to achieve the same goal. It is evident that using barrel as a cost driver
have caused the management of SG to look at the wrong things and make inappropriate
decision sacrificing the actual cost pools by looking at the wrong cost driver.
It is only then, when they were in crisis and compete for scarce resources (funding for
capital expenditure for new explorations) when they realized that their view was incorrect,
and they are going in the wrong direction.
Other things to consider.
• Logistics - In the case of SG they have joint ventures for pipelines with other players
in the industry, these costs are not affected by barrels produced and are based on
construction complexity or agreements.
• Legal- RDS faces lawsuits for spills, violations and in some cases are required to have
a minimum level of corporate social responsibility.
• Exploration, R&D- Cost incurred when prospecting, developing new processes and
products are not directly correlated to barrels produced. Labour hours and
equipment usage cost constitute the majority of the costs.
• Net-Zero- RDS is transforming its business and finding new opportunities –
providing more low-carbon energy such as wind farms, biofuels, hydrogen, charging
for electric vehicles and electricity generated by solar. These do not rely on barrels
produced and would require other cost bases for instance Kilo-watt/hrs produces
1.3 Why RDS chooses to monitor costs per barrel.
The main reason would be that The main reason is because Crude oil prices are quoted per
barrel and monitoring costs per barrel makes the cost more comparable to these prices
it is cheaper and easy to apply and implement compared to approaches like Activity Based
Management (ABM) which are more sophisticated, which analyzes and evaluates the
company’s business activities through activity-based costing and value-chain analysis.
Activity Based Costing (ABC) assigns costs more effectively and requires a lot of individual
cost pools. The more cost pools, the more complex the system and the more work and
expense it will require to gather data but the accurate it becomes.
ABC requires input from multiple departments. Some of them may decide they have higher
priorities and fall behind in providing you with the necessary data.
2. Compute the cost of activities in the IT and Telecommunication services Process. What
item did you include or exclude from your calculation? Why?
2.1 Taking into consideration that staff benefits and staff services average 35% and 30 % of
staff salaries respectively, then direct trace for staff salaries in 35% of salaries ($720) an
direct trace for staff services is 30% of salaries ($720).

2.2 Add all the cost for (a) select, Install operate, support Hardware and software (b)
Provide SAP support and (c) Provide telecommunication services, we will get the following
cost values for the Provide IT and Telecommunication:
 Table
Select, Install, Operate, Support, Software & 1499.6
Hardware

Provide SAP services 1074.8

Telecommunication 5421.3

Total Cost for Department 7995.7

We include the item of (a) select, Install operate, Support hardware and software, (b)
Provide SAP support and (c) Provide telecommunication services department. We
eliminate the other processes in business management because it is not directly related to
this department and therefore should not be considered as department cost.

4. How would you use the activity analysis and activity cost data that you have developed to
improve operation and better manage costs?
 Background of Activity-based analysis:

Activity-based analysis is a powerful tool for improving operations and for managing costs. By
looking at what tasks are done and how much they cost, we can figure out where money is going
and how to spend it wisely. This helps us see which tasks helpful and which ones are aren't so
useful. So, we can make things better over time and save money. When a company uses this
approach, it can follow its plans step by step and measure success at every level.

This data can be used to improve operational performance by asking whether an activity is
essential (adds value) or it is not essential (nonvalue-added). An activity adds value if there is a
customer or stakeholder for that activity.

Activity Assessment Value Added Non-value added

Benefits of using Activity-based analysis and Activity based costing

Activity based analysis and Activity based costing helps in making better decisions. The 10 step
procedures formulated in Shell Gabon case gives a continuous evaluation of the actual
performance with the standard performance expected. This financial and non financial
performance results explains where the operations are going wrong and helps to make better
decisions to correct these operational failures by using these results.

Activity based costing helps the company to accurately make pricing decisions by allocating the
expenses to most proper cost drivers. Allocation of the costs to precise drivers will result in best
pricing of a product and shows which cost drivers are using more and less costs. The details of
specific cost drivers and its cost allocations can be used to optimise the costs by making changes to
the specific cost driver where the expenses are going higher than expected and thus results in better
management of costs.

Activity-based analysis and Activity based costing gives an idea about the cost structure of the
organisation. Activity based analysis records the major process and activities of each department
and calculate the performances on financial and non financial basis. These financial performances
indicates the clear picture of costs in relation to each activities. Activity based costing gives an idea
about the cost drivers in the operations and the expenses allocated to each cost drivers. These
values from both Activity based costing and Activity based analysis gives an idea about the cost
structure of the organisation which can be used for making decisions for improving operations

Activity based costing helps identify inefficient process where business loss money by identifying
the cost pool driver which is having higher expense. By identifying this cost pool driver, steps can
be taken to better manage cost and improve operations. Setting of benchmarks for comparison of
actual to the standard performances in Activity based analysis will help in identifying activities
which are cost effective and analyse the inefficiencies which can be used to improve operations by
making the required changes.

Reference: https://getcircuit.com/teams/blog/activity-based-costing