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The Unit Cost Goal
The corporate expectation of "should cost".
Distributing the Unit Cost Goal
All organizations, even in the same business area, are not alike,
The Annual Operating Budget
The funding document that provides the basis for budgetary authority.
The Monthly Unit Cost Report
Cost and performance information to help manage the business.
| The Unit Cost Goal Calculating and knowing the actual unit cost per output is an essential element of managing under unit cost. But, by itself, the unit cost of an output cannot answer the question "how well are we doing?" To address this question, we use a financial benchmark, the unit cost goal. The unit cost goal represents the corporate expectation of "should cost." It is the maximum average total cost to be incurred in the production of an output. To derive the goal, all projected costs (direct, indirect, and G&A) associated with an output are divided by the expected number of units of output (workload). The USD (Comptroller) develops and issues unit cost goals at the DoD component level for each support area. The component is then responsible for subsequently passing specific unit cost goals to subordinate component activities. The unit cost goal is based on historical data, adjusted for known and anticipated changes in the budget year. Some of these anticipated changes may be based on expected increases for the cost of inputs, increased productivity based on improved processes (including new technology), and so forth. The expected quantity of output is based on anticipated demand. Actions such as weapon systems retirements, base closures and changes in force structure should be included in demand projections. |
| Distributing the Unit Cost Goal A unit cost goal is established by the USD (Comptroller) and determined at the component or agency level for each business area. The component should then distribute those goals to the activities involved in performing the function. The intent is to gain visibility of costs and manage those costs at the lowest possible level. However, it is not necessary, desirable nor appropriate to give each activity the same goal. Understanding cost classification and behavior is critical in this process. For example, if a component has several activities in the same functional support area which have similar workloads, capabilities, and cost structures, we might expect the unit cost goal for each activity to be about the same. However, if one activity was in a high cost geographic area and another in a low cost geographic area, it would be reasonable to expect a significant difference in the unit cost goals between the two activities. The unit cost goal established at the component level would have been developed with these considerations in mind. |
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| The Annual Operating Budget The annual operating budget (AOB) is the funding document which provides the basis for earning budgetary authority. The AOB includes an operating and a capital budget. The operating budget identifies every unit cost Output and its associated unit cost goal. The capital budget provides obligational authority for investments. The AOB is released from the USD (Comptroller) to the Military Services and Defense Agencies. The Services and Defense Agencies are responsible to further disseminate budget authority by releasing AOBs with approved unit cost goals to their subordinate activities. An example of an AOB is provided in Appendix B. Unit cost resourcing is the process of using the AOB to make funding allocations based on cost per output and directly tie budgetary authority to the number of outputs produced. It is "business-type" accounting that supports measuring productivity and management decision making by focusing on the relationship of cost to output produced. Unit cost authority is the approval to incur costs. Cost authority "earned" by an activity is determined by multiplying the actual number of outputs produced by the unit cost goal. This is commonly referred to as "earned authority." For example, if the unit cost goal is $100, then for every output actually produced, the producer earns $100 of cost authority; for two units produced, the producer earns $200; for ten units, $1,000 and so forth. This authority becomes the budget within which the activity manages. Unit cost resourcing is a process in which the level of budgetary authority is not fixed. Because it fluctuates with the amount of workload produced, the right amount of resources should be available at the right time. This allows management to focus on production process management as well as overall budget management. |
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| The Monthly Unit Cost Report A monthly unit cost report, the result of the process represented in Figure 3, provides monthly information on execution, by business area. The report, entitled "Costs and Workload Analysis Report", provides costs broken down by labor and non-labor. Costs are further broken down by direct, indirect and G&A categories. Workload data by output is also provided. Appendix C is a sample monthly unit cost report. The information in the report provides the basis for management to analyze the operations of the organization. Comparisons of the monthly information with the annual unit cost goal provides an indicator of "where we are." Uses of unit cost information will be further discussed in the next section. |
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