Today, the international economy requires financial analysts to: change management methods, apply relevant methods to improve the efficiency of modern economic systems.
Functional cost analysis (FCA) is recognized as one of these fairly innovative methods. Its effectiveness lies in:
- reducing the cost of production resources;
- improving the efficiency of the administrative apparatus;
- downsizing;
- improving performance.
Active development of management systems was accompanied by testing methods for their improvement. Unfortunately, many traditional methods do not meet modern requirements, so it was necessary to create other methods that could penetrate the essence of phenomena and take into account the relationship between systems.
This article will give a detailed answer to the question: what isa functional cost analysis? Is it the most convenient analytical method?
Reasons for creation
It is worth noting that traditional methods appeared and actively developed at the turn of the nineteenth and twentieth centuries. The method of functional cost analysis emerged in the eighties. At a time when traditional ways of calculating costs are no longer relevant and answering the questions asked by entrepreneurs. Since the early 1960s, and especially in the 1980s, the then current cost accounting methods became obsolete.
Traditional cost estimation methods initially:
- invented to evaluate material values;
- were intended for external users. All methods have a number of unexplored points.
The two main disadvantages of traditional methods are that they cannot:
- calculate in detail the production costs of the production process;
- provide the feedback required for operational management.
As a result, company managers are forced to make responsible pricing decisions, in part based on inaccurate cost information. A solution has been found. Functional cost analysis was created to give detailed and complete answers to all questions of managers. It ended up being one of the most important developments in management in the last century.
The method was developed by leading scientists Robin Cooper and Robert Kaplan. These professors identified threeindependent factors that are the main reasons for applying the FSA method in practice:
- The cost structure has changed very significantly over time. At the beginning of the century, labor costs accounted for about half of total costs, material costs thirty-five percent, and other costs fifteen percent. With the development of production, other expenses began to account for about sixty percent, materials - one third, and labor - about ten percent of production costs. The use of labor hours as the basis for allocating costs was relevant in the last century, but with the current cost structure it has lost its economic meaning.
- Competition has increased. Knowing the practical costs is vital to running a profitable business in this reality.
- Advances in technology have reduced the performance of computational measurements. Database scoring systems are now available.
Essence of FSA
Functional cost analysis is an analytical method that gives an estimate of the actual cost of a product or service without reference to the structure of the enterprise. All costs are allocated to products and services in relation to the resources expended required at each stage. The actions performed at these production stages are called functions in the functional cost analysis.
Object
FSA is used to analyze any production processes. Objects of functional cost analysis:
- Products.
- Processes.
- Production structures.
Method task
The task of cost analysis is to ensure the distribution of funds allocated for the production of products or the provision of services for all types of costs in the correct way. The method allows you to evaluate the costs of the enterprise in a visual way.
FAS calculation algorithm
The method of functional cost analysis operates according to the following algorithm:
- Describes the functions required to produce a good or service.
- Functions calculate annual cost and hours required.
- For functions, the characteristic of the cost source measured in units is calculated.
- The total costs of producing a good or service are calculated.
Principles of the modern method
Let's list the principles of functional cost analysis:
- The approach assumes an individual consideration of the object, its components as a variant of the implementation of the functional set required by the user. Finding the most efficient ways to implement these features on this platform.
- Complex approach means consideration of the object in relation to its relation to all processes: development, production, transportation, use, destruction.
- The system approach means considering an object as a system divided intosubsystems, and functions as external and internal, direct and feedback links of the object of analysis.
- The principle of hierarchy implies a step-by-step specification of the analyzed functions and costs for individual components of the analyzed object.
- The principle of joint work of the entire working staff involves the extensive use of creative methods of the entire working team, specially developed methods, and the activation of individual thinking during the FSA.
- The principle of harmonization means that the goals and objectives of the FSA correspond to certain stages of research and development.
- The principle of regulated stage-by-stage implementation of individual processes and sub-processes of the FSA creates conditions for their formalization and automation.
- Principle of continuous evaluation by economic sector experts of all proposals.
- The principle of certain information and organizational support involves the creation of special units of the FSA and specialized information support.
Functional analysis is the basic platform of the FSA methodology. It is a financial tool for identifying the required properties of the object for the end user and the possibilities for its improvement. The cost of production is ultimately the total cost of the features. If some functions are not used in practice, then the costs for them become meaningless.
The principle of a functional approach is the basis of the FSA. In other words, it is one hundred percent understanding, accuracy and analysis of all practical functions. Functional analysis includesyourself:
- formulation of basic functions;
- distribution of functions by class;
- building models;
- determination of costs;
- setting the value of a feature from a consumer point of view;
- selection of functions for analysis.
Despite the variety of types of products and services, the number of functions is much less.
Evaluation of functions in practice comes down to indicators:
- needs;
- aesthetic.
The analysis is based on the fact that useful functions that affect the cost of the product in the object under consideration are always accompanied by auxiliary and useless functions that do not affect the cost of the product.
Advantages and disadvantages of FAS
Here is a list of FSA benefits:
- Accurate knowledge of the final cost of a product or service helps to make the right decisions for any period. Decisions can be about pricing products, choosing the right mix of products, making your own or buying your own products, investing in innovative projects, automating processes.
- Clarity on the functions that enable companies to focus on management functions to improve the efficiency of labor-intensive and material-intensive operations, and to identify and reduce non-value-adding activities.
Let's list the shortcomings of the FSA:
- The work on describing the functions of the method is very time-consuming. Sometimes the FSA model is too complicated,it is difficult to maintain on a permanent basis.
- Often the process of collecting analytical data on sources by function is underestimated by management.
- FSA implementation usually requires automated software products.
- The model quickly becomes obsolete due to changes.
- Method implementation is often seen as an unnecessary financial management requirement, not often supported by operational management.
Application of the method in the modern world of people
Functional cost analysis of personnel management is a research method for studying management functions, aimed at finding ways to reduce costs and increase the level of management functions. The method is used to improve the efficiency of the enterprise. This type of analysis is designed to:
- Choose the best way to build a management system for working with personnel or perform any function of managing a team that requires the least cost and is effective in terms of the results obtained.
- Identify ineffective, unnecessary management functions, determine the degree of centralization and dispersal of functions.
- Apply a system of methods used in building an effective personnel management system.
Functional cost analysis of personnel includes the following steps:
- Initial. At the preparation stage, the state of the system is analyzed in detail, in detail, the analyzed object is selected, the tasks of the ongoinganalysis, a system analysis plan is drawn up.
- Informational. At this stage, the collection, systematization and study of information essential for analysis takes place.
- Analytical. Carrying out the FSA at this stage implies the need to formulate, analyze and classify functions, their decomposition, analysis of interrelated actions between management units, calculation of the costs of performing functions.
- Creative. At the creative stage, the employees of the team put forward ideas and ways to perform managerial functions. Formulation by an initiative group of people on the basis of ideas of options for implementing functions in reality, a preliminary assessment of the most appropriate and real functions. In order to find more options for improving the system, it is recommended to use the following methods (methods): group meetings, team notebook, test questions and other possible ways of creativity of the whole team. The choice of a creative method is carried out based on the structure of the object of analysis and the specific situations that have developed in the process of performing managerial functions in relation to personnel.
- Research. At the research stage, each of the previously selected options is described in detail, they are compared with each other and an assessment is given to each of them, the most reasonable of them is selected for practical implementation, and a system project is developed. The project can cover the entire personnel system or a separate management subsystem, unit, department. Labor costs and duration depend on the essence of the forecasting object.project development.
- Recommendatory. At the recommendations stage, the draft personnel management system developed using the functional method is carefully analyzed and finally approved, and the final decision is made on the process of its implementation, a schedule for the implementation of the analysis is drawn up and approved.
- Innovative. At the stage of implementation of the results of the functional cost analysis of management, psychological, professional, material preparation for the implementation of the result is carried out. A system for stimulating the implementation of the project is being developed, training, retraining and professional development of the working personnel are taking place, and the economic efficiency of the successful implementation of the project is being assessed.
Case study of FSA application
Let's consider a functional cost analysis using the example of choosing a lamp for a desk. We list the main elements of the lamp design in the table below in the text. Let's see in tabular form what role each of the listed elements of the lamp plays and what part of the cost of the entire described object is.
| Element | Performed Role | Necessity, % | Price, % | Performance | |
| 1 | Lamp | Main | 50 | 7 | 7 |
| 2 | Rim | Auxiliary | 10 | 20 | 0, 5 |
| 3 | Cartridge | Fixing | 7 | 12 | 0, 6 |
| 4 | Wire | Providing | 5 | 3 | 1, 7 |
| 5 | Switch | Controlling | 3 | 4 | 0, 75 |
| 6 | Floor lamp | Auxiliary | 10 | 15 | 0, 67 |
| 7 | Basis | Auxiliary | 10 | 35 | 0, 28 |
| 8 | Fork | Providing | 5 | 4 | 1, 25 |
The tabular list lists all required values. Of course, some of the expert assessments can be challenged, but the qualitatively analytical picture is unambiguous. It can be concluded on the basis of a functional cost analysis that the final buyer's decision to purchase a lamp is mainly related to the less significant elements of the table lamp. Tabular calculations give a fairly clearan understanding of where it is necessary to direct forces in order to reduce the ratio of cost and quality to an adequate value for the code as a whole and for all its components. Of course, there is no need to worsen this ratio, but it is necessary to think about improving some of the constituent elements.
FSA results
A feature of the process of functional cost analysis is that the object of research and study is the function of a product, service or process. Its main advantage lies in the fact that it allows not only to show the true idea of the object of study, its functions, properties that are significant for the consumer, but also to see the true causes of unsatisfactory, inadequate quality and high costs. He can offer specific, diverse ways to achieve a reasonable ratio between quality and costs for the functioning of the object under study, its effectiveness. Functional cost analysis is a method of technical and economic analysis. It aims to increase or at least preserve the usefulness of an object from a functional point of view while minimizing the costs of its creation and use, disposal.
The subject of the FSA is the function of the object under study. The functional cost analysis of the system is a universal effective method of reducing the specified parameters and other characteristics of the product according to the selected, specified criterion. Financial analysts take as the basis of the main criterion a ratio of properties defined in a special way,significant to the consumer, per unit of production costs. Optimization occurs through the use of systemic analytical work of the functions of objects, aimed at a significant change in the design of the object, and the search for new ways to perform the specified functions. Conducting a functional cost analysis reflects the current trend of a gradual departure from designing the structure of the material basis of an object to the initial design of its functional structure, which is a fundamental adjustment in the design system.
Cost management is also a process, organized over time, used to achieve continuous improvement in a manufacturing process. The success of the cost management process is due to its ability to notice all opportunities to reduce unnecessary, unnecessary costs for the production of goods, provided that the quality and provenance, the main characteristics and other production factors either meet consumer expectations or exceed them. Continuous improvement over time is the result of fulfilling all the requirements assigned by specialists from the employees of this enterprise. Cost management is a function-oriented method. It differs in that as a result of its use, a perfect technique appears that performs the necessary functions more quickly and easily, with a higher level of quality and more efficient technological processes.
To the question of what is functional cost analysis, this article gives a detailed answer.
