Functional-cost analysis: history, principles, methods and features

Today, the international economy requires financial analysts: changes in management methods, the application of relevant methods to improve the efficiency of modern economic systems.

Functional-cost analysis (PSA) is recognized as one of such fairly innovative methods. Its effectiveness lies in:

• reduction of costs of production resources;
• improving the efficiency of the administrative apparatus;
• staff reduction;
• improving performance.

The active development of control systems was accompanied by testing methods for their improvement. Unfortunately, many traditional methods do not meet modern requirements, so it took the creation of other methods that could penetrate the essence of phenomena and take into account the interconnections between systems.

This article will give a detailed answer to the question: what is a functional-cost analysis? Is it the most convenient analytical method?

Reasons for creating

It is worth noting that traditional methods appeared and actively developed at the turn of the nineteenth and twentieth centuries. The functional-value analysis method arose in the eighties. At that time, when traditional methods of calculating costs ceased to be relevant and answering questions asked by entrepreneurs. Since the beginning of the sixties, and especially in the eighties, the methods of cost accounting existing for that period of time have become obsolete.

Traditional costing methods initially:

• invented to assess material values;
• Intended for external users. All methods have a number of unworked points.

Two main disadvantages of traditional methods are the impossibility of:

• calculate in detail the production costs of the production process;
• provide feedback required for operational management.

As a result, company managers are forced to make responsible decisions about pricing, in particular, based on inaccurate information about costs. A solution was found. Functional-cost analysis was created to give detailed and complete answers to all questions of managers. As a result, it turned out to be one of the most important developments in management over the past century.

The developers of the method are leading scientists Robin Cooper and Robert Kaplan. These professors identified three independent factors that are the main reasons for applying the FSA method in practice:

• The cost structure has changed significantly over time. At the beginning of the century, labor costs for workers amounted to about half of the total costs, materials costs - thirty-five percent, other expenses - fifteen percent. With the development of production, other expenses began to make up about sixty percent, materials - one third, and labor - about ten percent of production costs. The use of labor hours as the basis for the distribution of costs was relevant in the last century, but with the modern cost structure, this has lost its economic meaning.
• Competition has increased. Knowing the practical costs is vital to running a profitable business in this reality.
• The development of technology has led to a decrease in computational measurements. Database evaluation systems are available today.

The essence of the FSA

Functional-cost analysis is an analytical method that allows you to evaluate the actual cost of a product or service without reference to the structure of the enterprise. All costs are distributed by products and services in relation to the expended resources required at each stage. The actions performed at these production stages in the functional-cost analysis are called functions.

An object

FSA is used to analyze any production processes. Functional value analysis objects:

• Products
• Processes.
• The structure of production.

Method task

The task of the functional-cost analysis is to ensure the distribution of funds allocated for the production of goods 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 functional cost analysis method operates according to the following algorithm:

• The functions required to produce a product or service are described.
• For functions, costs are calculated per year and the number of hours required.
• For functions, the cost source characteristic, measured in units, is calculated.
• The total costs for the production of goods or services are calculated.

Principles of the modern method

We list the principles of functional cost analysis:

• The approach involves an individual consideration of the object, its components as an option for implementing the functional set required by the user. Finding on this platform the most effective ways to implement these functions.
• An approach in a complex means consideration of an object with regards to its relation to all processes: development, production, transportation, use, destruction.
• A systematic approach means the consideration of the object as a system, divided into subsystems, and functions - as external and internal, direct and feedback of the object of analysis.
• The principle of hierarchy implies a phased refinement of the analyzed functions and costs for the individual components of the analyzed object.
• The principle of joint work of the entire working staff implies the extensive use of the creative methods of the entire working team, specially developed techniques, and the activation of individual thinking at the FSA.
• The principle of coordination means that the goals and objectives of the FSA correspond to certain stages of research and development.
• The principle of regulated phased conduct of individual processes and sub-processes of the FSA creates the conditions for their formalization and automation.
• The principle of continuous evaluation by experts of the economic sector of all proposals.
• The principle of certain informational and organizational support involves the creation of special units of the FSA and specialized provision of information.

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 of its improvement. The cost of production is, ultimately, the total cost of the functions. If some functions are not used in practice, then the costs of them become meaningless.

The principle of a functional approach is the basis of the FSA. In other words, this is a complete understanding, accuracy and analysis of all practical functions. Functional analysis includes:

• formulation of core functions;
• distribution of functions by classes;
• building models;
• determination of costs;
• setting the value of the function from the point of view of the consumer;
• selection of functions for analysis.

Despite the variety of types of products and services, the number of functions is much smaller.

The evaluation of functions in practice is reduced to indicators:

• need;
• aesthetics.

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 the benefits of FSA:

• Accurate knowledge of the final cost of a product or service helps you make the right decisions for any period. Decisions may concern the setting of prices for products, the correct combination of products, the choice between the ability to produce independently or buy goods, investing in innovative projects, and automating processes.
• Clarity with respect to functions due to which companies manage to pay attention to managerial functions related to increasing the efficiency of labor-intensive and material-intensive operations, to identify and reduce the volume of operations that do not add value to goods.

Here is a list of FSA flaws:

• The work on the description of the functions of the method is very laborious. Sometimes the FSA model is too complex, it is difficult to maintain on an ongoing basis.
• Often the process of collecting analytical data on sources by function is underestimated by management.
• For the implementation of FSA, automated software products are usually required.
• The model quickly becomes obsolete due to changes.
• The implementation of the method is often seen as an excessive requirement of financial management, and is rarely 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 implementation of managerial functions. The method is used to improve the efficiency of the enterprise. This type of analysis was created in order to:

• Choose the best way to build a management system for working with personnel or performing any team management function, which requires the least cost and is effective in terms of the results obtained.
• Identify ineffective, unnecessary managerial functions, determine the degree of centralization and dispersal of functions.
• Apply the system of methods used in building an effective personnel management system.

Functional-cost analysis of personnel includes the following stages:

• Elementary. At the preparation stage, the state of the system is analyzed in detail, in detail, the object to be analyzed is selected, the tasks of the analysis are formulated, a system analysis plan is drawn up.
• Informational. At this stage, there is a collection, systematization and study of information essential for analysis.
• Analytical. Conducting the FSA at this stage implies the need for the formulation, analysis and classification of 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 of performing managerial functions. Formulation by an initiative group of people based on the ideas of options for the implementation of 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 the creative method is based on the structure of the object of analysis and specific situations that have developed in the process of performing managerial functions in relation to staff.
• Research. At the research stage, each of the previously selected options is described in detail, a comparison is made between them and each of them is evaluated, the most reasonable of them for practical implementation is selected, a system design is developed. The project may cover the entire personnel system or a separate management subsystem, unit, department. The labor costs and the duration of the project development depend on the nature of the forecasting object.
• Recommender. At the recommendations stage, the personnel management system project developed using the functional method is carefully analyzed and finally approved, and the final decision on the process of its implementation is made, a schedule for the implementation of the analysis is drawn up and approved.
• Promotional. 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 raising the professional level of working staff are being carried out, and the economic efficiency of successful project implementation is being evaluated.

Case study of FSA

Consider the functional-cost analysis on the example of choosing a lamp on a desk. We list the main elements of the design of the lamp in the table below in the text. Let us see in tabular form what role each of the listed lamp elements plays and what part of the cost of the entire described object is.

The table list lists all the required values. Of course, some of the expert assessments can be challenged, but the qualitatively analytical picture is unambiguous. A conclusion can be drawn on the basis of a functional-cost analysis; the end customer’s decision to purchase a lamp is mainly associated with less significant elements of a table lamp. Tabular calculations give a fairly clear understanding of where it is necessary to direct forces in order to reduce the ratio of cost and quality to the adequate value for the code as a whole and for all its components. Of course, there is no need to worsen this ratio, but you need to think about improving some of the constituent elements.

FSA Results

The feature of the process of functional-cost analysis is that the object of research and study are the functions of the product, service or process. Its main advantage is that it allows not only to show the true idea of ​​the object of study, its functions, properties significant for the consumer, to see the true reasons for unsatisfactory, inadequate quality and high costs. He can offer specific, diverse ways to achieve a reasonable balance between quality and the cost of functioning of the investigated object, its effectiveness. Functional-cost analysis is a method of technical and economic analysis. It is aimed at increasing or at least maintaining the utility of the object from a functional point of view while minimizing the costs of its creation, use, disposal.

The subject of the FSA is the function of the investigated object. 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. The basis of the main criterion is taken by financial analysts to determine in a special way the ratio of properties significant for the consumer per unit of production costs. Optimization occurs through the use of system 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 given functions. 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, organizational in time, used to achieve continuous improvement of the production process. The success of the cost management process is explained by its ability to notice all the possibilities of reducing unnecessary, unnecessary costs for the production of goods, provided that the quality and reliability, basic 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 staff 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.