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rm_e_4cp_p.jpg ABC Costing Manual 2012-13 Copyright © Royal Mail 2013 Issued By: Royal Mail Group Ltd Date: March 2013 Version: 2012-3
Transcript of ABC Costing Manual - Royal Mail Group Costing... · ABC Costing Manual . 2012-13 . ... RAG...
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ABC Costing Manual
2012-13
Copyright © Royal Mail 2013 Issued By: Royal Mail Group Ltd Date: March 2013
Version: 2012-3
Version Control
Version Comments
1.0 Issued March 2011
2010-4 Issued July 2011
2011-1 Issued September 2011
2011-3 Issued March 2012
2012-1 Issued September 2012
2012-2 Issued December 2012
2012-3 Issued March 2013
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Glossary
Term Description
ABC Model Activity Based Costing Model.
Activity Driver A measure of the frequency and intensity of the demands placed on activities by products. It is used to assign costs to products.
Activity Module A primary component of ABC Modelling, the activity module represents the activities undertaken by the organisation.
AMU Royal Mail's Address Management Unit
Attribute Characteristics of resources, activities, and products. The attributes are held as static data but can be altered every time the model is run, if required to meet business needs.
Business Area Tertiary organisational area of the business within a Business Unit, e.g. Delivery Office.
Business Sustaining Management activities related to running the business.
Business Unit Secondary organisational area of the business, e.g. Letters Operations.
C&NA Commercial & Network Access
Collection Collection and acceptance of mail from post boxes, post offices and businesses.
Commercial Marketing and Sales activity in the management of products offered to the retail market.
Cost Centre The basic unit of responsibility in an organisation for which costs are accumulated. This could be a production or service location, function, activity or item of equipment.
Cost Element Individual General Ledger account level detail, e.g. Basic Pay, Overtime, and National Insurance.
Cost Type A grouping of similar cost elements, e.g. Pay, accommodation etc.
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Term Description
Customer An individual, group of individuals or organisation that purchases Letter’s products.
Delivery – Indoor Sorting of the mail to specific delivery routes and then sequenced to final delivery point in preparation for the actual delivery to individual addressed delivery points.
Delivery – Outdoor Taking the mail from the Delivery Office and delivering to the individual addressed delivery points.
DO Delivery Office
Downstream Access (DSA) Other providers of mail services can bring their mail to Royal Mail for delivery to final destination.
General Ledger Royal Mail use of the SAP R3 General Ledger system.
International Operations Processing centre dealing with international import and export mail items.
Inward Mail Centre (IMC) Inward Mail Centre. i.e. the part of a mail centre dedicated to inward processing, i.e. sorting mail by DO, rather than forwarding to another mail centre
Local Distribution (LD) Distribution of mail between Mail Centres and Delivery Offices.
Letters Letters business unit
Mail Centre (MC) Processing centre dealing with single piece mail items.
MCS Mails Characteristics Survey
Manager Grouping A grouping of Payroll Grade Codes.
Network Distribution of mail between Mail Centres, International Operations and RDCs moving the mail closer to its final delivery destination.
Network Access Management of products offered to the downstream access market.
NIPOC National Insurance Post Office Contributions.
Organisation Unit Level at which cost centres and various
Term Description
driver data are grouped for purposes of calculations in the ABC Model, e.g. Chesterfield Delivery Office.
Pay Premium A grouping of Payroll Cost Elements.
PC Postcode
Perform Mailroom Management Provision of mailroom services to businesses where their mail is prepared to meet internal sorting specifications.
Product The products and services offered by Letters.
Product Module A primary component of ABC Modelling, the product module represents the products, customers, countries and markets of the organisation (Outputs).
RAG Regulatory Accounting Guidelines
Regional Distribution Centres (RDC) Processing centre dealing with bulk containerised mail.
Resource Drivers A measure of the quantity of resources consumed by an activity.
Resource Module A primary component of the ABC Model with the resource module representing the cost base of the organisation.
Routing Matrix The Routing Matrix details the path products take through the pipeline.
SPHCC Sales Product Handling Characteristic Combinations are sub-products of sales products.
SSC Standard Selection Codes
SUPPOC Employers Staff Pensions Contributions.
Support General activities providing support to other business processes.
Walk Bundling Centre (WBC) The preparation of unaddressed mail to Delivery Office walk.
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Contents
1.0 Introduction 10 1.1 Letters Operational Processes 11 1.2 ABC Overview 12 1.3 Maintenance Process 13 1.4 Audit Process 14 1.5 Change Control Process 14
2.0 Resource Module 15 2.1 Payroll System Expenditure Records 17 2.1.1 Consolidation of Payroll Grades 18 2.1.2 Consolidation of Payroll Accounts 18 2.1.3 Consolidation of Pay Expenditure Types 18 2.1.4 Employers National Insurance and Pensions Cost Reattribution
Methodology 19 2.2 General Ledger Expenditure 20 2.2.1 Treatment of GL Cost Centres 20 2.2.2 Treatment of GL Expenditure Codes 21 2.3 Treatment of Vehicle Services 22 2.4 Non-staff Cost Types 22 2.4.1 Accommodation 23 2.4.2 Compensation 23 2.4.3 Computers 24 2.4.4 Consumables 24 2.4.5 Cost of Sales 24 2.4.6 Transportation 24 2.4.7 Bicycles 24 2.4.8 Consultancy 24 2.4.9 Customer Management 25 2.4.10 Depreciation 25 2.4.11 Finance 25 2.4.12 Holiday Pay Accrual 25 2.4.13 Interbusiness 25 2.4.14 Marketing 26 2.4.15 Miscellaneous 26 2.4.16 Non-Operational 26 2.4.17 Overseas Delivery and Transportation 26 2.4.18 Plant Maintenance 26 2.4.19 Postage 26 2.4.20 Staff Relocation 26 2.4.21 Staff Related Costs 26 2.4.22 Street Furniture 26 2.4.23 Uniforms and Workwear 27 2.4.24 Vehicle Costs 27 2.5 Entering Cost Adjustments 27 2.6 Maintenance of Resource Module 29
3.0 Resource Drivers 30 3.1 Operational Resource Drivers 30
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3.1.1 Operational Staff Hours 30 3.1.2 Consolidated SHRS Drivers 31 3.1.3 Vehicle Hours 32 3.1.4 Machine Hours 33 3.1.5 Accommodation Square Metres 34 3.1.6 System Generated Consolidated Drivers 35 3.1.7 Costing of Services 35 3.2 Non-Operational Resource Drivers 35 3.2.1 Post Office Limited (POL) 37 3.2.2 Customer Experience 37 3.2.3 Stamps and Collectables 37 3.2.4 Commercial 37 3.2.5 Financial Services 37 3.3 Maintenance of Resource Drivers 37
4.0 Activity Module 39 4.1 Business Processes and Activities 40 4.2 Classification of Activities 42 4.3 Maintenance of Activity Module 42
5.0 Activity Drivers 43 5.1 Operational Activity Drivers 43 5.1.1 Routing Matrix Drivers 44 5.1.1.1 SPHCC Weightings 46 5.1.1.2 Weighted Traffic Volumes 48 5.1.1.3 Derivation of Collection SPHCC Weightings 49 5.1.1.4 Derivation of Outward and Inward Mail Centre SPHCC Weightings 50 5.1.1.5 Derivation of Outward and Inward RDC SPHCC Weightings 51 5.1.1.6 Derivation of Delivery Indoor SPHCC Weightings 51 5.1.1.7 Derivation of Delivery Outdoor SPHCC Weightings 52 5.1.1.8 Derivation of International Operations SPHCC Weightings 54 5.1.1.9 Network 55 5.1.1.10 Local Distribution 55 5.1.2 Operational Direct One to One Mapping 55 5.2 Non-Operational Activity Drivers 56 5.2.1 Non-Operational Direct One to One Mapping 56 5.2.2 Post Office Limited (POL) 56 5.2.3 Customer Experience 57 5.2.4 Stamps and Collectables 57 5.2.5 Commercial 57 5.2.6 Financial Services 57 5.2.7 Manage Services 57 5.2.8 Compensation 57 5.2.9 Services 58 5.3 Allocation of Overhead Activity Costs 59 5.3.1 Allocation Based on Pipeline 59 5.3.2 Allocation Based on Groups of Products 61 5.4 Maintenance of Activity Drivers 62
6.0 Product Module 63 6.1 Product Module Structure 63 6.2 Classification of Products 65
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6.3 Products with no Cost 65 6.4 Universal Service Obligation (USO) Categorisation 65 6.5 Maintenance of Product Module 65
7.0 Class Costing 66 7.1 Assessment Approach 67 7.2 Deployment in ABC Model 68 7.2.1 Cost Types to Class Activities 69 7.2.2 Class Activity to Product 70 7.3 Class Costing – Economy Approach 71 7.3.1 RDC 71 7.3.2 Collection 71 7.4 Maintenance of Class Costing 72
8.0 Zonal Costing Methodology 73 8.1 Introduction 73 8.2 Relevant Costs 73 8.3 Principles and Rationale 74 8.4 Allocating Postcode Sectors to Zones 76 8.4.1 Introduction 76 8.4.2 London 77 8.4.3 Non-London 78 8.5 Allocating Costs to Zones 81 8.5.1 Introduction 81 8.5.2 Data 81 8.5.3 Inward Mail Centres Costs 83 8.5.4 Local Distribution Costs 83 8.5.5 Delivery Office Costs 84 8.5.5.1 Delivery Costs by Delivery Office 84 8.5.5.2 Delivery Staff Costs by Postcode Sector 84 8.5.6 Total Annual Cost 85 8.5.6.1 Total Annual Cost for Each Postcode Sector 85 8.5.6.2 Total Annual Cost by Zone 85 8.6 Conclusion 86
Annex A Guiding Principles 87
Annex B Methodological Principles 89
Annex C Zonal Costing Background and Historical Position 96
Annex D Zonal Costing Regression to estimate non-London staff costs by postcode sector 97
Annex E Zonal Costing Allocation changes of postcode sectors to zones100
Annex F MCS methodology and statistical accuracy of the MCS volume distribution In Zonal Costing 101
Annex G Zonal Costing List of Sources 102
Annex H Cross-references between Ofcom's October 2011 proposals and their implementation in Zonal Costing 103
Annex I Technical Appendices Contents 105
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Table of Figures
Figure 1.1.i Letters Operational Processes............................................................ 11 Figure 1.2.i Letters ABC Model.............................................................................. 12 Figure 2.0.i Resource Module................................................................................ 15 Figure 2.1.i Payroll Cube Data Structure ............................................................... 17 Figure 2.1.ii Transformation of Payroll Cube Data to ABC Payroll Record............. 17 Figure 2.1.4.i NIPOC – SUPPOC Reattribution Illustration....................................... 19 Figure 2.2.1.i GL Cost Centre to ABC Business Area Mapping................................ 21 Figure 2.2.2.i Illustration Of Mapping of GL Codes to ABC Cost Types ................... 22 Table 2.5.i Cost Adjustments................................................................................ 27 Figure 3.0.i Resource Drivers ................................................................................ 30 Table 3.2.i Cost Types that are Directly Attributed to Activities ............................ 36 Figure 4.0.i Business Process and Activity Hierarchy............................................ 39 Figure 4.0.ii Activity Module.................................................................................... 39 Table 4.1.i Business Processes and Descriptions................................................ 40 Figure 5.0.i Activity Drivers .................................................................................... 43 Figure 5.1.1.i Routing Matrix Illustration ................................................................... 44 Table 5.1.1.1.i Weighting Factor Rules ................................................................. 46 Table 5.1.1.1.ii Illustration of Industrial Engineering Analysis................................ 48 Figure 5.1.1.2.i Weighted Traffic Volume Illustration ............................................. 49 Table 5.1.1.3.i Collection Sub-Activities ................................................................ 49 Figure 5.1.1.7.i Illustration of Delivery Proportions by Delivery Route................... 52 Figure 5.1.1.7.ii Unmotorised to Motorised Switching Illustration .......................... 53 Table 5.1.1.7.iii Delivery Outdoor Sub-Activities.................................................... 53 Figure 5.2i Activity mapped to single SPHCC...................................................... 56 Figure 5.2ii Activity mapped to many SPHCCs..................................................... 56 Figure 5.3.1.i Overhead Allocation ........................................................................... 59 Table 5.3.1.ii Pipeline Overhead Allocation Rules.................................................... 60 Figure 5.3.2.i Illustration of Overhead Allocation ...................................................... 61 Table 5.3.2.ii Product Overhead Allocation Rules .................................................... 61 Figure 6.0.i Product module................................................................................... 63 Table 6.1.i Size Tariff and Costing Options for Inland Products ........................... 64 Figure 6.1.ii Illustration Of Product Hierarchy ......................................................... 64 Figure 7.0.i Class Costing Methodology ................................................................ 66 Figure 7.2.i Creating Class Activities ..................................................................... 68 Table 7.2.1.i Class Costed Cost Types by Business Process ................................. 69 Figure 7.2.2.i Class Activity to Sales Products ......................................................... 70 Figure 7.2.2.ii Activity to Products Assignment...................................................... 70 Table 7.3.2.i Saturday Collection Assessment Illustration ....................................... 72 Figure 8.3.i Flow diagram of the main components in the methodology................ 76 Figure 8.4.1.i Sequence of time periods for building and using the zonal costing model ............................................................................................................ 77 Figure 8.4.3.i Map of postcode sectors to zones ...................................................... 80
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1.0 Introduction
Royal Mail processes and delivers around 70 million letters and packages to 28 million addresses each working day, in line with its unique Universal Service Obligation (USO) which is required under the Conditions issued to Royal Mail in 2011, and more generally by the European Union. The Royal Mail Activity Based Costing (ABC) system (ABC Model) forms the basis of the businesses understanding of the cost of providing the range of products for both USO and non USO areas. As Royal Mail’s cost accounting system, the outputs are used to inform the preparation of the Regulatory Financial Statements as required under General Authorisation Condition Acc1.
The purpose of this document is to describe how the ABC Model is constructed, processed and updated, thereby providing transparency of the ABC methodology (calculation) that is applied in the cost calculation of the products provided by Royal Mail and as required by the Guiding and Methodological Principles(1). It then provides an overview of the Letter’s processes, followed by a description of the ABC methodology through a descriptive walkthrough of the ABC Model itself using the key stages in ABC, namely;
Section 2: Resource Module – details what business costs are used in the costing;
Section 3: Resource Drivers – details how business costs are attributed to the activities;
Section 4: Activity Module – details the business activities;
Section 5: Activity Drivers – details how the activity costs are attributed to the outputs, i.e. products;
Section 6: Cost Object Module – details the costed outputs
Section 7: Class Costing – details the approach to class costing; and
Section 8: Zonal Costing – details the approach to zonal costing.
This document does not include any detail regarding the contents of the Regulatory Reporting Framework, nor does it include any of the input or output data relating to regulatory reporting.
1) Document available from www.ofcom.org.uk and reproduced in Annex A and Annex B
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1.1 Letters Operational Processes 1.1 Letters Operational Processes
The ABC Model covers in detail all of the Letters processes within the operational pipeline. The operational pipeline includes: The ABC Model covers in detail all of the Letters processes within the operational pipeline. The operational pipeline includes:
National coverage for daily collections from street boxes, post offices and customer premises across the UK;
National coverage for daily collections from street boxes, post offices and customer premises across the UK;
Processing involving mail sorting (including overnight in the case of all first class services);
Processing involving mail sorting (including overnight in the case of all first class services);
Distribution of mail between processing centres; and Distribution of mail between processing centres; and
Final delivery of mail. Final delivery of mail.
Figure 1.1.i provides an overview of the Letters operational pipeline. Figure 1.1.i provides an overview of the Letters operational pipeline.
Figure 1.1.i Letters Operational Processes Figure 1.1.i Letters Operational Processes
CollectionOutward Mail
CentreNetwork
DistributionInward Mail
CentreLocal
DistributionDelivery
Outward Regional
Distribution Centre
Walk Bundling Centre
Inward Regional
Distribution Centre
International Processing
Downstream Access
Mail can enter the operational process at a number of different points depending on the customer and how the mail is presented. Typically, mail is collected from a number of facilities including street pillar boxes and post offices (from Post Office Limited). Mail is also delivered direct to Inward Mail Centres from Downstream Access customers. Incoming International mail arrives at the International operations facilities, and Walk Bundling Centres (WBC) accepts unaddressed mail for processing prior to distribution to Delivery Offices. For business customers with large mail volume postings (Bulk sorted mail), these postings are accepted at Regional Distribution Centres (RDC) for processing before transfer to Mail Centres.
Mail can enter the operational process at a number of different points depending on the customer and how the mail is presented. Typically, mail is collected from a number of facilities including street pillar boxes and post offices (from Post Office Limited). Mail is also delivered direct to Inward Mail Centres from Downstream Access customers. Incoming International mail arrives at the International operations facilities, and Walk Bundling Centres (WBC) accepts unaddressed mail for processing prior to distribution to Delivery Offices. For business customers with large mail volume postings (Bulk sorted mail), these postings are accepted at Regional Distribution Centres (RDC) for processing before transfer to Mail Centres.
Mail is transferred around the country using the network routes of road, rail and air to achieve the necessary national distribution. On arrival at the Inward Mail Centre, the mail is further sorted to individual Delivery Offices and transferred via Local Distribution to the individual Delivery Office for final delivery. Some products are offered with a level of compensation available in the event of damage or loss (e.g. Special Delivery). To accommodate this discrete processing areas are utilised and transfers of items between operational sites are documented.
Mail is transferred around the country using the network routes of road, rail and air to achieve the necessary national distribution. On arrival at the Inward Mail Centre, the mail is further sorted to individual Delivery Offices and transferred via Local Distribution to the individual Delivery Office for final delivery. Some products are offered with a level of compensation available in the event of damage or loss (e.g. Special Delivery). To accommodate this discrete processing areas are utilised and transfers of items between operational sites are documented.
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Mail that has an overseas destination is transferred to the International processing facility where it undergoes sorting, customs and security checks prior to despatch to either an air or sea port for transportation.
Mail that has an overseas destination is transferred to the International processing facility where it undergoes sorting, customs and security checks prior to despatch to either an air or sea port for transportation.
1.2 ABC Overview 1.2 ABC Overview
ABC methodology is applied to the Letters business unit covering all the activities performed, the expenditure incurred and the Letters products provided. Figure 1.2.i provides an illustration of the ABC Model.
ABC methodology is applied to the Letters business unit covering all the activities performed, the expenditure incurred and the Letters products provided. Figure 1.2.i provides an illustration of the ABC Model.
Figure 1.2.i Letters ABC Model Figure 1.2.i Letters ABC Model
General Ledger and Payroll
Resource Drivers
Activity Drivers
CT
CT
50.00Overtime
Expenditure Records
Value
Standard Pay 10,000.00
Etc …
Expenditure Records
Value
50.00Overtime
Standard Pay 10,000.00
Etc …
Resource Module Product Module
Products &
Services
Activity Module
The ABC Model incorporates generic ABC principles, namely: The ABC Model incorporates generic ABC principles, namely:
It is the activities of the organisation that consume the organisation’s resources; and
It is the activities of the organisation that consume the organisation’s resources; and
It is the outputs of the organisation that determine the level of the organisation’s activities.
It is the outputs of the organisation that determine the level of the organisation’s activities.
The ABC Model is held on a SAP Business Warehouse (BW) platform and, where appropriate, links to existing data sources are also held on the BW platform, which follows standard BW functionality by holding data stored in multidimensional cubes.
The ABC Model is held on a SAP Business Warehouse (BW) platform and, where appropriate, links to existing data sources are also held on the BW platform, which follows standard BW functionality by holding data stored in multidimensional cubes.
The ABC Model design consists of three major steps; The ABC Model design consists of three major steps;
Data sourcing: extraction of data from other business systems, e.g. General Ledger, Payroll;
Data sourcing: extraction of data from other business systems, e.g. General Ledger, Payroll;
Cost processing: the actual calculation of data; and Cost processing: the actual calculation of data; and
Reporting: the actual costs of activities and products. Reporting: the actual costs of activities and products.
The process undertaken in maintaining and populating the ABC Model is described in section 1.3. The process undertaken in maintaining and populating the ABC Model is described in section 1.3.
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An important constraint of the model design is that it calculates the national average cost for the activities performed and the average cost of the products handled. The cost calculated, of the average item, is consistent with the national tariff structure that is in place for the majority of the products provided by Letters. The ABC Model does not calculate the actual cost of a particular item of mail processed at a specific processing centre.
The ABC Model is built around the standard three modules, namely;
Resource Module: the resources used in processing products and services, including, for example staff, vehicle, machine, property costs, etc.;
Activity Module: the activities undertaken by the business including, for example, mail processing and delivery; and
Product Module: the outputs (products) of the business activities, including, for example, first class letters.
The resources used by the business (e.g. cost of staff, vehicles, property) are attributed to activities using resource drivers. Resource drivers (e.g. staff hours) represent a meaningful basis of attributing the costs incurred to the activities that consumed those resources.
The activity costs, as calculated through the application of resource drivers, are attributed to products using activity drivers. An activity driver is a meaningful basis of attributing the activity cost to the products that were handled by that activity (e.g. sorting letters). All of these are explained in more detail in subsequent sections of this document.
The outputs of the ABC Model are used to support internal decision making and external reporting, in particular the Regulatory Reporting Framework. This document does not cover the details regarding the Regulatory Reporting Framework, but does cover the requirement for an annual examination of the ABC Model by an independent external auditor.
1.3 Maintenance Process
The deployed maintenance approach to data sets in the ABC Model is designed to meet two key requirements:
Close alignment to operational reality; and
The ABC Model processing schedule.
The ABC Model processes quarterly sets of data e.g. January – March, April – June, within 8 weeks of the quarter ending. Some business data is collected on a monthly basis in readiness for quarterly processing and is reviewed on receipt, testing for inconsistencies and new records. Additionally some data is captured annually and is input to the system as part of an annual data refresh.
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As part of the data and system maintenance and governance process, the costing team are involved with a number of cross functional working groups and leverage knowledge from this network to understand the impact on the ABC Model from changes in operational activities and data sources.
The specific maintenance process relevant to each part of the ABC Model is described in the relevant sections below.
1.4 Audit Process
The ABC Model is subject to an annual external audit. This audit2 evaluates the integrity of processes, as described, that underpin the data preparation and ABC Model calculations, which in turn are used to produce the annual Regulatory Statements. The audit activity includes onsite visits covering the main suppliers of financial and non financial data used in the ABC Model, and the costing team as custodians of the ABC Model. These activities focus on the following key areas;
System Walkthroughs: These replicate the mappings and calculations carried out when sourcing cost data from Payroll and the GL, and in creating the relevant resource drivers used by the ABC Model;
Reconciliations: Reconciling cost data within the ABC Model to Payroll and the GL whilst also ensuring the ABC Model reconciles to the statutory accounts. Reconciliations are also performed to ensure costs within all modules of the ABC Model reconcile to each other;
Cost Adjustment Journals: The ABC Model has the capacity to process journal entries recording costs at Business Area and Cost Type level. All cost adjustments are fully documented and are reviewed for consistency to prior quarters and to ensure the adjustment is completed as defined; and
Arithmetical Rules: the audit includes a review of changes to data held in tables maintained in the ABC Model to ensure that any changes in the underlying data have been explained in relevant documentation.
1.5 Change Control Process
Royal Mail conforms to the requirements as set out in General Authorisation Condition Acc13.
2 The audit confirms that the audited section of the Regulatory Financial Statements has been prepared using the “Regulatory accounting principles and basis of preparation” as disclosed in the Regulatory Financial Statements and with the requirements of General Authorisation Condition Acc1.
3 Document available from www.ofcom.org.uk
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2.0 Resource Module 2.0 Resource Module
The resource module is a record of all the costs appropriate to the scope of the ABC Model for the products that are handled by the business activities. These costs can be broadly classified as being staff costs, non-staff costs and depreciation. Figure 2.0.i illustrates the area of the ABC Model that is being described in this section.
The resource module is a record of all the costs appropriate to the scope of the ABC Model for the products that are handled by the business activities. These costs can be broadly classified as being staff costs, non-staff costs and depreciation. Figure 2.0.i illustrates the area of the ABC Model that is being described in this section.
Figure 2.0.i Resource Module Figure 2.0.i Resource Module
There are two sources for expenditure records, namely the Payroll system for staff expenditure records and the General Ledger (GL) for non staff expenditure records including the statutory account system. Although the GL contains staff cost expenditure, it does not include sufficient detail on the type of staff expenditure, for example staff grade. The GL includes interbusiness transactions which are those from other businesses outside of Letters but within the Royal Mail Group e.g. Post Office Limited and Central Group Functions. The interbusiness charge from POL covers the provision of counter services and mailwork. Counter services include the selling of products and collecting of revenues. Mailwork includes acceptance of mail volumes and the provision of accommodation facilities to enable local delivery activities to be performed. Central group functions covers areas such as treasury, communications and secretariat.
Resource Module
General Ledger and Payroll
CT
CT
Resource Drivers
Activity Drivers
Products &
Services
50.00Overtime
Expenditure Records
Value
Standard Pay 10,000.00
Etc …
Expenditure Records
Value
50.00
Standard Pay 10,000.00
Overtime
Etc …
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The GL is constructed in a traditional way using a combination of cost centres and expenditure codes to record costs incurred and recognises that some of these costs may be incurred by Letters for activities that are relevant to other parts of Royal Mail Group. For example, Customer Services support both Parcelforce Worldwide and POL. The ABC System deals with this by attributing relevant trading business costs to trading business specific activities.
The ABC Model undertakes a series of consolidation exercises on the financial data from both of these source systems. The key reason for this is that the ABC Model is designed to calculate the average cost of activities and products; hence the granularity of much of the financial data is too detailed. Retention of the granularity of source data would only lead to processing unnecessarily large quantities of data.
Consolidating GL cost centres generates an aggregated business area view, where a business area represents a group of similar types of operating facility, for example Delivery Offices, or processing centres.
Consolidating expenditure records to ABC cost types is built on the principle of the application of common resource drivers to the expenditure records. Cost types represent the levels at which costs are attributed to activities within the ABC Model using the identified resource driver. For example, there may be twenty individual GL expenditure records to cover the general theme of accommodation expenditure. The floor space that each activity occupies/utilises within the building has been identified as an appropriate driver for attributing the accommodation costs of that building to the activities performed within that building. Given that the resource driver is the same for each of the individual expenditure records, there is little value in attributing twenty individual GL expenditure records when they could be combined into one cost type and attributed on a single basis.
This section is structured around the two sources of financial data, namely Payroll and GL and for each, the outcome of the consolidation of the financial data for use within the ABC Model is described.
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2.1 Payroll System Expenditure Records 2.1 Payroll System Expenditure Records
The payroll system is constructed based on pay records per employee. It is neither necessary nor appropriate to retain individual employee pay data for the purpose of activity and product costing. Therefore, the actual source of the payroll costs is not taken from the payroll system itself, but from the BW data cube that holds payroll expenditure used for business reporting. The format of the data held in the payroll cube is detailed in Figure 2.1.i.
The payroll system is constructed based on pay records per employee. It is neither necessary nor appropriate to retain individual employee pay data for the purpose of activity and product costing. Therefore, the actual source of the payroll costs is not taken from the payroll system itself, but from the BW data cube that holds payroll expenditure used for business reporting. The format of the data held in the payroll cube is detailed in Figure 2.1.i.
Figure 2.1.i Payroll Cube Data Structure Figure 2.1.i Payroll Cube Data Structure
Payroll Payroll Cube
Cost Centre
Period
Grade code
Account code
Pay
Data from the Payroll Cube requires further pre-processing before it can be used in the ABC Model which involves consolidation of pay grades and of pay expenditure types.
Data from the Payroll Cube requires further pre-processing before it can be used in the ABC Model which involves consolidation of pay grades and of pay expenditure types.
The transformation of the payroll cube records to those used in the ABC Model is detailed in Figure 2.1.ii The transformation of the payroll cube records to those used in the ABC Model is detailed in Figure 2.1.ii
Figure 2.1.ii Transformation of Payroll Cube Data to ABC Payroll Record Figure 2.1.ii Transformation of Payroll Cube Data to ABC Payroll Record
NIPOC Reattribution (See Section 2.1.4)
Payroll Payroll Cube
Cost Centre
Period
Grade code
Account code
Pay
Business Area
Period
Manager/Non Manager/Engineer
Pay Type
Cost
Business Area
Quarter
Cost
Cost Type
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2.1.1 Consolidation of Payroll Grades
The payroll system holds information on all pay grades. As would be expected, there are different rates of pay associated with different pay grades which reflects the terms and conditions that are applicable for roles within the business. The variation in pay rates reflects, for example, the type of role, the type of contract (full time, fixed term) and the geographical location of the role (e.g. London) etc. Much of these criteria have been deemed not relevant for the calculation of activity and product costs, primarily because the business operates on a national level and the pricing structure in place for the majority of our customers is based on a national tariff. The consolidation of payroll grades creates four staff grades for the ABC Model, namely manager, non manager, drivers and engineers.
The ABC Model contains a table which links the payroll grade code and staff grades.
2.1.2 Consolidation of Payroll Accounts
The payroll system holds information for all individual payroll accounts. The payroll accounts are consolidated into five pay types for the ABC Model:
Pay;
Shift;
Driving;
Employer National Insurance (NIPOC); and
Employer Pensions (SUPPOC).
The National Insurance and pension costs are attributed, where appropriate, across the other pay types as a final consolidation process. For more detail please see Section 2.1.4
The ABC Model contains a table that links the payroll account code and pay types.
2.1.3 Consolidation of Pay Expenditure Types
The Payroll Cube is the source of staff pay costs used in the ABC Model except for agency staff and the accounting treatment of holiday pay accrual and IFRS pension’s adjustment. For these three areas of staff cost the values are taken from the GL. The ABC Model uses the following staff cost types to consolidate payroll expenditure pay types;
Pay manager;
Pay non-manager;
Pay manager shift;
Pay non-manager shift;
Pay driving supplement;
Pay engineers; and
Pay driving grades.
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The ABC Model contains a table that links grouping of pay and pay types to cost types.
2.1.4 Employers National Insurance and Pensions Cost Reattribution Methodology
National Insurance contributions (NIPOC) are paid by Letters to build up employee’s entitlement to certain social security benefits, including the state pension. NIPOC is payable on pay and allowances. Therefore to align this cost to the type of work carried out in incurring this cost, it is appropriate to reattribute it across these pay types.
Similarly the business makes payments towards an individual’s pension (SUPPOC), though not all pay types are pensionable. Therefore, again to align this cost to the type of work that is carried out in incurring the cost it is appropriate to reattribute to those pay types that incur the cost.
Costs in the payroll cube are held by grade as detailed in Section 2.1.1 and account codes as detailed in Section 2.1.2.
NIPOC average rates are calculated annually for all staff grades. These rates are used in the allocation of NIPOC to other account types in the ABC Model by multiplying the costs associated with an account other than the standard pay code by the NIPOC rate and attributing the difference between these calculated costs and that posted in the ledgers to the standard pay code.
NIPOC and SUPPOC are attributed over the appropriate prime staff costs in line with PAYE directives and pay terms and conditions for each grade. These can be seen by reference to the worked illustration given below in Figure 2.1.4.i, which shows how NIPOC and SUPPOC are reattributed over pay, shift and driving.
Figure 2.1.4.i NIPOC – SUPPOC Reattribution Illustration
Grade Ordinary Postal Grade
NIPOC % 9.5
Pay Type
Original Value
NIPOC Element
SUPPOC Element
Revised Value
0 1 2 3
Pay £500000.00 A £33841.00 F £24404.53 I £558245.53 L
Shift £12000.00 B £1140.00 G £585.71 J £13725.71 M
Driving £200.00 C £19.00 H £9.76 K £228.76 N
NIPOC £35000.00 D £0.00
SUPPOC £25000.00 E £0.00
Total £572200.00 £35000.00 £25000.00 £572200.00
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COLUMN 0 Shows original value for Postal Grade by five types.
COLUMN 1 Shows reattribution of NIPOC to pay, shift and driving using the following staged calculation.
i B*9.50% = G ii C*9.50% = H iii F = D–G–H
COLUMN 2 Shows reattributed figure for SUPPOC to pay, shift and driving using the following calculation.
i (A / (A+B+C))*E = I ii (B / (A+B+C))*E = J iii (C / (A+B+C))*E = K
COLUMN 3 Shows pay, shift and driving with fully reattributed NIPPOC and SUPPOC.
i L = A+F+I ii M = B+G+J iii N = C+H+K
The ABC Model contains a table that links pay grouping and NIPOC rates used.
2.2 General Ledger Expenditure
The GL is the source of the non staff expenditure postings used in the ABC Model.
The GL requires further pre-processing before it can be used in the ABC Model involving the consolidation of cost centres to business areas and of GL expenditure codes to cost types. These are discussed in detail below.
2.2.1 Treatment of GL Cost Centres
As detailed above, there are a large number of cost centres used in Letters. The cost centre records a geographical location’s expenditure for each financial period. The mapping of these cost centres to ABC Model business areas is shown below in Figure 2.2.1.i.
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Figure 2.2.1.i GL Cost Centre to ABC Business Area Mapping Figure 2.2.1.i GL Cost Centre to ABC Business Area Mapping
Mapping Table
Cost Centre 1
Cost Centre 2
Cost Centre 3
Business Areae.g. Delivery
Product ModelRM Operations
The relevant table maintained in the ABC Model holds the mapping of GL cost centre to a business area code and an Organisation Unit. The relevant table maintained in the ABC Model holds the mapping of GL cost centre to a business area code and an Organisation Unit.
2.2.2 Treatment of GL Expenditure Codes 2.2.2 Treatment of GL Expenditure Codes
As outlined above, the GL has a large number of expenditure records available for use. These expenditure records are used to record actual business expenditure for each financial period. The purpose of the ABC Model is to provide the average activity and product costs. Working within these parameters the individual GL expenditure records have been mapped to a number of cost types. The cost types have a common theme for the type of expenditure being incurred, for example, vehicle costs and property costs. The development of these cost types is linked to;
As outlined above, the GL has a large number of expenditure records available for use. These expenditure records are used to record actual business expenditure for each financial period. The purpose of the ABC Model is to provide the average activity and product costs. Working within these parameters the individual GL expenditure records have been mapped to a number of cost types. The cost types have a common theme for the type of expenditure being incurred, for example, vehicle costs and property costs. The development of these cost types is linked to;
The identification of the resource drivers that should be used to attribute the costs to activities. This provides an optimum way for the resource module to be structured in the attribution of costs to activities;
The identification of the resource drivers that should be used to attribute the costs to activities. This provides an optimum way for the resource module to be structured in the attribution of costs to activities;
The retention of cost transparency, for both staff and non-staff, that is pertinent to one or more activities or products; and
The retention of cost transparency, for both staff and non-staff, that is pertinent to one or more activities or products; and
To support class costing. To support class costing.
However, for products where there is a discrete cost recorded in the GL, this level of detail needs to be retained to minimise arbitrary cost re-attribution further through the calculation of the ABC Model. Mapping of GL codes to ABC cost types is illustrated in Figure 2.2.2.i.
However, for products where there is a discrete cost recorded in the GL, this level of detail needs to be retained to minimise arbitrary cost re-attribution further through the calculation of the ABC Model. Mapping of GL codes to ABC cost types is illustrated in Figure 2.2.2.i.
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Figure 2.2.2.i Illustration Of Mapping of GL Codes to ABC Cost Types
Profit & Loss
External Income
Staff Costs
Chart of Accounts
Interbusiness Income
Staff & Agents Costs
Agents Costs
Other Costs
Staff & Agent Related Costs
Accommodation
Telephones
Computer
Consumables
Vehicles
Conveyance, Collection & Delivery Charges
Marketing
Stamp Market Resale
Stamp Purchases
Gains/Losses
Finance
Operating Lease Charges
Other Maintenance
Other Miscellaneous Costs
Annual Depreciation
Depreciation
Write Off on Disposal
Amortisation
Balance Sheet
Resources
Salaries
Staff Costs
Agent Costs
Facilities
Facilities
Finance
Finance
Accommodation
Accommodation
Other Non Staff etc..
Other
The ABC Model holds the mapping of GL codes to cost type codes.
2.3 Treatment of Vehicle Services
For Vehicle Services, cost centres are not brought in from either Payroll or GL – costs are posted directly into the resource module (see Section 2.5 – Entering Cost Adjustments).
2.4 Non-staff Cost Types
GL expenditure records are consolidated into a number of cost types. The following sections describe each of the cost types and explain their origin and purpose.
Some cost types are defined in order to allow for class costing, which relates to the treatment and allocation of costs to different classes of mail e.g. first class. Class
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costing within the ABC Model recognises that traditional ABC does not differentiate the class of mail being handled, attributing costs to products based on consumption of the underlying activity rather than recognising the relative demands of the service specification. The creation of cost types that support the class costing methodology are described in detail in Section 7.0 below.
2.4.1 Accommodation
This area of expenditure is covered by three individual cost types that represent indoor and parking accommodation, and machine power consumption.
Accommodation costs, as recorded in the GL, are mapped to indoor accommodation. A manual intervention as described in section 2.5 is then used to reallocate costs to two other cost types, differentiating between buildings and parking charges and the cost of running machines. The amount of costs that are allocated in this way has been calculated based upon analysis identifying the percentage of outdoor area to indoor and the appropriate market rates for outdoor accommodation and machine running cost by type of machine (as supplied by the Royal Mail asset team).
Property assets are managed by one business unit on behalf of Royal Mail Group. The costs of property assets are reported against each business unit that enjoys the benefit of those assets. The costs transferred cover a range of expenses from utility charges, waste management, cleaning, ground maintenance, catering facilities and property costs.
Property rental values are based on the sites facilities, and for costing purposes, the property rental charge includes indoor and outdoor areas.
The utility charges are recorded for the property facility, and no distinction is made on how the utilities are used. For costing purposes a share of the electricity costs are reported as Accommodation Machine Energy. This cost type is then assigned to activities that rely on machinery which clearly uses electricity during their operation. This provides a more appropriate cost distinction between mechanised and manual processing activities.
2.4.2 Compensation
There are two themes in this area, product compensation and non product compensation. The business incurs compensation expenditure in these distinct areas due to product service failures and injury or damage to employees, non employees or their property.
The ABC Model details this expenditure across four individual cost types, representing product and non product compensation and provision for quality of service compensation charges.
The Customer Management team manages product compensation claims. They retain the information of the products for which claims have been made and this informs the attribution of this cost to products (see Section 5.2.3). The cost type
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structure supports meaningful and appropriate attribution of costs to activities and products.
2.4.3 Computers
A single cost type – Computers includes the GL expenditure records for hardware maintenance, hardware non capital items and software. This covers all the businesses operational and administrative systems e.g. payroll and GL. The GL does not hold any details on the specific application of the computer spend, but the cost centre structure does in some cases provide a better insight as to which processes made use of these resources.
2.4.4 Consumables
This area of expenditure covers printing and stationary and other general administrative items.
2.4.5 Cost of Sales
Three individual cost types cover this area of expenditure, representing cost of sales and sales commission.
The GL expenditure records cover purchases made for resale and commission payments made to third parties for sale of stamps and the sale of any products listed in Letters product portfolio4. The cost type structure supports the attribution of cost of sales via discrete activities to products sold through this channel.
2.4.6 Transportation
The business incurs expenditure for a range of transport modes supplied through a number of different providers.
This area of expenditure is covered by seven individual cost types, representing couriers, air, rail, road and sea transportation.
2.4.7 Bicycles
The cycle cost type records costs associated with cycles, handcarts, trolleys and rigid stackable containers (RSC), which can be used across a number of Business Units, therefore the ABC Model attributes these costs to activities relevant to the Business Units that recorded the original costs.
2.4.8 Consultancy
A single cost type consolidates the GL expenditure records that cover many types of consultancy e.g. legal, financial, IT, audit and general. From a costing perspective the ABC Model does not differentiate between the types of consultancy as this does not generally relate to any specific part of the operational process or product. However differentiation in consultancy cost is maintained
4 Letters A-Z guide to products and services is available from the Royal Mail website www.royalmail.com
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through the recording at business unit level. The combination of business unit and cost type ensures attribution to appropriate activities.
2.4.9 Customer Management
This area of expenditure is a single cost type covering expenditure items for the consumables (e.g. marketing materials) used in the provision of customer management support.
2.4.10 Depreciation
This area of expenditure is covered by four individual cost types, representing depreciation of fixtures and equipment, land and buildings, plant and machinery and amortisation of software systems and licences.
The business incurs depreciation charges for the capitalised assets for that business unit. GL expenditure records maintain a distinction by asset type, and this logic is maintained within the cost type structure. This supports an appropriate attribution of these cost types to activities that utilise the assets for which the depreciation is being incurred.
2.4.11 Finance
A single cost type consolidates the GL expenditure records ranging from foreign exchange costs, gains and losses, bank charges, accounting adjustments and insurance premiums. Differentiation in finance cost is maintained through the recording at business unit level. The combination of business unit and cost type ensures attribution to appropriate activities.
2.4.12 Holiday Pay Accrual
This area of expenditure is covered by two cost types and includes the accounting adjustment relating to the amount of employee holiday incurred and the amount owed. Under IFRS Royal Mail has an explicit requirement to create a holiday pay accrual. This expense is posted in Payroll, but for costing purposes the value is sourced from GL.
2.4.13 Interbusiness
This area of expenditure is covered by four cost types, representing interbusiness charges from associated business units including POL, Royal Mail Group and a pension adjustment as required by IFRS.
Interbusiness refers to the internal transactions between different business units within the Royal Mail Group.
The GL expenditure records cover the transactions between Letters and other Royal Mail Group business units for the provision of services e.g. the Post Office Limited counter services contract and the allocation of group costs.
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2.4.14 Marketing
This area of expenditure is covered by three cost types, representing market research and marketing either of individual products or broader services.
The GL expenditure records cover marketing, media responses, exhibitions, advertising and market research expenditure.
2.4.15 Miscellaneous
A single cost type consolidates the GL expenditure records covering the remaining expenditure items that do not fall naturally into any other cost type and therefore have no specific resource driver requirements. Differentiation in miscellaneous cost is maintained through the recording of expenditure at business unit level. The combination of business unit and cost type ensures attribution to appropriate activities.
2.4.16 Non-Operational
This area of expenditure is covered by one cost type and covers expenditure items such as telephones which do not directly support operational processes.
2.4.17 Overseas Delivery and Transportation
This area of expenditure is covered by two cost types, representing charges made by administrations for the delivery and transportation of mail posted in the UK and destined for overseas.
2.4.18 Plant Maintenance
The GL expenditure records cover expenditure items that deal with the maintenance of equipment used for the sorting of mail including machine spare parts and engineers tools which are summarised into a single cost type.
2.4.19 Postage
This area of expenditure is covered by one cost type covering the purchase of stamps and official mail expenditure.
2.4.20 Staff Relocation
A single cost type consolidates the GL expenditure records covering items related to relocation and retraining costs of staff.
2.4.21 Staff Related Costs
A single cost type consolidates the GL expenditure records covering items in support of staff such as travel and subsistence, reward and recognition, and recruitment.
2.4.22 Street Furniture
Royal Mail's street furniture is part of the range of equipment supplied to support the collection and delivery of mail and includes street post-boxes. This area of expenditure is one cost type covering items such as the maintenance of post-
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boxes and delivery pouch boxes, though the costs associated with pouch boxes are small in comparison and are expected to reduce further with delivery methods.
2.4.23 Uniforms and Workwear
A single cost type consolidates the GL expenditure records covering the purchase and supply of staff uniforms.
2.4.24 Vehicle Costs
This area of expenditure is covered by four cost types, representing vehicles fuel, vehicles staff, vehicles non staff and vehicles depreciation.
2.5 Entering Cost Adjustments
The ABC Model has the capacity to process journal entries recording costs not sourced from the GL either to;
Enter costs to a business area and cost type combination that cannot be sourced directly from either the Payroll or GL; or
Move costs between business area and cost type combinations to allow for more appropriate ABC reporting, where better information is available over and above that sourced in the ledgers.
Few costs are processed in this way. However it is an essential capability of the ABC Model to bring in necessary and appropriate costs to maintain the integrity of the costing outputs through appropriate attribution of costs to products. All cost adjustments are fully documented and form part of the ongoing external audit activity.
A full list of journal entries is shown in Table 2.5.i.
Table 2.5.i Cost Adjustments
Name Frequency Description
Fleet and Maintenance Services
Quarterly This entry records Fleet and Maintenance costs for the various business units it services.
Accommodation Quarterly This entry reassigns accommodation costs from indoor to outdoor and machine energy cost types.
GL Reconciliations
Quarterly This is part of the standard process to compare the GL extract as taken into the ABC Model to the numbers reported in the statutory accounting system for the Letters business unit. Any differences are entered ensuring that the ABC Model aligns to the values within statutory reporting.
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Name Frequency Description
Customer Experience Quarterly This entry moves Customer Experience costs between the various business units it services.
Depreciation Quarterly This entry transfers depreciation charges to the appropriate business area.
Courier Services
Quarterly Charges for the Royal Mail Courier Service are posted directly to the statutory accounting system and not the Letters GL. Therefore this entry brings the costs into the ABC Model.
Indirect Controllable Costs Recovered (ICC)
Quarterly This entry moves Group Technology, Human Resources and Finance costs between the various business units they service.
Royal Mail Eliminations
Quarterly This entry eliminates the Interbusiness postings for Group Technology, Human Resources and Finance costs between the various business units they service as the prime costs are used instead.
VAT Quarterly This entry identifies the amount of recoverable VAT that is required to be moved from exempt products to standard or zero rated.
LAMU/GAMU Quarterly This entry represents the work done by the London and Gatwick Airmail Units on behalf of Parcelforce. This allows the costs to be isolated against a dedicated Business Area and keep them discrete through the model.
UKPIL Quarterly In order to align to the UKPIL business, this entry records additional costs within the ABC model.
Cost Movements Ad-Hoc This entry moves costs between business areas to ensure an appropriate resource driver attribution.
Holding Company
Quarterly This catflap transfers the allocations for Holding company to the relevant cost type.
Holiday Accrual Quarterly This entry records the holiday accrual or reversal costs posted at Business Unit level and ensures that the ABC Model aligns to the values within statutory reporting.
Post Year End Costs Annual This entry deals with the posting of costs
Name Frequency Description
in the GL following the closure of Period 12 accounts.
Ofcom Compensation
Annual This entry records the full year values because any postings during the year are excluded from the ABC Model.
Parcelforce Interbusiness
Annual This entry ensures that the ABC Model aligns to the values within statutory reporting.
2.6 Maintenance of Resource Module
The resource module is a record of all the costs appropriate to the scope of the ABC Model. As described in this section, there are two principal sources for the expenditure records, namely the Payroll system for staff expenditure records and General Ledger (GL) for non staff expenditure records.
There are a series of consolidation routines that the ABC Model applies to the source expenditure data. These routines rely upon a number of mapping tables which need to be maintained to ensure that all source expenditure records are treated in an appropriate way. The mapping tables hold the alignment of source system codes to ABC codes.
The mapping relationships that are maintained are between the following source systems and the ABC Model elements;
Source system cost centre to ABC business areas;
Source system GL codes to ABC cost types;
Source system payroll account code to pay type and cost type; and
Source system payroll grade code to ABC staff grade.
These mapping relationships are maintained on a quarterly basis reflecting the actual data sourced for that time period.
NIPOC and SUPPOC percentages are re-evaluated on an annual basis based on applying the previous year’s actual results.
Cost adjustments are reviewed each quarter for appropriateness.
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3.0 Resource Drivers 3.0 Resource Drivers
The purpose of resource drivers is to attribute the resource costs, (as detailed in section 2), to the business activities (see section 4) in a meaningful way, thereby recognising the causality of the level of resource being incurred.
The purpose of resource drivers is to attribute the resource costs, (as detailed in section 2), to the business activities (see section 4) in a meaningful way, thereby recognising the causality of the level of resource being incurred.
Figure 3.0.i illustrates the area of the ABC Model that is being described in this section. Figure 3.0.i illustrates the area of the ABC Model that is being described in this section.
Figure 3.0.i Resource Drivers Figure 3.0.i Resource Drivers
General Ledger and Payroll
CT
CT
Resource Drivers
Activity Drivers
Products &
Services
50.00Overtime
Expenditure Records
Value
Standard Pay 10,000.00
Etc …
Expenditure Records
Value
50.00
Standard Pay 10,000.00
Overtime
Etc …
Resource drivers fall into five categories: Resource drivers fall into five categories:
Operational staff hours; Operational staff hours;
Vehicle hours; Vehicle hours;
Machine hours; Machine hours;
Accommodation square metres; and Accommodation square metres; and
Direct to activities. Direct to activities.
This section describes each of these categories in turn. Resource drivers for class costing methodology are developed as part of this stage of the ABC Model, (See Section 7 Class Costing).
This section describes each of these categories in turn. Resource drivers for class costing methodology are developed as part of this stage of the ABC Model, (See Section 7 Class Costing).
The ABC Model contains a table that links cost types and associated resource drivers. The ABC Model contains a table that links cost types and associated resource drivers.
3.1 Operational Resource Drivers 3.1 Operational Resource Drivers
3.1.1 Operational Staff Hours 3.1.1 Operational Staff Hours
Operational staff hours are sourced from the business operational staff hour recording system (SHRS). This is used to record both the actual hours worked and the type of work performed by Operational Postal Grade (OPG) staff in each of the operational sites (e.g. Mail Centres, RDCs etc). Hours are collected for the same time period as the costs that are being attributed to activities.
Operational staff hours are sourced from the business operational staff hour recording system (SHRS). This is used to record both the actual hours worked and the type of work performed by Operational Postal Grade (OPG) staff in each of the operational sites (e.g. Mail Centres, RDCs etc). Hours are collected for the same time period as the costs that are being attributed to activities.
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The SHRS holds the base data on an individual unit basis for every operating unit in Letters in total hours and split by work task The SHRS also provides input to Letters weekly financial performance reporting which forms part of the management control and performance review.
The type and amount of work performed in each of the operational areas, such as collection, processing and delivery is recorded through the use of work tasks (that is, individual tasks and activities performed as part of an employee’s job). Each OPG job profile is constructed with reference to these work tasks which therefore provides a standard level of resource, by work task, for the OPG staff. It is this standard that is reviewed and amended to reflect operational reality and the actual hours and work tasks performed for a defined period.
Each work task is mapped to an ABC activity, and SHRS cost centres are mapped to business areas. The ABC Model takes the data and calculates the operational hours by activity.
For operational areas, the cost types that use operational staff hours as a resource driver are;
Pay – non-manager;
Pay – non-manager shift;
Staff relocation;
Staff related costs;
Uniforms and workwear;
Pay;
Cycles;
Pay – driving premium; and
Pay – driving grades.
The ABC Model contains a table that links activities to operational processes.
3.1.2 Consolidated SHRS Drivers
There are a number of cost types that need to be attributed to pipeline activities, (e.g. collection, processing and delivery), but these activities do not have SHRS hours recorded against them. One such example is the management activity for a given pipeline segment.
To provide a meaningful basis for attribution, SHRS hours for pipeline activities are consolidated at pipeline process level. For operational areas, the consolidation of hours by pipeline process then provides a profile to apply to a number of cost types including those associated directly with the management of the pipeline area;
Pay – manager; and
Pay – manager shift;
In addition to the staff cost, the following non staff costs are attributed on this basis;
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Computers;
Consumables;
Couriers;
Miscellaneous;
Non-operational, e.g. non-staff costs including phones;
Interbusiness miscellaneous; and
Consultancy.
These cost types are a reflection of the resources used and controlled in support of the operational area and are therefore appropriate to be attributed to the management activity for that operational area.
All ABC Model operational activities are mapped to a management activity dependant on the operational area the activity is performed in. The management activities are related to;
Collection;
Outward processing;
Network;
RDC;
Inward processing;
Local distribution;
Delivery; and
Inward office of exchange.
The ABC Model consolidates all the SHRS operational hours by work task to these management activities and the total is used to assign the cost types costs to the management activities.
3.1.3 Vehicle Hours
Vehicle related hours are taken from the SHRS to generate the vehicle analysis for each business area. This data is collected for the same time period as the costs that are being attributed to activities and represent the actual hours incurred.
Vehicle costs are obtained by operational area from the GL. Costs are grouped by business area, and are attributed to vehicle activities using the total number of vehicle hours associated with each business area.
Vehicle fuel cost types are only attributed to activities that relate to driving. The cost types that use vehicle hours as a resource driver to operational activities are;
Accommodation – outdoor;
Depreciation – vehicles;
Vehicles - Staff
Vehicles fuel; and
Vehicles – non staff.
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Operational processes and associated activities that are related to vehicles are identified and then linked, where appropriate, to these cost types.
3.1.4 Machine Hours
Machine hours are used to reflect the differing cost consumption of the various types of plant and machinery. Data is extracted periodically on the number of;
Items of plant and machinery by location;
Hours in use by activity; and
Hours not in use by activity.
Plant and Machinery expenditure is recorded at operational area level in the GL. Costs are grouped by business area, and are linked to machine activities using a weighted measure of machine hours associated with each business area.
The weighted measure of machine hours is generated by taking the number of plant and machines by type and multiplying this by the Machine Type weighting for each cost type. The Machine Type weighting for each cost type is calculated as follows:
Accommodation Machine Energy: the typical energy in KWh consumed during operating hours (based on data obtained from the manufacturer’s data);
Machine Depreciation: the annual depreciation cost of operational equipment by type of machine, as recorded in the GL in the prior year;
Engineers Pay: the number of hours spent each year by engineers maintaining machines, by type of machine, based on data from the prior year; and
Machine Maintenance: annual cost of spare parts used in maintenance and repair, by type of machine, based on data from prior year.
The weighted number of plant and machines is then multiplied by the machine hours by activity to give the weighted driver quantity.
Cost types that use Machine Hours as a resource driver to operational activities are;
Accommodation machine energy;
Machine depreciation; and
Machine maintenance.
It should be noted that the cost type Accommodation Machine Energy is only driven to operating machine activities and not the machinery non running time activities.
To illustrate how the weighted machine drivers are calculated assume that the;
‘Eastern’ Mail Centre organisational unit has one integrated mail processor (IMP);
‘Northern’ Mail Centre organisational unit has one letter sorting machine (LSM);
The IMP was used for 100 hours at the ‘Eastern’ Mail Centre and the ‘Northern’ Mail Centre used the LSM for 100 hours; and
The IMP weighting factor is 3.9 and the LSM weighting factor is 1.9.
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Then the calculation for the weighted machine hours for the LSM and IMP for machine energy would be as follows.
Org unit Machine
type Activity
No of machine types (A)
WF (B) Hours (C)
Weighted machine
hours (AxBxC)
Eastern Mail Centre
LSM Outward LSM Operation
1 1.9 100 190
Northern Mail Centre
IMP Outward IMP Operation
1 3.9 100 390
The ABC Model contains a table which links machine type activities, showing a usage percentage where usage is split between activities.
A further table holds machine type together with relevant weighting factors by the cost types Machine Energy, Deprecation, Engineers Pay and/or Machine Maintenance, where relevant.
3.1.5 Accommodation Square Metres
Accommodation cost types are attributed using the resource driver Accommodation Square Meters. For each organisation unit, accommodation analysis is supplied as part of the annual data update and as part of this process, details on the square metres each activity occupies is provided.
For example, if the total space in a Delivery Office is equal to 750m2 and the Delivery Office has three distinct work areas which take up the following amount of space:
Inward sortation of mail for delivery – 300m2;
Preparation of mail for delivery - 375m2; and
Callers office work – 75m2.
Then the inward sortation of mail for delivery activity would be assigned 40% of the cost (300/750), preparation of mail for delivery would be assigned 50% of the cost (375/750) and callers office work 10% of the cost (75/750).
The driver quantities come from two sources:
Data on accommodation provided by Letters and updated annually; and
Dynamic data for organisational units in the delivery business area.
The Accommodation Square Metres resource driver is used for the following cost types:
Accommodation – indoor;
Depreciation – fixtures and fittings; and
Depreciation – land and buildings.
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The system identifies operational processes and associated activities that are related to accommodation or depreciation and whether they are related to the cost types listed above.
3.1.6 System Generated Consolidated Drivers
The ABC Model reviews costs for all business areas and identifies if a valid driver exists for the costs recorded against that business area. If a valid driver does not exist then the ABC Model generates that driver.
The drivers generated are based on either SHRS hours, vehicle hours, machine hours or accommodation square meters as described above. The driver data is sourced from a group of business areas identified as having an organisational link to the business area requiring a resource driver.
This methodology ensures that there are no costs left unattributed to activity in the resource module.
The integrity of system generated consolidated drivers is established by an off system manual replication of their calculation. This exercise forms a structural part of the external audit activity.
3.1.7 Costing of Services
Many Letters services make use of operational activities. However, typically, services are not directly associated with items of mail. A resource driver is created to allocate the relevant costs within the activity module to specific services.
This is achieved by identifying the average usage a service makes of an activity by reference to Industrial Engineering Planning Values.
These are either maintained as described in section 5.1.1.4 or by commissioning an Industrial Engineer to carry out a time and motion study for the relevant service. The resource driver for this usage, for example, could take the form of the number of contracts maintained or the number of times the service is carried out.
These resource driver volumes are then sourced by period and multiplied by the time taken to carry them out, which calculates the total time required for the services. This time is transferred from relevant ABC Model activities and posted against a single or a number of new, service specific, activities.
3.2 Non-Operational Resource Drivers
There are a number of cost types where the resource driver is directly mapped to one or more activities. This direct mapping has been selected for a number of cost types as it is deemed that the resource drivers described above are not appropriate for these cost types. Table 3.2.i below details the cost types that are driven directly to activities.
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Table 3.2.i Cost Types that are Directly Attributed to Activities
Description of cost type
Air Conveyance
Compensation – Non-product
Compensation – Product
Conveyance/Couriers
Cost of Sales
Finance
Interbusiness
Market Research
Marketing Above The Line
Marketing Below the Line
Overseas Delivery
Postage
Rail Conveyance
Road Conveyance
Sea Conveyance
Owner Drivers
Overseas Conveyance
Customer Management
Compensation International Product
Street Furniture
Compensation Provision
Inter BU/Overlay
Stamp Sales Commission
IFRS – Pension Adjustment
Holiday Pay Accrual FY
Spring Commission
Amortisation
Holiday Pay Accrual
Share In Success
VAT Exempt
VAT Rated
In addition there are a number of business areas (e.g. Walk Bundling Centre) for which a direct to activity mapping is used. Specifically, direct drivers are created to allocate cost to discrete activities.
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3.2.1 Post Office Limited (POL)
The Interbusiness charge from POL covers the provision of counter services which include the selling of products and collecting of revenues and mailwork which includes accepting mail and the provision of accommodation facilities to enable local delivery activities to be performed. The resource driver values are defined by the POL management report which is supplied periodically to Letters.
3.2.2 Customer Experience
The Customer Experience team provide support to our customers via Call Centres and postal enquiries. Typically, enquiries from our customers relate to product pricing, service failures and lost or damaged items of mail. The cost of Customer Experience is split to three business areas as described in section 2.5, relating to Letters, POL and Parcelforce Worldwide. The costs held against the POL and Parcelforce Worldwide business areas are mapped directly on a one to one basis to two activities representing the two business units.
The costs held against the Letters business area are attributed to a number of activities based on the number of FTEs supplied by the Customer Experience team.
3.2.3 Stamps and Collectables
The Stamps and Collectables main function is providing philatelic services to stamp collectors. In addition, they also provide stamps to large customers including retailers. Costs are attributed to an activity based on management information supplied by the Stamps and Collectables team.
3.2.4 Commercial
The Commercial team provides sales, pricing and marketing support for Letters. Resources consumed by the Commercial team are mapped to a number of activities reflecting Commercials organisational structure.
3.2.5 Financial Services
Financial Services hold the costs of all the financial operations for Letters including accounts payable and receivable. Resources consumed by the Financial Services team are mapped to a number of activities reflecting Financial Services organisational structure.
3.3 Maintenance of Resource Drivers
Resource drivers are applied to the cost types to ensure that costs incurred are accurately attributed to activities. Resource drivers developed fall into five categories, namely;
Operational staff hours;
Vehicle hours;
Machine hours;
Accommodation square metres; and
Direct to activities.
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The operational staff hours and vehicle hours are sourced from the SHRS for a given period. The SHRS to activity mapping relationship is maintained to ensure that all relevant operational hours are mapped to an activity. The mapping of SHRS work tasks to activity may require a new activity to be created and new activities will need to be classified by pipeline segment and as either attributable or overhead (see section 4.2).
Machine Hours are analysed on an annual basis with a quarterly review to ensure they are aligned to operational activities. Machine weightings are reviewed annually with reference to the asset register, maintenance schedule, and expenditure of machine parts.
Accommodation Square Metres are analysed with reference to the overall total property square metres, number of machines and pieces of equipment in place, and their standard footprint. This review creates a profile which is used for the following twelve months.
Direct drivers are maintained on a quarterly basis and updated to reflect any new cost types that require a direct resource driver.
Class costing resource drivers are maintained to reflect any change to cost types that require class costing (see Section 7.0).
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4.0 Activity Module 4.0 Activity Module
The activity module holds the business processes and activities, populated with resource costs using the resource drivers (as detailed in Section 3). The business has a number of operational commercial and support processes. A hierarchical structure exists between the business processes and activities, as illustrated in Figure 4.0.i.
The activity module holds the business processes and activities, populated with resource costs using the resource drivers (as detailed in Section 3). The business has a number of operational commercial and support processes. A hierarchical structure exists between the business processes and activities, as illustrated in Figure 4.0.i.
Figure 4.0.i Business Process and Activity Hierarchy Figure 4.0.i Business Process and Activity Hierarchy
RM Letters
ProcessingCollections Delivery
The number of activities within each business process varies and is to some extent a reflection of the business data available. The activity module has a number of business processes detailed across approximately five hundred activities.
The number of activities within each business process varies and is to some extent a reflection of the business data available. The activity module has a number of business processes detailed across approximately five hundred activities.
Figure 4.0.ii illustrates the area of the ABC Model that is being described in this section.
Figure 4.0.ii Activity Module Figure 4.0.ii Activity Module
This section outlines the business processes that are used in the ABC Model, the classification of activities and how these classifications support cost attribution methodologies.
This section outlines the business processes that are used in the ABC Model, the classification of activities and how these classifications support cost attribution methodologies.
Figure 4.0.ii illustrates the area of the ABC Model that is being described in this section.
Activity
Activity
Activity
Activity
Activity
Activity
Activity
Activity
Activity
Activity
Activity
Activity
General Ledger and Payroll
CT
CT
Resource Drivers
Activity Drivers
Products &
Services
Activity Module
50.00Overtime
Expenditure Records
Value
Standard Pay 10,000.00
Etc …
Expenditure Records
Value
50.00
Standard Pay 10,000.00
Overtime
Etc …
___________________________________________________________________________________________________________________________________ P a g e | 39
4.1 Business Processes and Activities
For costing purposes, processes and activities have been defined so as to achieve two clear objectives;
To reflect the actual business processes and activities; and
To provide a meaningful basis for attributing costs to both activities and products.
The high level business processes are described in Table 4.1.i shown below.
Table 4.1.i Business Processes and Descriptions
Business process Description
Collection Collecting and accepting of mail from post boxes, post offices and businesses.
Outward – Mail Centre Mail processed for onward despatch around the country to other Mail Centres.
Regional Distribution Centres (RDC) Mail processed for onward despatch to RDCs or Mail Centres around the country.
International Operations Mail processed for export and despatch for overseas delivery or import mail processed for despatch around the country to other Mail Centres.
Network Distribution of mail between Mail Centres, International Operations and RDCs moving the mail closer to its final delivery destination.
Inward – Mail Centre Mail processed for onward despatch to local Delivery Offices.
Local Distribution Distribution of mail between Mail Centres and Delivery Offices.
Delivery – Indoor Sorting of the mail to specific delivery routes and then sequenced to the final delivery point in preparation for the actual delivery to individual addresses.
Delivery – Outdoor Taking the mail from the Delivery Office and delivering to the individual addresses.
Perform Mailroom Management Provision of mailroom services to businesses where their mail is prepared to meet internal sorting specifications.
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Business process Description
Walk Bundling Centre The preparation of unaddressed mail to delivery walks.
Support General activities providing support to other business processes.
Commercial Marketing and Sales activities relating to products offered to the retail market.
Network Access Management activities relating to downstream access.
Business Sustaining Management activities related to running the business.
To meet these objectives, the ABC activity dictionary has a number of activities that are used specifically to collect discrete costs, as recorded in the GL, that are relevant to one or more products. For example, the national distribution of products is achieved using a combination of resources including road, rail and air, which collectively make up the process of Network. However, only specific products use air transportation routes, and for this reason the cost of air transportation, as recorded in the GL, is retained through creating an activity against which the GL costs can be recorded. This approach supports a more transparent and appropriate attribution from activity to product in the third stage of the ABC Model calculation.
ABC operational pipeline activities are similar to those described within the SHRS. The SHRS provides an analysis of operational tasks, thereby providing a dynamic alignment to actual business activities as referenced in Section 3.1.
The Operational Postal Grade (OPG) resources are managed by Operational Managers and for ABC purposes, generic management activities have been created for each section of the operational pipeline. These management activities reflect the costs of management including other non staff operational unit costs appropriate to that part of the operational pipeline. The list of management activities include those related to;
Collection;
Inward office of exchange;
RDC;
Outward processing;
Network;
Inward processing;
Local distribution; and
Delivery activities.
For commercial activities which are outside of the operational pipeline, ABC Model activities have been developed to reflect the way the Commercial team organise their resources in terms of customer groups, product groups and marketing activity. For example, the cost centres relating to the management of stamps is mapped to the manage stamps activity.
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All other activities have been created to reflect the existence of other business activities outside of the operations and commercial areas. The activities then attract the costs for the business process they represent, for example the activity Letters Human Resources reflects the cost of the Human Resources function within Letters.
The ABC Model activity code has been designed to provide information on the purpose of the activity itself. The activity code is made up of the following three elements;
Prefix which generally indicates part of the business it represents, e.g. Operations, Commercial;
Numerical value which is a unique identifier; and
Suffix which generally indicates a specific attribution treatment for cost types within that activity, e.g. class costing.
4.2 Classification of Activities
Each ABC activity has two classifications, which are used for both the cost attribution methodology and reporting purposes. These are:
Pipeline Segment Classification: each of the activities is linked to a business process, referred to as pipeline segment (see Table 4.1.i); and
Attributable or Overhead Classification: each of the activities is classified as either:
– Attributable activities: defined as activities that have a direct cost relationship between the activity costs and the outputs of that activity. Attributable activities can be either pipeline or non-pipeline.
The criteria followed in identifying the which classification to use is as follows; 1) Does the activity deal directly with the processing or movement of products; If
so the activity is defined as pipeline attributable. 2) Is the activity directly in support of the selling, marketing or management of a
product or defined group of products; If so the activity is defined as commercially attributable.
– Overhead activities: defined as any activity that has no direct cost
relationship between the activity and the outputs. Therefore the Overhead classification identifies which activities are subject to the overhead allocation methodology (see section 5.3).
4.3 Maintenance of Activity Module
Maintenance of activities is achieved in part through the resource driver SHRS maintenance routine. In addition, the business may request a change in the level of detail of a particular process area, in which case a new activity would need to be created or removed. In the case where this is an operational activity, then a new SHRS element is also required to measure the activity resource level. In the case of a deleted activity the relevant SHRS element should be combined or deleted.
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5.0 Activity Drivers 5.0 Activity Drivers
Activity drivers link the second and third parts of the ABC Model and are the mechanism for attributing the activity costs from the activity module to products in the cost object module. Figure 5.0.i illustrates the area of the ABC Model that is being described in this section.
Activity drivers link the second and third parts of the ABC Model and are the mechanism for attributing the activity costs from the activity module to products in the cost object module. Figure 5.0.i illustrates the area of the ABC Model that is being described in this section.
Figure 5.0.i Activity Drivers Figure 5.0.i Activity Drivers
General Ledger and Payroll
CT
CT
Resource Drivers
Activity Drivers
Products &
Services
50.00Overtime
Expenditure Records
Value
Standard Pay 10,000.00
Etc …
50.00Overtime
Expenditure Records
Value
Standard Pay 10,000.00
Etc …
The purpose of the activity driver is to attribute the costs associated with activities to products. The methodology is chosen based on the following criteria; The purpose of the activity driver is to attribute the costs associated with activities to products. The methodology is chosen based on the following criteria;
Is the activity an attributable or overhead activity (as described in Section 4.2)? Is the activity an attributable or overhead activity (as described in Section 4.2)?
If the activity is attributable, is the overall level of resources consumed by the activity dependent upon the number of items passing through that activity, i.e. is it volume of traffic items related?
If the activity is attributable, is the overall level of resources consumed by the activity dependent upon the number of items passing through that activity, i.e. is it volume of traffic items related?
Any class costing adjustments to activity drivers required are discussed in Section 7.0. Any class costing adjustments to activity drivers required are discussed in Section 7.0.
Revenue Derived Traffic (RDT) is used to attribute activity costs to products. Revenue Derived Traffic is account based traffic sourced from accounts receivable information while stamp and meter volumes are sourced from revenue received divided by average unit prices (both of which are identified through business sampling).
Revenue Derived Traffic (RDT) is used to attribute activity costs to products. Revenue Derived Traffic is account based traffic sourced from accounts receivable information while stamp and meter volumes are sourced from revenue received divided by average unit prices (both of which are identified through business sampling).
The following sections describe the two different types of activity drivers used in the ABC Model: the operational and the non-operational drivers, and how the most appropriate activity drivers are identified for each activity. This section then describes the mechanism by which the activity drivers are applied, and how weighting factors are used.
The following sections describe the two different types of activity drivers used in the ABC Model: the operational and the non-operational drivers, and how the most appropriate activity drivers are identified for each activity. This section then describes the mechanism by which the activity drivers are applied, and how weighting factors are used.
5.1 Operational Activity Drivers 5.1 Operational Activity Drivers
Operational activity drivers are based on traffic volumes and weighting factors. The drivers can either be calculated directly or via a multiple stage process. Operational activity drivers are based on traffic volumes and weighting factors. The drivers can either be calculated directly or via a multiple stage process.
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This process will involve both the routing matrix and the outputs from the Mails Characteristics Survey, both of which are described below. This process will involve both the routing matrix and the outputs from the Mails Characteristics Survey, both of which are described below.
5.1.1 Routing Matrix Drivers 5.1.1 Routing Matrix Drivers
Volume related drivers are derived from the number of mail items posted by customers. These volumes, referred to as traffic, are used to attribute activity costs to products through what is termed the routing matrix.
Volume related drivers are derived from the number of mail items posted by customers. These volumes, referred to as traffic, are used to attribute activity costs to products through what is termed the routing matrix.
The Routing Matrix The Routing Matrix
The routing matrix is a two dimensional view of the journey mail takes through the operational processes and activities, including collection, processing and delivery (as discussed in Section 4.1). The two dimensions of this matrix are the routes and the activities. The routes reflect how the operations handle and process mail volumes, and there are a number of routes that are dependent on the specific characteristics of the mail. This in turn influences which activities are used to sort and process the mail.
The routing matrix is a two dimensional view of the journey mail takes through the operational processes and activities, including collection, processing and delivery (as discussed in Section 4.1). The two dimensions of this matrix are the routes and the activities. The routes reflect how the operations handle and process mail volumes, and there are a number of routes that are dependent on the specific characteristics of the mail. This in turn influences which activities are used to sort and process the mail.
There are four characteristics of mail: There are four characteristics of mail:
Class: e.g. first class; Class: e.g. first class;
Payment method: e.g. stamp; Payment method: e.g. stamp;
Format: e.g. letter, large letter or packet; and Format: e.g. letter, large letter or packet; and
Handling: e.g. manual or machined. Handling: e.g. manual or machined.
The routing matrix operates at the Sales Product Handling Characteristic Combination (SPHCC) level, therefore reflecting the operational characteristics detailed above. The routing matrix operates at the Sales Product Handling Characteristic Combination (SPHCC) level, therefore reflecting the operational characteristics detailed above.
An illustration of how the routing matrix works can be seen in Figure 5.1.1.i where the percentage represents the proportion of the SPHCC that goes through the operational processes.
An illustration of how the routing matrix works can be seen in Figure 5.1.1.i where the percentage represents the proportion of the SPHCC that goes through the operational processes.
Figure 5.1.1.i Routing Matrix Illustration Figure 5.1.1.i Routing Matrix Illustration
Stamp Letters
Meter Large Letters
Downstream Access
100%
100%
0%
100%
100%
0%
85%
90%
0%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Collection Processing Network Processing Local Distribution
Delivery
___________________________________________________________________________________________________________________________________ P a g e | 44
In most instances, all of the mail volume on the route goes through the activity, but there are instances where the share is less than 100%. For example, some mail that is posted is for delivery within the same area. As such this mail does not rely on the network, so the share of mail going on network is less than 100%.
Mails Characteristic Survey
In order to identify the characteristics of mail items, Letters makes use of the Mails Characteristic Survey (MCS). This is a survey which provides the business with a range of information about the characteristics of mail. The survey objective is to gather observations about the range of products Letters delivers in the UK. Data is collected from all Mail Centres and RDCs.
Every Mail Centre and RDC has one or more dedicated sampling staff that carry out the sampling in line with a daily sampling schedule. The sampling procedures are consistent across all sites, and as such, a statistically valid sample is obtained. Once items have been selected for the sample, the required observations are recorded locally and transferred electronically to the Traffic Volumes and Characteristics team.
Mail volumes posted by customers have different combinations of these characteristics listed above, and therefore need to go through different routes within the operational processes. For example, non business customers tend to post items with stamps while business customers typically use a prepaid or meter machine impression as the payment method. Mail volumes with stamps need to have the stamps cancelled, but the mail with meter impressions do not.
Mail volumes are grouped according to the defined routes, and these mail volumes are then handled the same way. This represents the flow of mail through the operational pipeline.
Application of the Routing Matrix
In terms of how the routing matrix is applied, the first step involves assessing whether the activity is relevant to the route. If it is not then there is no routing share, while a routing share is required if the activity is indeed relevant to the route.
The routing matrix also contains information on the share of mail volumes that go through an activity on that route. The pipeline segment in which the activity sits is identified and the relevant Head of Design confirms that the share of volume is appropriate to each route, and identifies the factors that may change this share. Appropriate calculations are carried out based on various criteria, such as volumes and number of times the item is handled etc to reflect any relative difference.
Costs are attributed to SPHCC based on the share obtained from the routing matrix which reflects the relative difference in the volumes of SPHCCs being handled via specific activities.
These routing proportions are updated annually, if not more frequently following a review by the operational Heads of Design to reflect any operational change in the business. Updates can also take place on an ad-hoc basis to reflect any material changes to operations within the year.
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The ABC Model holds a list of SPHCCs with associated proportion and weighting factors by activity.
5.1.1.1 SPHCC Weightings
Weighting factors (WFs) are used within the ABC Model as a means of attributing activity costs between the different products that use the activity. They are designed to reflect the relative amount of resource used by each product. WFs are required for each activity and SPHCC combination although in many cases the same basic rules apply.
Royal Mail holds a Databank of Standard Times, (known in Letters as Planning Values or PVs), that expresses the expected time to undertake a wide variety of tasks within operational processes. PVs are obtained from standard Industrial Engineering work measurement exercises undertaken over a number of years. A task is observed, the specific actions involved in the task are recorded, and the relevant time standards are applied to arrive at the time it should take to undertake the activity at a given rate of working.
WFs can be derived from PVs, which indicate the time typically taken to complete the various work tasks associated with an activity. PVs are prescribed for letters, large letters and packets and have been extrapolated to achieve the next level of detail (for different weights) based on the assumed cubic capacity of the average item within each weight category for different types of items (i.e. sub-formats).
Depending on the specific nature of the activity, WFs are designed on the rules as detailed in Table 5.1.1.1.i.
Table 5.1.1.1.i Weighting Factor Rules
Rule Basis Description
1 Composite WFs without routing matrix adjustment
Activities are split into sub-activities. Time-based WFs are created for each sub-activity using PVs and then combined to create a single set of WFs for the activity.
2 Composite WFs with routing matrix adjustment
Activities are split into sub-activities. Time-based WFs are created for each sub-activity using PVs and then combined to create a single set of WFs for the activity. Composite factors are calculated by adjusting the WFs to reflect the different proportions relevant to the weight of the SPHCC.
3 WFs are directly related to average size of the item
WFs for these activities are directly related to the average size of the item. Average sizes are sourced using MCS data (as described in Section 5.1.1).
4 WFs are directly related to average weight of the item
WFs for these activities are directly related to the average weight of the item. Average weights are estimated from MCS data (as described in Section 5.1.1).
5 Weighting Factor = 1 All WFs for these activities are set to 1 where the
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Rule Basis Description
items are processed the same way regardless of exact size or weight. As such there is no requirement to have individual WFs. These WFs can also apply to activities that apply to a single SPHCC.
6 PVs WFs for these activities are directly linked to industrial engineering PVs.
This section details the assessment criteria and information used to calculate the SPHCC weightings. A WF is calculated for each SPHCC for each activity. The basis on which the SPHCC weightings are chosen is undertaken at process level, and if appropriate, refined for individual activities within the process.
The assumed cubic capacities for sub-formats are calculated through regression analysis of the MCS data. For example, for outward and inward MC activities in Section 5.1.1.4 each comprise three parts:
Transporting the work to the appropriate work area;
Sorting; and
Clearing and despatching the work.
Planning times are calculated separately for each of these three parts and then summed to give a single PV for the activity.
For example, in the outward primary sort activity, Table 5.1.1.1.ii below illustrates the industrial engineering analysis that would be prepared.
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Table 5.1.1.1.ii Illustration of Industrial Engineering Analysis
Planning Times for component tasks (Standard Minute Values SMV), by sub-format
Task Letter
Large Letter 0–100g
Large Letter 101–250g
1) Transport to work area
1 2 3
2) Undertake the sorting
24 28 30
3) Clear, containerise and transfer to next work area
2 10 20
Total Planning Time (TPT)
27 40 53
Weighting Factor (TPT/Letter TPT)
1 1.48 1.96
5.1.1.2 Weighted Traffic Volumes
Weighted traffic volumes are used to attribute the appropriate share of an activity’s cost to products.
Many of the activities are common to a range of products, for example Outdoor Delivery involves the delivery of inland addressed products. The ABC Model recognises that mail with different characteristics consumes different levels of resource within the same activity. The way in which these differences are captured is through the application of WFs.
A WF is calculated for each SPHCC for each activity and reflects the following characteristics:
Workload: effort required to process types of mail items for each SPHCC; and/or
Size: cubic size and weight of the item.
The activity driver is calculated by multiplying the
A. Volume of individual SPHCCs by
B. The proportion of SPHCC passing through that activity by
C. The weighting factor for that SPHCC and activity by
D. The class weighting factor of the SPHCC – for example first class.
Figure 5.1.1.2.i illustrates how the driver quantities of weighted traffic volumes are created for a single activity.
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Figure 5.1.1.2.i Weighted Traffic Volume Illustration Figure 5.1.1.2.i Weighted Traffic Volume Illustration
2nd Stamp Letters
1st Meter Large Letters
Downstream Access
1,000
500
2000
SPHCC Volumes – A
2nd Stamp Letters
1st Meter Large Letters
Downstream Access
100%
100%
0%
Routing Proportion – B
2nd Stamp Letters
1st Meter Large Letters
Downstream Access
100%
100%
0%
Routing Proportion – B
2nd Stamp Letters
1st Meter Large Letters
Downstream Access
1.0
1.5
N/A
SPHCC WF – C
2nd Stamp Letters
1st Meter Large Letters
Downstream Access
1.0
1.5
N/A
SPHCC WF – C
2nd Stamp Letters
1st Meter Large Letters
Downstream Access
1.0
2.0
N/A
Class WF – D
2nd Stamp Letters
1st Meter Large Letters
Downstream Access
1.0
2.0
N/A
Class WF – D
2nd Stamp Letters
1st Meter Large Letters
Downstream Access
1,000
500
2000
A
100%
100%
0%
B
1.0
1.5
0
C
1.0
2.0
N/A
D
1,000
1,500
0
Weighted Volumex x x =
5.1.1.3 Derivation of Collection SPHCC Weightings 5.1.1.3 Derivation of Collection SPHCC Weightings
Collection routes are operated out of either Mail Centres or Delivery Offices. These are assumed to be sufficiently similar, and substitutable, such that the same principle in determining WFs is used for both.
Collection routes are operated out of either Mail Centres or Delivery Offices. These are assumed to be sufficiently similar, and substitutable, such that the same principle in determining WFs is used for both.
Collection activities themselves comprise a number of separate sub-activities and these determine if the task is impacted by either the size and/or the number of items processed. This is used to create a composite size or number of items processed WF based on rule 1 in Table 5.1.1.1.i. This is shown in Table 5.1.1.3.i.
Collection activities themselves comprise a number of separate sub-activities and these determine if the task is impacted by either the size and/or the number of items processed. This is used to create a composite size or number of items processed WF based on rule 1 in Table 5.1.1.1.i. This is shown in Table 5.1.1.3.i.
Table 5.1.1.3.i Collection Sub-Activities Table 5.1.1.3.i Collection Sub-Activities
Rule Basis Description
1 Vehicle preparation Not affected by size or number of items collected.
2 Travel to start of route Not affected by size or number of items collected.
3 Collecting from collection points of Related to size of items collected. This is because it will take longer to
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Rule Basis Description
various types
collect larger items – for example collecting the same number of packets as letters will require more time.
4 Travel between collection points Not affected by size or number of items collected.
5 Travel from end of route to hub/Mail Centre
Not affected by size or number of items collected.
6 Unloading, consolidation work on loading bay
Related to size of items collected. The larger the items the more time it will take to carry this out for a given number of items.
The outcome of the analysis demonstrates that there should be two bases for determining the weights;
A weighting factor of one (rule 5 in Table 5.1.1.1.i) for vehicle preparation, travel to the start of the route, and travel from the end of the route to the hub or Mail Centre (items 1, 2, 4 and 5); and
‘Relative size’ of items (rule 3 in Table 5.1.1.1.i) for the other sub-activities (items 3 and 6).
5.1.1.4 Derivation of Outward and Inward Mail Centre SPHCC Weightings
Outward and inward Mail Centre activities relate to the mechanised or manual processing of mail for onward despatch towards final delivery.
For the outward and inward Mail Centre activities, the weighting factors are determined as follows:
Manual packet sortation: the WFs are based on the PVs for the different sortation activities. This takes into account the transportation to the work area, sortation and transfer to the next work area as detailed above. (See rule 6 in Table 5.1.1.1.i);
Manual and machined letter sortation: the WFs are one for all SPHCCs as there is only one letter format. (See rule 5 in Table 5.1.1.1.i);
Machined large letter sortation: the WFs are one for all SPHCCs as the letter formats are processed the same way regardless of the weight of the item. (See rule 5 in Table 5.1.1.1.i);
Support activities: includes Revenue Protection and Address Interpretation. The WFs are one for all SPHCCs as all formats are processed the same way regardless of the size or weight of the items. (See rule 5 in Table 5.1.1.1.i); and
Mail movement: includes Platform Work, where the WFs differ depending on the average size of the items. (See rule 3 in Table 5.1.1.1.i).
In most cases the activity drivers have a WF of one due to the recording of operational activities by format.
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5.1.1.5 Derivation of Outward and Inward RDC SPHCC Weightings
The RDCs provide the equivalent operation of a Mail Centre for the pre-sorted range of products and are strategically placed across the country. Products are collected from customer premises, having already been pre-sorted and containerised in accordance with product specifications. At a minimum, containers are sorted to an Inward Mail Centre and to individual delivery walk as a maximum.
For outward and inward RDC activities, the WFs are determined as follows;
Mail movement: which includes the movement of containers (e.g. bags) for onward despatch. The attribution of cost to product is directly related to the average size of the item (See rule 3 in Table 5.1.1.1.i); and
Support activities: which includes mail verification. The WFs are one for all SPHCCs as all formats are processed the same way regardless of the size or weight of the items. (See rule 5 in Table 5.1.1.1.i).
The methodology used to attribute activity costs to products follows three rules:
The use of routing matrix and associated weighted drivers. In this instance, the attribution of cost to product is directly related to the average size of the item (See rule 3 in Table 5.1.1.1.i);
A two stage process which firstly identifies the proportion of cost for an activity relevant to groupings of products. This product grouping cost is then attributed to individual products within that group using weighted volumes. The weighting is a reflection of the average size of the item. (See rule 3 in Table 5.1.1.1.i); and
The WFs are set to 1 for all SPHCCs as all formats are processed the same way regardless of the size or weight of the items (see rule 5 in Table 5.1.1.1.i).
In most cases the activity costs are based upon a WF relating to the average size of the item, which in turn impacts on the number of containers processed.
5.1.1.6 Derivation of Delivery Indoor SPHCC Weightings
Delivery Indoor activities relate to the costs associated with the sortation and preparation of mail for final delivery or in handling customer enquiries resulting from undelivered mail within the caller’s office.
The attribution of costs to product falls into the following categories:
Sortation and preparation: the WFs are based on the PVs for the different activities, taking into account the transportation to the work area, sortation and transfer to the next work area (see rule 6 in Table 5.1.1.1.i);
Callers office: which involves dealing with customer enquiries where the WFs are based on PVs, taking into account the movement to/from the counter to the storage area, sortation of items transferred to the caller’s office and dealing with customer enquiries (see rule 6 in Table 5.1.1.1.i);
Walk sequencing of machined letters: the WFs are one for all SPHCCs as there is only one letter format. (See rule 5 in Table 5.1.1.1.i); and
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Special Delivery locker work: the WFs are one for all SPHCCs as all formats are processed the same way regardless of the size or weight of the items (see rule 5 in Table 5.1.1.1.i).
Special Delivery locker work: the WFs are one for all SPHCCs as all formats are processed the same way regardless of the size or weight of the items (see rule 5 in Table 5.1.1.1.i).
Activity drivers are either a weighting factor of 1, where items are processed the same way regardless of weight or size, or with reference to industrial engineering PVs. Activity drivers are either a weighting factor of 1, where items are processed the same way regardless of weight or size, or with reference to industrial engineering PVs.
5.1.1.7 Derivation of Delivery Outdoor SPHCC Weightings 5.1.1.7 Derivation of Delivery Outdoor SPHCC Weightings
Outdoor delivery activities typically consume resources from a number of cost types but the majority of these are OPG pay (and related payments) and vehicle costs. Outdoor delivery activities typically consume resources from a number of cost types but the majority of these are OPG pay (and related payments) and vehicle costs.
There are six main types of outdoor delivery routes, which reflect the nature of the work undertaken on each route. Figure 5.1.1.7.i illustrates the share of products by format delivered by each route.
There are six main types of outdoor delivery routes, which reflect the nature of the work undertaken on each route. Figure 5.1.1.7.i illustrates the share of products by format delivered by each route.
Figure 5.1.1.7.i Illustration of Delivery Proportions by Delivery Route Figure 5.1.1.7.i Illustration of Delivery Proportions by Delivery Route
Town
40%
Delivery Routes
Rural
Delivery Methods Letters
Large Letters
Packets LettersLarge
LettersPackets
Foot
Cycle
Hand Cart
Singleton Van
Shared Van
Bulk Van
Total
18%
2%
15%
5%
5%
85%
38%
18%
2%
15%
5%
7%
85%
35%
15%
10%
4%
3%
15%
82%
1%
2%
12%
15%
1%
2%
12%
15%
1%
2%
15%
18%
Unmotorised deliveries cannot deliver all of the packets destined for the delivery points on their routes, due to restricted space and weight capacity on the foot, cycle and trolley delivery methods. This can also apply to time dependant products such as Special Delivery products to fulfil the product specification. Oversized packets and time dependant products are delivered on vehicle routes.
Unmotorised deliveries cannot deliver all of the packets destined for the delivery points on their routes, due to restricted space and weight capacity on the foot, cycle and trolley delivery methods. This can also apply to time dependant products such as Special Delivery products to fulfil the product specification. Oversized packets and time dependant products are delivered on vehicle routes.
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An assessment of the volume and distribution of packets that are transferred from unmotorised deliveries to motorised deliveries is prepared. Typically, it is assumed that the largest size items will be the most likely to be transferred and the share that is transferred is lower for smaller size items (see Figure 5.1.1.7.ii.)
An assessment of the volume and distribution of packets that are transferred from unmotorised deliveries to motorised deliveries is prepared. Typically, it is assumed that the largest size items will be the most likely to be transferred and the share that is transferred is lower for smaller size items (see Figure 5.1.1.7.ii.)
Figure 5.1.1.7.ii Unmotorised to Motorised Switching Illustration Figure 5.1.1.7.ii Unmotorised to Motorised Switching Illustration
Town
W%
Delivery Routes
Delivery Methods Packets SwitchedPackets
Packet volume
Packet volume
Packet volume
Packet volume
Packet volume
Foot
Cycle
Hand Cart
X%
Y%
Z%
Singleton Van
Shared Van
Bulk Van
Total
Motorised deliveries also transfer some of the unmotorised mail for delivery to the start of their delivery routes and drop off additional pouches of mail to predetermined locations along unmotorised routes.
Motorised deliveries also transfer some of the unmotorised mail for delivery to the start of their delivery routes and drop off additional pouches of mail to predetermined locations along unmotorised routes.
Outdoor delivery activities themselves comprise a number of separate sub-activities and these determine if the task is impacted by either the size and/or the number of items processed and is used to create a composite WF based on rule 2 in Table 5.1.1.1.i as shown in Table 5.1.1.7.iii.
Outdoor delivery activities themselves comprise a number of separate sub-activities and these determine if the task is impacted by either the size and/or the number of items processed and is used to create a composite WF based on rule 2 in Table 5.1.1.1.i as shown in Table 5.1.1.7.iii.
Table 5.1.1.7.iii Delivery Outdoor Sub-Activities Table 5.1.1.7.iii Delivery Outdoor Sub-Activities
Item Input Analysis
1 Volume for delivery to addresses on each route by format code
Impacted by volume by delivery route.
2 Volume transferred from unmotorised routes by format code
Packet switching analysis for each delivery route (does not apply to the unmotorised delivery activity).
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Item Input Analysis
3 Time per non-attendance call Based on delivery planning analysis for each delivery route.
4 Number of items per call by type of delivery
Impacted by volume by delivery route.
5 Total time on this activity (SHRS hours)
SHRS hours for each activity.
6 Total volume through this activity From ABC Model base data.
7 Acceleration time Based on delivery planning analysis for each delivery route (does not apply to the unmotorised delivery activity).
This shows that the final composite WF is derived from a combination of PVs created for each sub-activity, the ‘relative size’ of the items being delivered on each delivery route and for the items that are transferred between unmotorised and motorised delivery.
5.1.1.8 Derivation of International Operations SPHCC Weightings
The International function is responsible for the processing of both export and import mail at its processing centres and for arranging the transport of all export mail to and delivery by, overseas administrations.
The attribution of costs to product falls into the following categories:
Manual packet sortation: the WFs are based on the PVs for different sortation activities, taking into account the transportation to the work area, undertaking the sortation and transfer to the next work area as detailed above. (See rule 6 in Table 5.1.1.1.i.);
Manual and machined letter sortation: the WFs are one for all SPHCCs as there is only one letter format. (See rule 5 in Table 5.1.1.1.i.);
Machined large letter sortation: the WFs are one for all SPHCCs as the letter formats are processed the same way regardless of the weight of the item. (See rule 5 in Table 5.1.1.1.i.);
Support activities: includes Revenue Protection and Customs. The WFs are one for all SPHCCs as all formats are processed the same way regardless of the size or weight of the items. (See rule 5 in Table 5.1.1.1.i.); and
Mail movement: includes Platform Work. The WFs differ depending on the average size of the items. (See rule 3 in Table 5.1.1.1.i.)
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Activity drivers are based upon either a weighting factor of one (where items are processed the same way regardless of weight or size, by reference to the average size where this is a factor) or with reference to industrial engineering PVs.
5.1.1.9 Network
Network activity costs relate to distribution of mail volumes around the country between different processing centres. National distribution is achieved using a mixture of resources, namely road, rail, air and sea transport. The attribution of network costs to products is based on the actual distribution services performed for each of the different products.
The methodology used to attribute activity costs to products incorporates;
The use of routing matrix and associated weighted drivers – in this instance the WFs differ depending on either the average size of the items or the item related component. (See rules 3 or 5 in Table 5.1.1.1.i.);
A two-stage process, which firstly identifies the proportion of cost for an activity relevant to groupings of products. Then secondly, this product grouping cost involves attributing the grouped product costs to products within that group using weighted volumes. The weighting is a reflection of either the items average size or the item related component. (See rules 3 or 5 in Table 5.1.1.1.i.); or
Operational direct one to one drivers (as described in Section 5.1.2).
In most cases the size and the item related components are the drivers of the activity costs.
5.1.1.10 Local Distribution
Local Distribution activity costs relate to the cost associated with the distribution of mail from Inward Mail Centres to the Delivery Offices within the Mail Centre’s catchment area.
WFs are based on the average size of the item (rule 3 in Table 5.1.1.1.i) and are calculated using MCS data using the method described in Section 5.1.1.
5.1.2 Operational Direct One to One Mapping
A number of activities are directly related to a SPHCC. As such the activities are mapped directly to a single SPHCC as the activity costs have been incurred in the handling or support of that individual SPHCC. In these instances WFs are not required nor are the activities included in the routing matrix.
The ABC Model identifies those operational activities that have a direct relationship to a single SPHCC.
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5.2 Non-Operational Activity Drivers 5.2 Non-Operational Activity Drivers
In the case of activities where the level of resources consumed by the activity are not dependant upon the number of items passing through that activity, the driver value is not based on mail volumes.
In the case of activities where the level of resources consumed by the activity are not dependant upon the number of items passing through that activity, the driver value is not based on mail volumes.
Drivers are calculated based on non mail volume data and are used to attribute activity costs to products. A direct driver can work on two levels, namely; Drivers are calculated based on non mail volume data and are used to attribute activity costs to products. A direct driver can work on two levels, namely;
A single activity mapped to a single SPHCC (See Figure 5.2i); or A single activity mapped to a single SPHCC (See Figure 5.2i); or
Figure 5.2i Activity mapped to single SPHCC Figure 5.2i Activity mapped to single SPHCC
Activity
SPHCC
1st Meter Letters
Activity
A single activity mapped to many SPHCCs (See Figure 5.2ii). A single activity mapped to many SPHCCs (See Figure 5.2ii).
Figure 5.2ii Activity mapped to many SPHCCs Figure 5.2ii Activity mapped to many SPHCCs
Activity
1st Meter Large Letters
2nd Meter Large Letter
2nd Meter Letter
Activity SPHCC
This section describes the key methodologies associated with the latter level. This section describes the key methodologies associated with the latter level.
5.2.1 Non-Operational Direct One to One Mapping 5.2.1 Non-Operational Direct One to One Mapping
As with operational direct one to one mappings, there are a number of activities that are mapped directly to a single SPHCC as the activity costs have been incurred in support of an individual product.
As with operational direct one to one mappings, there are a number of activities that are mapped directly to a single SPHCC as the activity costs have been incurred in support of an individual product.
5.2.2 Post Office Limited (POL) 5.2.2 Post Office Limited (POL)
The interbusiness charge from POL covers the provision of counter services and mailwork. Counter services include the selling of products and collecting of revenues. Mailwork includes acceptance of mail volumes and the provision of accommodation facilities to enable local delivery activities to be performed. The share of activity cost to SPHCC is defined by the POL management report which is supplied periodically to
The interbusiness charge from POL covers the provision of counter services and mailwork. Counter services include the selling of products and collecting of revenues. Mailwork includes acceptance of mail volumes and the provision of accommodation facilities to enable local delivery activities to be performed. The share of activity cost to SPHCC is defined by the POL management report which is supplied periodically to
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Letters. Activity costs are attributed to product based on either the volume or the revenue of that product.
5.2.3 Customer Experience
The Customer Experience team provide support to our customers via call centres and postal enquiries. Typically, enquires from our customers relate to product pricing, service failures and lost or damaged items of mail.
The cost of Customer Experience is attributed to products based on a two stage process, which firstly identifies the proportion of cost for an activity relevant to groupings of products. Then secondly, this product grouping cost involves attributing the grouped product costs to products within that group using non weighted volumes.
5.2.4 Stamps and Collectables
The Stamps and Collectables main function is providing philatelic services to stamp collectors. In addition, they also fulfil the provision of stamps to large customers including retailers. Costs are attributed to product based on management information supplied by the Stamps and Collectables team.
5.2.5 Commercial
The Commercial team provides sales, pricing and marketing support for Letters. The costs of commercial activities are attributed to products based on a profile of activities supplied by the Commercial team.
5.2.6 Financial Services
Financial Services costs are those associated with the costs of accounts receivable for Letters. The cost of Financial Services activities are attributed to products based on a profile of activities supplied by the Financial Services team.
5.2.7 Manage Services
The Manage Services area relates to the marketing and sales activities associated with the products offered to the market. There are a number of activities to reflect the different products that are managed in this way e.g. stamp, meter, fulfilment, and media. The activity costs are then attributed to the products being managed based on a profile using either the volume or revenue for each product.
5.2.8 Compensation
The costs of compensation are those associated with making payments to customers for quality of service failures of products provided including delay, damage and loss. The compensation incurred is attributed to products based on the actual compensation paid out for each product. Compensation is reported within the GL against specific cost centres and GL codes and allows for the separate reporting of International and Domestic product compensation costs. The costs are then attributed to product on the profile of compensation costs reported by product by the team managing the process.
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5.2.9 Services
Many Letters services make use of operational activities. However, typically, services do not relate to items of mail, i.e. are not traffic item related.
As described in Section 3.1.7, service specific activity costs are created by the creation of resource drivers built from industrial engineering PVs. These activities are then allocated to the relevant services either directly on a one to one basis where there is no further breakdown of that service, or split, based upon a defined set of rules. For example, Redirections will be split to the different lengths of Redirection contract offered on the basis of number of contracts.
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5.3 Allocation of Overhead Activity Costs
The ABC Model initially attributes activity costs to products where a direct causal relationship can be observed. For those activities where this relationship is not observed, the allocation of activity costs to products is based on the proportion of previously attributed costs. This is consistent with the Third Postal Directive5 preferred methodology.
There are two overhead allocation methods;
1. Allocation based on operational pipeline. This can also be broken down to sub-pipeline. For example, where different units operate in the same pipeline such as Network and Collections, which collect different types of mail; and
2. Allocation based on groups of products. This could be all products for general overheads, subsets of products or SPHCC relevant to the type of overhead being allocated.
5.3.1 Allocation Based on Pipeline
Overhead activities occur across a number of business processes. Royal Mail uses a non nested approach to allocate overheads. Non nesting is a method whereby all overheads are allocated based upon only the calculated attributable cost base. Each overhead activity has been reviewed individually to identify the group of products that have indirectly benefited from that activity. This has generated the overhead attributions that are illustrated in Figure 5.3.1.i below.
Figure 5.3.1.i Overhead Allocation
All Products that use the Operational Pipeline
General Overhead Costs
£
General Overhead Costs
£
Collection Overhead Costs
Products Collected
£
Collection Overhead Costs
Products Collected
£
Processing Overhead Costs
Products Processed
£
Processing Overhead Costs
Products Processed
£
Distribution Overhead Costs
Products Distributed
£
Distribution Overhead Costs
Products Distributed
£
Delivery Overhead Costs
Products Delivered
£
Delivery Overhead Costs
Products Delivered
£
5 Document available from www.ofcom.org.uk
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Table 5.3.1.ii details the rules specifically in place for the allocation of overhead costs to products.
Table 5.3.1.ii Pipeline Overhead Allocation Rules
Overhead Area
Overhead costs at the International processing centre applied to SPHCCs processed there Overhead costs at RDC’s applied to SPHCCs processed at RDC’s Overhead costs at RDC’s applied to SPHCCs processed at RDC’s excluding economy Overhead costs in Collections applicable to Network vehicles applied to SPHCCs collected using network vehicles Overhead costs in Collections applicable to RM operations vehicle applied to SPHCCs collected using RM operations vehicles Overhead costs in Indoor Delivery applied to SPHCCs processed in Indoor Delivery Overhead costs in Delivery (Indoor and Outdoor) applied to SPHCCs processed in Delivery (Indoor and Outdoor) Overhead costs in Outdoor Delivery applied to SPHCCs delivered Overhead costs in inward processing applied to SPHCCs processed at an Inward Mail Centre Overhead costs in support of 1c and Import SPHCCs requiring inward processing applied to 1c and Import SPHCCs processed at an Inward Mail Centre Overhead costs in Local Distribution applied to SPHCCs using local distribution Overhead costs in Network using network vehicles applied to SPHCCs conveyed by network vehicles Overhead costs in Network using network vehicles applied to SPHCCs conveyed by network vehicles excluding economy Overhead costs in Network using RM Operations vehicles applied to SPHCCs conveyed by RM Operations vehicles Overhead costs in outward processing applied to SPHCCs processed at an Outward Mail Centre Overhead costs in inward/outward processing applied to SPHCCs processed at an Inward/Outward Mail Centre Overhead costs in support of 1c and Import SPHCCs requiring outward processing applied to 1c and Import SPHCCs processed at an Outward Mail Centre Overhead costs in Outdoor Delivery applied to all SPHCCs excluding Recorded Signed For
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5.3.2 Allocation Based on Groups of Products 5.3.2 Allocation Based on Groups of Products
Figure 5.3.2.i illustrates how the non-nested overhead cost allocation based on groups of products method works. Figure 5.3.2.i illustrates how the non-nested overhead cost allocation based on groups of products method works.
Figure 5.3.2.i Illustration of Overhead Allocation Figure 5.3.2.i Illustration of Overhead Allocation
Co
llect
ion
Ov
erh
ead
Co
sts
= £
90
Overhead Allocation
£100/£225 x £90 = £40
£75/£225 x £90 = £30
£20
£40
£30
£50/£225 x £90 = £20
£50
£100
£75
Packets £70
Letters £140
Large Letters £105
Attributable Collection Costs Fully Allocated Cost
A number of rules fall into this category of overhead allocation as shown in Table 5.3.2.ii A number of rules fall into this category of overhead allocation as shown in Table 5.3.2.ii
Table 5.3.2.ii Product Overhead Allocation Rules Table 5.3.2.ii Product Overhead Allocation Rules
Overhead Area
Overhead Commercial costs excluding Network Access, 1c and 2c stamp commission and overseas delivery applied to all SPHCCs excluding Network Access, 1c and 2c stamp commission and overseas delivery.
Network Access overhead costs applied to Network Access SPHCCs
General overhead costs applied to all SPHCCs
Overhead costs in support of account based products excluding Network Access products applied to all account based SPHCCs excluding Network Access products Overhead costs in support of account based products excluding Network Access, Unaddressed Mail and Response Services applied to all account based SPHCCs account based products excluding Network Access, Unaddressed Mail and Response Services
Incoming International overheads applied to Incoming international SPHCCs
Airmail, Surface Mail, Contract, International Priority and Incoming International overheads applied to Airmail, Surface Mail, Contract, International Priority and Incoming International SPHCCs
Overhead costs applied to all SPHCCs excluding Network Access
Overhead costs in support of stamp SPHCCs applied to all stamp SPHCCs
Overhead Commercial costs excluding Network Access, all regulated products and overseas delivery applied to all SPHCCs excluding Network Access, all regulated products and overseas delivery.
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5.4 Maintenance of Activity Drivers
Activity drivers are either volume related or direct to product. The volume related drivers are based on the SPHCC traffic volumes for the period being processed. The maintenance of this type of driver is planned around the SPHCCs. When a new SPHCC is identified, decisions are required in relation to:
Product group;
Format group;
Route to be allocated on routing matrix; and
WFs to be allocated for activities that the SPHCC is routed through.
Maintenance of direct to product drivers can be done on a quarterly or annual basis. Of the direct to product drivers described above, only Stamps and Collectables is updated annually, with all other drivers updated quarterly. Because the purpose of an activity driver is to attribute activity costs to products, the maintenance routine is focused around changes in the SPHCCs, which link to the volume related driver maintenance above.
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6.0 Product Module 6.0 Product Module
The product module holds costs associated with Letters products (see Figure 6.0.i). These are populated with costs using the activity drivers detailed in Section 5 above. Costs are held at a level of detail defined by the SPHCC. The SPHCC is an important feature of the volume related drivers methodology. There are over one thousand SPHCCs mapping to approximately three hundred individual products.
The product module holds costs associated with Letters products (see Figure 6.0.i). These are populated with costs using the activity drivers detailed in Section 5 above. Costs are held at a level of detail defined by the SPHCC. The SPHCC is an important feature of the volume related drivers methodology. There are over one thousand SPHCCs mapping to approximately three hundred individual products.
Figure 6.0.i Product module Figure 6.0.i Product module
General Ledger and Payroll
CT
CT
Resource Drivers
Activity Drivers
Products &
Services
Product Module
This section describes the structure of the products against which costs are reported and the type of costing information available from the ABC Model. This section describes the structure of the products against which costs are reported and the type of costing information available from the ABC Model.
6.1 Product Module Structure 6.1 Product Module Structure
The ABC Model attributes costs at SPHCC level, which is the product level with the following associated handling characteristics: The ABC Model attributes costs at SPHCC level, which is the product level with the following associated handling characteristics:
Class: including first class, second class and economy; Class: including first class, second class and economy;
Payment method: including stamp, meter and account; Payment method: including stamp, meter and account;
Size: including letter, large letter and packet; and Size: including letter, large letter and packet; and
Route: machined or manual. Route: machined or manual.
50.00Overtime
Expenditure Records
Value
Standard Pay 10,000.00
Etc …
Expenditure Records
Value
50.00
Standard Pay 10,000.00
Overtime
Etc …
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The current tariff structure for many of the inland products provides a more detailed structure on the size characteristic and this is also reflected within the ABC Model. The detailed sizes of different products are shown in Table 6.1.i.
Table 6.1.i Size Tariff and Costing Options for Inland Products
Weight band Letter Large letter A3 packet Packet
0–100g
101–250g
251–500g
501–750g
751–1000g
1001–2000g
2001–5000g
>5000g
Further details can be accessed via http://www.royalmail.com/
SPHCC costs can be expressed as a total or on an average per unit basis, which is calculated by dividing the total by the SPHCC volume.
The Product module is hierarchical and an illustration of the hierarchy is shown below in Figure 6.1.ii.
Figure 6.1.ii Illustration Of Product Hierarchy
SPHCCs
Costbase
Sales Product
Product Group
RM Products
e.g. First Class
e.g. First Class Stamp
e.g. First ClassStamp Letter
Time Period Cost type Activity
The ABC Model contains a table that links the sales product and sales product group.
A separate table holds SPHCC codes mapped to a sales product code.
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6.2 Classification of Products
As part of the reporting mechanism, products are classified either by:
Group: this level is used for Regulatory Reporting, e.g. bulk mail, first class etc.; or
Format: e.g. letter, large letter or packet.
The classification is held as an attribute against each product in the ABC Model.
6.3 Products with no Cost
A small number of products exist within the ABC Model for which there are no attributed costs. The reasons are;
There are no reported volumes: the costs and volumes for this product are reported against the main mailing product;
Licence fees: revenues relate to a Licence Fee paid to allow customers use specific products;
Services: revenues relate to fees charged for services provided to customers which are not volume related;
Volumes: there are no volumes for these products in the reported quarter; or
Adjustments: revenue relates to central adjustments added to the ABC Model for reconciliation purposes in producing the regulatory accounts made or at customer level rather than product level.
6.4 Universal Service Obligation (USO) Categorisation
Product costs are assigned to regulatory service groups, defined as part of the General Authorisation Condition Acc1 regarding Regulatory Reporting. The service groups are:
Downstream Services.
Non-USO Products.
USO Products.
End-to-end Only Products.
6.5 Maintenance of Product Module
The maintenance of products is achieved through the maintenance of activity drivers (see Section 5.0).
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7.0 Class Costing
Letters processes, activities and resources reflect the products provided and their corresponding attributes e.g. format (letter, large letter, and packet) and class (first6, second or economy). Product attributes have determined the design and resourcing requirements of many of the activities. For example, the first class product offer is a next day delivery service Monday to Saturday. To achieve this requirement Letters operational processes have the capability of joining up all collection and delivery points overnight. Working between the latest acceptance collection times and the time the mail needs to be available for delivery, the mail is distributed around the country overnight. This requires staff to work through the night, and in some cases using aircrafts to fly mail between the most southerly and northerly points of the UK.
In the ABC Model, such a differentiation between class of the service and the impact that has on activities and resources consumed is not typically required. This means that activity costs are attributed to products based on consumption of the underlying activity rather than recognising the relative demands of the product service specification. Class costing methodology aligns the impact that the class of a service has on the activities and resources consumed in achieving that level of service in the ABC Model.
The methodology has two key stages:
Determining if an activity or resource is pertinent to a single class of mail; and
Creating class activities for one or more cost types.
The high level methodology is illustrated in Figure 7.0.i
Figure 7.0.i Class Costing Methodology
Activities and Cost TypesIn a single Class world,
would the costs change?
Do all Cost Types for that Activity change?
Activity to follow standard ABC
attributionYes
No
Total Activity cost attributed to single Class
Part Activity cost attributed to single Class
Yes No
6 For the purpose of class costing both export and import International mail is treated as first class. This reflects the operational processes undertaken.
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This section details the approach used to assess whether activities and cost types need to be class costed, and how class costing is deployed in the ABC Model.
7.1 Assessment Approach
The assessment approach is focused on both the activities undertaken and cost types used by the business as well as the quantity of activities and cost types used to meet the product service specifications.
In the assessment approach, the basic question is ‘if Letters had only one class of mail, at current total volumes, would the costs change?’ If the answer is ‘no’ then class costing is not required and hence the ABC cost attribution rules apply as detailed in sections 3.0 and 5.0. If the answer is ‘yes’ then it may be applicable for class costing the activity and/or cost types.
The assessment falls into 2 categories;
Discrete costs that can be allocated directly to a class, for example shift payments; and
An assessment of the extra level of resource required in support of processing a certain class of mail. Any scale or scope costs assessed are then allocated to that class of mail.
In the case where class costing adjustments are required, it is necessary to consider whether all cost types for that activity change, or whether only some cost types will vary.
If in the situation where activities are based on the resources consumed by a single class of mail it is clearly appropriate to attribute that cost in total to the relevant class.
In the situation where only specific costs within an activity change, then the activity cost is attributed to products in a way that is specific for the cost type. This involves estimates of the economies of scope that arise from having two or more classes of mail. Given that Letters processes handle different classes of mail using the same activities, (for example the sortation of mail via machines covers both first and second class items) these economies can then be assigned to a particular class of mail (in the above example first class mail is processed during a short processing window in order to achieve next day delivery, leading to a requirement for more machines, and is processed during the evening, leading to the incursion of shift payments, therefore non running time machine costs and shift payments are assigned to first class items).
Because the mail centre network infrastructure is mainly designed and resourced to provide a next day (first class) service, then this operation is described as first class led which means the economies of scope are assigned to second and economy class products.
To assess the economies of scope the quantity of resources required by the existence of first class products is assessed, for example, as follows;
The requirement to have more machines to operate over a short processing window leads to the creation of non running time for those machines. Class costing assumes
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that the first class products are driving the machine requirement to meet a peak workload. that the first class products are driving the machine requirement to meet a peak workload.
Within the ABC Model the non running time of each machine type is recorded separately and costed. This cost is allocated to the first class products that use the particular machine. This can involve more than one activity if a machine is used for both outward and inward activities and it is the first class product volumes that are used as the basis of allocation.
Within the ABC Model the non running time of each machine type is recorded separately and costed. This cost is allocated to the first class products that use the particular machine. This can involve more than one activity if a machine is used for both outward and inward activities and it is the first class product volumes that are used as the basis of allocation.
Accommodation costs associated with machines are also class costed in this way; Accommodation costs associated with machines are also class costed in this way;
Shift payments are incurred in order to process first class mail to ensure that it meets its delivery specification. This cost is therefore allocated to first class products;
Shift payments are incurred in order to process first class mail to ensure that it meets its delivery specification. This cost is therefore allocated to first class products;
Air freight costs are primarily incurred for the transport of time critical products and therefore costs are largely allocated to first class products
Air freight costs are primarily incurred for the transport of time critical products and therefore costs are largely allocated to first class products
As illustrated above, the economies of scope can be shown by looking at shared machines, and the allocation of accommodation costs associated with these machines to class.
As illustrated above, the economies of scope can be shown by looking at shared machines, and the allocation of accommodation costs associated with these machines to class.
The total volume of mail by format and class from the prior year is divided by the processing window to create a throughput by class of mail. The total volume of mail by format and class from the prior year is divided by the processing window to create a throughput by class of mail.
An average throughput for the total of all classes and formats of mail is calculated and the difference between the average throughput and the first class throughput is attributed to first class mail only, representing the overcapacity (the extra machines required to allow for a next day service) required to support first class in the available processing window to achieve first class specification.
An average throughput for the total of all classes and formats of mail is calculated and the difference between the average throughput and the first class throughput is attributed to first class mail only, representing the overcapacity (the extra machines required to allow for a next day service) required to support first class in the available processing window to achieve first class specification.
7.2 Deployment in ABC Model 7.2 Deployment in ABC Model
Activity costs are made up of a number of cost types and class costing methodology defines the attribution of cost types within activities to product. Activity costs are made up of a number of cost types and class costing methodology defines the attribution of cost types within activities to product.
This approach notionally recognises each appropriate cost type and activity combination as a separate class and non-class activity as illustrated in Figure 7.2.i This approach notionally recognises each appropriate cost type and activity combination as a separate class and non-class activity as illustrated in Figure 7.2.i
Figure 7.2.i Creating Class Activities Figure 7.2.i Creating Class Activities
Meter Post Operation
Accommodation £Pay £ Shift £
Class Activity
Class Activity
Meter Post Operation
Meter Post Operation
Shift £
Standard Activity Structure Class Activity Structure
Activity Cost Type £ Activity Cost Type £
Accommodation(1st) £
Class ActivityMeter Post Operation
Accommodation (2nd) £
Non Classed ActivityMeter Post Operation Pay £
Relevant to first class products
Relevant to second class products
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In the case of accommodation an assessment is made between that required for first class and that required for second based upon the amount of traffic and the time available for processing, leading to the creation of two classed activities for the cost type accommodation.
The approach does not apply directly to activity drivers (see Section 5.1.2).
7.2.1 Cost Types to Class Activities
For any cost type within an activity that is defined as being class costed, it is necessary to create a class activity and allocate the defined cost type to that class activity. Cost types that are class costed are detailed in Table 7.2.1.i. This rule is superseded in the case of direct drivers as described in 7.2.
Table 7.2.1.i Class Costed Cost Types by Business Process
Accommodation
Machinery
Shift
Shift
Air freight Process/cost
type/class First First First Second First
Collection
Outward X X X
Inward X X X
International X
Delivery Indoor X
Network X
Delivery Outdoor
RDC X X
For example, the meter post operation within the Outward Mail Centre is a class activity. The accommodation cost type has been identified as a class cost type. As such, class costing involves creating a new activity to which the single cost type for accommodation is attributed using the resource driver appropriate to that cost type. This new activity is then attributed to a class mail depending on the nature of the class activity.
A class activity uses the same type of resource driver as the non-class activity. As such the resource driver needs to be split between the non-class and class activities.
Building on the meter post operation example, this activity occupies part of the indoor floor space at the Mail Centre. The accommodation cost type uses the resource driver of accommodation square metres, and hence this is split between the classes of mail that are processed in the meter post operation.
This split then allows different proportions of the accommodation indoor costs to be attributed to the different classes of mail as illustrated in Figure 7.2.2.i.
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7.2.2 Class Activity to Product 7.2.2 Class Activity to Product
For the second step the class activity costs are attributed to SPHCCs using the traffic volumes (generated from the routing matrix) multiplied by the format WF multiplied by a class WF.
For the second step the class activity costs are attributed to SPHCCs using the traffic volumes (generated from the routing matrix) multiplied by the format WF multiplied by a class WF.
Figure 7.2.2.i Class Activity to Sales Products Figure 7.2.2.i Class Activity to Sales Products
Meter Post Operation
Meter Post Operation
Shift £
Class Activity
Non-Class Activity
Class Activity Structure
Activity Cost Type £
Pay £
Accommodation (1st) £
Sales Products £
First Class
First Class
Class Activity
Class ActivityMeter Post Operation
Accommodation (2nd) £
Meter Post Operation First Class
Second Class
Second Class
Activity to SPHCC assignments are created from the routing matrix and activity driver quantities are generated when the traffic volumes are applied. The activity driver quantities are then multiplied by the WFs to give a revised driver product quantity in relation to the class of products that use the activity. This is illustrated in Figure 7.2.2.ii.
Activity to SPHCC assignments are created from the routing matrix and activity driver quantities are generated when the traffic volumes are applied. The activity driver quantities are then multiplied by the WFs to give a revised driver product quantity in relation to the class of products that use the activity. This is illustrated in Figure 7.2.2.ii.
Figure 7.2.2.ii Activity to Products Assignment Figure 7.2.2.ii Activity to Products Assignment
Product Volumes
Class Activity
Non Classed Activity
1st Meter Letters
1st Meter Large Letters
1st Meter Letters
1st Meter Large Letters
2nd Meter Letters
2nd Meter Large Letters
Routing Matrix
Weighting Factor
Class Weighting
Factor
Weighted Product Volumes
1,000 100% 1.0 1.0 1,000
500 100% 3.0 1.0 1,500
1,000 100% 1.0 0 1,000
500 100% 3.0 0 1,500
2,000 100% 1.0 0 2,000
1,000 100% 3.0 0 3,000
Meter Post Operation
Meter Post Operation
Shift £
Pay £
Accommodation (1st) £
Meter Post Operation
Accommodation (2nd) £
Meter Post Operation
2nd Meter Letters
2nd Meter Large Letters
2,000 100% 1.0 0 2,000
1,000 100% 3.0 0 3,000
Class Activity {
Class Activity {
{___________________________________________________________________________________________________________________________________
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7.3 Class Costing – Economy Approach
Class costing for economy focuses on RDC and Collections.
7.3.1 RDC
Where Mail Centres are regarded as being first class led, due to the need to process mail for delivery the next working day, RDC’s are considered to be second class led, dealing with pre-sorted mail mainly for later than next working day delivery, though there is a small amount of first class pre-sorted mail entering the network via RDC’s which is then transferred to the Mail Centre network.
RDC’s are considered to be second class led, therefore, shift payments are attributed to first and second class products only, shift payments are incurred in order to process mail to ensure it meets its delivery specification, economy mail is not time critical. This is to reflect the fact that the operation has been set up as second class network, to be consistent with the class costing methodology applied in the mail centres.
7.3.2 Collection
The product specification for bulk mail economy is a five day collection carried out Monday to Friday compared to all other product specifications which have a six day collection.
An incremental approach has been applied with economy treated as the baseline with the increment being applied to first and second class. This is to reflect the additional Saturday collection costs for first and second class, as illustrated in Table 7.3.2.i.
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Table 7.3.2.i Saturday Collection Assessment Illustration Table 7.3.2.i Saturday Collection Assessment Illustration
Mail Volume Proportions by Day of the Week
Monday Tuesday Wednesday Thursday Friday Saturday
First Class Bulk Mail 20% 20% 20% 20% 15%
5%
Second Class Bulk Mail 20% 20% 20% 15% 20%
5%
First Class Publishing Mail 20% 15% 20% 30% 10%
5%
Second Class Publishing Mail 20% 20% 20% 15% 20%
5%
Average Daily Profile 20% 20% 20% 20% 15%
5%
The proportion of mail collected on a Saturday is used as the basis of additional costs incurred by first and second class mail.
7.4 Maintenance of Class Costing
Through the maintenance of resource drivers the requirements of class costing is included. For example the calculation of non running time is refreshed via the static data refresh of machines.
In addition class resource drivers (as described in section 7.2) are updated yearly based on prior years data. These drivers reflect an assessment of the accommodation requirements for first class and that required for second based upon the amount of traffic and the time available for processing.
No maintenance is required for activity drivers as the class weighting factor as described in section 7.2.2, is binary which reflects whether SPHCC’s are first or second class.
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8.0 Zonal Costing Methodology
8.1 Introduction
The purpose of this section is to set out the methodology used by Royal Mail to determine unit costs of geographic zones as a percentage relative to the national average for mail taken from the Inward Mail Centres to the point of delivery, and to do so by format. For 2012/13 the geographic zones are London, Urban, Suburban, Rural. The methodology involves two steps. First postcode sectors are mapped to non-London zones defined by reference to delivery point density and the proportion of business delivery points (and for London identified by reference to Standard Selection Codes (SSCs) and secondly postcode sector costs are mapped to zones. Geographically, mail items are identified by their destination in terms of postcode (e.g. SE15 3UE), postcode sector (e.g. SE15 3), postcode district (e.g. SE15) and postcode area (e.g. SE). By contrast, zonal costs are recorded within Royal Mail by the costs of Inward Mail Centres, the local distribution of mail to delivery offices and the delivery offices themselves (preparation, walks). There is a link in that the postcode sectors fall within the delivery office’s area and therefore can be associated with a delivery office and its Inward Mail Centre. Costs can then be allocated to postcode sectors within a delivery office either uniformly per item or taking account of geographic drivers that distinguish postcode sector costs within a delivery office. Section 8.2 explains the relevant costs and the principles and the rationale of the methodology along with a graphical presentation in Section 8.3. Section 8.4 describes the data and methodology used to allocate postcode sectors to zones, including reference to SSCs. The methodology used to allocate the relevant costs to zones is described in Section 8.5. Section 8.6 concludes. In addition, Annex C provides a historic context to the methodology. Annex D sets out details of the analysis undertaken to allocate delivery office costs to zones and Annex E lists data sources.
8.2 Relevant Costs
In terms of its approach, the methodology effectively determines differential zonal unit direct costs (i.e. unit costs excluding overheads) for each relevant pipeline part, adds them up and aggregates them to total zonal unit direct costs for the complete pipeline downstream from the Inward Mail Centre (IMC). Broadly speaking, the relevant costs include the following:
(a) Revenue protection, handling and sortation at the IMC (b) Local Distribution (LD) from the IMC to the delivery office (DO) (c) Indoor delivery (mail sorting and preparation in the DO) (d) Outdoor delivery (in each postcode (PC) sector) (e) Overheads.
The overhead costs are currently included in the analysis only to the extent that they are included in the national costs total used for scaling (see Section 3). If the other relevant costs are allocated first, and only subsequently the relevant overheads are allocated as
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a single cost category and as an equi-proportional mark up (EPMU), then this would not change the relative unit cost across the zones. Hence if an EPMU assumption is made for these costs, the actual allocation of overhead costs is not needed to form the zonal unit costs relative to the national level Costs are identified for the following functions in the downstream part of the mail processing pipeline from the Inward Mail Centre to the point of delivery: Inward Mail Centre (IMC): the mail centre that receives mail dispatches, either
from other Royal Mail mail centres or from C&NA’s access customers, to undertake revenue protection for access customers, sort the mail and forward it to the DOs in the respective region.7
Local Distribution (LD): the conveyance of mail from an IMC to the DOs in its area.
Delivery: the function performed by a DO, with a distinction made between Indoor and Outdoor8:
Indoor Delivery is the process of sorting mail to walks and other preparation for outdoor delivery; moreover: keeping items that could not be delivered at first for pick-up by customers (e.g. packets).
Outdoor Delivery is the journey from the DO to the delivery point.
8.3 Principles and Rationale
The geographic attributes of mail items are identified by their destination in terms of postcode, PC sector, PC district and PC area, whereas geographic disaggregations of business costs are recorded by the functions IMCs, LD and DOs. Hence the main principle required of the methodology is to marry the geographic attribute of the mail item to the geographic disaggregations of Royal Mail’s relevant costs. Several guidelines then inform the approach. There is a link from the postcode sectors that fall within the DOs area and
therefore can be associated with a DO and its IMC. Costs can then be allocated to postcode sectors within a DO, either pro-rata to postcode sector volumes or taking account of geographic cost drivers in postcode sectors.
Known and recorded costs rather than estimates are used whenever the infor-mation is available. For instance, known and recorded costs are used at the level of IMCs and DOs. By contrast, no specific costs are known for PC sectors, so their costs are estimated (see Annex D).
Geographically distinct zonal costs are reconciled to national costs. Bottom-up geographic cost data from sources outside the ABC Model are aligned to the national total levels in the audited ABC Model. For example, DO and IMC cost data recorded for operational purposes in the operational business information
7 Note that each Royal Mail mail centre serves both an inward and an outward function (where the outward function is to receive mail from letter-box collections, post offices and large business customers, to sort it by mail centre and to forward it corres-pondingly). Thus, the term IMC is used to refer to a mail centre when the focus is on its inward function. 8 A distinction between Indoor and Outdoor is made in the ABC Model, which is the source used for cost data identified at the national level. However, in the calculation the two are combined for the allocation of the costs between zones.
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system are scaled to align to the ABC Model total, and this applies to all the costs used: IMC costs (staff and non-staff), LD costs (staff and non-staff) and delivery costs (staff and non-staff).
Data is used in ways that are considered to lead to statistically reliable outcomes. For example, postcode sector cost estimates are aggregated to zones and national format profiles are used for each of the zones.
To form zonal costs for specific formats, national costs by pipeline activity by format from the ABC Model are used. The cost allocated to each pipeline activity differs by format. For example, local distribution costs are driven more by size than an indoor processing activity and hence are allocated a higher portion of packet costs within ABC. These differences drive different weightings of costs across the pipeline between format, at a national level and for the zones.
The methodology estimates geographical cost differences only where there are known to be geographical cost drivers. These drivers include geographically dif-ferent average wage rates of staff costs, local distribution costs associated with the distance between IMC and DOs and the DO costs associated with delivery to the delivery points in potentially different zones within the area served by the DO.
The methodology allocates costs to zones in a two stage process. Firstly it a) maps the non-London PC sectors to zones defined by reference to delivery point density and the proportion of business delivery points and b) defines the London zone by London SSC (3-digit standard selection code), see Section 8.4 for details. Secondly it maps PC sector costs to zones, see Section 8.5 for details. Following the principles above: Each IMC's costs are allocated at a uniform cost per item to the DOs using that
IMC and then postcode sectors (Section 8.5.3). LD costs are allocated to DOs based on the distance and time from the IMC to
each DO using that IMC and then at a uniform cost per item for each DO across the postcode sectors within the DO (Section 8.5.4).
DO staff costs for London are allocated using known and recorded information related to SSC. This results in the London zonal unit costs reflecting the average DO unit costs within the M25 area. Non-London delivery staff costs are allocated between the postcode sectors within each DO using the estimated coefficients from a national cost function for these DO costs applied to postcode sector level data (Section 8.5.5), prior to aggregation of the costs back to the zonal level (Section 8.5.6).
DO non-staff costs are allocated, unlike DO staff costs, using the same cost per item for all the postcode sectors within each DO.
A graphical representation of the methodology is given in Figure 8.3.i: The IMC, LD and DO costs at the left-hand side are allocated, by using PC sector and DO volume data at the top, to PC sectors on the right-hand side before being aggregated into zones at the bottom. A detailed description is given for each step involved in Section 8.5.
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Figure 8.3.i Flow diagram of the main components in the methodology Figure 8.3.i Flow diagram of the main components in the methodology
IMC staff and non-staff cost
Lo
cal d
istr
ibu
tio
n Staff unit cost
Vehicle unit cost Other unit cost
Del
iver
y o
ffic
e
Indoor staff cost Outdoor staff cost Vehicle cost
Other cost including property
PC sector volume shares (from MCS) * DO volumes = estimated PC sector volumes
Total cost for each PC sector
- IMC staff and non-staff cost
- Local Distribution cost (staff, vehicles, other)
- Delivery staff cost - Other delivery costs
Aggregation of costs across PC sectors, then division by volume – by zone or nationally
Delivery time: Estimation of delivery time for each PC sector
Dow
nstr
eam
pip
elin
e
Unit cost values by zone and, respectively, nationally
8.4 Allocating Postcode Sectors to Zones 8.4 Allocating Postcode Sectors to Zones
8.4.1 Introduction 8.4.1 Introduction
This Section describes the data and method applied for mapping PC sectors to zones, firstly for London and secondly for non-London. A postcode sector is allocated to London if the majority of volume for its SSC falls within the M25 (details in Section 8.4.2). The zonal allocation of PC sectors outside London is based on the delivery point density and the business density (details in Section 8.4.3).
This Section describes the data and method applied for mapping PC sectors to zones, firstly for London and secondly for non-London. A postcode sector is allocated to London if the majority of volume for its SSC falls within the M25 (details in Section
8.4.2). The zonal allocation of PC sectors outside London is based on the delivery point density and the business density (details in Section 8.4.3).
A full review and update of the postcode sector allocation to zones is undertaken using data from the second, fourth and sixth months of the financial year (May, July and A full review and update of the postcode sector allocation to zones is undertaken using data from the second, fourth and sixth months of the financial year (May, July and
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September)9. Where the data shows that the mappings of existing PC sectors to zones or SSCs in London should be changed and that the change remains the same for the five months to September, Royal Mail updates the file with the new mappings. Where data shows that the mappings of existing PC sectors to zones or SSCs in London should be changed but that the change is unstable over the five months to September, or where the data does not show any significant change, Royal Mail does not update the file and the original mappings are retained. This ensures that changes to mappings are not driven by a single month’s data, and thereby seeks to provide some protection from any data volatility that might be present or become present in the data. The latest change in the mapping of postcode sectors to zones, along with the degree of instability over the 3 sample months, is shown in Annex E. For the reporting of historical zonal costs for year t (for example 2010/11), one could use the allocation of postcode sectors to zones for the same year t (in the example: May to September 2010). However, in practice, the movement in reallocating postcode sectors to zones is small in any year and, by the time the costs are reported, an update of the allocation is known. Hence the postcode sector mapping to zones used in relation with zonal costs for year t is defined by the data to September in year t+1 (in the example: May to September 2011). For data sources used see Section 8.4.3.
Figure 8.4.1.i Sequence of time periods for building and using the zonal costing model
Period t (e.g. 2010/11)
Cost and volume data (financial year)
Period t+1 (e.g. 2011/12)
Density data to define zones (May to Sept)
Period t+2 (e.g. 2012/13)
Use of the costing model
A geographical representation of the zones is given in Figure 8.4.3.i (at the end of this Section). This shows the London zone being encircled by the M25 and the Rural and Suburban zones dominating the rest of the map, with the Urban zones being small, densely populated areas.
8.4.2 London
The London zone is the first to be defined. This uses the 3-digit Standard Selection Codes (SSCs) and their mail volumes that sit within or overlap the boundary of the M25, as identified by Royal Mail using the Mails Characteristics Survey (MCS, see the description in Annex F and in the ABC Costing Manual, section 0). The 3-digit SSC is used by large bulk mail customers for c120-way sortations. It often corresponds to a PC area (e.g. 108 to PA).10 Each PC sector will map onto one and only one 3-digit SSC because
9 Every other month is used as a proportionate response to ensure that there are more than two data sets to allow comparison, but not so many as six as that would make the review overly burdensome. 10 The Royal Mail Selection Files uses numeric coding which identifies each selection in a unique way. The first three digits identify the Residue/ Low Sort selection code, for example 125 is the Residue selection code for the CW, WA and WN postcode areas. This defines the area or Mail Centre to which it belongs. See also “User Guide for Marketing, Publishing and General Correspondence Products” Royal Mail 2012 at: http://www.royalmailtechnical.com/rmt_docs/User_Guides_2012/Sorting.pdf
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i) for each PC sector there is one and only one DO, ii) for each DO there is one and only one 3-digit SSC.
(In 2012 there are 88 3-digit SSCs and around 1.3k DOs and 11k PC sectors in the UK.) Following a review, for example from a change to the SSC definition, the 3-digit SSCs that have more than 50 percent of their mail volumes going to an area within the M25 boundary are allocated to the London zone. That allocation of 3-digit SSCs then determines the allocation of DOs and its PC sectors to the London zone.
The following detailed points are noted: An existing SSC can be renumbered within year for operational purposes and in
this event the new SSC number is mapped to the same zone as the original number (i.e. London or non-London).
An existing SSC may be split within year. Where this happens in relation to non-London SSCs it has no effect on the mapping to zones. Where this happens in relation to a London SSC, the mail to the two new SSCs continues to be allocated to the London SSC until the annual update is implemented.
Two existing SSCs may be combined within year. Where this happens the two original SSCs are retained until the annual update is implemented.
In practice the splitting and combining of SSCs has been rare and is driven by operational procedures. Hence the purpose of the above process is to allow operational procedures to be updated with minimal impact on the London zone definition within the same financial year.
8.4.3 Non-London
For non-London zones, the following data sets are used: i) The area in square kilometres for every “geographic” PC sector is sourced from
Royal Mail using external mapping programs (notably Geoplan11). “Non-geographic” PC sectors have no area in square kilometres but can still have a physical geographic location point (e.g. PO boxes).
ii) The number of business and residential delivery points for all PC sectors (both “geographic” and “non-geographic”) is sourced from Royal Mail's Address Management Unit (AMU) using the Postcode Address File (PAF).12
11 Geoplan is a provider of geographic information, with products such as databases and mapping software. Specifically for postcode sector data see www.geoplan.com/Mapping_Solutions/GIS_Mapping_Data/Postcode_Sector_Boundaries . 12 For details on AMU and PAF see www.poweredbypaf.com and www.pafcompliancecentre.com/documents.php – specifically www.pafcompliancecentre.com/documents/241011_AMU%20Story.pdf and www.pafcompliancecentre.com/documents/081111_What_is_PAF.pdf .
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iii) Three-digit Standard Selection Codes and their mail volumes that sit within or overlap the boundary of the M25 are identified by Royal Mail using the MCS.13
The following methodology is used to allocate PC sectors to zones: a) Geographic PC sectors with business address density (number of business
addresses as a percentage of the total) greater than 10% and delivery point density per km2 greater than 500, or delivery point density per km2 greater than 1000 regardless of business address density are allocated to the Urban zone (excluding PC sectors allocated to the London zone).
b) Geographic PC sectors with a delivery point density per km2 between 100 and 1000 are allocated to the Suburban zone (excluding PC sectors allocated to the London and Urban zones).
c) Geographic PC sectors with a delivery point density per km2 less than 100 are allocated to the Rural zone (excluding PC sectors allocated to the London, Urban and Suburban zones).
d) All “non-geographic” sectors have an infinite delivery point density (as they have no area in km2) and are allocated to the London zone when in a London SSC, or otherwise to the Urban zone.
e) All sectors in PC areas GY, IM and JE (Guernsey, Isle of Man and Jersey) are allocated to the Rural zone.
13 The use of access volumes will have no impact on the process of mapping postcode sectors to the London zone using SSC.
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Figure 8.4.3.i Map of postcode sectors to zones
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8.5 Allocating Costs to Zones
8.5.1 Introduction
This Section describes the data (Section 8.5.2) and method (Sections 8.5.3 to 8.5.6) applied for allocating the relevant costs to postcode sectors and hence to zones. The methodology determines differential zonal costs for each relevant pipeline part, adds them up and aggregates them to zonal unit costs for the complete downstream pipeline. We identify costs in the mail processing pipeline downstream from the Inward Mail Centre, along the different functions as explained at the end of Section 8.3). Those costs are combined together to form an estimate of the relevant cost (excluding overheads, as explained in Section 8.2), and then unit cost, in each zone (Section 8.5.6). The model assumes that in each zone the same traffic distribution between formats applies as at the national level. This assumption is supported by MCS data, which shows that the maximal deviation for any zone and any format is small. The ABC Model has costs at IMC, LD or DO level to the national level, split by format. This enables different format splits to be applied for the different functions of the pipeline. These costs can then be used to split the zonal costs at each function between the zones. Regarding traffic data and formats, the model uses unweighted traffic figures, i.e. a Letter has the same weight as a Large Letter or a Packet. That is appropriate under the above-mentioned assumption that the traffic distribution between formats is similar across the zones. It has the practical advantage that no format weights, specifically for different functions such as IMCs or DOs, need to be determined.
8.5.2 Data
The data used includes the following:
a. For each IMC: average wage rate, total staff costs from the business operational business information system; plus: the IMC staff and, respectively, accommoda-tion national cost totals from the ABC Model (used for scaling).
b. LD: distances (miles and average driving time) between each IMC and each of its DOs, number of round-trip journeys per day for each DO, driver wage rate, national-average vehicle costs per km, national estimate of loading and uploading time from the operational business information system; plus: the national cost totals from the ABC Model (used for scaling).
c. For each DO: volume (unweighted DO total across formats or, if applicable, format-specific, see Section 8.5.1), indoor staff cost, outdoor staff cost, average gross wage rate14, delivery vehicle cost, accommodation costs, and other non-staff costs, number of delivery points, business density, area, from the operational business information system; plus mapping to a specific IMC and the national cost totals from the ABC Model (used for scaling).
14 In the calculation, DO wage rates are relevant only to allocate to DOs the national DO wage total, by equating to it (scaling) the sum, over all DOs, of the product of the estimated DO delivery time and the DO wage rate. Therefore, only the relative wage rates between DOs are relevant in the calculation (the higher a DOs wage rate, the higher its share will be in the national DO wage total). By contrast, the absolute wage rates used are not relevant, due to scaling.
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DO volume data uses operational traffic measure and this is then scaled to align to the revenue-derived national total.
d. For each PC sector: share in the DOs volume total (volume distribution from the MCS, with volumes as unweighted totals across formats), number of delivery points, business density, area, from the operational business information system and mapping to a specific DO and, via the DO, to its IMC.
Details regarding data sources are given in Annex E. Several other variables are known and recorded at the DO level but not at the postcode sector level, e.g. the number of redirections. Hence the subsequent analysis is con-strained by the availability of data at postcode sector level. Sample data for the volume distribution for IMCs, DOs and postcode sectors is available from the MCS. The operational traffic measure is used for each DO and split into postcode sectors using proportions derived from the postcode sector sample from the MCS. Once the DO volume is allocated to its postcode sectors using the proportions from the MCS sample, it is scaled to the revenue-derived volume measure for each format used in the ABC Model. Data is used in ways that are considered to lead to statistically reliable outcomes. The use of MCS data introduces the scope for sampling error. While this can be marked at the postcode sector level, the volume and costs derived with the data at this level are subsequently grouped into the four zones at which level the data is statistically reliable (see Annex F for details). Ultimately postcode sector cost estimates are aggregated to zones and national format profiles are used for each of the zones.
For 2011/12 for the first time we have both retail (end to end) and downstream access MCS data. The additional use of access MCS data, by adding downstream access MCS volumes to retail MCS volumes for each postcode sector, has been implemented in December 2012 (in line with the RAG15) in the zonal costing model based on 2011/12 data, increasing the sample size. For a description of the MCS methodology see Annex F.
15 See in the Regulatory Accounting Guidelines (Annex 11 to Ofcom's March 2012 decision document) "Zonal Costing Rule 13: Zonal Traffic measurement", par. 8.59, and in the guidelines on Regulatory Financial Reporting (Annex 3 to Ofcom's March 2012 decision document), par. A3.164 and Table 3.
8.5.3 Inward Mail Centres Costs
To identify the IMC costs for each IMC, the following steps are undertaken:
i) Inward frontline staff annual cost for each IMC is taken from the operational business information database, with a proportional mark-up related to common costs for inward and outward activities (meal relief, training, processing support).
ii) The thus adjusted IMC frontline staff annual costs are scaled so that their sum across IMCs aligns to the national total of IMC staff annual cost in the ABC Model (by format if applicable), which also includes costs for manage-ment and administration staff.
iii) IMC accommodation annual costs are scaled to the national total in the same way.
iv) These scaled total costs for each IMC are then allocated to individual postcode sectors proportionally to volume.
8.5.4 Local Distribution Costs
To identify the Local Distribution (LD) unit costs for each DO, the following steps are undertaken:
i) An estimate (unscaled) of annual LD staff cost associated with each IMC is calculated as the product of the IMC-specific driver wage rate, the DO-specific driving time from each IMC (incl. an standard uploading and unloading time), the DO-specific number of round-trips per day and the number of working days per year. This is then scaled to align to the corresponding total in the ABC Model (by format if applicable).
ii) An initial estimate of annual LD vehicle cost is calculated as the product of the standard applied national average vehicle cost per mile, the DO-specific driving distance from its IMC, the DO-specific number of round-trips per day and the number of working days per year. A scaling to the ABC Model is then applied.
iii) The national total of annual LD Other costs (2% of total LD costs and 0.02% of the grand total) is allocated to DOs proportionally to the sum of i) and ii).16
iv) The sum of scaled annual LD staff, LD vehicle and Other LD costs gives the total annual LD cost. For each DO, this sum is divided by the annual DO volume (unweighted DO total across formats or, if applicable, format-specific, see Section 8.5.1) to yield the unit LD cost.
This cost value needs to be explicitly modelled using physical variables and input factor prices because, unlike for IMC Staff costs in Section 1.1, no individual LD cost values are otherwise available for each link from an IMC to a DO.
16 "Other costs" in Local Distribution are mainly property (e.g. parking space for vans) but also include computers and uniforms.
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8.5.5 Delivery Office Costs
8.5.5.1 Delivery Costs by Delivery Office
To identify the Delivery office (DO) unit cost for each DO, the following steps are undertaken:
i) Indoor delivery staff DO annual cost (incl. meal relief and training), an input from the operational business information system, is scaled to align to the ABC Model total.
ii) Analogously for Outdoor delivery staff annual cost, vehicle annual cost and accommodation annual cost.
iii) Other non-staff annual cost (incl. machinery depreciation) by DO is calculated by allocating the national total to DOs proportionally to the sum of their other scaled costs (indoor and outdoor staff, vehicles, accommodation).
iv) The Indoor and Outdoor staff costs are combined to give total staff cost at the DO level for subsequent allocation to the postcode sectors.
v) Non-staff DO costs (accommodation, vehicles, other non-staff) are allocated pro-rata to volumes.
8.5.5.2 Delivery Staff Costs by Postcode Sector
Delivery hours are recorded and delivery costs calculated (by the ABC Model) on the level of DOs but not for PC sectors (of which on average there are eight per DO). However, as the costing zones are made up of PC sectors, delivery costs on that level need to be estimated, as stated in Section 8.3. This could be done by either allocating DO costs to postcode sectors uniformly per item or by taking account of geographic cost drivers that distinguish postcode sectors within a delivery office, as stated in Section Error! Reference source not found.. Econometric analysis suggests that, besides the number of items (volumes), there are important geographic cost drivers, such as area, the number of delivery points and the proportion of business delivery points. Their relative importance is captured by a regression on the DO level, whose coefficients are then used in the cost estimation for PC sectors. To identify the proportion of annual delivery time and hence staff cost for each non-London PC sector served by a DO, the following steps are undertaken:
i) Divide the combined Indoor and Outdoor Delivery staff annual costs for each DO by the DO-specific wage rate to give the annual combined Indoor and Outdoor delivery time for each DO.
ii) Run a regression for non-London DO data to form an estimated cost function (see Annex D).
iii) Combine the cost-function independent variable values at the PC sector level with the estimated parameters from the DO regression, to give the estimated annual combined Indoor and Outdoor delivery staff time for each non-London PC sector. Using the DO-specific wage rate this is then converted to the PC sector delivery staff cost.
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For PC sectors in London, simply aggregate the delivery costs for the SSCs.
8.5.6 Total Annual Cost
8.5.6.1 Total Annual Cost for Each Postcode Sector
For PC sectors in the London zone, unit costs are directly calculated for the entire zone, see Section 8.5.6.2. For each PC sector not in the London zone, to identify the total annual cost the following steps are undertaken:
i) PC sector IMC cost = share of the relevant IMC's annual cost, calculated as that IMC's total annual cost (as per Section 1.1) times the PC sector's share of that IMC's total annual volumes,
ii) PC sector LD cost = share of Local Distribution (LD) annual cost for that IMC, calculated as LD unit cost of Section 8.5.4 times PC-sector annual volumes.,
iii) PC sector DO cost = share of the DO annual cost (for the PC sector in question), calculated as the sum of:
a) Delivery staff annual cost for that PC sector, calculated as the product of
- the DO-specific wage rate (exogenous), - the estimated annual delivery time for the PC sector in
Section 8.5.5, - a DO-specific scaling factor that is equal to the ratio of the
actual total annual DO delivery time and the sum of the estimated annual delivery times for all PC sectors belonging to the DO.17
b) Other delivery annual costs (accommodation, vehicles, other) for that postcode sector, calculated as DO-specific Other delivery unit cost from Section 8.5.5 multiplied by postcode sector annual volumes.
8.5.6.2 Total Annual Cost by Zone
For the London zone, unit costs are calculated as the sum of all costs (IMC, LD, DO, both staff and non-staff annual costs) recorded for London SSCs, divided by their annual volume (by format if applicable). For non-London PC sectors, the final step is the aggregation, across postcode sectors to zones and, respectively, to the national level, of postcode sector annual volumes and postcode sector annual total costs. Then a unit cost value (i.e. a ratio of total costs and volume) can be determined for each format, both nationally and for each particular zone, for the financial year in question. These zonal aggregates are then used to calculate zonal unit costs relative to their corresponding weighted national averages. A small difference between the national
17 The scaling means that for each DO the sum of scaled estimated delivery times over PC sectors will be equal to the actually measured delivery time for the DO. This implies that on the national level the sum of scaled estimated delivery times over all PC sectors will be equal to the sum of actually measured delivery times for all DOs.
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average cost and weighted average cost of the zones is applied outside the zonal costing model, as an equal absolute cost increment for each zone to account for the additional costs incurred by Royal Mail C&NA from sampling whether those on national contracts are meeting the requirements of the National Geographic Posting Profile (NGPP).18
8.6 Conclusion
This section describes the methodology used by Royal Mail to determine zonal costs for 2011/12. In the current methodology, the postcode sectors are mapped to zones based on delivery point density and the proportion of business delivery points. This is the first step. The methodology then estimates the delivery time and cost for each postcode sector outside of London, with parameters from a regression performed on the DO level. Zonal average unit costs are then determined on the basis of the estimated costs and volumes for individual postcode sectors and their mapping to zones. Royal Mail intends to review the methodology for allocating the relevant costs to zones from time to time subject to applicable regulatory requirements.
18 See DSA zonal contracts.
Annex A Guiding Principles
The Costing Methodology Guiding Principles as shown in the Annex to Condition Acc1 is replicated below.
Part I – The Guiding Principles
If there is conflict between the requirements of any of the Guiding Principles, the Principles are to be applied in the order in which they appear below.
1. Compliance with the European Postal Services Directive
The Costing Methodology must comply with the European Postal Services Directive.
2. Completeness
The Costing Methodology must take into account all the relevant RML costs captured in Royal Mail’s financial records including all the relevant costs recorded in Royal Mail Letters’ General Ledger.
The Costing Methodology must cost all Sales Products.
3. Causality
The Costing Methodology must assign General Ledger costs to Activities that cause those costs to be incurred.
The Costing Methodology must assign Activity Costs to those Sales Products that are provided as a result of, or are supported by, those Activities.
4. Objectivity
Each element of the Costing Methodology must, as far as possible, be based on, or take account of all the available financial and operational data that is relevant to that element.
Where an element of the Costing Methodology is based on assumptions, those assumptions must be justified and supported, as far as possible, by all available relevant empirical data. The assumptions must not be formulated in a manner which unfairly benefits Royal Mail Letters or any other operator, or creates undue bias towards any Sales Product or Activity.
5. Accuracy
The Costing Methodology must maintain an adequate degree of accuracy throughout the costing process in both extracting and processing data.
An adequate degree of accuracy means the costing process is free from material errors, including any double-counting (see Principle 9 for the definition of materiality).
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6. Compliance with the International Financial Reporting Standards (IFRS)
The Costing Methodology must comply with IFRS, to the extent that Royal Mail's statutory accounts comply with IFRS, with the exception of any departure from IFRS in the preparation of those statutory accounts which is expressly disclosed in the statutory accounts.
7. Consistency
The Methodological Principles must be consistent with the Guiding Principles.
The Costing Methodology (as documented in the Costing Manual) must be consistent with the Methodological Principles.
As far as possible, the Costing Methodology must be applied to all elements of costing consistently. All differences in application must be justified by reference to the Methodological Principles or Guiding Principles.
As far as possible, the Costing Methodology must be applied consistently over time. All changes from one period to another must be justified in accordance with the change control procedures, and by reference to the Methodological Principles or changes in them, or by reference to the Guiding Principles.
8. Transparency
The Methodological Principles must be published by Royal Mail. The detailed Costing Methodology must be clearly documented in Royal Mail’s Costing Manual. The Costing Manual must contain the level of detail necessary to allow a user of the Costing Manual, with a reasonable degree of professional skill, to gain a clear understanding of a given calculation carried out through the application of the Costing Methodology without the need for further instruction or interpretation.
9. Materiality
The Guiding Principles 1 to 8 must be applied to all material costs, or material changes in costs.
A material cost, or a material change in a cost, is one which is reasonably expected to affect the views of a competent user of Royal Mail Letters’ regulatory reports and costing results.
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Annex B Methodological Principles
1. Primary purpose
The primary purpose of the Costing Methodology is to calculate the total and unit costs of Royal Mail Letters’ Activities, Products and Sub-products using all the relevant costs captured in Royal Mail’s financial records including Royal Mail Letters’ General Ledger.
2. Activity Based Costing (ABC)
The Costing Methodology must be Activity Based Costing. This principle states the broad requirements for the costing methodology while the requirements around specific aspects of the methodology are covered in more detail in subsequent principles:
The Costing Methodology must identify (i) all the Activities that Royal Mail Letters performs as part of its Operational and Non-operational Business Processes, and (ii) all the Products and Sub-products which Royal Mail provides.
The Costing Methodology must calculate Activity Costs, using appropriate Resource drivers, and ensure that the costs of the resources which each Activity consumes are attributed to that Activity.
The Costing Methodology must assign Activity Costs, using appropriate Activity drivers, to all the Products and Sub-products which are provided as a result of, or are supported by, that particular Activity. The assignment of Activity Costs must be done in one of the following two ways.
– Attributing, where a direct causal link between an Activity and the relevant Products and Sub-products can be identified and used as the basis for assigning costs; or
– Allocating, where no direct causal link can be identified between an Activity and the relevant Products and Sub-products, and instead a reasonable assumption needs to be made to assign the Activity Costs to the relevant Products and Sub-products.
3. Operational reality
As far as practicable, the Costing Methodology must reflect the operations of Royal Mail as they are undertaken.
The exception to this Principle is Class costing (see Principle 4).
4. Class costing
First Class mail
Class costing must be applied to all avoidable First Class costs. Avoidable First Class costs are costs which meet the following criteria:
The costs would be avoided, if Royal Mail were not to offer First Class Products, but the current operational specifications of all other Products were to remain unchanged, and
The costs exclude any incremental costs which would be incurred, if all Second Class items using the First Class Activities were to be processed alongside other Second Class items.
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Avoidable First Class Costs
All avoidable First Class costs must be attributed only to First Class Products. Avoidable First Class costs may include, but need not be limited to, the following Cost Types:
Accommodation;
Shift allowance; and
Plant & machinery non-running time costs.
Second Class mail
Class costing must also be applied to all avoidable Second Class costs. Avoidable Second Class costs are costs which meet the following criteria:
The costs would be avoided, if Royal Mail were not to offer First or Second Class Products, but the current operational specifications of economy products were to remain unchanged; and
The costs exclude any incremental costs which would be incurred, if all economy items using the First or Second Class Activities were to be processed alongside other economy items.
Avoidable Second Class Cost
All Avoidable Second Class costs must be attributed only to Second Class Products. Avoidable Second Class costs may include, but need not be limited to, the following Cost Types:
Accommodation,
Shift allowance, and
Plant & machinery non-running time costs.
5. General Ledger costs and Cost Types
The relevant categories of costs recorded in Royal Mail’s financial records, including Royal Mail Letters’ General Ledger cost accounts, may be aggregated into a set of Cost Types before attributing those costs to Activities.
Cost Types must be selected such that each represents the costs of a single key resource being utilised (e.g. staff, machines, accommodation, vehicles).
6. Activities
Where appropriate and where to the extent possible, Business processes must be divided into Activities.
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7. Resource Drivers
All costs aggregated into Cost Types must be attributed to the Activities which cause those costs to be incurred. Where a Cost Type is incurred as a result of more than one Activity, Resource drivers must be used to attribute an appropriate share of the Cost Type to each Activity. The Resource driver for each Cost Type must be:
Based on the resource consumption giving rise to the Cost Type (e.g. staff hours, machine hours, accommodation footprint, vehicle hours), and
Quantified based on appropriate operational and financial data (including the prior year’s costs).
8. Products and Sub-products
Where applicable, each Product, or a group of similar Products, must be divided into a range of Sub-products which identifies, and differentiates between, all the applicable and relevant measured characteristics which affect how processing an item of that Product, or group of Products, incurs costs. The measuring characteristics should, as a minimum include the following:
Format (e.g. letter, large letter, packet, etc.) ;
Class (e.g. first, second, economy, etc.);
Payment method (e.g. stamp, meter, account, etc.); and
Handling (e.g. mechanised versus manual, etc.).
The Costing Methodology must cost the whole range of Sub-products. For the avoidance of doubt, the use of additional measuring characteristics is permitted.
9. Activity Costs
The Costing Methodology must assign an appropriate share of each Activity Cost to each of the relevant Sub-products as set out below.
To determine how an Activity cost is to be assigned to the relevant Sub-products, it must first be determined into which one of the following categories the Activity cost falls:
Attributable Costs
Costs of Activities within a single operational Business process which have a direct causal link to the processing of some or all of the Sub-products;
Overheads
Pipeline Overheads: Costs of Activities related to one or more operational Business processes which do not have a direct causal link to any of the Sub-products being processed; and
General Overheads: Costs of Activities related to non-operational Business processes (these overheads relate to the pipeline as a whole).
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Non-operational Direct Costs
Costs of Activities which are directly related to certain Products, but are not part of the operational Business; and
Aggregate Costs
Activity costs, or a proportion of an Activity cost, which are assigned in aggregate to notional Sub-products and not incorporated into the unit costs of the commercial Sub-products, for the following reasons:
The costs do not follow the handling characteristics which are used to define Sub-products (see Principle 8), or
The costs relate to Activities carried out on behalf of other Royal Mail Group business units apart from Royal Mail Letters, and do not relate to any of Royal Mail Letters’ Products. These costs must be included in the costing to ensure reconciliation of costs and data integrity.
10. Activity Drivers
The assignment of Activity costs to Sub-products must be done using appropriate Activity drivers which are identified and quantified based on the following rules:
Each Activity cost must be assigned to all the Sub-products which that Activity directly contributes to, or indirectly supports; and
Activity drivers must reflect the relative proportions of the workload which the totality of all the units of each Sub-product creates for the related Activity.
Three types of Activity drivers are to be used.
Weighted Volume Drivers (see Principle 11)
Weighted Sub-product traffic volumes represent the relative workload of processing all the units of each Sub-product taking into account the proportion of the total number of units which consume the relevant Activity;
EPMU (see Principle 12)
Equi-Proportional Mark-Up methods which allocate costs based on the relative proportions of the costs which have already been assigned to the relevant Sub-products; and
Other Drivers (see Principle 13)
These are used for costs which are directly linked to a factor other than mail traffic in the pipeline (e.g. certain network costs which depend on vehicle runs).
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The following table shows how each type of Activity cost is to be assigned to Sub-products:
Attributable
costs
Overheads (Pipeline and
general)
Non-operational direct costs and aggregate
costs
Weighted Volume Drivers
EPMU Drivers
Other Drivers
11. Weighted Volume Drivers
Weighted Volume Drivers must incorporate two types of factors for each relevant attributable Activity cost:
Proportional Factors which represent the proportion of the total volume of each Sub-product which uses the related Activity; and
Weighting Factors which represent the relative proportions of workload that units of each Sub-Product require from the related Activity
Proportional Factors must be based on operational data collected using representative measurements of total volumes (including statistical sampling techniques where necessary).
Depending on the nature of the Activity, one of the following variables may be used as a determinant of the workload to calculate the Weighting Factors:
Time (needed to carry out the Activity): Where appropriate, industrial engineering studies must be carried out in accordance with relevant ISO standards;
Weight: Appropriate operational data must be used; and
Size: Appropriate operational data must be used.
Annual reviews must be conducted to ascertain which Proportional Factors and Weighting Factors need to be reviewed, and if necessary, updated to ensure that they continue to reflect the operational reality accurately.
To identify the Proportional Factors and Weighting Factors which may need adjusting, as a minimum, the changes during the year in the following areas must be considered:
Working practices;
Technology; and
Sub-products mix (relative volumes).
Ad hoc event-driven reviews and updates may be carried out as and when necessary.
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12. Equi-Proportional Mark-Up (EPMU)
EPMU must be used for allocating Overheads (Pipeline and General). Overheads must be allocated to all, and only, those Sub-products which they support:
Pipeline Overheads must be allocated to all, and only, those Sub-products which are processed by that element of the pipeline; and
General Overheads must be allocated to all Sub-products which are processed through the pipeline.
EPMU must be applied for each of the Activity costs within Overheads separately, and be based only on the proportions of all the Attributable Costs once they have been attributed. EPMU applications must not take account of any other costs already allocated using EPMU (non-nested approach).
13. Other Drivers
Other Drivers are used for costs (certain Attributable costs and all Non-operational direct costs and aggregate costs) which are directly linked to a factor other than mail traffic in the pipeline (e.g. certain network costs which depend on vehicle runs).
Other Drivers must be defined in a way which appropriately reflects the causal link with that factor.
14. Traffic measurement
Royal Mail may use two methods of traffic measurement in its Costing Methodology:
Operational measurement (e.g. using machine counts or sampling); and
Revenue derived measurement whereby the Product traffic volume is calculated by dividing the total Product revenue by the average Product unit price.
The measurement method used for each Sub-product must be applied consistently within the Costing Methodology and over time.
Where the difference between the results obtained by the two measurement methods is material, Royal Mail must:
reconcile, and explain the material differences between the two measurement methods; and
demonstrate that where the unit cost of a Sub-product calculated using an operational traffic measurement is different to the unit cost calculated using a revenue-derived traffic measurement, that the difference is due solely to the difference in the two measurement methods.
15. Operational data and sampling
All operational data used by the Costing Methodology must be regularly reviewed and where necessary updated to ensure the accuracy of costing and its consistency with the operational reality (see Principle 3).
All sampling used by the Costing Methodology must be based on statistical techniques regarded as appropriate and applied by qualified professional statisticians.
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16. Data integrity
The integrity of financial and operational data used in the ABC Model must be preserved by adequate checks and controls, which must include reconciliation of total cost data flowing through appropriate points in the system.
The total amount of input costs relating to any element of the ABC Model must be equal to the total amount of output costs relating to that element. In particular, the following total figures must be reconciled to each other:
Total costs as per Royal Mail Letters’ General Ledger accounts;
Total activity costs; and
Total costs of all Sub-products.
17. Materiality
17a) Compliance materiality
For the purposes of determining compliance with the Methodological Principles non-compliant items shall be deemed to be material if there is a resultant percentage difference that exceeds 1%. The resultant percentage difference shall be calculated by taking the cost of the non-compliant item and subtracting from it the cost of the same item if calculated under compliant conditions (“Compliance Base Cost”) and dividing this result by the Compliance Base Cost.
17b) Change materiality
The Methodological Principles 1 to 16 must be applied to all material costs, including Activity costs, total Product or Sub-product costs, and unit Product or Sub-product costs.
Any change to the Royal Mail product Costing Manual will be deemed to be material if:
There is a resultant percentage change (be it positive or negative) in the total cost of any Activity set out in the Costing Manual that exceeds 1%;
There is a resultant percentage change (be it positive or negative) in the total cost of any Sub-product set out in the Costing Manual that exceeds 1%; and
There is a resultant percentage change (be it positive or negative) in the unit cost of any Sub-product set out in the Costing Manual that exceeds 1%.
The resultant percentage change shall be calculated by taking the cost of each Sub-product or Activity without the change (“Base Cost”) and subtracting that Base Cost from the corresponding cost of each Sub-product or Activity with the change and dividing this result by the Base Cost.
Materiality shall be measured by reference to the most recent quarterly accounts provided that where Royal Mail can justify a longer period as being more representative, then, such longer period may be used.
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Annex C Zonal Costing Background and Historical Position
In 2004, Royal Mail C&NA offered the first contract with a zonal pricing structure for access to its Inward Mail Centres (IMCs). At that time the structure comprised of five zones. The five zones were formed by allocating PC sectors to specific zones on the basis of the density of delivery points and percentage of delivery points that are businesses, as these were considered to be the prime factors determining the unit cost and relative, cost reflective zonal prices. The density of delivery points took account of the distance between the points and the percentage of business delivery points took account of larger postal recipients. Consequently they captured two of the main cost drivers for outdoor delivery activity. To identify the relative average unit costs of the zones, each delivery office (DO) was allocated to a single zone, based on the density of delivery points and percentage of business delivery points. Having allocated the costs and associated DO volumes to the zones by this method, the overall unit costs were readily identified through the addition of Inward Mail Centre and Local Distribution costs. In 2007 Postcomm, Royal Mail's regulator at the time, reviewed the approach to zonal pricing when Royal Mail submitted an application to charge Retail zonal prices for bulk mail services. Postcomm rejected the application and considered that the associated zonal access prices were not sufficiently cost reflective. Postcomm considered that some of the zones could be combined without loss of cost reflectivity and that London appeared to have distinct costs. It also considered that the allocation of the whole of a DO cost to a single zone did not take account of the variation of cost within the DO, i.e. between PC sectors, and thereby advocated a move towards identifying PC sector costs. The review by Postcomm led to a change to the structure of the zonal access prices. In April 2010, Royal Mail amended the geographical boundaries applied to zonal access pricing to comprise of a London zone (boundaries based on Standard Selection Codes (SSCs), or groups of Postcode district costs, within the M25) and three other zones (Urban, Suburban, Rural) the geographical boundaries of which were defined by the density of delivery points and percentage of business delivery points within individual PC sectors. The structure still applies today. The review by Postcomm also led to a change to the method of allocating costs relevant to access at IMCs to zones, with a view to better reflecting the variation of the costs within each individual DO by its composition of PC sectors. Royal Mail considered the identification of actual costs at PC sectors to be prohibitively expensive to collect, and therefore Postcomm made specific allowance in setting the regulatory conditions for the components of zonal costing that were identified to be specific to individual PC sectors to be estimated. Royal Mail consulted and decided upon this methodology in 2010/11 and subsequently applied it to 2010/11 costs in a submission to Postcomm in September 2011. After further work IMC accommodation costs were included.
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Annex D Zonal Costing Regression to estimate non-London staff costs by postcode sector
Introduction Royal Mail does not collect delivery time information by PC sector. It collects it by delivery office and by walk. However, it is not straight forward to map walks to postcode sectors as many walks will cross postcode sectors. Hence a delivery time function is estimated from delivery office data and then applied to postcode sector data to form post code sector delivery time estimates, which becomes a cost function after multiplying those postcode sector hours by the average wage rate for each DO. We use a statistical model to estimate a delivery time function for DOs (outside of London) and then apply that estimated delivery time function to PC sector data to form estimates of the delivery time for each PC sector (outside of London). The London DO costs are known to SSCs (Standard Selection Codes) comprising the zone (see Section 8.4.2) and therefore do not need to be estimated. (SSCs outside London can comprise PC sectors of different zones – Urban, Suburban and Rural – and therefore do not allow an SSC-based calculation of zonal costs.) More precisely, for the non-London zones, we
i) estimate by econometric regression a delivery time function on the level of DOs, where delivery time is known,
ii) apply the estimated parameters, as well as PC sector data, for predicting the unknown delivery time for PC sectors,
iii) use the predicted delivery time for PC sectors in the estimation of delivery costs for each PC sector, before the aggregation from PC sectors to zones.
Regression Several research papers provide a useful background to the approach applied to estimate the time function on the level of DOs: First, the paper by Cazals et al (2005)19 identified a statistical Outdoor cost
function for DOs (in logarithmic form) with explanatory variables of number of delivery points, volume of delivered mail per delivery point, and area. It also identified that this cost function changed by geography, as represented by the proportion of non rural routes.
Second, the papers by Horncastle et al (2006)20 and Moriarty et al (2006)21 identified a statistical Total cost function for DOs (in logarithmic form) with
19 C. Cazals, J.-P. Floren and S. Soteri “Delivery Costs for Postal Services in the UK”, in “Regulatory and Economic Challenges in the Postal and Delivery Sector”, edited by M. A. Crew and P. R. Kleindorfer, and published by Kluwer Inc. (2005). 20 A. Horncastle, D. Jevons, P. Dudley, E. Thanassoulis. “Efficiency Analysis of Delivery Offices in the Postal Sector Using Stochastic Frontier and Data Envelopment Analysis”, in “Liberalisation of the postal and delivery sector”, edited by M. A. Crew and P. R. Kleindorfer, and published by Edward Elgar Publishing Inc. (2006).
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explanatory variables of wage rates, number of delivery points, volume of delivered mail per delivery point, and road length22. It also identified that this cost function changed by geography, as represented by the proportion of business delivery points and an urban dummy variable.
The estimated time function includes the main explanatory variables used in recent research papers. The dependent variable, which is the time taken to serve the sector, is explained in the model by the following independent variables23: number of delivery points in the sector volume of mail delivered per delivery point in the sector area of the sector proportion of business delivery points in the sector
These are all exogenous variables that a potential operator might consider when looking to deliver in a particular PC sector, and are available at the PC sector level. Some potential explanatory variables, such as redirection volumes, are unlikely to be known to potential operators and are also not available at the PC sector level. Other potential explanatory variables, such as income, might be a relevant consideration for estimating mail volumes but not necessarily the costs of delivering mail volumes to recipients. More specifically, we identify a statistical delivery staff total cost function for DOs (as measured in hours worked) for non-London, with explanatory variables of number of delivery points, volume of delivered mail per delivery point, area and percentage of business delivery points. This is expressed in equation (1): lnTi = a + blnNDPi + clnVPDPi + dlnAREAi + eBDPi (1) where Ti is the time taken to serve the DO sector
NDPi is the number of delivery points in the DO sector VPDPi is the volume of mail delivered per delivery point in the DO sector AREAi is the area of the DO sector BDPi is the proportion of business delivery points in the DO sector
and i represents each DO sector
21 R. Moriarty, S. Yorke., G. Harman., J. Cubbin, M. Meschi and P. Smith. “Economic Analysis of the Efficiency of Royal Mail Units and the Implications for Regulatory Policy”, in “Liberalisation of the postal and delivery sector”, edited by M A Crew and P R Kleindorfer, and published by Edward Elgar Publishing Inc. (2006). 22 Similar results are obtained when the explanatory variable of area replaced the road length and when the dependent variable is hours worked and the explanatory variable of wage is omitted. 23 Dummy variables (taking a value of 1 or 0) for DOs in a zone could be included in the DO cost function. However, these variables were excluded to avoid driving DO only information into the equation and to keep it relatively simple for third parties to follow and apply the PC level of inputs.
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If we knew the Ti for each PC sector, we could estimate the coefficients a to e in equa-tion (1) on the PC sector level. Instead, the regression is performed at the DO level and then the information at PC sector level on the right-hand side of equation (1) is used to form estimates at the PC sector level. Applying regression results from the DOs (the larger unit) to PC sectors (the smaller unit comprised in a DO) is unproblematic insofar the original regression, i.e. the one not in logarithm, does not include a constant to represent a DO-specific fixed cost (but the constant effectively represents a multiplier). Data Confidential Results The following table shows measures of the statistical robustness for total delivery office staff costs using 2010/11 cost data.
Regression Statistics Multiple R 0.979R Square 0.958Adjusted R Square 0.968Standard Error 0.149Observations 1112
Conclusions The regression, which is performed of the level of DOs, is used to estimate the relevant postcode sector delivery staff costs. For step (ii) above, the values at a postcode sector level are input into the right-hand side of equation 1 to form estimates of the PC sector costs. For step (iii) above, the estimated costs and volumes at the postcode sector level are aggregated into zones, using the mapping of postcode sectors to zones.
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Annex E Zonal Costing Allocation changes of postcode sectors to zones
This sets out the changes identified from the definition of mappings used for the costing in 2011/12 and zonal pricing in 2012/13, to the definition of mappings used for the costing in 2012/13 and zonal pricing in 2013/14. 73 out of some 11,250 postcode sectors, 0.65% of the total, have changed zone as a result either of a change in delivery-point density, or in the allocation of their area to London, since last year. Out of these, 3 have moved from Urban to Suburban. 16 have moved in the opposite direction, from Suburban to Urban. 15 have moved from Rural to Suburban. The shift of the 39 St. Albans (AL) postcode sectors out of the London zone has brought 18 of them from London to Urban, 17 from London to Suburban and 4 from London to Rural. This shift is related to the reduction from 122 to 88 SSCs, which changed a number of SSCs. St Albans, which is predominantly outside of the M25, used to share an SSC with Watford (WD) and Enfield (EN), both of which are predominantly inside the M25. As such the SSC in total was defined as inside London. Now however, AL has been moved to share an SSC with Luton (LU), which is totally outside of the M25 and as such this new SSC is defined as outside of London
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Annex F MCS methodology and statistical accuracy of the MCS volume distribution In Zonal Costing
Confidential
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Annex G Zonal Costing List of Sources The following table shows the data sources used. Input Source Costs ABC Model, Business Warehouse Format-specific national cost proportions
ABC Model
Volume distribution across PC sectors
MCS (Mails Characteristics Survey)
Traffic, national total Business Warehouse MC / DO staff costs Business Warehouse Wage rates Staff cost and hours from Business Warehouse data Vehicle costs ABC Model Business percentage Pegasus Number of delivery points Address management unit (PAF data), Pegasus Surface area Mapping team (Geoplan data) Mappings: - PC sectors to DOs - DOs to IMCs
Business Warehouse (cost centre hierarchy)
Distances from MC to DO Paragon, Automobile Association
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Annex H Cross-references between Ofcom's October 2011 proposals and their implementation in Zonal Costing
The following table contains cross-references between the proposals Ofcom made for the main headings or sections of the zonal costing manual (cf. annex 6 of Ofcom's October 2011 consultation document) and the relevant Sections of this manual. Ofcom proposals (as per Annex 6, para 1.253, October 2011)
Where located within this manual
Rationale for the methodology used
Section 3 – Principles and rationale
Graphical representation of the zonal costing methodology
Figure 1 - Flow diagram of the main components in the methodology
Relevant costs
Section 2 – Relevant costs Section 5 – Allocating costs to zones
Regressions
Annex B: Regression to estimate non-London staff costs by postcode sector. See the workbooks supplied for a list of postcode sectors, with the associated values of each of the variables in the cost function.
Data
For actual data see the worksheets "IMC Cost Function", "DO Cost Function" and "PC Sector Data" in the workbook supplied. Sections 5.2 through to 5.5 explain what data are used to determine Inward Mail Centre costs, Local distribution costs and Delivery Office costs. Section 4 explains how postcode sectors are allocated to zones.
Sampling
Section 5.2 and section 5.5.2 mention MCS sampling. For a more detailed description of the sampling methodology used for the MCS and measures of statistical reliability see Annex D. For postcode sector volumes see worksheet "DO Cost Function" in the workbook supplied.
Mapping of postcode sectors to zones
Section 4 explains how postcode sectors are allocated to zones.
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Ofcom proposals (as per Annex Where located within this manual 6, para 1.253, October 2011)
Figure 3 maps postcode sectors to zones. Descriptive statistics of postcode sector data per zone are included in Annex B (delivery points, delivery point density, business density, volume, volume per delivery point, area).
Reconciliation of zonal costs with national costs
This is explained in general in Section 3 and more specifically for different functions (such as IMCs) in Sections 5.2 to 5.6.
Costs of each zone
Zonal unit costs are shown in the User Guide to Section 5.6.2. (Total costs and mail volumes applicable to each zone are not shown specifically, as unit costs are calculated in a single step, i.e. as zonal costs divided by zonal volumes for each zone.)
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Annex I Technical Appendices Contents
Appendix 1.0 INTRODUCTION
Appendix 2.0 RESOURCE MODULE
Appendix 2.1.1 Mapping of Payroll Grade Code to ABC Manager Grouping
Appendix 2.1.2 Mapping of Payroll Account Code to ABC Pay Type
Appendix 2.1.3 Mapping of Manager Grouping and ABC Pay Type to ABC Cost Type
Appendix 2.1.4 NIPOC Rates
Appendix 2.2.1 Business Areas
Appendix 2.2.1 Mapping of ESFS Cost Centres to ABC Business Areas and ABC Organisational Units
Appendix 2.2.1 Cost Types
Appendix 2.2.2 Mapping of ESFS Cost Elements to ABC Cost Types
Appendix 2.2.2 Extract Showing Interbusiness Cost Elements
Appendix 2.2.2 Mapping of Cost Types to Cost Type Account
Appendix 2.5 Entering Cost Adjustments
Appendix 3.0 RESOURCE DRIVERS
Appendix 3.0 Cost Types and Resource Drivers
Appendix 3.1.1 SHRS Operational Activities
Appendix 3.1.1 SHRS Operational Cycle Activities
Appendix 3.1.3 SHRS Operational Vehicle Activities – Cross Reference to Staff Cost Type
Appendix 3.1.3 Operational Vehicle Activities - Cross Reference to Non Staff Cost Type
Appendix 3.1.4 Machine Hour usage by Activity
Appendix 3.1.4 Machine Weighting by Cost Types
Appendix 3.1.4 Machine Hour Operational Activities
Appendix 3.1.5 Accommodation Operational Activities
Appendix 3.1.7 PO Boxes
Appendix 3.1.7 Surcharges
Appendix 3.1.7 Redirections
Appendix 3.1.7 Local Collect
Appendix 3.1.7 Keepsafe
Appendix 3.1.7 Timed Delivery
Appendix 3.1.7 Bespokes
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Appendix 3.1.7 Relay Callers Office
Appendix 3.1.7 Mail Collect
Appendix 3.1.7 Rural Newspaper Distribution Services
Appendix 3.1.7 Poste Restante
Appendix 3.1.7 Diversions
Appendix 3.1.7 Address Management Unit
Appendix 3.2 Non Operational Resource Drivers
Appendix 3.2.1 POL
Appendix 3.2.2 Customer Experience
Appendix 3.2.3 Stamps and Collectables
Appendix 3.2.4 Commercial
Appendix 3.2.5 Financial Services
Appendix 3.3 Machine Analysis
Appendix 3.3 Accommodation Analysis
Appendix 3.3 Shared Activities
Appendix 4.0 ACTIVITY MODULE
Appendix 4.1 ABC Activities
Appendix 4.1 Template B
Appendix 5.0 ACTIVITY DRIVERS
Appendix 5.1.1 Routing Matrix
Appendix 5.1.1 Template C
Appendix 5.1.1.1 SPHCC Weightings
Appendix 5.1.1.3 Derivation of Collection SPHCC Weightings
Appendix 5.1.1.4 Derivation of Outward Mail Centre SPHCC Weightings
Appendix 5.1.1.4 Derivation of Inward Mail Centre SPHCC Weightings
Appendix 5.1.1.5 Derivation of Outward and Inward RDC SPHCC Weightings
Appendix 5.1.1.6 Derivation of Delivery Indoor SPHCC Weightings
Appendix 5.1.1.7 Derivation of Delivery Outdoor SPHCC Weightings
Appendix 5.1.1.8 Derivation of International Operations SPHCC Weightings
Appendix 5.1.1.9 Derivation of Network SPHCC Weightings
Appendix 5.1.1.10 Derivation of Local Distribution SPHCC Weightings
Appendix 5.1.2 Operational Direct One To One Mapping
Appendix 5.1.3 Operational Activity Drivers
Appendix 5.2 Non Operational Activity Drivers
Appendix 5.2.1 Non Operational Direct One To One Mapping
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Appendix 5.2.2 Post Office Limited (POL)
Appendix 5.2.3 Customer Experience
Appendix 5.2.4 Stamps & Collectables
Appendix 5.2.5 Commercial
Appendix 5.2.7 Manage Services
Appendix 5.2.8 Product Compensation
Appendix 5.2.9 PO Boxes
Appendix 5.2.9 Surcharges
Appendix 5.2.9 Redirections
Appendix 5.2.9 Local Collect
Appendix 5.2.9 Keepsafe
Appendix 5.2.9 Timed Delivery
Appendix 5.2.9 Bespokes
Appendix 5.2.9 Relay Callers Office
Appendix 5.2.9 Safebox
Appendix 5.2.9 Mail Collect
Appendix 5.2.9 Rural Newspaper Distribution Services
Appendix 5.2.9 Post Restante
Appendix 5.2.9 Diversions
Appendix 5.2.9 Address Management Unit
Appendix 5.3 Allocation of Overhead Activity Costs
Appendix 5.3.1 Allocation Based on Pipeline
Appendix 5.3.1 Allocation Based on Groups of Products
Appendix 5.3 Template E
Appendix 5.4 Routing Matrix
Appendix 6.0 PRODUCT MODULE
Appendix 6.1 Sales Product
Appendix 6.1 Template A
Appendix 6.1 Template F
Appendix 6.1 Sales Product Traffic Sources
Appendix 6.1 Products with no Cost
Appendix 7.0 CLASS COSTING
Appendix 7.2.2 Template D
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