Activity-Based Management in Shell Gabon (Case Study)

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1. Calculate the UOC per barrel for SG. Is a barrel of oil the cost driver for all the activities that go on within RDS? Comment on why RDS chooses to monitor costs per barrel. The UOC per barrel for SG is $3.21.

OPEX| $140,640,200| 120,000| barrels/day|
| | 365| days/year|
Total| $140,640,200| 43,800,000| barrels/year|
Unit Operating Cost (UOC)| $3.21| | |
*UOC = (Total Operating Expense – Exploration – Depreciation & Depletion) / Barrels Produced Barrels of oils produced may be a cost driver for some activities in RDS, but not all activities are driven by the production of oil. RDS has other activities that requires significant expenditures as the headquarter. The capital investment on exploration for various subsidiaries to increase or at least maintain its oil reserve size for oil production to keep per barrel cost competitive would be a large expenditure done regardless of oil production. The research and development cost for new products, new production technology, new exploration target site search and more would also be another significant cost RDS to create its competitive advantages whether the oil is produced or not. RDS decided to monitor costs per barrel as a mean to control costs to obtain necessary funding for capital expenditures for new oil exploration and keep the real oil price per barrel below $16.71 at least the half of the time as suggested by the concerned industry reports. Also, by looking at SG’s cost structure, 80.2% of SG costs come directly from the production of oil that it would be additional reason to keep the subsidiaries’ cost low to ultimately achieve higher profits overall.

2. Compute the cost of the activities in the Provided IT and Telecommunication Services process. What items did you include or exclude from your calculations? Why?

Provide IT and Telecommunication Service| | |
Select, install, operate, support hardware & software| 1,499| | Provide SAP Support| 1,075| |
Provide Telecommunications| 5,421| |
Total| 7,995| 7,995|

In our calculation for each activity in the Provided IT and Telecommunication Services, we included both direct and indirect costs to find the true cost for each activities. The direct costs were staff salaries, staff benefits, staff services, service contracts and licenses & subscriptions. Staff benefits and services were included in addition to salaries because any employee who works on any activities not only receives his/her salaries, but also the benefits and services accompanied for being an employee at SG and works on these activities. The indirect costs were materials and supplies, logistics and training. These costs maybe overlapped with other activities, but with identified resource driver, these resource costs are allocated accordingly to each activity’s requirements. All the costs for Other Processes in Business Management are excluded because those are costs incurred to execute six other major processes done within the Business Management department.

3. Suggest some performance measures to evaluate if these activities are being performed well. There are many different measurement frameworks, including the balanced scorecard (BSC), activity based costing (ABC), industry benchmarking, and shareholder value added. Activity-Based Management (ABM) focuses on the management of activities to maximize the profit from each activity and to improve the value received by the customer. This discipline includes cost-driver analysis, activity analysis, and performance measurement. ABM draws on ABC as its major source of information. ABC is used by many organizations that implement the balance scorecard as well because it enables businesses to more accurately define and measure their metrics Each of these provides a unique and different perspective through which to view an organization’s performance. Examples below:

A. Effectiveness: A process characteristic indicating the degree to which the...
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