What all employees need to know about an "unbundled" accounting system.

• Author: Lewis, Tom

Rural electric cooperatives have historically used the Federal Energy Regulatory Commission (FERC) accounting system, as modified by the RUS. This system has been used because it is a utility accounting system that is an effective means of reporting to the regulator. It has also been very helpful for preparing annual financial statements that present fairly, in all material respects, the financial condition of the cooperative. Cooperatives can then receive from their auditors the unqualified audit opinion that is essential for business success.

It is important, however, to remember that the historical FERC/RUS system is a financial accounting system; that is, it is intended for external reporting purposes. The concern has always been with satisfying regulators' requirements. The FERC/RUS system was not intended to be a managerial (internal), decision-making system. With greater deregulation and greater competition, however, it is the market place that has to be satisfied. It is important, therefore, that utilities incorporate a management decision-making system within their utility accounting systems.

This is why so many cooperatives are moving in the direction of "unbundling," an activity-based costing (ABC) or activity-based management (ABM) accounting system. This movement is not intended to usurp the FERC/RUS system. Its intent is to modify that system so that a cooperative has a decision-making system as well as a financial reporting system. It is this decision-making system that will permit the cooperative to satisfy the market place on a daily basis, as it must. As the finance director of one cooperative explained, "We are unbundling to create a competitive advantage and to be prepared to satisfy regulatory requirements if utility restructuring occurs in our state."

The Difference between Activity-based Costing and Activity-Based Management

The terms ABC and ABM are sometimes used interchangeably. Actually, ABM is a management, decision-making system that is a progression of an ABC costing system. An ABC costing system is a system that accumulates costs based on the activities that are performed. It assumes that products, jobs, or services do not cause costs, but rather it is the activities involved in providing those products, jobs, or services that cause costs. To know the total cost of a product, job, or service; therefore, it is first essential to determine the activities involved in providing that product, job, or service.

This is contrary to what a traditional costing system assumed. A traditional system assumed that products (or jobs or services) cause costs to be incurred. For example, traditional costing assumed that the service of selling electricity caused costs. ABC assumes that the selling of electricity requires activities, like meter reading, billing, and purchasing wholesale power, and it is these activities that cause costs.

The new RUS expense allocation rules that became effective this year incorporate the principles of ABC. For example, pension and benefit costs, which historically have been charged to account 926, "Employee Pension and Benefits," must be cleared to all of the accounts to which labor is charged, such as Account 593, "Maintenance of Overhead Lines," or Account 903, "Consumer Accounting Expense."

The regulator is satisfied when cooperatives report the ending balance in account 903, "Consumer Accounting Expense"; however, to satisfy the market place, the cooperative needs to know the costs of the activities included in account 903. Those activities include billing, reminders, and collections. Ideally, an ABC system would require pension and benefits to be allocated not only to the general ledger account, but also to the individual activities properly charged to each ledger account.

An ABM system is a very natural progression of an ABC system. It, too, assumes that activities cause costs. It goes further, however, in assuming, for example, that the way to control costs is not to look at costs, but rather to look at activities. If activities are controlled, costs will be controlled. An ABM system also looks at the advantages of reengineering. If a cooperative can produce a product, a job...